UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2018

 

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
Durham, North Carolina
  27703
(Address of Principal Executive Offices)   (Zip Code)

 

(919) 941- 5206

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:   Name of each exchange on which registered
(Title of Class)   None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the issuer: (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 (section 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 Exchange Act). Yes ☐ No ☒

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2018, was approximately $14,539,347 based on $3.50, the estimated per share price at which the registrant’s securities were last issued and sold, which was August 27, 2018. The registrant has provided this information as of August 27, 2018 because its common stock was not publicly traded as of the last business day of its most recent completed second quarter.

 

As of April 12, 2019, the issuer had 6,393,107 shares of common stock outstanding.

 

Documents incorporated by reference: None

 

 

 

 

 

 

FORM 10-K

 

TABLE OF CONTENTS

 

    Page
     
  PART I. 1
Item 1. Business 1
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 25
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Mine Safety Disclosures 25
  PART II. 26
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26
Item 6. Selected Financial Data 27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
Item 9A. Controls and Procedures 41
Item 9B. Other Information 41
  PART III. 42
Item 10. Directors, Executive Officers and Corporate Governance 42
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 51
Item 13. Certain Relationships and Related Transactions, and Director Independence 53
Item 14. Principal Accountant Fees and Services 56
  PART IV. 57
Item 15. Exhibits and Financial Statement Schedules 57
Item 16. Form 10-K Summary 60
SIGNATURES 61

 

i

 

 

PART I

 

Special Note Regarding Forward-Looking Statements

 

Many of the matters discussed within this Annual Report on Form 10-K (“Annual Report”) contain 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”), on our current expectations and projections about future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. Such risks and uncertainties include the risks noted under Part 1. “Business,” Part 1A “Risk Factors” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere. We do not undertake any obligation to update any forward-looking statements. Unless the context requires otherwise, references to “we,” “us,” “our,” and “Icagen,” refer to Icagen, Inc. and its subsidiaries.

 

You should refer to Item 1A. “Risk Factors” of this Annual Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.

 

Item 1. Business

 

Company Overview

 

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 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. Our scientific team is derived from two key acquisitions of drug discovery experts in Neuroscience (the “Pfizer Acquisition”) and Rare Disease (the “Sanofi Acquisition”).

 

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 pipeline of drug candidates provides the additional potential of significant long-term upside through milestone and royalty payments. The development and commercialization expense of our partnered assets are funded by our partners.

 

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

 

1

 

 

Cystic Fibrosis Foundation Collaboration

 

In May 2018, we announced that we had received an award of up to $11 million from the Cystic Fibrosis Foundation for a project focused on the discovery of therapeutics to treat patients with cystic fibrosis (CF) caused by nonsense mutations. Nonsense mutations in the Cystic Fibrosis Transmembrane Conductance Regulator (“CFTR”) gene result in the premature termination of protein synthesis and the formation of truncated, non-functional CFTR. Patients with these mutations in both copies of their CFTR genes currently have no therapies that treat the underlying cause of their disease. The aim of this program is to provide these patients with a transformative therapeutic that will markedly improve their quality of life and lifespan. The award is to support an integrated, multi-year drug discovery initiative. Our initial proposal is to screen approximately 2 million compounds as well as leverage our state-of-the-art in silico drug discovery platform to interrogate an additional ten million virtual structures for molecules that suppress nonsense mutations. Through these efforts, we intend to discover and evolve families of molecules that are suitable for clinical development.

 

Roche Collaboration

 

On December 4, 2018, we entered into a license and collaboration agreement with Roche to develop and commercialize small molecule ion channel modulators for the treatment of neurological disorders. The program incorporates our platform for ion channel targets in the body and is directed at a specific novel ion channel target expressed in neurons. Under the terms of the license and collaboration agreement, Roche paid us an upfront payment for program exclusivity and research funding. In addition, we are eligible to potentially receive development and commercial milestone payments of up to $274 million and royalty payments if a drug is commercialized. We will be responsible for all preclinical activities up to lead optimization with both us and Roche applying resources to identify candidates for entry into late stage preclinical and Investigational New Drug (“IND”) enabling studies. Thereafter, Roche will be responsible for the further development and commercialization of the programs.

 

Operating Sites & Expertise

 

We currently operate 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 we began to operate in July 2015, we have a leading biology expertise focused on ion channels which are important targets in neuroscience. The North Carolina site 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, our capabilities in North Carolina include a focus on ion channels and transporters, High Throughput Screening (“HTS”) and lead optimization, ion channels, assay development and x-ray fluorescence-based assays.

 

At the Tucson Facility, which we acquired in July 2016, we have leading biology expertise and platform capabilities in Rare Diseases, in silico & 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 Absorption, Distribution, Metabolism and Excretion (“ADME”). The facility also features high volume biology with a flexible robotic infrastructure capable of performing high throughput screening in ultra-high 1536 format, enhancing our depth of expertise running programs in a highly specialized, efficient and cost-effective manner. This enables Icagen 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 us to utilize our biology expertise in both the North Carolina and Arizona sites to accelerate drug discovery for challenging, but innovative programs and identify quality leads faster.

 

2

 

 

Pfizer Acquisition

 

On July 1, 2015, pursuant to the asset purchase agreement that we executed with Pfizer Research Inc (formerly Icagen, Inc.), an indirect subsidiary of Pfizer (“Icagen NC”) (the “Pfizer APA”), we acquired certain assets of Icagen NC (including certain cell lines, office equipment, servers, biology instruments, benchtops and the Icagen name), assumed certain liabilities of Icagen NC and agreed to continue the employment of several employees of Icagen NC for at least two years. We agreed to pay: (i) an upfront cash purchase price of $500,000, in four equal installments of which the final installment of $125,000 was paid on March 1, 2016; (ii) a cash payment of $500,000 on the second anniversary of the closing provided that prior to such date the Master Scientific Services Agreement with Pfizer (“MSSA”) has generated at least $4,000,000 in revenue; this milestone was never met and the payment to Pfizer was forfeited; and (iii) beginning in 2017, a quarterly earn out payment (the “Earn Out Payment”) of 10% of revenue earned during the quarter up to a maximum aggregate payment of $10,000,000. On July 15, 2016, the Pfizer APA was amended to provide that we are required to pay Pfizer, commencing May 2017, minimum quarterly payments of $50,000 each for the period May 2017 to December 31, 2018 (with deferral allowed for the difference between $250,000 and the quarterly amount paid (the “Deferred Amount”), interest on the Deferred Amount and a lump sum payment of the cumulative Deferred Amount is due on March 31, 2019 and thereafter a minimum payment of $250,000 each quarter up to a maximum of $10,000,000. Pursuant to the terms of the amendment to the agreement, we also agreed that we will not and we will cause Icagen-T not to, (A) run assays or perform other contract research services, in each case, that we could reasonably provide by utilizing assets we acquired pursuant to the Pfizer APA, other than services performed or to be performed by Icagen-T for Sanofi or its affiliates under the MSSA; or (B) perform or engage in ion channel screening.

 

We also entered into a MSSA with Pfizer, the execution of which was a condition to closing under the Pfizer APA. In accordance with the terms of the MSSA, we agreed to perform ion channel screening and other contract research for Pfizer, including but not limited to, on demand assay development, modification and optimization, compound screening, ion channel screening, reagent and cell line generation, and biology platform development. The MSSA and Pfizer APA provided that Pfizer would guarantee revenue to us totaling at least $1,000,000 for each of the first two 12-month periods following the closing on a “take or pay” basis, all of which was paid with the last payment received in July 2017.  

 

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Sanofi Acquisition  

 

On July 15, 2016, Icagen-T, our wholly owned subsidiary consummated the transactions with Sanofi contemplated by the Asset Purchase Agreement, dated June 27, 2016 (the “Sanofi Asset Purchase Agreement”), pursuant to which Icagen-T acquired certain assets of Sanofi that include the (i) the Tucson Facility, known as the Tucson Research Center, a two story laboratory and office building with approximately 113,950 square feet of space located in the Town of Oro Valley, Pima County, Arizona, and the land on which the Tucson Facility is built; and (ii) certain machinery and equipment located at the Tucson Facility. The cash purchase price under the Sanofi Asset Purchase Agreement was $1.00. Icagen-T assumed certain liabilities, was obligated to continue the employment of 46 employees at the Facility for at least two years from consummation of the acquisition and is obligated to maintain the Sanofi chemical libraries that remains at the Facility and continues to be owned by Sanofi.

 

Upon the closing of the Sanofi Asset Purchase Agreement, Icagen-T and Sanofi entered into a Master Services Agreement (the “MSA”). The MSA contains terms requiring that Icagen-T perform certain contract research for Sanofi, including, but not limited to, compound testing services. Pursuant to the terms of the MSA, Sanofi agreed to make payments (the “MSA Payments”) to Icagen-T in consideration of Icagen-T’s provision of services (including maintenance of the chemical libraries) in the aggregate amount of $32 million over a five year period of which $27,500,000 has been paid to date and a further $4.5 million is expected to be paid over the next 18 months. The MSA Payments are to be credited against all direct service costs for which Icagen-T performs services, and in the event the MSA Payments exceed the direct service costs, a maximum aggregate credit of $2 million will be carried forward to subsequent years during the term of the MSA.

 

Upon the closing of the Sanofi Asset Purchase Agreement, Icagen-T executed a Deed of Trust providing Sanofi with a five year, $5 million lien on the Tucson Facility, securing performance of Icagen-T’s obligations under the MSA and the Sanofi Asset Purchase Agreement. The lien is subject to termination on the five year anniversary of the closing or upon the payment by Icagen-T of $5 million to Sanofi. The parties have also agreed to a Special Warranty Deed with a Right of Reverter (“Deed of Sale”) that will revert in Sanofi all rights in the Tucson Facility in the event that Icagen-T sells the Tucson Facility at any time within the next five years and upon certain other events related to the leasing of space at the Tucson Facility. The reversion rights of Sanofi under the Deed of Sale will terminate after five years or upon a cash payment of $5 million to extinguish the lien created by the Deed of Trust.

 

The MSA contains certain affirmative and negative covenants that Icagen-T is required to meet as well as certain maintenance covenants. The affirmative covenants include: (i) maintenance of separate books and records from its affiliates; (ii) maintenance of a separate board of directors from its affiliates; (iii) maintenance of its own bank accounts, invoices and checks; (iv) that it conduct business in its own name; (v) that it pay liabilities from its own bank account; (vi) segregation of its assets and liabilities from other entities; (vii) an allocation of any overhead expenses that are shared with affiliated entities through intercompany agreements; and (viii) observing corporate formalities. The negative covenants include a prohibition on: (a) dividends other than up to a maximum of $3.5 million during the first two years of the term; (b) the guaranty of debts of its affiliates; (c) the pledge of any of its assets for the benefit of any affiliate; (d) liens or borrowings unless done in furtherance of the Facility; (e) acquisitions or sale of assets outside of the ordinary course of business; and (f) amendments to organizational documents. In accordance with the terms of the maintenance covenants Icagen-T will be required: (A) to maintain a daily average cash balance held in all of its accounts for the prior five days of at least $575,000; (B) to maintain minimum current ratio (as defined in the MSA) of 1.05; (C) to maintain a minimum net worth of $1.5 million and (D) not to run assays or perform other contract research services, in each case, that Icagen-T or its affiliates could reasonably provide at the Tucson Facility, at any site other than the Tucson Facility. Icagen-T is also obligated to fulfill certain reporting requirements specified in the MSA. At any time after the second anniversary of the effective date of the MSA that Icagen-T provides an independent third party valuation certified by the National Association of Certified Evaluators and Analysts that concludes that: (x) Icagen-T’s assets are greater than its liabilities at fair value (or fair market value); (y) Icagen-T has sufficient capital to operate its business; and (z) Icagen-T has the ability to pay its debts as they mature, then: (1) all affirmative covenants and negative covenants shall terminate; (2) all reporting obligations shall terminate; and (3) all future MSA Payments and the associated Payment credit mechanism will be converted into a take or pay arrangement.

 

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XRPro Technology

 

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 have received aggregate grant funding of $10,456,000 from twenty-one grants and contracts from United States governmental agencies; of which nine were granted from the Department of Defense and twelve were granted from the National Institutes of Health. Of such contracts, all have been completed and we received payment in full for all completed contracts.

 

Our XRpro® technology quantifies drug/protein interactions without the need to modify the drug, protein, or cell, or use expensive reagents. We apply this technology to assay a variety of cellular processes and enzymatic functions. Cellular processes include ion channel and transporter function, which we assay to determine whether a drug is safe and effective as modeled by certain cellular processes, which are typically specified by our customers.  Many technologies require that expensive reagents (substances that are added to a system in order to bring about a chemical reaction or is added to see if a reaction occurs) or “labels” be used to measure the properties of drug candidates during the drug discovery process. These reagents are expensive, toxic, subject to regulatory oversight and can introduce experimental errors. Label-free technologies are particularly sought by the pharmaceutical industry because it is believed that they provide superior data at lower cost. Our technology measures directly or indirectly multiple parameters for both drugs and proteins, including chemical and biochemical binding and functional effects. This allows, for example, the ability to measure multiple interactions between a single drug and multiple proteins in a single measurement. 

 

Our high throughput XRpro® technology allows us to perform assays that were previously unavailable or unacceptably expensive when performed using other technologies in specific cases. Advantages of XRpro® include the ability to perform measurements in challenging matrices, such as serum, and the ability to conduct assays of non-electrogenic transporters.

 

5

 

 

Strategy

 

Our goal is to become a leader in the discovery of drugs in the early phase of drug discovery that address disease areas with significant unmet medical need and commercial potential. We intend to diversify our business and increase awareness about our company through the execution of our strategy, key elements of which are as follows: 

 

  Artificial Intelligence (“AI”) in drug discovery will indelibly impact the way drugs are discovered, designed, created, distributed, and used. AI will drive more combination products, higher quality, and more personalization across the industry. At its core, the power of AI for pharma lies in its ability to mine and analyze enormous sets of raw data, such as those generated through R&D – an area in life sciences with the most to gain in these nascent stages of AI adoption. AI stands to bring a stronger degree of certainty in the clinical stage by enabling a more thorough understanding of biological and disease complexities that would, in turn, allow a more targeted approach at the onset, thus increasing the likelihood of clinical success and decreasing the associated risks. As the volume of data collected increases, so too does the potential of AI to have a transformative impact on the industry .

 

  Maximize and strengthen and expand our core drug discovery technologies and development capabilities. All of our research programs have resulted from our core drug discovery technologies. We have steadily built these technologies, which span the key disciplines of biology, chemistry, computational chemistry and pharmacology, over a number of years. We intend to continue to invest in these core technologies, as the key to our future research programs and drug candidate identification. We are focusing a significant portion of our business efforts on increasing our partnerships that utilize our scientific expertise and technologies to aid in their determination of which molecules to advance into late stage preclinical and clinical trials.  This couples our depth of expertise with that of our partner which we believe increases our probability of success.

 

  Grow our strategic alliances with leading pharmaceutical and biotechnology companies . We plan to selectively enter into new additional strategic alliances with leading pharmaceutical and biotechnology companies to assist us in advancing our drug discovery and development programs. We expect that these alliances will provide us with access to the therapeutic area expertise and research, development and commercialization resources of our collaborators as well as augment our financial resources. We expect that in some of these alliances we will seek to maintain rights in the development of drug candidates and the commercialization of drugs as part of our effort to build our  internal clinical development and sales and marketing capabilities.

 

  Build and advance our product candidate pipeline. Through our ion channel drug discovery and development programs, we have created a pipeline of drug candidates that address diseases with significant unmet medical need and commercial potential across a range of therapeutic areas. We plan to aggressively pursue the development and commercialization of these drug candidates. We believe that the breadth of our capabilities in ion channel drug discovery technology and rare diseases will enable us to continue to identify and develop additional drug candidates on an efficient and rapid basis. In addition to developing drug candidates internally, we continue to evaluate opportunities to in-license promising compounds and technologies.

 

  Enter into licensing relationships for our XRPro Technology. We are pursuing opportunities for the licensing of our proprietary XRPro technology, our legacy technology, which has unique capabilities in the transporter target class. For any licensing transactions that we may engage in, we anticipate receiving an up-front license fee, as well as fees for reagents we provide and our services in aiding the licensee with the use of the technology.

 

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Our Strengths

 

We have established ourselves as one of the leaders in the early stage drug discovery market. Below are our strengths that we believe will enable us to capture a significant portion of the early stage drug discovery market:

 

  Ability to Offer A Wide Range of Integrated Capabilities . Our capabilities span the key stages of early drug discovery and development up to IND. We have a leading biology expertise focused on ion channels which are important targets in neuroscience. Our capabilities in Icagen NC include a focus on ion channels and transporters, HTS and Lead optimization, ion channel profiling, assay development and x-ray fluorescence-based assays. At the Tucson Facility, we have leading biology expertise and platform capabilities in rare diseases and integrated drug discovery. Our Tucson Facility is also home to our in silico drug discovery platform applying both deep learning and AI-based approaches to advance our programs.

 

  Strong Alliances and Partnerships. Our partners include several of the top 20 pharmaceutical companies, biotechnology and mid-sized pharmaceutical companies along with academic institutions and foundations.

 

  Industry Trend Towards Outsourcing Innovation . During the last decade, many of the large pharmaceutical companies have downsized their research and development, leading to an increased need and willingness to outsource early drug discovery activities. As an indicator of this trend, Grand View Research (June 2018 report) estimates that the global drug discovery outsourcing market size is expected to reach $4.44 billion by 2025, with half of the drug discovery processes anticipated to be outsourced, thereby increasing the number of collaborations among drug discovery partners and key pharmaceuticals players (1) . The report further states that lead identification and candidate optimization is slated for impressive growth. The urgent need to identify potential drug candidates for various chronic diseases is anticipated to fuel growth for outsourcing of early drug discovery activities, such as those that we provide. Grand View Research in its November 2017 report estimates that the global preclinical outsource market is anticipated to reach $6.6 billion in revenues in 2025 and it attributes the growing demand for quality partners to the number of complex drugs entering preclinical trials and growing pressure to curb research and development expenses (2) .

 

  Highly Experienced Team. Our team is derived from two key acquisitions of drug discovery experts in neuroscience, the Pfizer Acquisition, and rare disease, the Sanofi Acquisition. The teams at Icagen NC and the Tucson Facility have extensive experience over the last 20 plus years performing early drug discovery within Pfizer and Sanofi respectively, delivering Leads from the pre-clinical stage to the clinical candidate. Our team has a deep internal knowledge base in neuroscience and rare diseases that enables us to more rapidly move drug discovery projects forward.

 

  Novel Asset Portfolio That Can Be Used for Partnership/ Collaboration Opportunities . We have developed in house a portfolio of assets targeting different indications that we believe would be ideal candidates for partnership opportunities. In May 2018, we announced our first such collaboration with the Cystic Fibrosis Foundation to discover therapies to treat cystic fibrosis and in December 2018, we announced our second such collaboration with Roche to discover therapies for certain neurological diseases.

 

  Large Markets for Our Focus Research Areas . We have ongoing alliances and partnerships with pharmaceutical and biotechnology companies, foundations and academic institutions in many areas of neurological and rare diseases. These disease areas present markets with huge unmet medical needs and opportunities of significant revenue. According to the World Health Organization approximately 14.0% of the global population is expected to suffer from some form of central nervous system disorder by 2020 and that number is expected to remain fairly constant through 2030 (3) . A rapidly increasing geriatric population base results in increased levels of incidence of central nervous system disorders. Central nervous system disorders are one of the three main therapeutic areas worldwide and are expected to reach $128.9 billion according to a Grand View Research July 2017 report (4) . In addition, the rare disease market is also expanding and Grand View Research in its report published in June 2017 estimated that the global cystic fibrosis therapeutics market size was $3.56 billion in 2016 (5) . According to the data published by Cystic Fibrosis Foundation, the incidence of these hereditary disorders is constantly growing; in the U.S., in 2017, there were 29,887 patients as compared to the 27,607 patients in 2012 (6) .

 

 

(1) Grand View Research, Drug Discovery Outsourcing Market worth $4.4 Billion by 2025, Report June 2018.
(2) Grand View Research Pre-clinical CRO Market Size worth $6.6 Billion by 2025/CAGR 8.3% Report, November 2017.
(3) World Health Organization, Neurological Disorders: public health challenges Report.
(4) Grand View Research, CNS Therapeutics Market worth $128.9 Billion by 2025/CAGR 5.9%, July 2017.
(5) Grand View research, Cystic Fibrosis (CF) Therapeutics Market Analysis by Drug class (Pancreatic Enzyme Supplements, Mucolytics, Bronchodilators, CTFR Modulators), By Route of Administration, By Region and Segment Forecasts, 2018-2025, June 2017.
(6) Cystic Fibrosis Foundation, Annual Data Report 2017: Cystic Fibrosis Foundation Patient registry, August 2017.

 

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Industry Overview

 

Pharmaceutical research and development organizations are under pressure to deliver differentiated products while holding spending flat. During the last decade, many of the large pharmaceutical companies have downsized their research and development, leading to an increased need and willingness to outsource early drug discovery activities. Thus, to invest their R&D budget more efficiently, the pharmaceutical industry has been increasing the segment of the budget dedicated for outsourcing and partnering. This leads to increased flexibility to address the changing landscape in the discovery world and to reduce significantly the fixed costs for headcounts. In addition, this allows rapid access to specific know-how instead of building up know-how internally which is time and resource intensive. For the foreseeable future, outsourcing is expected to increase even further as a proportion of R&D spending, including significant investment in the early part of the discovery phase. Meanwhile, big pharma’s well-known innovation gap, including the absence of promising preclinical leads in their pipelines, has been further increased. Therefore, we believe we are evolving at an opportune time as a leading drug discovery company, offering outsource services to support the growing need of the pharmaceutical industry while in parallel generating proprietary leads for innovative therapies for diseases with a high unmet medical need.

   

Source and Availability of Raw Materials

 

In general, most of the materials we use for our research operation are readily available from multiple suppliers including specialty chemicals for certain types of assays. We do, however, conduct high throughput electrophysiology experiments on specific pieces of equipment from multiple vendors. In these cases, the consumables (i.e. chips or plates) are manufactured and sold by the same vendors who manufacture the equipment. Should these vendors fail to deliver the consumables in a timely manner this could adversely affect our assay services operation.

 

Research and Development

 

For the years ended December 31, 2018 and 2017, we spent approximately $2,187,190 and $3,328,843, on research and development salaries. For more information regarding our research and development expenses, please see “Critical Accounting Policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Intellectual Property

 

Patents and Trade Secrets

 

Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

 

We are maintaining and building our patent portfolio by filing new patent applications and prosecuting existing applications. In total, we hold approximately 75 patents, both U.S. and foreign, and approximately 10 pending patent applications, both U.S. and foreign, all related to our X-ray fluorescence-based technologies. As shown below, these patents and patent applications are spread across roughly 9 technology families.

 

8

 

 

Our patent estate as of April 11, 2019  is summarized below:

 

  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 2021;

 

  Advanced Drug Development and Manufacturing, which includes about 20 issued foreign patents, in Europe, Japan, and Hong Kong, expected to expire in 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 issued over 15 issued patents in the U.S. Europe, and Japan, which are expected to expire in 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 2028 and pending applications in U.S. and Japan, which, if issued, are also expected to expire in 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 2030/2031, and pending applications in U.S., Europe, and China, which, if issued, are also expected to expire in 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.

 

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications that we license will result in the issuance of any patents. Our issued patents and those that may issue in the future, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may have for our products. In addition, our competitors may independently develop similar technologies or duplicate any technology developed by us, and the rights granted under any issued patents may not provide us with any meaningful competitive advantages against these competitors.

 

We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and other contractors, as well as physical security of our premises and our information technology systems. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

 

Competition

 

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face competition from many different sources and organizational sizes, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies and private and public research institutions. Many of the major multi-national contract research organizations offer some similar assay services to those we provide. These include companies with operations in the US, China, Europe and Asia. There are also a small number of private companies of similar size to us that provide ion channel-related services. In addition, we also compete in the pre-clinical drug discovery space with in-house groups of pharmaceutical and biotechnology companies as well as universities.

 

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Many of our competitors have significantly greater financial resources and expertise in research and development. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Our commercial opportunity will be reduced or eliminated if our competitors develop screening services that are more effective, faster or are less expensive than any products that we may develop. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, as well as customers.

 

Government and Environmental Regulation and Laws

 

We currently operate two laboratories, one in our principal headquarters in Durham, North Carolina and the other in our facility located in Tucson, Arizona. Our laboratory services are subject to various regulatory requirements and our standard operating procedures are written in accordance with appropriate regulations and guidelines for operations.

 

There are certain licensing and regulations under federal, state and local laws relating to hazard communication and employee right-to- know regulations, our use and handling and disposal of bio-medical specimens and hazardous waste. In addition, there are regulations related to ensuring the health and safety of laboratory employees. Our laboratories are subject to applicable laws and regulations as appropriate from the Nuclear Regulatory Commission, Environmental Protection Agency, the Department of Transportation, and the National Fire Protection Agency and the Resource Conservation and Recovery Act. In addition, the Nuclear Regulatory Commission has rules and regulations regarding the use of x-ray devices and radioactive materials. To the best of our knowledge we are currently in compliance in all material respects with such laws and continual endeavors to maintain compliance. Lack of compliance with such laws could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

 

The Occupational Safety and Health Administration have also established extensive requirements relating to workplace safety for healthcare employers whose workers may be exposed to blood-borne pathogens. Our employees receive initial and periodic training focusing on lab safety including blood-borne pathogens.

 

The use of controlled substances in testing for drugs with a potential for abuse is regulated in the United States by the U.S. Drug Enforcement Administration. Our laboratories have all necessary licenses from the U.S. Drug Enforcement Administration for the use of controlled substances.

 

The United States has addressed the disclosure of confidential personal data with increased regulation. In the United States, various federal and state laws address the security and privacy of health and other personal information. We will continue to monitor our compliance with applicable regulations.

 

The regulations of the U.S. Department of Transportation, the U.S. Public Health Service and the U.S. Postal Service apply to the surface and air transportation of laboratory specimens. Our laboratory also must comply with the applicable International Air Transport Association regulations, which govern international shipments of laboratory specimens.

 

Company History

 

Our company, formerly known as XRpro Sciences and Caldera, was founded in 2003 at the request of the then director of Los Alamos National Laboratory (“LANL”) for the purpose of commercializing the use of x-ray fluorescence to measure the chemical composition of pharmaceuticals. In March 2015, we effected a 1-for -2 reverse stock split of our common stock. In July 2015, we expanded our services and capabilities and entered into an asset purchase agreement with Pfizer Research (NC), an indirect subsidiary of Pfizer (“Pfizer Research”), whereby certain assets were acquired from Pfizer Research, including the name Icagen. We moved our headquarters to Research Triangle Park, Durham, North Carolina, where the Pfizer subsidiary’s operations were conducted and on August 28, 2015 changed our name to Icagen, Inc.

 

Pfizer Research was founded in 1992 as a start-up biotech to discover, develop and commercialize small molecules targeting ion channels. Pfizer Research sent its first molecule into the clinic for sickle cell anemia in 1999. Over the years Pfizer Research also provided access to its innovative discovery platform. In 2007, Pfizer Research entered into a collaborative agreement with Pfizer to identify novel compounds targeting voltage-gated sodium channels for the treatment of pain. Due to the success of the programs, Pfizer Research was acquired in 2011 by Pfizer. Pfizer integrated Pfizer Research into Neusentis, which was a biotech-like unit within Pfizer combining research in pain, sensory disorders, and regenerative medicine for the next 4 years. In an effort to move to a more variable (outsourced) R&D model, Pfizer in July 2015 divested Pfizer Research to us and we re-launched the Pfizer Research team and capabilities under the Icagen name.

 

Since the Pfizer Research spinout from Pfizer, we have experienced accelerated growth and market acceptance as a leader in the area of ion channel and transporter targets with major large pharma clients and biotech companies. We then began to look for ways to leverage that success and did so in July 2016 with the newly acquired Icagen Tucson business from Sanofi which added a complete integrated drug discovery capability beyond ion channels and transporters covering most classes of drug discovery targets.

 

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The Tucson Research Center, a two-story laboratory and office building with approximately 113,950 square feet of space located in the Town of Oro Valley, Pima County, Arizona (the “Tucson Facility”), which we acquired from Sanofi in July 2016, enhances our depth of expertise as a specialized pharmaceutical services company, enabling us to offer a broad range of integrated drug discovery services in a growing market. The Tucson Facility provides capacity in cell models, human biomarkers and stem cells-based assays. In addition, the site provides compound management services, HTS and Hit identification, in vitro pharmacology, medicinal chemistry, computational chemistry and ADME, as well as high volume biology with a flexible robotic infrastructure capable of performing high throughput screening in ultra-high 1536 format.

 

Corporate Information

 

We were incorporated in the State of Delaware on November 12, 2003 under the name Caldera Pharmaceuticals, Inc. On December 4, 2014 we changed our name to XRpro Sciences, Inc. and on August 28, 2015, after our acquisition of certain assets of Pfizer Research, we changed our name to Icagen, Inc. Our principal executive offices are located at 4222 Emperor Blvd., Suite 350, Durham, North Carolina 27703, our telephone number is (919) 941-5206.

 

Discussions with respect to our operations included herein include the operations of our operating subsidiary, Icagen Corp (formerly known as XRpro Corp), formed on July 10, 2010 and Icagen-T, Inc, formed on June 16, 2016, a subsidiary formed to acquire the assets of Sanofi’s ultra-high-throughput biology, screening and chemistry capabilities and research facility in Oro Valley, Arizona. We have two other subsidiaries, XRpro Sciences Inc., formed on December 10, 2015 and Caldera Discovery Inc., formed on March 26, 2015, which have always been dormant.

 

Additional information about our company is contained at our website, www.icagen.com . Information contained on our website is not incorporated by reference into, and does not form any part of, this Annual Report on Form 10-K. We have included our website address as a factual reference and do not intend it to be an active link to our website. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the investor relations page of our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The following Corporate Governance documents are also posted on our website: Code of Conduct, Code of Ethics for Financial Management and the Charters for the Audit Committee, Compensation Committee and Nominations Committee of the Board of Directors.

 

Employees

 

As of the date of this Annual Report on Form 10-K, we employed 68 employees, of which 66 are full time employees. A significant number of our management and professional employees have had prior experience with pharmaceutical, biotechnology or medical product companies. None of our employees are covered by collective bargaining agreements, and management considers relations with our employees to be good.

 

Item 1A. Risk Factors

 

Investing in our common stock involves a high degree of risk. In addition to the risks related to our business set forth in this Annual Report on Form 10-K and the other information included and incorporated by reference in this Annual Report on Form 10-K, you should carefully consider the risks described below before purchasing our common stock. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations.

 

We have a history of losses and there can be no assurance that we will generate or sustain positive earnings.

 

For the years ended December 31, 2018 and 2017 we had a net loss of $(13,039,313) and ($6,110,434), respectively. The only year that we had net income was the year ended December 31, 2014 when we received proceeds from the settlement of the Los Alamos National Security, LLC matter. We cannot be certain that our business strategy will ever be successful. During the years ended December 31, 2017 and 2018, we did not generate sufficient cash from ongoing operations to pay our expenses and required additional debt and equity funding in addition to revenue generated from operations to pay our expenses. Future revenues and profits, if any, will depend upon various factors, including the success, if any, of our expansion plans and our services to biotechnical and pharmaceutical customers, successful development and commercialization of product candidates, marketability of our technology, instruments and services, our ability to maintain favorable relations with manufacturers and customers, and general economic conditions. There is no assurance that we can operate profitably or that we will successfully implement our plans. There can be no assurance that we will ever generate positive earnings.

 

A significant portion of our net revenue has been generated from services provided to a limited number of our customers.

 

For the year ended December 31, 2018, we derived 100% of our revenues from commercial revenues for services provided to pharmaceutical and biotech customers, of which 83.4% was derived from seven customers. For the year ended December 31, 2017 we derived 56.2% of our revenue from commercial revenues (of which 78.8% of our commercial revenues was for services provided to five large pharmaceutical customers and one biotech company); 42.4% of our revenue was from subsidy revenue and the remaining 1.4% was derived from government grants. Prior to the acquisition of certain of the assets of a subsidiary of Pfizer we derived substantially all of our revenue from services we performed for two governmental agencies. Our business model which now concentrates on commercial customers is relatively new and there can be no assurance that we will be able to increase the revenue derived from commercial customers to a significant amount. Our master services agreement with Sanofi guaranteed $32 million over a five-year period of which $27,500,000 has been received and a further $4,500,000 is expected to be paid in the next 18 months, subject to us meeting certain terms and conditions. There can be no assurance that we will attract a sufficient number of other pharmaceutical companies to provide our services to or that Pfizer, Sanofi and our other customers will continue to use our services or that Sanofi will increase the scope of the services required. We do not have enough information regarding our new business model to assess its success.

 

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Our consolidated financial statements have been prepared assuming that we will continue as a going concern.

 

Although we have generated revenue, our operating losses, negative cash flows from operations and limited alternative sources of revenue raise substantial doubt about our ability to continue as a going concern. During the years ended December 31, 2018, and 2017 we did not generate enough revenue from operations to sustain our operations. We will be required to increase our revenue from customers and/or obtain additional financing in order to pay existing contractual obligations (which include amounts required to maintain the Tucson Facility and the amounts owed under our loans) and to continue to cover operating losses and working capital needs. We cannot assure you that our revenue generated from operations or any future funds we raise will be sufficient to support our continued operations.

 

The audit report of RBSM LLP for the fiscal year ended December 31, 2018 contained a paragraph that emphasizes the substantial doubt as to our continuance as a going concern. If we cannot raise adequate capital on acceptable terms, we will need to revise our business plans.

  

We will need to generate significant revenue or raise additional capital to fully implement our business plan and meet our existing obligations, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment. 

 

We incurred a net loss of $(13,039,313) for the year ended December 31, 2018 and a net loss of $(6,110,434) for the year ended December 31, 2017. Achieving and sustaining profitability will require us to increase our revenues and manage our product, operating and administrative expenses. We cannot guarantee that we will be successful in achieving profitability. Pursuant to the terms of our asset purchase agreement with Pfizer, as amended July 15, 2016 (the Pfizer APA), we are required to pay Pfizer, commencing May 2017, minimum quarterly payments of $50,000 each for the period January 2017 to December 31, 2018, including interest on the difference between the unpaid deferred purchase consideration and the $50,000, a lump sum of unpaid deferred purchase consideration due for the period January 1, 2017 to December 31, 2018, the deferred portion of the quarterly payments from January 2017 until December 31, 2018 on March 31, 2019 and thereafter a minimum payment of $250,000 each quarter up to a maximum of $10,000,000. Pursuant to the terms of our asset purchase agreement with Sanofi (the Sanofi APA), our subsidiary, Icagen-T, agreed to maintain and pay the maintenance costs of the Sanofi chemical libraries that remain at the Tucson Facility. We are also required to make significant payments under the terms of our outstanding term loans. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations at their current level and in order to fully implement our business plan. We do not have any commitments in place for additional funds. If needed, additional funds may not be available on favorable terms, or at all. As of the date hereof, we expect that our current cash and revenues generated from services, our private placement financings will provide us with enough funds to continue our operations at our current level for the next six months. Unless we raise additional funds or increase revenues, we will be forced to curtail our operations and limit our marketing expenditures. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities, such as senior secured notes, may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in achieving profitability and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease our operations significantly, it could result in the loss of all of your investment in our stock.

 

During the past three years, a significant portion of our net revenue at our Tucson Facility has been generated from services provided to Sanofi. 

 

Our failure to increase our customer base and the services we provide at the Tucson Facility will adversely affect our business. Our Sanofi Master Services Agreement (Sanofi MSA) required Sanofi to make significant payments to us during the next two and a half years in consideration of Icagen-T providing services to Sanofi, so long as Icagen-T complies with the covenants set forth in the Sanofi MSA. The Sanofi MSA requires that Sanofi make payments to us of an aggregate $4,500,000 over the next two and a half years. Inasmuch as prior to the acquisition of the Tucson Facility, the Tucson Facility was used solely to service Sanofi and had no third-party customers, Sanofi continues to be a significant customer of Icagen-T. We cannot guarantee when, or if ever, our dependence upon Sanofi as a major customer at the Tucson Facility will end. There can be no assurance that we will attract a sufficient number of other pharmaceutical companies to provide our services to or that Sanofi will increase the scope of the services required. We do not have enough information regarding our new business model to assess its success.

 

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Our business is dependent upon our ability to attract new commercial customers.

 

Our future success is dependent upon us attracting new commercial customers and increasing the services that we provide to existing customers, including Sanofi and Pfizer. The $1,000,000 annual guaranteed payment that we received from Pfizer under the Pfizer MSA terminated on June 30, 2017. The payments that we are to receive from Sanofi under the terms of the Sanofi MSA are subject to termination in the event that we do not comply with certain covenants contained in the Sanofi MSA that are unrelated to our performance of services under the Sanofi MSA. In addition, the guaranteed payments from Sanofi over the next two and a half years are significantly less than those paid in the first two and a half years and will not be sufficient to cover the costs of the operations at the Tucson Facility. We do not have enough information regarding our new business model which concentrates on collaborations/partnerships and commercial customers to assess our success. Our future success is dependent upon us attracting new customers and increasing the services that we provide to existing customers, including Sanofi and Pfizer. There can be no assurance that we will be able to attract new commercial customers or increase the services that we provide to existing customers, including Pfizer and Sanofi.

 

We depend significantly on our relationship with our third party collaborators.

 

A termination or expiration of our current collaboration with Sanofi and the Cystic Fibrosis Foundation and Roche or any potential future collaborations would adversely affect us financially and could harm our business reputation. The Sanofi MSA provides that Icagen-T will perform services for Sanofi at our Tucson Facility for the next two and half years for payments from Sanofi to Icagen-T of $4.5 million, so long as Icagen-T complies with the covenants set forth in the Sanofi MSA. Our collaboration with Sanofi and the Cystic Fibrosis Foundation and Roche or future collaborations we may enter into may not be scientifically or commercially successful.

 

Collaborations with pharmaceutical companies and other third parties often are terminated or allowed to expire by the other party. A termination or expiration of our current collaboration with Sanofi and the Cystic Fibrosis Foundation, Roche or any potential future collaborations would adversely affect us financially and could harm our business reputation.

    

If we do not comply with certain of the covenants under the Sanofi MSA, Sanofi has the right to terminate the Sanofi MSA and foreclose on its lien on the Tucson Facility.

 

The Sanofi MSA has several affirmative and negative covenants as well as certain maintenance covenants with which Icagen-T must comply. Under the Sanofi MSA, the failure to comply with the maintenance covenants and certain responsibilities with respect to maintenance of the chemical libraries results in the automatic termination of the Sanofi MSA which would result in termination of the MSA Payments to us as well as the right of Sanofi to exercise its rights under the Deed of Trust and foreclose on its $5,000,000 lien on the Tucson Facility.

 

Our business is difficult to evaluate because we have recently changed our business model to offering a full complement of screening services to the broader pharmaceutical sector. There can be no guarantee that we will be able to effectively integrate the Icagen and Sanofi business.

 

Since our acquisition of the Pfizer Research assets, we have shifted our business model from offering only our XRpro screening services to governmental agencies as we did in the past offering a full complement of screening services to the broader pharmaceutical sector. With the addition of the assets acquired from Sanofi, we now offer ultra-high-throughput biology, screening and chemical capabilities. We have also entered into partnerships/collaborations that require estimates of capital and personnel required to perform under the partnerships/collaborations. There is a risk that we will be unable to successfully conduct our business under our new model. Our estimates of capital, personnel and equipment required for our expanded business model are based on the experience of management and businesses they are familiar with. We are subject to the risks such as our ability to implement our business plan, market acceptance of our services, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources, competition from better funded and experienced companies, and uncertainty of our ability to generate revenues. There is no assurance that our activities will be successful or will result in any revenues or profit, and the likelihood of our success must be considered in light of the stage of our development. Even if we generate revenue, there can be no assurance that we will be profitable. In addition, no assurance can be given that we will be able to consummate our business strategy and plans, as described herein, or that financial, technological, market, or other limitations may force us to modify, alter, significantly delay, or significantly impede the implementation of such plans. We have insufficient results for investors to use to identify historical trends or even to make quarter to quarter comparisons of our operating results. You should consider our prospects in light of the risk, expenses and difficulties we will encounter as an early stage company. Our revenue and income potential is unproven and our business model is continually evolving. We are subject to the risks inherent to the operation of a new business enterprise and cannot assure you that we will be able to successfully address these risks.

 

To date we have established only two partnerships/collaborations and there is no assurance that we will receive development and commercial milestone payments or royalty payments from such partnerships/collaborations.

 

Although we expect to generate significant future revenue from partnerships and collaborations as well as license revenue for the use of our technology, to date, we have not derived significant revenue from such sources and have only entered into two such partnership/ collaborations. To date, our sole source of revenue has been our provision of services and the upfront payments received from our partnerships/collaborations. To date we have entered into two partnerships/ collaborations for which we have an opportunity to receive development and commercial milestone payments and/or royalty payments; however, any such payments, if received, will not be received for many years and are dependent upon the successful commercialization of a drug candidate for which there can be no assurance. Therefore, there can be no assurance that we will ever receive the milestone payments or royalty payments from such partnerships/collaborations.

 

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Our Chairman of the Board and other members of our Board beneficially owns a substantial portion of our outstanding common stock and Series C Preferred Stock resulting in ownership by him of a significant percentage of our voting power, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our company.

 

The concentration of ownership of our stock could discourage or prevent a potential takeover of our company that might otherwise result in an investor receiving a premium over the market price for his shares. Our Chairman of the Board owns 164,284 shares of our common stock, 685,704 shares of the Series C Preferred Stock, which shares have the right to 2,057,112 votes and exercisable options, representing beneficial ownership of 16.9% of our outstanding shares of common stock and 25.3% of our voting power. In addition, the holders of the Series C Preferred Stock have the right to elect one director to our Board of Directors and have certain consent rights. In addition, the directors as a group beneficially own 2,671,662 shares of our common stock, 757,132 shares of the Series C Preferred Stock, which shares have the right to 2,271,396 votes and exercisable warrants and options, representing beneficial ownership of 32.0% of our outstanding shares of common stock and 34.0% of our voting power. Accordingly, our Chairman of the Board alone and our Board members together would have significant influence over the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our securities, you may have no effective voice in the management of our company. Such significant influence over control of our company may adversely affect the price of our common stock. Our Chairman of the Board as well as our board of directors may be able to significantly influence matters requiring approval by our stockholders, including the election of directors, as well as mergers or other business combinations which require the vote of a majority of our outstanding shares. Such significant influence may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

 

  We may not be able to utilize our tax net operating loss carry-forwards to offset future taxable income.

 

At December 31, 2018 we had approximately $28,041,000 in tax net operating loss carry-forwards available to offset future taxable income, thereby potentially reducing our future tax expense/liabilities. However, these tax net operating loss carry-forwards may be limited in accordance with IRC Section 382 following a more than 50 percentage point change in ownership, in aggregate during any three-year look-back period. This potential limitation on our ability to use our tax net operating loss carry-forwards to offset future taxable income could result in increased tax expense/liabilities and decreased net earnings. These loss carry-forwards expire through 2034 if unused.

 

We must expend a significant amount of time and resources to develop new products, and if these products do not achieve commercial acceptance, our operating results may suffer.

 

We expect to spend a significant amount of time and resources to develop new products, the molecules we own, new products and refine existing products and have spent significant time and money developing our XRpro® instruments. We commenced development of our XRpro® instruments in the year 2006 and since then have developed four enhanced versions of our original instrument; each enhancement was developed over an approximate two-year period of time. We may also be required to make modifications or enhancements at the request of our customers. Our expense for research and development salaries for the year ended December 31, 2018 was $2,187,190 and for the year ended December 31, 2017 was $3,328,843, most of which was used to develop assays for commercial applications. In light of the long product development cycles inherent in our industry, any developmental expenditure will typically be made well in advance of the prospect of deriving revenues from the sale of new services. In addition, since our potential customers are not expected to be obligated by long-term contracts to purchase our services, our anticipated services orders may not materialize, or orders that do materialize may be canceled. As a result, if we do not achieve market acceptance of services we provide, our operating results will suffer. Our services may also be priced higher than our competitors, which may impair commercial acceptance. We cannot predict whether new services that we expect to introduce will achieve commercial acceptance. 

 

If we deliver services with defects, our credibility will be harmed and the sales and market acceptance of our services will decrease.

 

Our services are complex and may at times contain errors, defects and bugs when introduced. If in the future, we deliver services with errors, defects or bugs, our credibility and the market acceptance and sales of our services would be harmed. Further, if our services contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We may agree to indemnify our customers in some circumstances against liability arising from defects in our services. In the event of a successful product liability claim, we could be obligated to pay significant damages.

 

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Most of our potential customers are from the pharmaceutical and biotechnology sector and are subject to risks faced by those industries.

 

We expect to derive a significant portion of our future revenues from sales to customers in the pharmaceutical and biotechnology sector, which includes governments and private companies. We expect a substantial part of our future revenue to be derived from pharmaceutical companies. As a result, we will be subject to risks and uncertainties that affect the pharmaceutical and biotechnology industries, such as availability of capital and reduction and delays in research and development expenditures by companies in these industries, pricing pressures as third-party payers continue challenging the pricing of medical products and services, government regulation, and the uncertainty resulting from technological change.

 

In addition, our future revenues may be adversely affected by the ongoing consolidation in the pharmaceutical and biotechnology industries, as well as decisions of pharmaceutical companies to conduct the services we provide in house, which would reduce the number of our potential customers. Furthermore, we cannot assure you that the pharmaceutical and biotechnology companies that may be our customers will not develop their own competing products or capabilities, or choose our competitors’ technology instead of our technology.

 

Many of our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our services.

 

We operate in a highly competitive industry and face competition from companies that design, manufacture and market instruments for use in the life sciences research industry, from genomic, pharmaceutical, biotechnology and diagnostic companies and from academic and research institutions and government or other publicly-funded agencies, both in the United States and elsewhere. We may not be able to compete effectively with all of these competitors. Many of these companies and institutions have greater financial, engineering, manufacturing, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of services, which could impair sales of our services. Moreover, there has been significant merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our potential customers are large companies that require global support and service, which may be easier for our larger competitors to provide. Many of the large pharmaceuticals companies have the financial resources to conduct the services we provide internally.

 

We believe that competition within the markets we serve is primarily driven by the need for innovative products that address the needs of customers. We attempt to counter competition by seeking to develop new services and provide quality, cost-effective services that meet customers’ needs. We cannot assure you, however, that we will be able to successfully develop new services or that our existing or new services will adequately meet our potential customers’ needs.

  

Rapidly changing technology, evolving industry standards, changes in customer needs, emerging competition and frequent new product and service introductions characterize the markets for our services. To remain competitive, we may be required to develop new services and periodically enhance our existing services in a timely manner. We may face increased competition as new companies enter the market with new technologies that compete with our services and future services. We cannot assure you that one or more of our competitors will not succeed in developing or marketing technologies products or services that are more effective or commercially attractive than our services or future services, or that would render our technologies obsolete or uneconomical. Our future success will depend in large part on our ability to maintain a competitive position with respect to our current and future technologies, which we may not be able to do. In addition, delays in the provision of our services may result in loss of market share due to our customers’ purchases of competitors’ services during any delay.

 

We are dependent upon equipment manufacturers for consumables.  

 

The consumables (i.e., chips or plates) used in our equipment upon which we conduct high throughput electrophysiology experiments are manufactured and sold by the same vendor who manufactures the equipment. Although we believe other vendors could provide these consumables, we have no assurance as to timing or price. Should this vendor fail to deliver the consumables in a timely manner this could adversely affect our assay services operations.

 

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We depend on our key personnel, the loss of whom would impair our ability to compete.

 

We are highly dependent on the employment services of key management, engineering and scientific staff. The loss of the service of any of these persons could seriously harm our service offerings and commercialization efforts. In addition, research, scientific and biological development and commercialization will require additional skilled personnel in areas such as chemistry and biology, and software and electronic engineering and recruitment and retention of personnel, particularly for employees with technical expertise, is uncertain. If we are unable to hire, train and retain a sufficient number of qualified employees, our ability to conduct and expand our business could be seriously reduced. Since our facilities are located in two specific cities, it may be difficult for us to attract employees in the cities in which our facilities are located. The inability to retain and hire qualified personnel could also hinder the planned expansion of our business and may result in us relocating some or all of our operations.

 

We may in the future need to initiate lawsuits to protect or enforce our patents and other proprietary rights, which would be expensive and, if we lose, may cause us to lose some of our intellectual property rights, which would reduce our ability to compete in the market.

 

Our success will depend in part upon protecting our technology from infringement, misappropriation, duplication and discovery, and avoiding infringement and misappropriation of third party rights. We intend to rely, in part, on a combination of patent and contract law to protect our technology in the United States and abroad.

 

The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following:

 

  the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;

 

  the claims of any patents which are issued may not provide meaningful protection;

 

  we may not be able to develop additional proprietary technologies that are patentable;

 

  the patents licensed or issued to us or our customers may not provide a competitive advantage;

 

  other companies may challenge patents licensed or issued to us or our customers;

 

  patents issued to other companies may harm our ability to do business;

 

  other companies may independently develop similar or alternative technologies or duplicate our technologies; and

 

  other companies may design around the technologies we have licensed or developed.

 

There can be no assurance that any of our patent applications or licensed patent applications will issue or that any patents that may issue will be valid and enforceable. We may not be successful in securing or maintaining proprietary patent protection for our products and technologies that we develop or license. In addition, our competitors may develop products similar to ours using methods and technologies that are beyond the scope of our intellectual property protection, which could reduce our anticipated sales. While some of our technologies have proprietary patent protection, a challenge to these patents can subject us to expensive litigation. Litigation concerning patents, other forms of intellectual property, and proprietary technology is becoming more widespread and can be protracted and expensive and distract management and other personnel from performing their duties. 

 

We also rely upon trade secrets, unpatented proprietary know-how, and continuing technological innovation to develop a competitive position. If these measures do not protect our rights, third parties could use our technology, and our ability to compete in the market would be reduced. In addition, employees, consultants and others who participate in the development of our technologies may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries and our trade secrets may become known through other means not currently foreseen by us. We cannot assure you that others will not independently develop substantially equivalent proprietary technology and techniques or otherwise gain access to our trade secrets and technology, or that we can adequately protect our trade secrets and technology.

 

There can be no assurance that third parties will not assert infringement or other claims against us with respect to rights to any of our products. Litigation to protect and defend the rights to our licensed technology or to determine the validity of any third-party claims could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. If we determine that additional rights are necessary for the development of our product(s) and further determine that a license to additional third-party rights is needed, there can be no assurance that we can obtain a license from the relevant party or parties on commercially reasonable terms, if at all. We could be sued for infringing patents or other intellectual property that purportedly cover products and/or methods of using such products held by persons other than us. Litigation arising from an alleged infringement could result in removal from the market, or a substantial delay in, or prevention of, the introduction of our products, any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

 

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Additionally, in order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Litigation may be necessary to:

 

  assert claims of infringement;

 

  enforce our patents;

 

  protect our trade secrets or know-how; or

 

  determine the enforceability, scope and validity of the proprietary rights of others.

 

Lawsuits could be expensive, take significant time and divert management’s attention from other business concerns. They would put our licensed patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. We may also provoke third parties to assert claims against us. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. If initiated, we cannot assure you that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable. During the course of these suits, there could be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors were to perceive any of these results to be negative, our stock price could decline.

  

We are subject to the risks of doing business internationally.

 

We currently offer our services to companies located outside of the United States, and therefore our business is subject to risks associated with doing business internationally, including:

 

  trade restrictions and changes in tariffs;

 

  the impact of business cycles and downturns in economies outside of the United States;

 

  unexpected changes in regulatory requirements that may limit our ability to export our services or sell into particular jurisdictions;

 

  import and export license requirements and restrictions;

 

  difficulties in maintaining effective communications with customers due to distance, language and cultural barriers;

 

  disruptions in international transport or delivery;

 

  difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices do not protect proprietary rights to as great an extent as do the laws and practices of the United States;

 

  difficulties in enforcing agreements through non-U.S. legal systems;

 

  longer payment cycles and difficulties in collecting receivables; and

 

  potentially adverse tax consequences.

 

If any of these risks materialize, our international sales could decrease and our foreign operations could suffer.

 

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We may acquire other businesses or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

 

As part of our business strategy, we may pursue acquisitions of businesses and assets. To date we have made two acquisitions, the acquisition of certain of the assets of Pfizer Research and the acquisition of the Tucson Facility from Sanofi. We also may pursue strategic alliances and joint ventures that leverage our technology and industry experience to expand our offerings or other capabilities. Though certain company personnel have business development and corporate transaction experience, including with licensing, and acquisitions, and strategic partnering, as a company we have limited experience with forming strategic alliances and joint ventures. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume known liabilities as well as unknown or contingent liabilities. Any future acquisitions also could result in us incurring significant debt or contingent liabilities as we did in the past, significant write-offs or the incurrence of debt, any of which could have a material adverse effect on our financial condition, results of operations and cash flows. Integration of an acquired company also may disrupt ongoing operations and require management resources that would otherwise focus on developing our existing business. We may experience losses related to investments in other companies, which could have a material negative effect on our results of operations. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, technology license, strategic alliance or joint venture.

 

To finance any acquisitions or joint ventures, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.

 

RISKS RELATED TO OUR DEBT OBLIGATIONS

 

The failure to comply with the terms of the Term Loans and Credit Agreements could result in a default under the terms of the notes and, if uncured, it could potentially result in action against our pledged assets.

 

In our August 2018 debt financing, we received advances in the aggregate principal amount of $7,250,000 (the “Icagen Term Loan”) pursuant to a Credit Agreement that we entered into 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 (the “Icagen Credit Agreement) and issued a warrant to purchase 723,550 shares of our common stock (the “Purchaser Warrants”), and Icagen-T received advances in the aggregate principal amount of $8,000,000 (the “Icagen-T Term Loan, collectively with the Icagen Term Loan, the “Term Loans”) pursuant to a Credit Agreement with the Lenders and Perceptive as administrative agent (the “Icagen-T Credit Agreement, together with the Icagen Credit Agreement, the “Credit Agreements”), which Term Loans are secured by a security interest in all of our existing and future assets, subject to existing security interests and exceptions. The Term Loans require us and Icagen-T, respectively, among other things, to maintain the security interest, make monthly installment payments, and meet various negative and affirmative covenants. In addition, on August 13, 2018, we issued our 10% Subordinated Promissory Note in the aggregate principal amount of $500,000 due on the earlier of: (x) the date that is twelve (12) months after its issue date or (y) our receipt of the proceeds of funding from our next collaboration/partnership (the “10% Subordinated Promissory Notes”), of which notes in the principal amount of $300,000 remain outstanding and are subordinated in certain respects to the Term Loans. If we or Icagen-T fails to comply with the terms of the Term Loans and/or the related agreements, the senior note holder could declare a note default and if the default were to remain uncured, the secured creditor would have the right to proceed against any or all of the collateral securing their Term Loans, subject to the first priority of our secured creditors. Any action by our secured or unsecured creditors to proceed against our assets would likely have a serious disruptive effect on our business operations. If we fail to comply with the terms of the Subordinated Notes, the note holder could declare a note default and if the default were to remain uncured, the creditor would have the right to proceed against us, subject to the first priority of our secured creditors.

 

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Servicing our debt requires a significant amount of cash. Our ability to generate sufficient cash to service our debt depends on many factors beyond our control.

 

Our ability to make payments on and to refinance our debt, to fund planned capital expenditures and to maintain sufficient working capital depends on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or from other sources in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. If our cash flow and capital resources are insufficient to allow us to make scheduled payments on our debt, we may need seek additional capital or restructure or refinance all or a portion of our debt on or before the maturity thereof, any of which could have a material adverse effect on our business, financial condition or results of operations. We cannot assure you that we will be able to refinance any of our debt on commercially reasonable terms or at all, or that the terms of that debt will allow any of the above alternative measures or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient cash flow to repay or refinance our debt on favorable terms, it could significantly adversely affect our financial condition and the value of our outstanding debt. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. There can be no assurance that we will be able to obtain any financing when needed.

 

Our substantial leverage may impair our financial condition and prevent us from fulfilling our obligations under the notes.

 

We have a substantial amount of indebtedness. As of December 31, 2018, principal debt owed under the Term Loans and 10% Subordinated Promissory Notes was $15.55 million (disclosed as $12.96 million net of debt discount of $2.59 million). Our substantial leverage could have important consequences to investors, including:

 

  making it more difficult for us to satisfy our obligations with respect to the Term Loans and other debt;

 

  increasing our vulnerability to general adverse economic and industry conditions by making it more difficult for us to react quickly to changing conditions;

 

  limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements;

 

  requiring a substantial portion of our cash flow from operations for the payment of interest on our indebtedness and reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions and general corporate requirements;

 

  limiting our flexibility in planning for, or reacting to, changes in our business, and the industry in which we operate; and

 

  placing us at a competitive disadvantage compared with our competitors that have less indebtedness.

 

Covenant restrictions under our indebtedness may limit our ability to operate our business.

 

The Term Loans contain, and our future indebtedness agreements may contain covenants that restrict our ability to finance future operations or capital needs or to engage in other business activities. The Term Loans restrict our ability and the ability of our restricted subsidiaries to:

 

  incur, assume or guarantee additional Indebtedness (as defined in the Term Loans);

 

  repurchase capital stock;

 

  make other restricted payments including, without limitation, paying dividends and making investments;

 

  create liens;

 

  sell or otherwise dispose of assets, including capital stock of subsidiaries;

 

  enter into agreements that restrict dividends from subsidiaries;

 

  enter into mergers or consolidations; and

 

  enter into transactions with affiliates

 

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In addition, the Credit Agreements also contain covenants requiring us and our subsidiaries to 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. The Credit Agreements also provide for specified quarterly minimum consolidated net revenue covenants of us and our subsidiaries for the trailing twelve month period ended on each such calculation date during the term of the Credit Agreements. In addition, the Credit Agreement also provides that it is an event of default if certain key persons (Richie Cunningham and Timothy Tyson) do not remain in certain positions with our company. A breach of any of these covenants would result in a default under our Term Loans. If an event of default under our Credit Agreements occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we were unable to pay such amounts, the lenders could proceed against the collateral pledged to them. We have pledged our inventory, accounts receivable, cash, securities, other general intangibles and the capital stock of certain subsidiaries to the lenders. In addition, Icagen-T has pledged all of its assets, including the facility located in Tucson, subject to the Sanofi lien. In such an event, we cannot assure you that we would have sufficient assets to pay amounts due on the Term Loans.

 

It may be difficult to realize the value of the collateral securing the Term Loans.

 

The collateral securing the Term Loans is subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the collateral agent for the notes and any other creditors that also have the benefit of liens on the collateral securing the Term Loans from time to time, whether on or after the date the Term Loans are issued. The existence of any such exceptions, defects, encumbrances, liens or other imperfections could adversely affect the value of the collateral securing the notes as well as the ability of the collateral agent to realize or foreclose on such collateral.

 

No appraisals of any collateral were prepared in connection with the Term Loans and appraisals relied upon were not currently obtained. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. Although we believe that the fair market value of the collateral exceeds the principal amount of the indebtedness secured thereby and the prior lien thereon, we cannot assure you that the fair market value of the collateral exceeds the principal amount of the indebtedness secured thereby and the prior lien thereon. The value of the assets pledged as collateral for the notes could be impaired in the future as a result of changing economic conditions, our failure to implement our business strategy, competition or other future trends.

 

Our failure to fulfill all of our registration requirements may cause us to suffer liquidated damages, which may be very costly.

 

Pursuant to the terms of the registration rights agreement that we entered into in connection with the Term Loans as well as our prior convertible note financing, we are required to file a registration statement with respect to securities issued to the Lenders upon their request within a certain time period and maintain the effectiveness of such registration statement. The failure to do so could result in the payment of damages by us. There can be no assurance as to when this registration statement will be declared effective or that we will be able to maintain the effectiveness of any registration statement, and therefore there can be no assurance that we will not incur damages with respect to such agreements.

 

RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK

 

The issuance of shares of common stock upon conversion of the Series C Preferred Stock and existing warrants would dilute the ownership of such holders and may adversely affect the market price of our common stock.

 

The conversion of the Series C Preferred Stock to common stock would dilute the ownership interest of existing holders of our common stock, and any sales in the public market of the common stock issuable upon conversion of the Series C Preferred Stock could adversely affect prevailing market prices of our common stock. Currently, we have 799,989 shares of Series C Preferred Stock outstanding that convert to 799,989 shares of common stock. Sales by such holders of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

 

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The holders of shares of the Series C Preferred Stock may exercise significant influence over us.

 

The holders of the Series C Preferred Stock will own approximately 11% of our shares of common stock on a fully diluted as-converted basis based on the number of shares of common stock outstanding as of the date hereof and have the right to votes equal to 27% of our outstanding voting securities.  

 

In addition, under the terms of the Certificate of Designation that governs the Series C Preferred Stock, the Series C Preferred Stock generally ranks, with respect to liquidation, dividends and redemption, senior to other securities and, so long as any shares of Series C Preferred Stock remain outstanding, the approval of the holders of 75% of the Series C Preferred Stock outstanding at the time of approval is required in order for us to, among other things, (i) alter or change adversely the powers, preferences or rights given to the Series C Preferred Stock or alter or amend the Certificate of Designation; (ii) amend our Articles of Incorporation or bylaws in any manner that adversely affects any powers, preferences or rights of the Series C Preferred Stock; (iii) authorize or create any series or class of stock ranking as to redemption, distribution of assets upon a Liquidation Event (as defined in the Certificate of Designation) or dividends senior to, or otherwise pari passu with, the Series C Preferred Stock; (iv) declare or make any dividends other than dividend payments on the Series C Preferred Stock or other distributions payable solely in common stock; (v) authorize any increase in the number of shares of Series C Preferred Stock or issue any additional shares of Series C Preferred Stock; or (vi) enter into any agreement with respect to any of the foregoing.

 

The holders of Series C Preferred Stock will have rights, preferences and privileges that are not held by, and are preferential to, the rights of our common stockholders.

 

Upon our liquidation, dissolution or winding up, the holders of the Series C Preferred Stock will be entitled to receive out of our assets, in preference to the holders of the common stock and any junior preferred stock, an amount per share equal to the greater of (i) the sum of the Accreted Value (as defined in the Certificate of Designation) plus an amount equal to all accrued or declared and unpaid dividends on the Series C Preferred Stock that have not previously been added to the Accreted Value, or (ii) the amount that such shares would have been entitled to receive if they had converted into common stock immediately prior to such liquidation, dissolution or winding up. In addition, upon consummation of a specified change of control transaction, each holder of Series C Preferred Stock will be entitled to have us redeem the Series C Preferred Stock at a price specified in the Certificate of Designation. These provisions may make it more costly for a potential acquirer to engage in a business combination transaction with us. Provisions that have the effect of discouraging, delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. If there are insufficient assets to pay in full such amounts, then the available assets will be ratably distributed to the holders of the Series C Preferred Stock in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common stock. The holders of Series C Preferred Stock also have a preferential right to receive cumulative dividends on the Accreted Value of each share of Series C Preferred Stock at an initial rate of 12% per annum, compounded quarterly.

 

In addition, the holders of the Series C Preferred Stock also have certain voting and conversion rights.

 

Our obligations to the holders of Series C Preferred Stock could limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. These preferential rights could also result in divergent interests between the holders of shares of the Series C Preferred Stock and holders of our common stock.

 

It is difficult for us to determine the number of shares of common stock that we will be required to issue upon conversion of the Series C Preferred Stock and exercise of our outstanding warrants issued with the Series C Preferred Stock.

 

Since the conversion price of our Series C Preferred Stock and the exercise price of many of our outstanding warrants issued are subject to reduction if we issue certain future securities at prices that are lower than the conversion price of the Series C Preferred Stock or exercise price of the warrants, we cannot at this time determine the number of shares of common stock that we will be required to issue upon conversion of the Series C Preferred Stock or exercise of the warrants.

 

Our failure to fulfill all of our registration requirements may cause us to suffer damages, which may be very costly.

 

Pursuant to the terms of the registration rights agreement that we entered into with investors in our recent private placement offerings, we are required to file a registration statement with respect to securities issued to them within a certain time period and maintain the effectiveness of such registration statement. The failure to do so could result in the payment of damages by us. There can be no assurance as to when this registration statement will be declared effective or that we will be able to maintain the effectiveness of any registration statement, and therefore there can be no assurance that we will not incur damages with respect to such agreements.

 

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As a result of our being a public company, we are subject to additional reporting and corporate governance requirements that require additional management time, resources and expense. 

 

We are obligated to file with the Securities and Exchange Commission annual and quarterly information and other reports that are specified in the Exchange Act. We are also subject to other reporting and corporate governance requirements under the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated thereunder, all of which impose significant compliance and reporting obligations upon us. The costs of preparing and filing annual and quarterly reports and other information with the Securities and Exchange Commission has and will continue to cause our expenses to be higher than they would be if we were a privately-held company.

 

Our internal controls over financial reporting are not effective which could have a significant and adverse effect on our business and reputation. 

 

We have identified a material weakness in our internal controls and can’t provide assurances that the weakness will be effectively remediated. As a public reporting company, we are in a continuing process of developing, establishing, and maintaining internal controls and procedures that allow our management to report on, and when applicable our independent registered public accounting firm to attest to, our internal controls over financial reporting if and when required to do so under Section 404 of the Sarbanes-Oxley Act of 2002. Our management is required to report on our internal controls over financial reporting under Section 404. If we fail to achieve and maintain the adequacy of our internal controls, we would not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Our management has determined that the adequacy of our internal controls is not effective and is therefore unable to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. Moreover, our testing, or the subsequent testing by our independent registered public accounting firm, that must be performed may reveal other material weaknesses or that the material weaknesses described above have not been fully remediated. If we do not remediate any material weaknesses identified, or if other material weaknesses are identified or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated or could subsequently require restatement, we could receive an adverse opinion regarding our internal controls over financial reporting from our independent registered public accounting firm and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the market price of our stock could decline. 

 

Future sales of our common stock and other securities by our existing shareholders after a public market is established could cause our stock price to decline.

 

We currently have 6,393,107 shares of our common stock outstanding and 799,989 shares of the Series C Preferred Stock outstanding that are currently convertible into 799,989 shares of our common stock. All of the common shares are eligible for resale under Rule 144 and the shares issuable upon conversion of the Series C Preferred Stock are eligible for resale under Rule 144; however, 792,762 shares of common stock and 799,989 shares currently issuable upon conversion of the Series C Preferred Stock are held by affiliates and are subject to certain volume limitations and secondly, Rule 144 requires that the shares be sold in “broker’s transactions” which is not possible before a public market for the common stock is established. If our shareholders were to sell substantial amounts of our common stock in the public market at the same time, the market price of the common stock could decrease significantly due to an imbalance in the supply and demand of our common stock. Even if they do not actually sell the stock, the perception in the public market that our shareholders might sell significant shares of the common stock could also depress the market price of the common stock.

 

A decline in the future publicly traded price of the shares of common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities and may cause you to lose part or all of your investment in our shares of common stock.

 

We do not expect to pay dividends on our common stock in the foreseeable future.

 

We do not expect to pay dividends on our common stock for the foreseeable future, and we may never pay dividends. In addition, the covenants contained in the Term Loans prohibit the payment of any dividends. Consequently, the only opportunity for common stockholders to achieve a return on their investment may be if a trading market develops and common stockholders are able to sell their shares for a profit or if our business is sold at a price that enables common stockholders to recognize a profit. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time, there is no trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.

 

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Limitations on director and officer liability and indemnification of our Company’s officers and directors by us may discourage stockholders from bringing suit against an officer or director.

 

Our certificate of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director or officer, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director or officer for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director or officer.

 

We are responsible for the indemnification of our officers and directors.

 

Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our certificate of incorporation and bylaws also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.

 

Our common stock is not currently traded on any market and there can be no assurance that an active trading market for the common stock will ever be established 

 

The common stock is not currently traded on any market and therefore no public market for our common stock exists. In addition, no assurance can be given that an active trading market for the common stock will ever be established. Even if a public market for our common stock is established on a securities exchange, we cannot predict the extent to which investors’ interests will lead to an active trading market for our common stock or whether the market price of our common stock will be volatile or exceed the price paid by investors for the common stock or the exercise price of our warrants outstanding. If an active trading market does not develop, investors will continue to have difficulty selling any of our common stock. There may be limited market activity in our stock and we are likely to be too small to attract the interest of many brokerage firms and analysts. If we trade on Over-The-Counter (“OTC”) markets, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds as well as individual investors, follow a policy of not investing in OTC stocks and certain major brokerage firms restrict their brokers from recommending OTC stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our company. The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us or competitors, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.

   

We may seek to raise additional funds in the future, which may be dilutive to stockholders or impose operational restrictions.

 

If our revenue from operations together with the proceeds of our recent debt financing are not sufficient to cover our operating expenses, we will need to raise additional capital. If we raise additional capital through the issuance of equity or of debt securities, the percentage ownership of our current stockholders will be reduced. We may also enter into strategic transactions, issue equity as part of license issue fees to our licensors, compensate consultants or settle outstanding payables using equity that may be dilutive. Our stockholders may experience additional dilution in net book value per share and any additional equity securities may have rights, preferences and privileges senior to those of the holders of our common stock.

 

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The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares. 

 

The Securities and Exchange Commission has adopted regulations which generally define a “penny stock” to be any equity security that has a market price, as therein defined, of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Additionally, if the equity security is not registered or authorized on a national securities exchange that makes certain reports available, the equity security may also constitute a “penny stock.” If our common stock becomes traded on a securities market or exchange, as long as the trading price of our common stock is below $5 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker- dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include: (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.

 

We may not be able to attract the attention of major brokerage firms, which could have a material adverse impact on the market value of our common stock. 

 

If a trading market develops for our common stock, we will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. However, security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock, which may adversely affect the market price of our common stock. If equity research analysts do provide research coverage of our common stock, the price of our common stock could decline if one or more of these analysts downgrade our common stock or if they issue other unfavorable commentary about us or our business. If one or more of these analysts’ ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

We have adopted certain measures that may have anti-takeover effects which may make an acquisition of our Company by another company more difficult.

 

We have adopted, and may in the future adopt, certain measures that may have the effect of delaying, deferring or preventing a takeover or other change in control of our Company that a holder of our common stock might not consider in its best interest. Our certificate of incorporation and bylaws contain provisions which may have anti-takeover effects. These include the authority to issue blank check preferred stock, and providing that vacancies on the board of directors may be filled by the existing directors then in office, although less than a quorum.

 

In addition, we are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits a Delaware corporation from engaging in any business combination, including mergers and asset sales, with an interested stockholder (generally, a 15% or greater stockholder) for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The operation of Section 203 may have anti-takeover effects, which could delay, defer or prevent a takeover attempt that a holder of our common stock might consider in its best interest.

 

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Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

Durham, North Carolina

 

We entered into an asset purchase agreement with Pfizer Research, an indirect subsidiary of Pfizer, Inc., whereby certain assets were acquired from Pfizer Research. The agreement included the sub-letting of premises located at Research Triangle Park, Durham, North Carolina with annual calendar year escalations of 3.5%. The lease terminates on April 30, 2019. The rental expense for the years ended December 31, 2018 and 2017 amounted to $200,404 and $198,820, respectively. We believe that we have adequate space for our anticipated needs.

 

Tucson, Arizona

 

We entered into an Asset Purchase Agreement with Sanofi US Services, Inc., pursuant to which Icagen-T, our wholly owned subsidiary, acquired certain assets of Sanofi that include the Tucson Research Center, a two-story laboratory and office building with approximately 113,950 square feet of space located in the Town of Oro Valley, Pima County, Arizona and the land on which the Facility is built. We believe that we have adequate space for our anticipated needs.

 

Upon the closing of the Sanofi Asset Purchase Agreement, Icagen-T executed a Deed of Trust providing Sanofi with a five year, $5 million lien on the Tucson Facility, securing performance of Icagen-T’s obligations under the MSA and the Sanofi Asset Purchase Agreement. The lien is subject to termination on the five year anniversary of the closing or upon the payment by Icagen-T of $5 million to Sanofi. The parties have also agreed to a Special Warranty Deed with a Right of Reverter (“Deed of Sale”) that will revert to Sanofi all rights in the Tucson Facility in the event that Icagen-T sells the Tucson Facility at any time within the next five years and upon certain other events related to the leasing of space at the Tucson Facility. The reversion rights of Sanofi under the Deed of Sale will terminate after five years or upon payment of $5 million to extinguish the lien created by the Deed of Trust.

 

Item 3. Legal Proceedings

 

Dentons Dispute

 

On May 11, 2017, we entered into a Settlement and Release Agreement (the “2017 Settlement Agreement”) with Dentons US LLP (“Dentons”) relating to disputes arising between them under a Settlement and Release Agreement, dated July 5, 2013 (the “2013 Settlement Agreement”), a judgment thereafter obtained by Dentons on May 7, 2014 in the Circuit Court of Cook County, Illinois Lawsuit based upon the 2013 Settlement in the amount of $3,050,000, and a lawsuit filed by the Company in San Francisco Superior Court in or about April 2014 against Dentons. In connection with the 2017 Settlement Agreement, we agreed to pay Dentons the sum of $1,400,000 over a fourteen month period, which was paid in full. In addition, to secure our obligations under the Agreement, we executed and delivered to Dentons a Confession of Judgment Affidavit in Support of Confession of Judgment in the amount of $3,891,549, representing the amount of the Judgment Dentons had obtained plus the costs of suit and interest accrued through May 15, 2017. The Confession of Judgment was returned to us unfiled upon our payment in full or the $1,400,000. The Agreement included mutual releases of claims each party had against the other and the parties also agreed to dismiss the litigation between them with prejudice;

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities

 

Our common stock is not currently trading on any established market.

 

As of April 11, 2019, there were 260 holders of our common stock and 4 holders of our Preferred Stock.

 

Dividend Policy

 

We have never paid any cash dividends on our common stock to date, and do not anticipate paying such cash dividends in the foreseeable future. Whether we declare and pay dividends is determined by our Board of Directors at their discretion, subject to certain limitations imposed under Delaware corporate law. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC.

 

Equity Compensation Plan Information

 

See Item 11—Executive Compensation for equity compensation plan information.

 

Recent Sales of Unregistered Securities

 

We did not sell any equity securities during the fiscal year ended December 31, 2018 in transactions that were not registered under the Securities Act, other than as previously disclosed in our filings with the Securities and Exchange Commission.

 

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Issuer Purchases of Equity Securities

 

There were no issuer purchases of equity securities during the fiscal year ended December 31, 2018.

 

Performance Graph and Purchases of Equity Securities

 

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

 

Item 6. Selected Financial Data

 

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

 

Item 7. 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. 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 expressed, implied or 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.

 

Cautionary Note Regarding Forward-Looking Statements

 

This report and other documents that we file with the Securities and Exchange Commission contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. Statements that are not historical facts are forward-looking statements. Words such as “expect,” “outlook,” “forecast,” “would,” “could,” “should,” “project,” “intend,” “plan,” “continue,” “sustain”, “on track”, “believe,” “seek,” “estimate,” “anticipate,” “may,” “assume,” and variations of such words and similar expressions are often used to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward- looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those described in our reports that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements after the date they are made, whether as a result of new information, future events, changes in assumptions or otherwise.

 

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.

 

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.

 

27

 

 

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 in house a 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, settlement of legal matters and revenue we generate from the services we provide and upfront payments received from collaborations. We expect to continue to seek to obtain our required capital through the private sale of securities and revenue derived from the services we provide.

 

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 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, our Term Loans and our Subordinated Notes in order to fund our operations. We believe that our existing cash and cash equivalents, including the $5,000,000 up front fee that we received from Roche and the $2,800,000 that we raised from our recent sale of shares of Series C Preferred Stock, the $500,000 that we raised from the sale of our Subordinated Notes and the $15,250,000 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 four 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 about 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. To meet our financing needs, we are considering multiple alternatives, including, but not limited to, additional equity financings, debt financings and/or funding from partnerships or collaborations. There can be no assurance that we will be able to complete any such transactions on acceptable terms or otherwise.

 

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-one grants and contracts from United States governmental agencies; of which nine were granted from the Department of Defense and twelve were granted from the National Institutes of Health. All grants and contracts have been completed and paid for in full.

 

As a result of the agreements that we entered into with Pfizer Research 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 is being deferred and paid as one lump sum with the payment being made for the quarter ended March 31, 2019, bearing interest at 12.5% per annum, which interest is payable quarterly; (iii) make minimum lease payments in terms of a sub-lease agreement entered into with Pfizer for the period July l, 2015 to April 30, 2019 with annual escalations of 3.5%, estimated to be $66,950.

 

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.

 

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Results of Operations for the year ended December 31, 2018 and the year ended December 31, 2017

 

Revenues

 

For the year ended December 31, 2018, we had revenues totaling $13,583,218, all of which was from commercial revenues and for the year ended December 31, 2017, we had revenues totaling $22,656,610 ($12,735,867 of which was from commercial revenue, $9,600,000 was from subsidy revenue and $320,743 was from government grants), a decrease of $9,073,392 or 40.0%. The decrease in revenue is due to a decrease in deferred subsidy of $9,600,000, there was no deferred subsidy revenue during the year ended December 31, 2018, a decrease in government grants of $320,743, there was no government grant revenue during the year ended December 31, 2018, offset by an increase in commercial revenues of $847,351 or 6.7%. The decrease in revenue over the prior year is primarily attributable to the following; i) cessation of the subsidy revenue received from Sanofi initially to support the Tucson Facility, in the prior year; ii) the completion of the remaining National Institutes of Health government grant work during 2017; offset by iii) an increase in revenue at both our Tucson and North Carolina sites, including revenues received from our CFF collaboration agreement which offset the declining revenues from Sanofi. The upfront payment received from Roche will be recognized as revenue over a period of time commencing in January 2019.

 

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 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 goods sold

 

Cost of goods sold totaled $9,910,569 and $11,175,692 for the years ended December 31, 2018 and 2017, respectively, a decrease of $1,265,123 or 11.3%. Cost of goods sold 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 expenses, 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 year ended December 31, 2018 and 2017, respectively was $5,791,963 and $6,880,513, a decrease of $1,088,550 or 15.8%. This is primarily due to a reduction in the number of personnel at our Tucson facility, a reduction in bonus accruals and the number of personnel working on Sanofi projects, partially offset by new business, including the Cystic Fibrosis collaboration agreement. 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 year ended December 31, 2018 and 2017, respectively was $3,334,984 and $3,303,311, an increase of $31,673 or 1.0%, the slight increase is due to the nature of the work performed requiring more expensive seal chips partially offset by more effective cost control over general consumables.

 

  Outside contractors’ cost included in cost of sales for the year ended December 31, 2018 and 2017, respectively, amounted to $783,622 and $991,868, a decrease of $208,246 or 21.0% is due to the reduction in the cost of outside laboratory maintenance contracts, primarily at our Tucson Facility.

 

Gross profit

 

Gross profit was $3,672,649 and $11,480,918 for the years ended December 31, 2018 and 2017, respectively, a decrease of $7,808,269, or 68.0%. The decrease in gross profit is primarily due to the cessation of the Sanofi subsidy which amounted to $9,600,000 in the prior year, after factoring in the reduction of the subsidy revenue, the gross profit increased by $1,791,731, primarily due to reduced labor costs and a reduction in outside contractors costs, as discussed above and slightly more profitable business conducted during the current year.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses totaled $10,309,471 and $13,936,542 for the years ended December 31, 2018 and 2017, respectively, a decrease of $3,627,071 or 26.0%.

 

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

 

    Year ended December 31,     Increase/     Percentage  
    2018     2017     (decrease)     change  
                         
Marketing and selling expenses   $ 69,865     $ 412,122     $ (342,257 )     (83.0 )%
                                 
Payroll expense     1,906,406       4,228,651       (2,322,245 )     (54.9 )%
                                 
Research and development salaries     2,187,190       3,328,843       (1,141,653 )     (34.3 )%
                                 
Directors fees     220,000       220,000       -       - %
                                 
Stock option compensation charge     1,515,824       645,756       870,068       134.7 %
                                 
Legal fees     349,372       787,685       (438,313 )     (55.6 )%
                                 
Consulting fees     514,446       551,138       (36,692 )     (6.7 )%
                                 
Professional fees     122,008       109,707       12,301       11.2 %
                                 
Facilities expense     2,409,687       2,662,019       (252,332 )     (9.5 )%
                                 
Travel expenditure     172,230       310,464       (138,234 )     (44.5 )%
                                 
Capital raising fee     -       76,000       (76,000 )     (100.0 )%
                                 
Other expenses     842,443       604,157       238,286       39.4 %
                                 
    $ 10,309,471     $ 13,936,542     $ (3,627,071 )     (26.0 )%

 

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, therefore less marketing effort was required during the current year. In the prior year, we had employed an outside marketing company to assist in messaging to our potential customers and developing a marketing strategy.

 

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 goods sold with a corresponding decrease in salary expense charged to selling, general and administrative expenses. A comparison of salary expenses is presented below.

 

Total salary expenditure for the year ended December 31, 2018 and 2017, respectively is included in the following expense categories:

 

    Year ended December 31,     Increase/     Percentage  
    2018     2017     (decrease)     change  
                         
Cost of goods sold   $ 5,791,963     $ 6,880,513     $ (1,088,550 )     (15.8 )%
                                 
Selling, general and administrative expenses     1,906,406       4,228,651       (2,322,245 )     (54.9 )%
                                 
Research and development salaries     2,187,190       3,328,843       (1,141,653 )     (34.3 )%
                                 
    $ 9,885,559     $ 14,438,007     $ (4,552,448 )     (31.5 )%

 

The decrease in total salary expenditure for the year ended December 31, 2018 of $4,552,448 or 31.5% is primarily due to the restructure of our operations with the termination of our business development team due to the change on our market focus from CRO to early stage drug discovery in the prior year, a restructure of our management team and the streamlining of operations at our Tucson site. We also reduced our bonus accrual related to the 2017 and 2018 fiscal years to reflect the actual bonus liability.

 

The payroll expense charged to Selling, general and administrative expenses for the year ended December 31, 2018 decreased by $2,322,245. This decrease is primarily due to the termination of the business development team in the prior year and the restructure of our management team at our Tucson site, together with a reduction in the overall bonus accrual for management.

 

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The research and development salaries decreased by $1,141,653 primarily due to the streamlining of operations at our Tucson facility by the reduction in staff numbers and the level of scientific activity at both our Tucson Facility and our Icagen NC sites with new customers and the Cystic Fibrosis Foundation.

 

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 $870,068. 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 the current year, 1,005,000 options to purchase shares of common stock were issued to our directors, executive officers and consultants. These options resulted in an increased expense in the current year as approximately 287,500 of these options vested immediately with the balance vesting over a period of twelve to thirty six months.

 

Legal fees decreased by $438,313 over the prior year. The decrease is primarily due to legal expenditure incurred on the 2017 GPB convertible debt funding due to the complexity of the legal documentation and a current year reversal of legal fees recorded as due to Dentons on the settlement of all liabilities owing to them.

 

The decrease in consulting fees of $36,692 is primarily due to the reduction in technical consulting expenses incurred at our Tucson Facility where an outside consultant assisted us with the Cystic Fibrosis collaboration agreement, offset by an increase in administrative consulting expenses at corporate financial controller level.

 

Professional fees increased by $12,301, primarily due to an increase in payroll related fees based on the outsourcing of several payroll functions in order to improve the quality of service delivered to our employees.

 

Facilities expense decreased by $252,332 over the prior year, primarily due to the following movements; (i) a decrease in cleaning and janitorial expenses of $131,664 due to a restructure in our agreement with our building maintenance contractor at the Tucson Facility; (ii) a decrease in utility expense by $54,944, primarily due to reductions at our Tucson Facility due to better negotiated tariffs ; (iii) a decrease in Security services expenditure of $46,594 due to a restructure of our security costs at our Tucson Facility and; (iv) a reduction in site repairs and maintenance expenditure at our Tucson Facility of $19,130 due to the cancellation and streamlining of certain maintenance contacts.

 

Travel expenditure decreased by $138,234 due to the termination of our business development team during the prior year.

 

Capital raising fees of $76,000 related to the GBP debt were expensed in the prior year.

 

Other expenses represent various insignificant individually insignificant expenses.

 

Depreciation and Amortization

 

We recognized depreciation expenses of $1,486,919 and $1,736,628 for the years ended December 31, 2018 and 2017, respectively, a decrease of $249,709 or 14.4%, which is primarily due to a reduction in the amount of laboratory software licensed during the current year. Software licenses are generally for a one year period and are amortized over the term of the license agreement. The balance of 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.

 

Amortization expense was $378,148 and $224,984 for the year ended December 31, 2018 and 2017, an increase of $153,164 or 68.1%. The increase is due to the amortization of cell lines purchased at our Tucson Facility in the prior year. The remaining amortization charge relates primarily to the intangibles acquired at our Icagen NC site.

 

Other income

 

Other income was $15,779 and $502,494 for the year ended December 31, 2018 and 2017, respectively, a decrease of $486,715 or 96.9%, primarily made up of the prior year reversal of deferred purchase consideration initially due on the acquisition of Icagen NC, due to our customer not meeting certain revenue milestones.

 

Gain on extinguishment of debt

Gain on debt extinguishment was $495,783 and $0 for the year ended December 31, 2018 and 2017, respectively. The gain arose on the extinguishment of the GPB convertible debt on August 31, 2018 and represents the unamortized debt discount, the derivative liability related to the convertible debt conversion feature and expenses directly related to the debt extinguishment.

 

Other Expense

 

Other expense was $562,524 and $262,966 for the year ended December 31, 2018 and 2017, respectively, an increase of $299,558 or 113.9%. Other expense in the current period represents severance costs of $572,524 incurred in the restructure of our management and the streamlining of operations at our Tucson Facility and the release of a $10,000 legal settlement accrual no longer required. In the prior year, other expense represented severance costs on the reduction of our business development team by four heads.

 

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Interest expense

 

Interest expense totaled $3,190,730 and $2,282,046 for the year ended December 31, 2018 and 2017, respectively. The interest expense is primarily made up of the following; (i) Imputed interest cost of $299,075 and $308,252 for the years ended December 31, 2018 and 2017, respectively, a decrease of $9,177 or 3.0%, the imputed interest was adjusted in the prior year due to the reassessment of 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; (ii) amortization of debt discount of $1,229,994 and $1,110,424 for the years ended December 31, 2018 and 2017, respectively, an increase of $119,570 or 10.8%, The debt discount represents the amortization of the valuation of the current year warrants issued in connection with our term loans, the debt issue costs associated with the current year term loans, the valuation of the conversion feature of the prior year Convertible Notes and the prior year warrants issued in connection with the Convertible Notes which is amortized over the term of the term loan and Convertible Notes. The valuation of the discount on the term loan amounted to $2,753,009 on a principal balance of $15,250,000 and the discount on the convertible note in the prior year amounted to $4,918,277 on a principal balance of $10,000,000; (iii) interest expense of $1,660,722 and $859,760 for the years ended December 31, 2018 and 2017, respectively, an increase of $800,962, this increase is primarily due to us borrowing $10,000,000 in May 2017 and replacing that borrowing with a $15,250,000 facility on August 31, 2018, the interest expense was incurred for four and a half months longer in the current year and the quantum of the borrowing increased by $5,250,000. The coupon of the borrowing decreased slightly from 13% per annum to 9.75% plus one month Libor, which average is approximately 0.8% lower than the 13% on the convertible debt; and (iv) other of $939 and $3,610 for the years ended December 31, 2018 and 2017, respectively, this consists primarily on foreign exchange movements on purchases and sales to foreign suppliers and customers.

 

Derivative liability movement

 

Derivative liability movement was $(1,295,732) and $349,313 for the year ended December 31, 2018 and 2017, respectively, an increase of $1,645,045. The debit during the current year represents the mark to market of the derivative liability raised on the warrants issued to the term loan holders, the GBP warrants and the Series C Preferred stock warrants, all with variable pricing options and the beneficial conversion feature of the convertible debt whilst it was still outstanding.

 

Net loss

 

Net loss was $13,039,313 and $6,110,434 for the year ended December 31, 2018 and 2017, respectively. The increase in the net loss is primarily due to the reduction in subsidy revenue and government contract revenue, an increase in interest expense and derivative liability movements, offset by a reduction in overall selling, general and administrative expenses, all discussed in detail above.

 

Liquidity and Capital Resources

 

We have a history of operating losses and net losses since inception and we have primarily funded our operations through sales of our unregistered equity securities and cash flows generated from government contracts and grants, settlement of lawsuits and more recently from debt funding, commercial customers and subsidy income. Although, we are generating revenue from commercial customers, we continue to experience losses and may need to raise additional funds in the future to meet our working capital requirements. To date, we have never generated sufficient cash from operations to pay our operating expenses. We have received $27,500,000 from Sanofi and despite the $4,500,000 we expect to derive from Icagen-T for services provided to Sanofi over the next eighteen months, we expect our expenses to increase as our operations expand and our expenses may continue to exceed such revenue. During the year ended December 31, 2018, we raised an additional $2,800,000 through the issuance of shares of our Series C Preferred stock, an additional $500,000 through the issuance of Bridge Notes and a further $15,250,000 in Term Loans of which $10,200,000 was utilized to settle convertible debt outstanding. As of December 31, 2018, despite out fund raising efforts mentioned in the preceding sentence, we had not generated sufficient additional revenue from operations to pursue our business strategy, to respond to new competitive pressures or to take advantage of opportunities that may arise. These factors raised substantial doubt about 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. We anticipate that our current cash and cash equivalents, including cash derived from the Series C Preferred Stock issued, the term loans and the bridge notes will not be sufficient to meet our operating needs for at least the next four months without additional revenue derived from operations or collaborations. If we should require additional capital, we may consider multiple alternatives, including, but not limited to, additional equity financings, debt financings and/or funding from partnerships or collaborations. There can be no assurance that we will be able to complete any such transactions on acceptable terms or otherwise.

 

As of December 31, 2018, we had cash totaling $4,119,058, other current assets totaling $2,224,774 and total assets of $15,615,587. We had total current liabilities of $10,938,402 and a net working capital deficit of $4,594,570. Total liabilities were $34,973,296 including net deferred purchase consideration of $8,581,739. The deferred purchase consideration includes a net present value discount of $1,118,261 (made up of a gross present value discount of $2,468,700 less imputed interest movements of $1,350,439), the gross amount still due in terms of the acquisition agreement with Pfizer, Inc., is $9,700,000 after the payment of $300,000 to date, based on a potential earn out charge of the greater of (i) 10% of gross revenues commencing in January 2017 per quarter and (ii) $250,000 per quarter, up to a maximum of $10,000,000 of which amounts in excess of $50,000 can be deferred and $200,000 was deferred for the quarters ended March 31, 2017 through to, December 31, 2018. The deferred amount bears interest at a rate of 12.5% per annum. Our stockholders’ deficit amounted to $19,357,709.

 

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Should we not achieve our forecasted operating results, or should strategic opportunities present themselves such that additional financial resources would present attractive investing opportunities for us, we may decide in the future to issue debt or sell our equity securities in order to raise additional cash. We cannot provide any assurances as to whether we will be able to secure any additional financing, or the terms of any such financing transaction if one were to occur.

 

2018 and 2017 Financings

 

Series C Preferred Stock Financings

 

From April 4, 2018 through August 27, 2018, we closed four tranches of our  best efforts offering of preferred stock and warrants pursuant to which we issued to investors an aggregate of 28 units (the “Series C Units”), at a purchase price of $100,000 per unit, each unit consisting of approximately 28,571 shares of our Series C Convertible Preferred Stock, and a seven year warrant (the “Series C Warrant”) to acquire approximately 28,571 shares of our common stock, at an exercise price of $3.50 per share. An aggregate of 799,989 shares of Series C Preferred Stock and Series C Warrants to purchase an aggregate of 799,989 shares of common stock were sold at the four closings. The gross cash proceeds to us from the sale of the Series C Units was approximately $2,800,000.

 

The Series C Preferred Stock ranks senior to the shares of our common stock and any other class or series of stock issued by us 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 our affairs. Holders of Series C Preferred Stock are entitled to a cumulative dividend at the rate of 12.0% per annum, as set forth in the Certificate of Designation of Powers, Preferences and Rights of Series C Convertible Preferred Stock classifying the Series C Preferred Stock (the “Certificate of Designation”). The Series C Preferred 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 $3.50 plus any accrued and unpaid dividends on such share of Series C Preferred Stock (the “Accreted Value”) divided by the conversion price, which initially shall be $3.50 per share, subject to certain customary anti-dilution adjustments. In addition, the Series C Preferred Stock automatically converts into shares of our 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 Preferred Stock (the “Requisite Holders”).  A “Qualifying Public Offering” is defined as the first firm commitment underwritten public offering by us on or following the initial issuance date of the Series C Preferred Stock in which shares of common stock are sold for our account solely for cash to the public resulting in proceeds to it and/or our 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, 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).

 

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

 

In the event of our liquidation, dissolution or winding-up, holders of the Series C Preferred Stock are entitled to a preference on liquidation equal to $5.25 per share of Series C Preferred Stock plus all accrued and unpaid dividends. Upon the occurrence of a Cash Liquidity Event (as defined below), the holders of the Series C Preferred Stock can require us to redeem their shares of Series C Preferred Stock for a price per share equal to $5.25, subject to adjustments. In addition, we have the right to redeem the shares of Series C Preferred 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 our ordinary course of 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 us at closing or closings in a transaction or transactions during any twelve (12) month period in excess of $40,000,000.  

 

The Series C Warrants have an initial exercise price of $3.50 per share (subject to applicable adjustments). The Series C Warrants expire seven (7) years after the issuance date.

 

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In addition, subject to limited exceptions, a holder of the Series C Warrants will not have the right to exercise any portion of the Series C Warrant if such holder, together with its affiliates, would beneficially own in excess of the Beneficial Ownership Limitation (as defined in the Series C Warrant).  A holder of the Series C Warrant may adjust the Beneficial Ownership Limitation upon not less than sixty one (61) days’ prior notice to us, provided that such Beneficial Ownership Limitation in no event shall exceed 9.99%.

 

The Series C Warrants also contain certain anti-dilution provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization and issuances of securities at prices below the conversion price or similar transactions.

 

If, at the time a holder exercises its Series C Warrant, there is no effective registration statement registering for an issuance of the shares underlying the Series C Warrant to the holder, then in lieu of making the cash payment otherwise contemplated to be made to us 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 common stock determined according to a formula set forth in the Series C Warrant. If we fail to timely deliver the shares underlying the Series C Warrant, it will be subject to certain buy-in provisions.

 

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

 

Pursuant to the terms of the Purchase Agreement pursuant to which the Series C Units were sold, we granted to the holders of the Series C Preferred Stock certain demand registration and piggyback registration rights, subject to certain rights of our lender.

 

Subordinated Note Financings

 

In addition, on August 13, 2018, we issued our 10% Subordinated Promissory Notes in the aggregate principal amount of $500,000 due on the earlier of: (x) the date that is twelve (12) months after its issue date or (y) our receipt of the proceeds of funding from our next collaboration/partnership. We also issued to the holders of the 10% Subordinated Promissory Notes five year warrants to purchase 1,500 shares of our common stock for each $10,000 principal amount invested at an exercise price of $3.50 per share (the “Subordinated Note Warrants”). The 10% Subordinated Note Warrants also contains certain anti-dilution provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transaction. An aggregate of $500,000 in principal amount of 10% Subordinate Promissory Notes and Subordinated Note Warrants to purchase an aggregate of 75,000 shares of common stock were sold at the closing. The gross cash proceeds to us from the sale of the fifty (50) units was $500,000. 10% Subordinated Promissory Notes in the principal amount of $200,000 were repaid when we received the upfront payment from the Roche collaboration and 10% Subordinated Promissory Notes in the principal amount of $300,000 currently remain outstanding and are subordinated in certain respects to the Term Loans

 

Term Loans

 

In our August 2018 debt financing with Perceptive, we received advances in the aggregate principal amount of $7,250,000 from the Icagen Term Loan and issued a warrant to purchase 723,550 shares of our common stock (the “Purchaser Warrants”), and Icagen-T received advances in the aggregate principal amount of $8,000,000 from the Icagen-T Term Loan. The Term Loans are secured by a security interest in all of our existing and future assets, subject to existing security interests and exceptions. The Term Loans require us and Icagen-T, respectively, among other things, to maintain the security interest, make monthly interest payments of approximately $160,000, make monthly installment payments of $152,500 after August 31, 2020 and meet various negative and affirmative covenants. If we or Icagen-T fails to comply with the terms of the Term Loans and/or the related agreements, the senior note holder could declare a note default and if the default were to remain uncured, the secured creditor would have the right to proceed against any or all of the collateral securing their Term Loans, subject to the first priority of our secured creditors. Any action by our secured or unsecured creditors to proceed against our assets would likely have a serious disruptive effect on our business operations.

 

The Term Loans contain, and our future indebtedness agreements may contain covenants that restrict our ability to finance future operations or capital needs or to engage in other business activities. The Term Loans restrict our ability and the ability of our restricted subsidiaries to:

 

  incur, assume or guarantee additional Indebtedness (as defined in the Term Loans);

 

  repurchase capital stock;

 

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  make other restricted payments including, without limitation, paying dividends and making investments;

 

  create liens;

 

  sell or otherwise dispose of assets, including capital stock of subsidiaries;

 

  enter into agreements that restrict dividends from subsidiaries;

 

  enter into mergers or consolidations; and

 

  enter into transactions with affiliates

 

In addition, the Credit Agreements also contain covenants requiring us and our subsidiaries to 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. The Credit Agreements also provide for specified quarterly minimum consolidated net revenue covenants of us and our subsidiaries for the trailing twelve month period ended on each such calculation date during the term of the Credit Agreements. In addition, the Credit Agreement also provides that it is an event of default if certain key persons (Richie Cunningham and Timothy Tyson) do not remain in certain positions with our company. A breach of any of these covenants would result in a default under our Term Loans. If an event of default under our Credit Agreements occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we were unable to pay such amounts, the lenders could proceed against the collateral pledged to them.

 

In connection with the entry into the Credit Agreements, on August 31, 2018, we issued to Perceptive a warrant (the “Perceptive Warrant”) to purchase 723,550 shares of our common stock exercisable for a period of seven years at a per-share exercise price of $3.50, subject to certain adjustments as specified in the Perceptive Warrant for customary anti-dilution adjustments and price protection. Upon any exercise of the Perceptive 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 Perceptive Warrant with an aggregate fair market value equal to the aggregate exercise price. 

 

We also granted Perceptive and GPB customary demand and piggy-back registration rights with respect to the shares of common stock issuable upon exercise of the Perceptive Warrant and the GPB Warrant. At any time commencing nine months following the closing of a Qualifying PO (as defined in the Perceptive Warrant) if we are not qualified to register securities under 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 Perceptive Warrants and/or shares of common stock issuable thereunder (the “Majority Holders”), we are obligated, among other things, to (i) file a registration statement on Form S-1 with 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 Perceptive Warrants, (ii) use our 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 registrable securities may be sold pursuant to Rule 144 under the Securities Act, without restriction as to volume.

 

GPB Securities Purchase Agreement, Notes and Warrant

 

On May 15, 2017, we and Icagen-T entered into a Securities Purchase Agreement (the “GPB Securities Purchase Agreement”) with GPB Debt Holdings II, LLC (“GPB”), pursuant to which (i) we issued to GPB for an aggregate purchase price payable in cash to us of $1,920,000, before reimbursement of expenses: (a) a Senior Secured Convertible Note in the aggregate principal amount of $2,000,000 (the “Parent Note”), which Parent Note was convertible into shares of our common stock at a conversion price of $3.50 per share and secured by a lien on all of our assets and the assets of our subsidiaries other than Icagen-T, and (b) a warrant to purchase initially up to 857,143 shares of our common stock (the “GPB Warrant”) in accordance with the terms of the GPB Warrant; and (ii) Icagen-T issued to GPB for an aggregate purchase price payable in cash to Icagen-T of $7,680,000, before reimbursement of expenses, a Senior Secured Convertible Note of Icagen-T (the “ Icagen-T Note ” and together with the Parent Note, the “Notes”), in the aggregate principal amount of $8,000,000, which Icagen-T Note was convertible into shares of our common stock at a conversion price of $3.50 per share and secured by a lien on all of our assets, the assets of Icagen-T and the assets of our other subsidiaries. Each Note was issued with a four (4%) percent original issue discount. The Notes had a maturity date of May 15, 2020 and bore interest at a rate equal to 13% per annum. The Notes provided for prepayment upon payment of a specified prepayment penalty. During the years ended December 31, 2018 and 2017, we paid $1,494,997 and $812,500 in interest payment under the Notes. In August 2018 we used $10,308,333 from the proceeds of the Term Loans to repay in full all amounts outstanding under the Convertible Notes, including interest thereon of $108,333.

 

We also issued the GPB Warrant to GPB at an initial exercise price of $3.50 per share (subject to applicable adjustments). The GPB Warrant expires on May 15, 2022. The GPB Warrant contains certain beneficial ownership limitations on exercise and also contains certain anti-dilution provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization and issuances of securities at prices below the conversion price or similar transactions. If, at the time a holder exercises its GPB Warrant, there is no effective registration statement registering available for an issuance of the shares underlying the GPB Warrant to the holder, then in lieu of making the cash payment otherwise contemplated to be made to us 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 common stock determined according to a formula set forth in the GPB Warrant. If we fail to timely deliver the shares underlying the GPB Warrant, we will be subject to certain buy-in provisions. The GPB Warrant also provides that we will not enter into or be party to a Fundamental Transaction (as defined in the GPB Warrant) unless certain conditions specified therein are met. In addition, on August 31, 2018, the GPB Warrant was amended to provide to GPB piggyback registration rights upon the same terms as the Perceptive Warrant.

 

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Cash Flows

 

An analysis of our cash flows from operating, investing and financing activities for the year ended December 31, 2018 and 2017 is provided below.

 

    Year Ended December 31,     Increase/     Percentage  
    2018     2017     (decrease)     change  
                         
Net cash used in operating activities   $ (4,199,706 )   $ (9,998,561 )   $ 5,798,855       (58.0 )%
                                 
Net cash used in investing activities     (1,439,011 )     (1,523,429 )     84,418       (5.5 )%
                                 
Net cash provided by financing activities     6,994,179       9,346,638       (2,352,459 )     (25.2 )%
                                 
Net increase (decrease) in cash and cash equivalents   $ 1,355,462     $ (2,175,352 )   $ 3,530,814       (162.3 )%

 

Net cash used in operating activities was $(4,199,706) and $(9,998,561) for the year ended December 31, 2018 and 2017, respectively. The decrease in cash provided by operating activities was primarily due to the following:

 

    Year Ended December 31,     Increase/     Percentage  
    2018     2017     (decrease)     change  
                         
Net loss   $ (13,039,313 )   $ (6,110,434 )   $ (6,929,879 )     113.4 %
                                 
Adjustments for non-cash items     5,709,909       3,183,350       2,526,559       79.4 %
                                 
Changes in operating assets and liabilities     3,129,698       (7,071,477 )     10,201,175       (144.3 )%
                                 
Net cash used in operating activities   $ (4,199,706 )   $ (9,998,561 )   $ 5,798,855       (58.0 )%

 

The increase in net loss is discussed under net loss in the results of operations for the year ended December 31, 2018 and 2017, respectively and includes a decrease in subsidy revenues received of $9,600,000.

 

The change in adjustments for non-cash items of $2,526,559 is primarily due to; i) an increase in derivative liability movements of $1,645,045 due to the mark-to market adjustments made in each period; ii) the increase in stock based compensation charge of $870,068 primarily due to the number of options issued during the current year; iii) the increase in the amortization of debt discount of $437,023; and (iv) reversal of $500,000 of deferred purchase consideration in the prior year; offset by (v) the gain realized on debt extinguishment of $495,783 in the current year.

 

The change in operating assets and liabilities of $10,201,175 included i) the net movement in the deferred subsidy of $5,600,000, due to the amortization of the remaining subsidy received in the prior year; ii) an advanced payment on collaboration of $5,000,000 ; iii) an increase in accounts payable movements of $490,703; offset by (iv) a decrease in other payables and accruals of $1,198,698, primarily due to the reduction in bonus accruals during the current year.

 

Net cash used in investing activities decreased by $84,418 primarily due to a slight increase in capital expenditure offset by the reduction in cell lines purchased during the prior year.

 

Net cash provided by financing activities decreased by $2,352,459, primarily due to; i) the net decrease of $4,350,000 in funds raised from term loans in the current year and the repayment of convertible loans in the current year and raising of net cash proceeds on convertible loans in the prior year; ii) the $207,000 payment of penalties and legal fees incurred on the early settlement of the convertible loans; iii) the payment of capital raising fees on the term loans of $1,006,944; iv) the proceeds received from Series C Preferred Stock of $2,800,000; v) the net proceeds received of $500,000 on bridge loans and the repayment of $200,000 during the current year; and vi) the reduction in asset financing repayments of $269,251 over the prior year due to the full repayment of the Nanion Syncropatch asset financing liability during March 2018.

 

Capital Expenditures

 

Our current plan is to purchase equipment and software to ensure that the Tucson Facility and the Icagen NC Facility function efficiently and that we are able to support the commercialization efforts of the Company. We anticipate that we would need to spend an additional $1,200,000 on necessary software and approximately $800,000 on equipment over the next twelve months.

 

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Other Commitments

 

As a result of the agreements that we entered into with Pfizer we are obligated; (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 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; (ii) make minimum lease payments in terms of a sub-lease agreement entered into with Pfizer for the period July l, 2015 to April 30, 2019 with annual escalations of 3.5%, estimated to be $66,750, for the remainder of the lease period.

 

Future annual minimum payments required under operating lease obligations as of December 31, 2018, are as follows:

 

    Amount  
       
2019   $

81,250

 
2020     -  
Total   $

81,250

 

 

Critical Accounting Policies

 

Estimates

The preparation of these consolidated financial statements in accordance with United States Generally Accepted Accounting Practices (“US GAAP”) requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts and recovery of long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe 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 our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the 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. and assumptions used in assessing impairment of long-term assets.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to us, but which will only be resolved when one or more future events occur or fail to occur. Our management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against and by us or un-asserted claims that may result in such proceedings, our management evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

Revenue recognition

 

Our revenue recognition policy is consistent with the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue.

  

We have analyzed our revenue transactions pursuant to ASC 606, Revenue, and it has no material impact as a result of the transition from ASC 605 to 606. Our revenues are recognized when control of the promised services are transferred to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those services. We derive our revenues from the sale of our services, as defined below. We apply the following five steps in order to determine the appropriate amount of revenue to be recognized as we fulfill our obligations under each of our 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.

 

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

 

1) Commercial revenues

 

We enter 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 such contracts is generally recognized upon delivery or as the development is performed.

 

2) Deferred subsidy revenue

 

In the prior year, we had received certain deferred subsidy revenue which was utilized to support our operations, maintain the facilities that we operate in and continue the employment of certain employees to provide, if needed, resources to certain of our customers. This deferred subsidy revenue was amortized over a straight-line basis to match the expected expenses to be incurred over the period July 15, 2016 to December 31, 2017.

 

3) Deferred revenue

 

We 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.

 

4) Multi-element collaboration agreements

 

We have entered into multiple-element collaboration contracts with customers and have 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

 

We receive upfront revenue payments, generally upon closing a collaboration agreement, these revenues are recognized over the expected initial contact timeline as outlined in the collaboration agreement.

 

  ii. Full Time Equivalent (“FTE”) based research payments

 

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

 

  iii. Development event payments

 

Revenue contingent upon the achievement of certain agreed upon development events is recognized in the period that the development event is achieved. The achievement of a development event is when our 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 our 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 our collaboration agreements, these royalties are recognized as revenue in the period in which a royalty report is received from our collaboration partners.

 

Research and Development

 

The remuneration of our 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 we make 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.

 

Share-Based Compensation

 

ASC 718, “Compensation - Stock Compensation,” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period or vesting period on a straight-line basis. Share-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have minimal awards with performance conditions and no awards dependent on market conditions.

 

38

 

 

 

We account for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity - Based Payments to Non-Employees.” Measurement of share-based payment transactions with nonemployees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.

 

Intangible assets

 

Certain of our intangible assets are subject to amortization. We evaluate the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. Where intangibles are deemed to be impaired we recognize an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.

 

1) Cell lines

 

Cell lines acquired by us are reported at acquisition value less any impairment. The useful life of cell lines is estimated to be indefinite.

 

2) Discovery platform

 

The discovery platform acquired by us is reported at acquisition value less accumulated amortization and any impairment. The estimated useful life of the discovery platforms acquired is estimated to be ten years .

 

3) Trademarks and trade names

 

The Trademarks and trade names acquired by us is reported at acquisition value less any impairments. The estimated useful life of trademarks and trade names is estimated to be indefinite.

 

4) Patents

 

Patents acquired by us are reported at acquisition value less accumulated amortization and impairments. The estimated useful life of patents is twenty years, the general useful life of patents.

 

5) Assembled workforce

 

Assembled workforce acquired by us is reported at acquisition value less amortization and impairments. The estimated useful life of the assembled workforce is ten years.

 

6) Amortization

 

Amortization is reported in the consolidated statement of operations on a straight-line basis over the estimated useful life of the intangible assets, unless the useful life is indefinite. Amortizable intangible assets are amortized from the date that they are available for use.

 

Plant and equipment

 

Plant and equipment is stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

 

  Leasehold improvements 5 Years
  Laboratory equipment 7 Years
  Furniture and fixtures 10 Years
  Computer equipment 3 Years

 

The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.

 

We examine the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

 

39

 

 

Derivative liabilities

 

We have derivative financial instruments.

 

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 we 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. We reassess the classification of our derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The Black-Scholes option valuation model was used to estimate the fair value of the conversion options. 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 effective interest method.

 

Recently Issued Accounting Pronouncements

 

The recent Accounting Pronouncements are fully disclosed in note 2 to our audited consolidated financial statements.

 

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying consolidated financial statements.

 

Off-Balance Sheet Arrangements

 

We do not maintain off-balance sheet arrangements, nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.

 

Inflation

 

The effect of inflation on our revenue and operating results was not significant.

 

Climate Change

 

We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 8. Financial Statements and Supplemental Data

 

    Page
Report of Independent Registered Public Accounting Firm   F-1
Consolidated Balance Sheets   F-2
Consolidated Statements of Operations   F-3
Consolidated Statements of Changes in Stockholders’ Deficit   F-4
Consolidated Statements of Cash Flows   F-5
Notes to Consolidated Financial Statements   F-6

 

40

 

 

805 Third Avenue

New York, NY 10022

212.838-5100

212.838.2676/ Fax

www.rbsmllp.com

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and stockholders

Icagen, Inc. and subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Icagen, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two year period ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

The Company’s Ability to Continue as a Going Concern 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3 to the consolidated financial statements, the Company has incurred recurring operating losses which has resulted in an accumulated deficit of approximately $47 million at December 31, 2018. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

  

/s/ RBSM LLP

We have served as the Company’s auditor since 2013.  

April 12, 2019

New York, NY

 

F- 1

 

 

ICAGEN INC.

 

CONSOLIDATED BALANCE SHEETS

    December 31,     December 31,  
    2018     2017  
Assets            
             
Current Assets            
Cash   $ 4,119,058     $ 2,763,596  
Accounts receivable, net     2,051,329       1,739,895  
Inventory     62,792       73,885  
Prepaid expenses and other current assets     110,653       213,367  
Total Current Assets     6,343,832       4,790,743  
                 
Non-Current Assets                
Intangibles, net     7,048,923       7,427,071  
Plant and equipment, net     1,982,845       2,181,753  
Deposits     239,987       238,987  
Total Non-Current Assets     9,271,755       9,847,811  
Total Assets   $ 15,615,587     $ 14,638,554  
                 
Liabilities and Stockholders’ Deficit                
                 
Current Liabilities                
Accounts payable   $ 1,721,812     $ 1,471,645  
Other payables and accrued expenses     922,457       2,332,109  
Legal settlement accrual     -       493,333  
Deferred revenue     5,090,210       219,828  
Deferred purchase consideration     2,450,000       206,458  
Bridge notes payable     254,641       -  
Loans payable     49,952       139,394  
Accrued interest     224,475       108,333  
Dividends payable     224,855       -  
Total Current Liabilities     10,938,402       4,971,100  
                 
Non-Current Liabilities                
Deferred purchase consideration, net     6,131,739       8,232,664  
Loans payable     18,861       71,296  
Term loan payable, net     12,705,696       -  
Convertible loan payable, net     -       5,861,794  
Derivative liability     5,178,598       4,168,964  
Total Non-Current Liabilities     24,034,894       18,334,718  
                 
Total Liabilities     34,973,296       23,305,818  
                 
Commitment and contingencies                
                 
Stockholders’ Deficit                
Preferred stock, $0.001 par value, 10,000,000 authorized, 400,000 shares designated as Series A Preferred Stock and unissued, 3,000,000  shares designated as Series B Preferred stock and unissued, 1,142,856 shares designated as Series C Preferred Stock and 5,457,144 undesignated and unissued     -       -  
Series C Preferred Stock, $0.001 par value, 1,142,856 shares authorized, 799,989 and 0 shares issued and outstanding as of December 31, 2018 and 2017, respectively (Liquidation preference $4,199,942)     800       -  
Common stock, $0.001 par value; 50,000,000 shares authorized, 6,720,107 shares issued and 6,393,107 outstanding as of December 31, 2018 and 2017.     6,392       6,392  
Additional paid-in-capital     27,657,098       25,084,252  
Treasury stock, at cost (327,000 shares of common stock as of December 31, 2018 and 2017)     (237 )     (237 )
Accumulated deficit     (47,021,762 )     (33,757,671 )
Total Stockholder’s Deficit     (19,357,709 )     (8,667,264 )
Total Liabilities and Stockholders’ Deficit   $ 15,615,587     $ 14,638,554  

 

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

 

F- 2

 

 

ICAGEN INC.

 

CONSOLIDATED STATEMENT OF OPERATIONS

 

    Year ended     Year ended  
    December 31,     December 31,  
    2018     2017  
             
Revenues   $ 13,583,218     $ 22,656,610  
                 
Cost of goods sold     9,910,569       11,175,692  
                 
Gross profit     3,672,649       11,480,918  
                 
Operating expenses:                
Selling, general and administrative expenses     10,309,471       13,936,542  
Depreciation     1,486,919       1,736,628  
Amortization     378,148       224,984  
Total Operating expenses     12,174,538       15,898,154  
                 
Operating loss     (8,501,889 )     (4,417,236 )
                 
Other income (expense)                
Other income     15,779       502,494  
Gain on extinguishment of debt     495,783       -  
Other expense     (562,524 )     (262,966 )
Interest income     -       7  
Interest expense     (3,190,730 )     (2,282,046 )
Derivative liability movement     (1,295,732 )     349,313  
Total other expense     (4,537,424 )     (1,693,198 )
                 
Net loss before income tax     (13,039,313 )     (6,110,434 )
                 
Income tax     -       -  
                 
Net loss     (13,039,313 )     (6,110,434 )
                 
Preferred stock dividend     (224,778 )     -  
                 
Net loss available to common stock holders   $ (13,264,091 )   $ (6,110,434 )
                 
Net Loss Per Share -  Basic and Diluted   $ (2.07 )   $ (0.96 )
                 
Weighted Average Number of Shares Outstanding -Basic and Diluted     6,393,107       6,393,107  

 

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

 

F- 3

 

 

ICAGEN, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

FOR THE PERIOD JANUARY 1, 2017 TO DECEMBER 31, 2018

 

    Preferred Stock    

 

Common Stock

   

Treasury

Stock

   

Additional

Paid-in

   

 

Accumulated

   

Total

Stockholders’

 
    Shares     Amount     Shares     Amount     Amount     Capital     Deficit     Deficit  
                                                 
Balance as of January 1, 2017     -     $ -       6,393,107     $ 6,392     $ (237 )   $ 24,108,143     $ (27,647,237 )   $ (3,532,939 )
                                                                 
Stock option based compensation     -       -       -       -       -       645,756       -       645,756  
                                                                 
Fair value of bridge note warrants issued     -       -       -       -       -       330,353       -       330,353  
                                                                 
Net loss     -       -       -       -       -       -       (6,110,434 )     (6,110,434 )
                                                                 
Balance as of December 31, 2017     -       -       6,393,107       6,392       (237 )     25,084,252       (33,757,671 )     (8,667,264 )
                                                                 
Stock option based compensation     -       -       -       -       -       1,515,824       -       1,515,824  
                                                                 
Series C Preferred stock issued     799,989       800       -       -       -       2,799,200       -       2,800,000  
                                                                 
Fair value of bridge note warrants issued     -       -       -       -       -       116,485       -       116,485  
                                                                 
Fair value of Series C Preferred warrants issued     -       -       -       -       -       (1,858,663 )     -       (1,858,663 )
                                                                 
Net loss     -       -       -       -       -       -       (13,039,313 )     (13,039,313 )
                                                                 
Series C Preferred Stock dividends     -       -       -       -       -       -       (224,778 )     (224,778 )
                                                                 
Balance as of December 31, 2018     799,989     $ 800       6,393,107     $ 6,392     $ (237 )   $ 27,657,098     $ (47,021,762 )   $ (19,357,709 )

 

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

 

F- 4

 

 

ICAGEN, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

  

    Year ended     Year ended  
    December 31,     December 31,  
    2018     2017  
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss   $ (13,039,313 )   $ (6,110,434 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depreciation expense     1,486,919       1,736,628  
Amortization expense     378,148       224,984  
Stock based compensation charge     1,515,824       645,756  
Amortization of debt discount     1,229,994       1,110,424  
Gain on extinguishment of debt     (495,783 )     -  
Derivative liability movements     1,295,732       (349,313 )
Deferred purchase consideration unearned by vendor     -       (500,000 )
Imputed interest on acquisition of Icagen assets     299,075       308,252  
Loss on disposal of assets held for resale     -       6,619  
Changes in operating assets and liabilities                
Accounts receivable     (311,434 )     (422,326 )
Inventory     11,093       (73,885 )
Prepaid expenses and other current assets     102,714       254,439  
Accounts payable     250,167       (240,536 )
Deferred subsidy     -       (5,600,000 )
Deferred revenues     (129,618 )     (394,643 )
Advanced payment on collaborations     5,000,000       -  
Other payables and accrued expenses     (1,793,224 )     (594,526 )
CASH USED IN OPERATING ACTIVITIES     (4,199,706 )     (9,998,561 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Payment of deferred purchase consideration     (150,000 )     (150,000 )
Purchase of plant and equipment     (1,288,011 )     (1,240,646 )
Purchase of intangibles     -       (153,164 )
Proceeds on assets held for resale     -       20,381  
Deposits paid     (1,000 )     -  
NET CASH USED IN INVESTING ACTIVITIES     (1,439,011 )     (1,523,429 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from term loan payable     15,250,000       -  
Proceeds from convertible loan payable     -       9,600,000  
Repayment of convertible loan payable     (10,000,000 )     -  
Proceeds from bridge notes payable     500,000       1,500,000  
Repayment of bridge notes payable     (200,000 )     (1,500,000 )
Capital raising fee     (1,006,944 )     -  
Fees paid on extinguishment of debt     (207,000 )     -  
Proceeds from Series C Preferred Stock     2,800,000       -  
Proceeds from loans payable     -       157,766  
Repayment of loans payable     (141,877 )     (411,128 )
NET CASH PROVIDED BY FINANCING ACTIVITIES     6,994,179       9,346,638  
                 
NET INCREASE (DECREASE) IN CASH     1,355,462       (2,175,352 )
                 
CASH AT BEGINNING OF YEAR     2,763,596       4,938,948  
                 
CASH AT END OF YEAR   $ 4,119,058     $ 2,763,596  
                 
CASH PAID FOR INTEREST AND TAXES:                
Cash paid for income taxes   $ -     $ -  
Cash paid for interest   $

1,554,580

    $ 742,254  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES                
Value of warrants issued concurrent with Series C Preferred Stock   $ 1,858,663   $ -  
Value of warrants issued concurrent with bridge notes payable   $ 116,485     $ 330,353  
Value of warrants issued on term loans payable   $ 1,746,065     $ -  
Discount on convertible loan payable and warrants issued concurrent with convertible loan payable   $ -     $ 4,518,278  
Extinguishment of derivative liability and unamortized debt discount on convertible note   $

3,890,826

   

$

-  

 

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

F- 5

 

 

ICAGEN, INC.

 

NOTES TO THE 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 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.

 

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 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 the Company’s partners.

 

In May 2018, the Company announced our 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, our 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 our 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.

 

F- 6

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES

 

Basis of presentation

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).

 

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

 

Consolidation

 

The 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 consolidated financial statements. The entities included in these 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 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 evaluate 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 our more significant judgments and estimates used in the preparation of the 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. and assumptions used in assessing impairment of long-term assets.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against and by the Company or un-asserted claims that may result in such proceedings, the Company’s management evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

F- 7

 

 

ICAGEN, INC.

 

NOTES TO THE 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 has recorded a derivative liability for its convertible notes and warrants which contain variable conversion prices. The derivative liability measured at fair value using unobservable inputs (Level 3) amounted to $5,178,598 as of December 31, 2018.

 

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.

 

Reporting by segment

 

No segmental information is presented as the Company operates in one segment and has changed its focus from Government contract revenue to revenues derived from commercial customers.

 

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 $3,650,565 are not covered by the FDIC as of December 31, 2018.

 

Concentration of major customers

 

The Company derives its revenues from commercial pharmaceutical and biotechnology companies as well as from Government research contracts and Government grants.

 

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

 

The Company derived 83.4% of its commercial revenues from seven customers during the year ended December 31, 2018. During the year ended December 31, 2017, the Company derived 89.4% of its commercial revenues from ten major customers. The Company continues its attempts to diversify its customer base.

 

The outstanding Government research contracts in the prior year were from one government agency; the National Institutes of Health. The granting of research contracts from Government agencies is a competitive process and there is no certainty that the Company will be awarded future contracts, which may cause its revenue to fluctuate from year to year. Furthermore, Government grants are subject to audits by the granting agency. If such audits were to determine that expenditures of the grant funds did not meet the applicable criteria, these amounts could be subject to retroactive adjustment and refunded to the granting agency.

 

F- 8

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Total revenues by customer type are as follows:

 

      Year ended December 31, 2018     Year ended December 31, 2017  
               
  Government grants   $        -     $ 320,743  
  Subsidy revenue     -       9,600,000  
  Commercial revenues     13,583,218        12,735,867  
      $ 13,583,218      $ 22,656,610  

 

Intangible assets

 

Certain of the Company’s intangible assets are subject to amortization. The Company evaluates the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. Where intangibles are deemed to be impaired the Company recognizes an impairment loss measured as the difference between the estimated fair value of the intangible and its book value.

 

1) Cell lines

 

Cell lines acquired by the Company are reported at acquisition value less any impairment. The useful life of cell lines is estimated to be indefinite.

 

2) Discovery platform

 

The discovery platform acquired by the Company is reported at acquisition value less accumulated amortization and any impairment. The estimated useful life of the discovery platforms acquired is estimated to be ten years.

 

3) Trademarks and trade names

 

The Trademarks and trade names acquired by the Company is reported at acquisition value less any impairments. The estimated useful life of trademarks and trade names is estimated to be indefinite.

 

4) Patents

 

Patents acquired by the Company are reported at acquisition value less accumulated amortization and impairments. The estimated useful life of patents is twenty years, the general useful life of patents.

 

5) Assembled workforce

 

Assembled workforce acquired by the Company is reported at acquisition value less amortization and impairments. The estimated useful life of the assembled workforce is ten years.

 

6) Amortization

 

Amortization is reported in the consolidated statement of operations on a straight-line basis over the estimated useful life of the intangible assets, unless the useful life is indefinite. Amortizable intangible assets are amortized from the date that they are available for use.

  

Plant and equipment

 

Plant and equipment is stated at cost less accumulated depreciation. Depreciation is computed using straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are as follows:

 

  Leasehold improvements 5 Years
  Laboratory equipment 7 Years
  Furniture and fixtures 10 Years
  Computer equipment 3 Years
  Computer software License period, generally 1 to 3 years

 

The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.

 

The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. There was no impairment as of December 31, 2018.

   

F- 9

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

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 December 31, 2018 and 2017 was $0. The amount charged to bad debt provision for the year ended December 31, 2018 and 2017 was $0.

 

Cash and cash equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with one financial institution in the USA.

 

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 subsidy revenue, 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 subsidy revenue

 

In the prior year, the Company had received certain deferred subsidy revenue which was utilized to support its operations, maintain the facilities that it operates in and continue the employment of certain employees to provide, if needed, resources to certain of its customers. This deferred subsidy revenue was amortized over a straight-line basis to match the expected expenses to be incurred over the period July 15, 2016 to December 31, 2017.

 

3) 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.

 

F- 10

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Revenue recognition (continued)

 

4) 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 closing 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 event payments

Revenue contingent upon the achievement of certain agreed upon development events is recognized in the period that the development event is achieved. The achievement of a development event 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 our 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 our collaboration agreements, these royalties are recognized as revenue in the period in which a royalty report is received from our collaboration partners.

  

5) 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.

 

Sales and marketing

 

Sales and marketing expenses are expensed as incurred and is included in selling, general and administrative expenses. The Company expects to incur expenditure on relevant conferences and seminars and publications in scientific media, minimal sales and marketing expenses were incurred and are expected to be incurred in future periods.

 

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 year ended December 31, 2018 and 2017 was $2,187,190 and $3,328,843, respectively.

 

Patents

 

Legal costs in connection with approved patents and patent applications are expensed as incurred and classified as selling, general and administrative expense in the Company’s consolidated statements of operations.

  

F- 11

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

     

Share-based Compensation

 

ASC 718, “Compensation - Stock Compensation,” prescribes accounting and reporting standards for all stock-based payment transactions in which employee services are acquired. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the employee’s requisite service period or vesting period on a straight-line basis. Stock-based compensation expense recognized in the consolidated statements of operations for the year ended December 31, 2018 and 2017 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. This estimate will be revised in subsequent periods if actual forfeitures differ from those estimates. We have no awards with performance conditions and no awards dependent on market conditions.

 

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity - Based Payments to Non-Employees.” Measurement of stock-based payment transactions with nonemployees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the stock-based payment transaction is determined at the earlier of performance commitment date or performance completion date.

 

Income taxes

 

The Company utilizes ASC 740, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740, “Income Taxes”. Accounting guidance addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements, under which a company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

 

The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Accordingly, the Company would report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company elects to recognize any interest and penalties, if any, related to unrecognized tax benefits in tax expense.

 

Net income (loss) per share

 

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

 

Diluted net income (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.

 

F- 12

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Beneficial conversion feature of convertible notes payable

 

The Company accounts for convertible notes payable in accordance with guidelines established by the FASB ASC Topic 470-20, “Debt with Conversion and Other Options”. The beneficial conversion feature of a convertible note is normally characterized as the convertible portion or feature of certain notes payable that provide a rate of conversion that is below market value or in-the-money when issued. The Company records a beneficial conversion feature related to the issuance of a convertible note when issued and also records the estimated fair value of any warrants issued with those convertible notes. The beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.

 

The beneficial conversion feature of a convertible note is measured by first allocating a portion of the note’s proceeds to any warrants, if applicable, as a discount on the carrying amount of the convertible on a relative fair value basis. The discounted face value is then used to measure the effective conversion price of the note. The effective conversion price and the market price of the Company’s common stock are used to calculate the intrinsic value of the conversion feature. The intrinsic value is recorded in the financial statements as a debt discount from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to amortization of debt discount on the Company’s consolidated statement of operations.

 

Derivative liabilities

 

The Company has derivative financial instruments as of 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 Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The Black-Scholes option valuation model was used to estimate the fair value of the conversion options. 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 effective interest method.

 

Inventory

 

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

 

Recent accounting pronouncements

 

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

 

The amendments in this update establishes 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 will adopt the new standard on January 1, 2019 using the prospective transition method. In preparation for adoption of the standard.

 

F- 13

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Recent accounting pronouncements (continued)

 

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. Based on the Company’s assessment, the Company has concluded that the adoption of the new standard will result in the recording of a right-of-use asset and a lease liability on the consolidated balance sheet on January 1, 2019. While substantially complete, the Company is still in the process of finalizing its evaluation of the effect of ASC 842 on its financial statements and disclosures. The Company does not expect the adoption of ASU 2016-02, as amended, to have a material impact on its consolidated statements of operations or consolidated statements of cash flows.

 

In February 2018, the FASB issued ASU 2018-2, Income Statement- Reporting Comprehensive Income (Topic 220), Reclassification of certain tax effects from accumulated other comprehensive income.

 

The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects.

 

The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.

 

This ASU was applied retrospectively to the consolidated financial statements and resulted in a reduction in the tax effect of net operating losses carried forward.

 

In February 2018, the FASB issued ASU 2018-3 Technical Corrections and Improvements to Financial Instruments – Overall (Sub topic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities.

 

The amendment clarifies that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820.

 

The amendment clarifies that the adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place.

 

The amendment clarifies that remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities.

 

The amendment clarifies that when the fair value option is elected for a financial liability, the guidance in paragraph 825-10-45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall.

 

The amendments clarify that for financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates.

 

The amendment clarifies that the prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services—Insurance, should apply a prospective transition method for Correction or Improvement Summary of Amendments when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected.

 

The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01.

 

The amendments in this update are not expected to have a material impact on the consolidated financial statements.

  

F- 14

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Recent accounting pronouncements (continued)

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting.

 

The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.

 

The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.

 

The impact of this ASU on the consolidated financial statements is not expected to be material.

 

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements.

 

The amendments in this Update provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests.

 

The amendments in this Update provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and both of the following are met: 1. The timing and pattern of transfer of the non-lease component(s) and associated lease component are the same. 2. The lease component, if accounted for separately, would be classified as an operating lease.

 

The amendments in this Update related to separating components of a contract affect the amendments in Update 2016-02, which are not yet effective but can be early adopted.

 

The Company is currently considering the impact this ASU will have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Changes to the Disclosure Requirements for Fair Value Measurement.

 

The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.

 

Removals

 

The following disclosure requirements were removed from Topic 820:

 

  1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
  2. The policy for timing of transfers between levels
  3. The valuation processes for Level 3 fair value measurements
  4. For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

 

Modifications

 

The following disclosure requirements were modified in Topic 820:

 

  1. In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities.
  2. For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
  3. The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

 

F- 15

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Recent accounting pronouncements (continued)

 

Additions

 

The following disclosure requirements were added to Topic 820:

 

  1. The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period
  2. The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

 

In addition, the amendments clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements.

 

The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date.

 

The impact of this ASU on the consolidated financial statements is not expected to be material.

 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808) Clarifying the Interaction between Topic 808 and Topic 606.

 

A collaborative arrangement, as defined by the guidance in Topic 808, is a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. Topic 808 does not provide comprehensive recognition or measurement guidance for collaborative arrangements, and the accounting for those arrangements is often based on an analogy to other accounting literature or an accounting policy election.

 

The amendments in this Update provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for with revenue under Topic 606. The amendments in this Update make targeted improvements to generally accepted accounting principles for collaborative arrangements as follows:

 

  1. Clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements.
  2. Add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606
  3. Require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer.  

 

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. An entity may not adopt the amendments earlier than its adoption date of Topic 606. The amendments in this Update should be applied retrospectively to the date of initial application of Topic 606. An entity should recognize the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings of the later of the earliest annual period presented and the annual period that includes the date of the entity’s initial application of Topic 606. An entity may elect to apply the amendments in this Update retrospectively either to all contracts or only to contracts that are not completed at the date of initial application of Topic 606. An entity should disclose its election.

 

The impact of this ASU on the consolidated financial statements is not expected to be material.

 

Any new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.

 

F- 16

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

  

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

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.

 

3. GOING CONCERN

 

As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $(13,039,313) and $(6,110,434) during the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, and 2017 the Company had accumulated deficits of $47,021,762 and $33,757,671, respectively. The Company’s working capital position has changed from a deficit of $(180,357), including deferred revenue of $219,828 for the year ended December 31, 2017, to a deficit of $4,594,570, including deferred revenue of $5,090,210 for the year ended December 31, 2018. The deferred revenue includes an upfront payment on a collaboration agreement of $5,000,000. 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 our ability to continue as a going concern for the next twelve month period from April 12, 2019, 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 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

 

      December 31,
2018
   

December 31,

2017

 
               
  Prepaid insurance     $ 35,723    

$

75,774  
  Prepaid maintenance     73,992       129,260  
  Prepaid rent     -       2,500  
  Prepaid subscriptions     938       5,833  
      $ 110,653     $ 213,367  

 

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 our 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.

 

F- 17

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

6. INTANGIBLE ASSETS (continued)

 

b. Trade name and trademarks

 

In 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 our 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 issued 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.

 

Intangible assets consist of the following:

 

     

December 31, 2018

    December 31, 2017  
      Cost     Amortization and
Impairment
   

Net book

value

   

Net book

value

 
  Cell lines   $ 5,153,664     $ (153,164 )   $ 5,000,500     $ 5,153,664  
  Discovery platform     1,450,500       (507,675 )     942,825       1,087,875  
  Trade names and trademarks     637,500       -       637,500       637,500  
  Assembled workforce     282,500       (98,875 )     183,625       211,875  
  Patents     972,000       (687,527 )     284,473       336,157  
      $ 8,496,164     $ (1,447,241 )   $ 7,048,923     $ 7,427,071  

 

F- 18

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

6. INTANGIBLE ASSETS (continued)

 

The aggregate amortization expense charged to operations was $378,148 and $224,984 for the year ended December 31, 2018 and 2017, respectively. The amortization policies followed by the Company are described in Note 2.

 

Amortization expense for future periods is summarized as follows:

 

      Amount  
         
  2019   $ 224,984  
  2020     224,984  
  2021     224,984  
  2022     224,984  
  2023 and thereafter     510,987  
  Total   $ 1,410,923  

 

7. PLANT AND EQUIPMENT

 

Plant and equipment consists of the following:

 

     

December 31,

2018

    December 31, 2017  
      Cost    

Depreciation

and Impairment

    Net book value     Net book value  
                           
  Laboratory equipment   $ 2,630,539     $ (1,382,271 )   $ 1,248,268     $ 1,396,617  
  Computer software     997,637       (349,059 )     648,578       716,860  
  Computer equipment     109,385       (65,151 )     44,234       43,816  
  Leasehold improvements     75,511       (33,746 )     41,765       24,460  
      $ 3,813,072     $ (1,830,227 )   $ 1,982,845     $ 2,181,753  

 

The aggregate depreciation charge to operations was $1,486,919 and $1,736,628 for the years ended December 31, 2018 and 2017, respectively. The depreciation policies followed by the Company are described in Note 2.

   

8. OTHER PAYABLES AND ACCRUED EXPENSES

 

      December 31, 2018     December 31, 2017  
               
  Bonus and vacation accrual   $ 508,550     $ 1,871,488  
  Payroll liabilities     275,001       44,858  
  Severance cost accrual     30,541       262,966  
  Other     108,365       152,797  
      $ 922,457     $ 2,332,109  

 

The Company accrues for bonus accruals in anticipation of making payments based on the achievement of pre-determined goals. Vacation pay unused at the end of the fiscal year is forfeited with no carry over or payments made to employees.

 

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.

 

F- 19

 

  ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

9. LEGAL SETTLEMENT ACCRUAL

 

The legal settlement liability is disclosed as follows:

   

      December 31,
2018
    December 31, 2017  
               
  Settlement liability accruals            
  Dentons dispute   $ -     $ 400,000  
  Eisenschenk matter     -       83,333  
  Other     -       10,000  
        -       493,333  
  Judgement liability     -       -  
      $ -     $ 493,333  
  Disclosed as follows:                
  Short-term portion   $ -     $ 493,333  
      $          -     $ 493,333  

 

In terms of a Mutual Release and Assignment Agreement entered into between American Milling LP and the Company, American Milling is a claimant in the Estate of Sigmund Eisenschenk matter. American Milling agreed to assign all its claims, both past and future against the Estate of Sigmund Eisenschenk to the Company for $800,000, to be paid by the Company in instalments. The remaining balance of $83,333 was paid on March 30, 2018.

 

The Company agreed to settle the Dentons dispute by the payment of $1,400,000 over a 14 month period. As of December 31, 2018, the Company had paid $1,000,000, a further $200,000 was paid on March 15, 2018 and the remaining $200,000 on June 30, 2018.

 

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 entered into with Sanofi on July 15, 2016. 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 an 18 month period.

 

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 will be 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 event payments

Revenue contingent upon the achievement of certain agreed upon development events is recognized in the period that the development event is achieved. The achievement of a development event 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 our 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 our collaboration agreements, these royalties are recognized as revenue in the period in which a royalty report is received from our collaboration partners.

 

F- 20

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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 $500,000 deferred purchase consideration due on July 1, 2017, was not earned by Pfizer due to Pfizer not meeting its $4,000,000 revenue target. This liability of $500,000 was reversed to other income during the Year ended December 31, 2017.

 

Deferred purchase consideration is disclosed as follows:

 

      December 31,
2018
    December 31,
2017
 
  Deferred purchase consideration            
  Opening balance   $ 9,856,458     $ 10,500,000  
  Reversal of unearned purchase consideration     -       (500,000 )
  Interest due on deferred purchase consideration     126,576       25,578  
  Repayment     (228,963 )     (169,120 )
  Closing balance     9,754,071       9,856,458  
                   
  Present value discount on future payments                
  Opening balance     (1,417,336 )     (1,712,689 )
  Imputed interest expense     299,075       300,511  
  Fair value adjustments     -       (5,158 )
  Closing balance     (1,118,261 )     (1,417,336 )
                   
  Deferred purchase consideration, net   $ 8,635,810     $ 8,439,122  
                   
  Disclosed as follows:                
  Short-term portion   $ 2,450,000     $ 206,458  
  Accrued interest     54,071       -  
  Long-term portion     6,131,739       8,232,664  
  Deferred purchase consideration, net   $ 8,635,810     $ 8,439,122  

 

F- 21

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

12. INCOME TAXES

 

The income tax provision/ (benefit) is different from that which would be obtained by applying the statutory Federal income tax rate of 21% to income before income tax expense. The items causing this difference for the years ended December 31, 2018 and 2017 are as follows:

 

      Year ended
December 31,
2018
    Year ended
December 31,
2017
 
               
  Income tax benefit at federal rate   $ (2,738,000 )   $ (2,139,000 )
  State tax, net of federal benefit     (652,000 )     (305,000 )
  Prior year under provision     22,000       (548,000 )
  Discount on notes     1,148,000       444,000  
  Derivative liability movement     (675,000     -  
  Income tax rate change     -       3,672,000  
  Other     82,000       51,000  
        (2,813,000 )     1,175,000  
  Utilization of net operating loss carry-forwards             -  
  Valuation allowance     2,813,000       (1,175,000 )
      $ -     $ -  

   

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities at December 31, 2018 and 2017 are as follows:

 

      December 31,     December 31,  
      2018     2017  
  Deferred tax assets            
  Accrual to cash adjustments   $ 117,000     $ 611,000  
  options based compensation     1,279,000       884,000  
  Deferred revenue     1,323,000       -  
  Capital loss     32,500       32,500  
  Plant and equipment     43,000       173,000  
  Net operating loss     7,291,000       5,492,000  
        10,085,500       7,192,500  
  Valuation allowance     (9,631,500 )     (6,818,500 )
        454,000       374,000  
  Deferred tax liabilities                
  Amortization of intangibles     (454,000 )     (374,000 )
      $ -     $ -  

  

We have established a valuation allowance against our gross deferred tax assets sufficient to bring our net deferred tax assets to zero due to the uncertainty surrounding the realization of such assets. Management has determined it is more likely than not that the deferred tax assets are not realizable beyond our deferred tax liabilities due to our historical loss position. The valuation allowance for the year ended December 31, 2018 also increased by $2,813,000 due to the additional operating losses incurred for the year ended December 31, 2018.

 

As of December 31, 2018, the prior three years remain open for examination by the federal or state regulatory agencies for purposes of an audit for tax purposes.

 

At December 31, 2018, we had tax loss carry forwards of approximately $28,041,000. These net operating loss carry forwards expire in 2037, if unused. The Company files its tax returns on a cash basis.

 

Pursuant to the Internal Revenue Code of 1986, as amended (“IRC”), §382, our ability to use net operating loss carry forwards to offset future taxable income is limited if we experience a cumulative change in ownership of more than 50% within a three-year period.

  

F- 22

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

12. INCOME TAXES (continued)

 

The Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017 and significantly changes tax law in the United States by, among other items, reducing the federal corporate income tax rate from a maximum of 35% to 21% (effective January 1, 2018). The Act embraces a territorial system for the taxation of future foreign earnings and modifies certain business deductions by, among other changes, repealing the domestic production activities deduction, further limiting the deductibility of certain executive compensation and increasing the limitation on the deductibility of certain meals and entertainment expenses. On the other hand, the Act permits 100% bonus depreciation on assets placed in service through 2022 (with a phase-out period through 2026). The full effects of these changes will be reflected for the first time in the determination of income tax expense for the year ending December 31, 2018. The Company determined that it had no liability as of December 31, 2018 for the one-time transition tax on deemed repatriated earnings of foreign subsidiaries imposed by the Act.

 

The Company will evaluate the impact of the Global Intangible Low-Taxed Income (“GILTI”) provision of the Act, beginning with the year ending December 31, 2018, the year for which it will first apply. The FASB has issued guidance stating that a company may elect to treat the additional taxes due in the United States as a result of GILTI inclusions as current period expenses when incurred or to include such amounts in the company’s determination of deferred taxes. The Company does not have any GILTI tax liability as of December 31, 2018, therefore no election is applicable.

 

13. BRIDGE NOTES PAYABLE

 

On April 12, 2017, the Company sold in a private placement offering (the “Bridge Note Offering”) to three investors, which included two members of the Board of Directors, pursuant to a securities purchase agreement entered into with each investor (the “Purchase Agreements”), 150 units at a price of $10,000 per unit (the “Units”) each Unit consisting of a note (the ’‘Note”) in the principal amount of $10,000 and a five year warrant (the “Bridge Warrants”) to acquire 1,500 shares of the Company’s common stock, par value, $0.001 per share, at an exercise price of $3.50 per share. The aggregate gross cash proceeds to the Company from the sale of the 150 Units was $1,500,000.

 

The Notes bore interest at a rate of 8% per annum and matured on the earlier of (i) the date that is thirty (30) days after the date of issuance or (ii) the closing of the Company’s next debt financing. Pursuant to a Security and Pledge Agreement the Notes were secured by a lien on all of the current assets of the Company (excluding the equity of and assets of the Company’s wholly owned subsidiary, Icagen-T, Inc.). Amounts overdue bore interest at a rate of 1% per month. The notes were repaid during May 2017 upon the closing of the convertible debt funding.

 

The Bridge Warrants have an initial exercise price of $3.50 per share and are exercisable for a period of five years from the date of issuance. Each Warrant is exercisable for one share of common stock, which resulted in the issuance of Bridge Warrants exercisable to purchase an aggregate of 225,000 shares of common stock. In addition, the Company also issued 25,000 warrants to the Placement Agent as compensation for the Bridge Note Offering.

 

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.

 

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

 

F- 23

 

 

ICAGEN, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

13. BRIDGE NOTES PAYABLE (continued)

 

On December 28, 2018, the Company repaid the principal sum of $200,000 of Bridge notes together with interest thereon of $7,616 to three Bridge note holders on the proceeds raised on 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:

  

      December 31,
2018
    December 31,
2017
 
  Bridge note liability            
  Bridge notes raised   $ 500,000     $ 1,500,000  
  Interest accrued     19,123       9,753  
  Repayment     (207,616     (1,509,753 )
  Closing balance     311,507       -  
                   
  Discount on bridge notes                
  Fair value of warrants issued     (116,485 )