~~INNOVATION PHARMACEUTICALS INC.~~

~~(Exact Name of Registrant as Specified in Charter)~~

Commission File Number: 001-37357

(Registrant’s telephone number, including area ~~code:~~ ~~(978) 921-4125~~code)

~~SECURITIES REGISTERED UNDER SECTION~~Securities registered under Section 12(b) ~~OF THE EXCHANGE ACT:~~ ~~NONE~~of the Exchange Act: none

~~SECURITIES REGISTERED UNDER SECTION~~Securities registered under Section 12(g) ~~OF THE EXCHANGE ACT:~~ ~~COMMON STOCK, CLASS~~of the Exchange Act: common stock, Class A, ~~PAR VALUE~~par value $0.0001 ~~PER SHARE~~per share

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

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 o ☐ No x☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. o☐

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.

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. o☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates on December 31, ~~2016~~2020 was ~~$116,693,863 (100,598,158~~$63,972,816 (355,404,535 shares), based on the closing price of the registrant’s common stock of ~~$1.16.~~$0.18.

~~There were 137,874,421 and -0-~~The number of shares ~~respectively,~~outstanding of each of the ~~registrant’s $0.0001 par value Class A and Class B~~issuer’s classes of common ~~stock outstanding~~equity, as of September ~~1, 2017.~~22, 2021 is as follows:

References in this report to “Innovation Pharmaceuticals,” “Company,” “we,” “us,” and “our” refer to Innovation Pharmaceuticals Inc., unless the context requires otherwise. References herein to our common stock refer to our Class A common stock, par value $0.0001 per share, unless the context requires otherwise. The Company’s common stock is traded under the stock symbol “IPIX” on the OTCQB.

Our fiscal year ends on June 30. When we refer to a fiscal year or quarter, we are referring to the year in which the fiscal year ends and the quarters during that fiscal year. Therefore, fiscal ~~2017~~2021 refers to the fiscal year ended June 30, ~~2017.~~2021.

Set forth below are definitions of certain technical terms used in this report that are commonly used in the pharmaceutical and biotechnology industries.

Apoptosis: A type of cell death in which a series of molecular steps in a cell lead to its death. This is one method the body uses to get rid of unneeded or abnormal cells. The process of apoptosis may be blocked in cancer cells. Also called programmed cell death.

BSL: Biological Safety Levels or Biosafety Levels (BSLs) are a series of biocontainment precautions applied to activities that take place in biological labs, in ascending order of containment based on the degree of the health-related risk associated with the work being conducted. They are safeguards designed to protect laboratory personnel, as well as the surrounding environment and community. These levels, which are ranked from one to four, are selected based on the agents or organisms that are being researched or worked on in any given laboratory setting. For example, a basic lab setting specializing in the research of nonlethal agents that pose a minimal potential threat to lab workers and the environment are generally considered BSL-1—the lowest biosafety lab level. A specialized research laboratory that deals with potentially deadly infectious agents like Ebola would be designated as BSL-4—the highest and most stringent level. The research to date on Brilacidin’s antiviral properties against the Coronavirus have mostly been researched at BSL-3 labs.

COVID-19 Variants: Numerous genetic viral mutations have emerged during the COVID-19 pandemic, giving rise to variants (new strains) of the original SARS-CoV-2 virus. A U.S. government Interagency Group (SIG) has created a three-tiered variant classification system—Variant of Interest, Variant of Concern or Variant of High Consequence. Currently, a number of variants have been identified as Variants of Interest, including: B.1.427, B.1.429, B.1.525 (Eta), B.1.526 (Iota), B.1.617.1 (Kappa), and B.1.617.3. The B.1.1.7 (Alpha), B.1.351 (Beta), B.1.617.2 (Delta) and P.1 (Gamma) variants of the original SARS-CoV-2 strain have been identified as Variants of Concern. Laboratory studies, as well as real-world data, show variants can reduce the efficacy of COVID-19 treatments and vaccines.

Covid-19 Breakthrough Infections: When a previously vaccinated individual contracts the virus resulting in infection. A breakthrough infection is specifically defined by the Centers for Disease Control and Prevention as the detection of SARS-CoV-2 RNA or antigen in a respiratory specimen collected from a person ≥14 days after receipt of all recommended doses of an FDA-authorized COVID-19 vaccine.

Coronavirus, SARS, SARS-CoV-2, COVID-19: Coronavirus Disease-2019 (COVID-19) is the disease caused by SARS-CoV-2, which is a new strain of coronavirus. SARS-CoV-2 is a positive sense, single-strand enveloped RNA virus. The Coronavirus name is derived from the Latin corona, meaning crown. The viral envelope under electron microscopy appears crown-like due to small bulbar projections formed by the viral spike (S) peplomers. SARS is the acronym for Severe Acute Respiratory Syndrome.

Defensin mimetics: Small compounds that mimic the structure and function of defensins, also known as host defense proteins.

Emergency Use Authorization: An Emergency Use Authorization (EUA) is a mechanism to facilitate the availability and use of medical countermeasures during public health emergencies, such as the current COVID-19 pandemic.

HNC: Head and Neck Cancer. Head and neck cancer is a term used to define cancer that develops in the mouth, throat, nose, salivary glands, oral cancers or other areas of the head and neck. Most of these cancers are squamous cell carcinomas, or cancers that begin in the lining of the mouth, nose and throat.

IBD: Inflammatory Bowel Disease. An umbrella term for chronic, hard-to-treat conditions of the Gastrointestinal tract, with ulcerative colitis, and Crohn’s disease being common examples of extensive forms of the disease and ulcerative proctitis / proctosigmoiditis being more limited in distribution.

IND: Investigational New Drug. A substance that has been tested in the laboratory and has been approved by the FDA for testing in people.

In Vitro: Refers to the technique of performing a given experiment in a test tube, or, generally, in a controlled environment outside a living organism.

In Vivo: Refers to that which takes place inside an organism. In science, in vivo refers to experimentation done in or on the living tissue of a whole, living organism as opposed to a partial or dead one. Animal testing and clinical trials are forms of in vivo research.

OM: Oral Mucositis. Oral mucositis is a common complication of cancer chemotherapy/ chemoradiation or radiation therapy. Oral mucositis causes the mucosal lining of the mouth to atrophy and break down, forming ulcers.

P21 (also known as protein 21): The expression of this gene is tightly controlled by the tumor suppressor protein p53, through which this protein mediates the p53-dependent cell cycle G1 phase arrest in response to a variety of stress stimuli. Used as a biomarker to detect change in p53.

P53 (also known as protein 53): A tumor suppressor gene that is mutated in many human cancers and results in the loss of a cell’s ability to check for DNA damage.

RBL: In the U.S., there are twelve Regional Biocontainment Laboratories (RBLs), and two National Biocontainment Laboratories (NBLs), which provide BSL4/3/2 and BSL3/2 biocontainment facilities, respectively, for research on biodefense and emerging infectious disease agents.

Small Molecule Drug: A medicinal drug compound having a molecular weight of less than 1,000 Daltons, and typically up to 500 Daltons.

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “intends,” “estimates,” “predicts,” “potential,” “continues,” “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will” or the negative of these terms or other comparable terminology, we are identifying forward-looking statements. These forward-looking statements include, but are not limited to, any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements; statements relating to potential licensing, partnering or similar arrangements concerning our drug compounds; statements concerning our future drug development plans and projected timelines for the initiation and completion of preclinical and clinical trials; the potential for the results of ongoing preclinical or clinical trials; other statements regarding our future product development and regulatory strategies, including with respect to specific ~~indications; any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements;~~indications such as, among others, COVID-19; and any other statements which are other than statements of historical fact. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, but are not limited to, our ability to continue as a going concern and our capital needs; our ability to fund and successfully progress internal research and development ~~efforts and~~efforts; our ability to create effective, commercially-viable drugs; our ability to effectively and timely conduct clinical trials; our ability to ultimately distribute our drug candidates; our ability to achieve certain future regulatory, development and commercialization milestones under our license agreement with Alfasigma S.p.A.; the development of treatments or vaccines relating to the COVID-19 pandemic by other entities; and compliance with regulatory ~~requirements; and our capital needs,~~requirements, as well as other factors described elsewhere in this report and our other reports filed with the Securities and Exchange Commission (the “SEC”). Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Forward-looking statements speak only as of the date on which they are made. Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business. Readers are cautioned not to put undue reliance on forward-looking statements.

For further information about these and other risks, uncertainties and factors, please review the disclosure included in this report under “Part I, Item 1A, Risk Factors.”

The following is a summary of the risks and uncertainties that could cause the Company’s business, financial condition or operating results to be harmed. Prospective investors should carefully consider all of the information in this report and, in particular, the disclosure included in this report under “Part I, Item 1A, Risk Factors,” before deciding whether to invest in the Company’s common stock.

Risks Related to the Securities Markets and Investments in Our Class A Common Stock

Innovation Pharmaceuticals Inc. is a clinical stage ~~biopharmaceutical~~pharmaceutical company developing innovative therapies with ~~dermatology,~~anti-infective, oncology, anti-inflammatory and ~~antibiotic~~dermatology applications. The Company owns the rights to ~~numerous drug compounds, including Prurisol (KM-133), which is in development for psoriasis;~~ Brilacidin, our lead drug in a new class of compounds called ~~defensin-mimetics;~~defensin-mimetics, and Kevetrin (thioureidobutyronitrile), our ~~lead~~ anti-cancer compound.

Brilacidin is being studied by the Company, ~~changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc.~~as well as other independent researchers, as a potential broad-spectrum antiviral therapeutic for the treatment of viruses including the novel coronavirus (SARS-CoV-2), which is responsible for COVID-19.

In December 2020, the U.S. Food and Drug Administration (FDA) approved the Company’s Investigational New Drug (IND) application to proceed with initiation of a randomized, placebo-controlled Phase 2 clinical trial of Brilacidin in moderate-to-severe hospitalized patients with COVID-19. Similar regulatory approval was obtained from the Russian Ministry of Health.

In January 2021, the FDA designated as a Fast Track development program the investigation of Brilacidin for the treatment for COVID-19.

In February 2021, the clinical trial of Brilacidin for treating hospitalized patients with COVID-19 in the United States and Russia began with patients being recruited to the study.

On February 9, 2021, antiviral results demonstrating Brilacidin’s inhibition of SARS-CoV-2 in cell culture were published in the journal Viruses.

In April 2021, the COVID-19 clinical trial’s independent Data Monitoring Committee (DMC) completed its scheduled review of interim safety data. Upon reaching 25 percent enrollment (30 subjects), recruitment was paused and a pre-specified unblinded safety data review and evaluation was conducted by the DMC. The DMC recommended increasing the dosing regimen of Brilacidin from 3 days to 5 days of treatment, as intended per the protocol, which the Company implemented.

In June 2021, 100 percent of the planned number of patients (n=120) were randomized in the study.

In July 2021, new in vitro data supporting Brilacidin’s broad-spectrum antiviral potential were presented by George Mason University/National Center for Biodefense and Infectious Disease researchers at the American Society of Virology’s Annual Meeting. Brilacidin showed inhibition in multiple human cell lines and in different strains of alphaviruses and bunyaviruses, building on earlier antiviral work in coronaviruses.

In July 2021, the independent DMC completed a second review of interim safety data from the Phase 2 clinical trial of Brilacidin in moderate-to-severe hospitalized patients with COVID-19. From their review, the DMC agreed to recommend the trial continue with no further modifications to the protocol.

On July 30, 2021, the last subject’s final visit occurred in the Company’s COVID-19 clinical trial.

On August 2, 2021, the Company provided an update on ongoing Brilacidin antiviral laboratory research being conducted by different groups of scientists. Their research includes insights into Brilacidin’s antiviral mechanisms of action as well as in vitro data supporting Brilacidin’s inhibition of the Alpha and Gamma variants and different strains of human coronaviruses.

The Company has received individual patient Expanded Access (compassionate use) requests for Brilacidin to treat critically ill COVID-19 patients who are not responding to prior therapy. Expanded Access was implemented by the FDA and Congress to address physician applications for access to potentially lifesaving drugs, prior to FDA approval, for patients in their care when available treatment options have failed. Following receipt of such requests, the Company has supplied Brilacidin to relevant hospitals for individual patient use, with the FDA granting the treating physician permission for the emergency administration of Brilacidin.

The study results as of the date of this Form 10-K remain blinded. The Company and vendors are currently engaged in the process of completing the necessary tasks for the unblinding of the Brilacidin COVID-19 clinical trial and obtaining study results.

The Company is actively engaged in business development and licensing initiatives with multiple specialty and global pharmaceutical companies. From time to time, the Company may be party to various indications of interest and term sheets and participate in preliminary discussions and negotiations regarding potential licensing or partnership arrangements. It remains the Company’s primary objective to complete licensing deals, territorial and/or global, to provide access to non-dilutive capital to advance clinical assets forward in the most expeditious and cost-effective manner. The Company can make no assurance that partnerships will occur, but is committed toward executing on these potential alliance and partnership opportunities.

In July 2019, the Company entered into a license agreement with Alfasigma S.p.A. (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and commercialize rectally administered Brilacidin for ulcerative proctitis/ulcerative proctosigmoiditis (“UP/UPS”). The license agreement provides Alfasigma with a right of first refusal for Brilacidin for the treatment of more extensive forms of inflammatory bowel disease (IBD), such as ulcerative colitis and Crohn’s disease, as well as a right of first negotiation for Brilacidin in other gastrointestinal indications. In January 2021, Alfasigma notified the Company that the Phase 1 study for the treatment of UP/UPS using Brilacidin in a proprietary Alfasigma formulation successfully completed dosing per protocol; an extra treatment cohort was subsequently added by amendment and commenced in 2Q 2021. In April 2021, the Company was notified that a Phase 2 multinational clinical trial for UP/UPS is planned to commence during the fourth quarter of 2021, and Alfasigma has ordered Brilacidin drug substance from the Company for use in this study. Due to a delay at the manufacturing vendor, delivery of drug substance to Alfasigma has moved out (mid 4Q2021), and the subsequent drug product manufacturing time will likely push any clinical trial start into 2022. The Company is eligible to receive $24 million in upfront and milestone payments, and a 6 percent royalty (net sales) upon the successful marketing of Brilacidin for UP/UPS.

On July 22, 2020, the Company and Fox Chase Chemical Diversity Center, Inc. (“FCCDC”) amended an earlier collaborative research agreement related to antifungal drug discovery work to which the Company had rights. In exchange for a six (6) percent fee tied to all potential future proceeds, the Company granted FCCDC all discovery, intellectual property and commercialization rights related to its share of their joint antifungal drug program.

We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Milestone payments from our licensee are also dependent on clinical/regulatory milestones. We are actively engaged in business development for partnering our drugs. Developing pharmaceutical products, however, is a lengthy and very expensive process and there can be no assurance that we will complete such development or commercialize such pharmaceutical products for several years, if ever.

The Company devotes most of its efforts and resources on ~~its compounds~~Brilacidin, which is in clinical trials: Prurisol for the treatment of psoriasis, Kevetrin for the treatment of ovarian cancer, and Brilacidin for treatments of skin infections, ulcerative proctitis (Inflammatory Bowel Disease) and prevention of oral mucositis complicating chemoradiation treatment for cancer.development. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process, which include: (i) design and oversight of clinical trials; (ii) development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) interactions with regulatory authorities, domestically and internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required for a promising compound to be identified and brought into clinical trials.

~~Research~~Set forth below is an overview of our most recent research and development efforts ~~are concentrated~~ on ~~Prurisol,~~ Brilacidin and ~~Kevetrin:~~Kevetrin through the date of this Annual Report on Form 10-K:

COVID-19 — Due to the global COVID-19 pandemic, the Company was approached by a number of organizations to research Brilacidin against the novel coronavirus (COVID-19). Material Transfer Agreements were signed with two academic institutions that operate Biosafety Level 3 Laboratories (BSL-3). Brilacidin drug substance (Brilacidin tetrahydrochloride) was provided for antiviral research.

The research data demonstrated that Brilacidin exerts potent inhibition of SARS-CoV-2 and thus supported Brilacidin as a promising COVID-19 drug candidate for clinical studies. Also of note, Brilacidin in these research studies demonstrated excellent synergistic antiviral activity when combined with Remdesivir, a broad-spectrum antiviral medication.

In a broader context, demonstration of Brilacidin’s direct antiviral activity against the SARS-CoV-2 virus supports the drug’s unique 3-in-1 therapeutic potential—antiviral, anti-inflammatory, antimicrobial—to treat COVID-19 and its associated complications.

	·	~~Brilacidin~~ ~~— This lead drug candidate is in a new immunomodulatory class~~ ~~with anti-inflammatory and antibiotic properties~~ called defensin-mimetics. Modeled after Host Defense Proteins (HDPs), the “front-line” of defense in the immune system, it is a small, non-peptidic, synthetic molecule that kills pathogens swiftly and thoroughly. Just as importantly, Brilacidin also functions in a robust immunomodulatory capacity, lessening inflammation and promoting healing. In June 2017, the Company completed an open-label Phase 2 Proof-of-Concept (PoC) trial of Brilacidin for the treatment by daily enema of ulcerative proctitis (UP)/ ulcerative proctosigmoiditis (UPS), two types of Inflammatory Bowel Diseases (IBD). Study results showed significant patient benefit and low systemic absorption. The Company is also studying Brilacidin’s effect on Oral Mucositis (under Fast Track designation) and, in August 2017, announced it had completed recruitment of subjects to the Phase 2 study below:

		~~Active Clinical Trials: Phase 2, Multi-center, Randomized, Double-blind, Placebo controlled~~~~Study to Evaluate the Efficacy and Safety of Brilacidin~~~~Oral Rinse Administered Daily for 7 Weeks in Attenuating Oral~~~~Mucositis in Patients with Head and Neck Cancer Receiving~~~~Concurrent Chemotherapy and Radiotherapy~~

	·	~~Kevetrin~~ — Our lead anti-cancer compound, is a small molecule compound that modulates p53, a protein involved in controlling cell mutations. In the majority of all cancers, regardless of origin, the p53 pathway is mutated, compromising its anti-tumor functions. In particular, most epithelial ovarian cancer patients have high-grade serous cancer, characterized by near universal p53 gene abnormalities. Pre-clinical research has demonstrated Kevetrin’s unique mechanism of action to induce apoptosis, slow tumor progression and reduce tumor volume in many types of cancers, including lung, breast, colon, prostate, squamous cell carcinoma and a leukemia tumor model. The United States Food and Drug Administration (FDA) has awarded Orphan Drug designations for Kevetrin for ovarian cancer, retinoblastoma and pancreatic cancer as well as Rare Pediatric Disease designation for Retinoblastoma. It is currently in Phase 2 clinical development study below:

		~~Active Clinical Trials: A Phase 2 study of Kevetrin (thioureidobutyronitrile) in Subjects with Platinum-Resistant/Refractory Ovarian Cancer~~

~~We are~~A Phase 2 clinical trial of intravenously-administered Brilacidin for COVID-19 has achieved full enrollment (n=120) in sites in the United States and Russa. The Company is now preparing for study unblinding, statistical analysis and reporting of data. The study is a randomized, double-blind, placebo-controlled, multi-center study to evaluate the efficacy and safety of Brilacidin in COVID-19 hospitalized patients. The trial’s primary endpoint is time to sustained recovery through Day 29, using a clinical stage company. We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety or efficacy issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate for several years, if ever.

~~The Company’s common stock traded under the stock symbol “CTIX”~~status ordinal scale based on ~~the OTCQB until the market close of June 8, 2017. As of June 9, 2017, trading on the OTCQB began under the new Innovation Pharmaceuticals name and ticker symbol “IPIX”.~~

~~We are~~that used in the ~~business~~series of ~~developing and/or acquiring innovative small molecule therapies~~National Institute of Allergy and Infectious Diseases (NIAID) Adaptive COVID-19 Treatment Trials (ACTTs). Additional endpoints include: in-hospital outcomes (e.g., duration of hospitalization, time to ~~treat diseases with significant medical need. Our strategy is~~discharge), all-cause mortality, measurement of disease biomarkers (e.g., CRP, ferritin) and inflammation-related biomarkers (e.g., IL-1β, IL-6, IL-10, total IL-18, TNF-α), changes to ~~use our business and scientific expertise to maximize the value of our diverse pipeline. We expect to develop the highest quality data and broadest intellectual property to support our compounds.~~

~~We currently own all development and marketing rights to our investigational products. In order to successfully develop and market our products, we may have to partner with~~SARS-CoV-2 viral load, as well as other ~~companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.~~

The work plan we have developed for the next twelve (12) months is expected to support our clinical trials. If we find that we have underestimated the time duration or cost of our studies or if we have to undertake additional studies, due to various reasons within or outside of our control, our development timelines and/or our financing needs may be significantly impacted.

~~As a mid-stage developmental pharmaceutical company, the Company has no customers, commercial products or revenues to date, and may never achieve revenues or profitable operations.~~

Prurisol is our anti-psoriasis drug candidate. It is a small molecule compound with a molecular weight of less than 500. It is synthesized through a multi-step process using commercially available starting materials. Prurisol acts through immune modulation and PRINS reduction.

We are developing Prurisol under FDA guidance that a 505(b)(2) drug approval pathway is an acceptable pathway for its development, which will permit us to support the new drug application (NDA) with included data not developed by or for the Company. This offers the benefits of a faster development process. Prurisol is eligible because it is metabolized to abacavir, which is the active moiety in the marketed drug Ziagen (abacavir sulfate). Given that psoriasis is a chronic condition with limited effective therapies that the National Psoriasis Foundation lists as affecting 125 million people worldwide, we see a tremendous market opportunity for an effective new oral treatment.key measures.

In ~~August 2015, we commenced~~April 2021, the clinical trial’s independent DMC completed its scheduled review of interim safety data. Upon reaching 25 percent enrollment (30 subjects), recruitment was paused and a ~~Phase 2a trial~~pre-specified unblinded safety data review and evaluation was conducted by the DMC. The DMC recommended increasing the dosing regimen of ~~oral Prurisol for~~Brilacidin from 3 days to 5 days of treatment, as intended per the ~~treatment of mild to moderate chronic plaque psoriasis; on May 24, 2016,~~protocol, which the Company ~~released top line data. The~~implemented. In July 2021, the independent DMC completed a second review of interim safety data; based on their review, the DMC agreed to recommend the trial ~~enrolled 115 patients~~continue with mild to moderate plaque psoriasis, graded at a score of 2 (“mild”) or 3 (“moderate”) on the Investigator’s Global Assessment (IGA) scale. The trial was structured with four arms, three receiving different dosing regimens of oral Prurisol (50mg, 100mg, 200mg per day) and one placebo arm for 12 weeks. The primary endpoint was a 2-point reduction in the IGA score at Day 84.

The trial achieved its primary endpoint in patients treated with 200mg of oral Prurisol. Among the most severe psoriasis patients participating in the study, those having a baseline IGA score of 3 (“moderate”), the primary endpoint was met in 46% of patients who received Prurisol 200mg as compared to 35% in the overall combined mild to moderate group. These data were derived from analyses of all patients randomized across all 9 participating study sites. Additional preliminary data analyses of secondary endpoints showed patients who received any dose of Prurisol, regardless of the treatment arm, had a 1-point improvement (using the IGA scoring system) at a higher rate than that of patients in the placebo arm. This was another indication of the drug’s efficacy. Increases in Prurisol’s therapeutic response, upon evaluating patients at Day 56 (Week 8) and Day 84 (Week 12) of treatment, also were apparent in the Prurisol 200mg arm, suggesting an improving response over time.

In light of Prurisol’s favorable responses and greater efficacy in treating moderate psoriasis, the Company engaged in a Phase 2b trial in patients with moderate to severe psoriasis. This study includes active treatment arms of 300mg and 400mg Prurisol per day and placebo and is anticipated to complete later this year.

Brilacidin is in a new class of drugs modeled after defensin-peptides, which represent a front-line of defense in the human immune system. It is a fully synthetic non-peptide small molecule that has anti-bacterial, anti-inflammatory and immunomodulatory properties. Over this past year, the Company has generated anchoring clinical data that are very encouraging regarding use of Brilacidin as an anti-inflammatory/ immunomodulatory agent for localized treatment of relevant diseases.

In animal models of oral mucositis induced by chemoradiation, topically applied Brilacidin was shown to significantly reduce the occurrence of severe ulcerative oral mucositis by more than 90% compared to placebo. Brilacidin and related compounds have shown antibacterial, anti-biofilm and anti-inflammatory properties in various pre-clinical studies. We believe that the combination of these attributes contributedno further modifications to the ~~efficacy of Brilacidin in these animal studies.~~protocol.

The Company is ~~engaged~~collaborating with a Regional Biocontainment Laboratory researcher investigating further research opportunities with Brilacidin as a treatment for the SARS-CoV-2 virus, other Human Coronaviruses (H-CoVs), and other types of viruses. Further, grant applications for federally-funded research are pending, and further grant applications are planned.

IBD, Ulcerative Proctitis/Proctosigmoiditis (UP/UPS) study —A Phase 2a trial has previously been completed by the Company, comprised of three sequential cohorts, with progressive dose escalation by cohort—cohort A (6 patients) - 50 mg, cohort B (6 patients) - 100 mg, and cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The primary efficacy endpoint of clinical remission (accounting for stool frequency, rectal bleeding and endoscopy findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient quality of life (as assessed by the short inflammatory bowel disease questionnaire, or SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. In July 2019, the Company entered into a license agreement with Alfasigma, granting Alfasigma the worldwide right to develop, manufacture and commercialize rectally administered Brilacidin for UP/UPS. In January 2021, Alfasigma notified the Company that the Phase 1 study for the treatment of UP/UPS using Brilacidin in a ~~clinical trial titled, “Phase 2, Multi-center, Randomized, Double-blind, Placebo-controlled Study to Evaluate~~proprietary Alfasigma formulation successfully completed dosing per protocol; an extra treatment cohort was subsequently added by amendment and commenced in 2Q 2021. In April 2021, the Efficacy and Safety of Brilacidin Oral Rinse Administered Daily for 7 Weeks in Attenuating Oral Mucositis in Patients with Head and Neck Cancer Receiving Concurrent Chemotherapy and Radiotherapy”. Interim analysis has shown a marked reduction in incidence of Severe OM (WHO Grade ≥ 3) observed in patients treated with Brilacidin who received at least 55 Gy cumulative units of radiation: Active Arm (Brilacidin): 2 of 9 patients (22.2 percent); Control Arm (Placebo): 7 of 10 patients (70 percent). In addition to good safety and tolerability, plasma samples from 6 patients treated with Brilacidin were analyzed and all concentrations of Brilacidin were below the lower limit of quantification (i.e., < 10 ng/mL).

~~The clinical trial is~~Company was notified that a Phase 2 multinational clinical trial for UP/UPS is planned to commence 4Q 2021, and Alfasigma has ordered Brilacidin from the Company for use in this study. Due to a delay at the manufacturing vendor, delivery of drug substance to Alfasigma has moved out (mid 4Q2021), and the subsequent drug product manufacturing time will likely push any clinical trial start into 2022.

See Note 7. Exclusive License Agreement of the Notes to Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K.

IBD, Ulcerative Colitis (UC) — Brilacidin is also being developed as a treatment in more extensive forms of IBD.

Development of a delayed release oral formulation has been in progress, with development work expanding into immediate release formulations due to unexpected findings encountered. Such findings appear due to the inherent physiochemical properties of the compound, and those of polymers used to achieve delayed release. An immediate release, multi-particulate capsule formulation has been developed and a ‘research and development’ batch has progressed to stability testing at the manufacturing vendor. Further work is ongoing, in preparation for manufacture of clinical trial supplies.

Based on these recent findings, the development plan for ulcerative colitis has been adapted with inclusion of Phase 1 testing of the immediate release oral formulation. Clinical trials will be able to progress pending completion of clinical trial supply manufacturing (currently scheduled for January 2022) and securing sufficient working capital.

Oral Mucositis (OM) study — In a randomized, double-blind ~~placebo-controlled~~Phase 2 study ~~evaluating the safety and efficacy~~ of Brilacidin ~~as an oral rinse in preventing~~for the prevention and ~~controlling~~control of OM in patients receiving chemoradiation ~~therapy~~ for ~~head~~treatment of Head and ~~neck cancer.~~Neck Cancer (HNC), Brilacidin markedly reduced the rate of severe OM (WHO Grade ≥ 3), delayed onset of severe OM and decreased duration of severe OM. The ~~study recently~~Company made available on its website a comparative data table (based on public information) showing Brilacidin compares favorably to other compounds in development for preventing and treating severe OM. The Company and the FDA have completed ~~full enrollment~~an End-of-Phase 2 meeting concerning the continuing development of 61Brilacidin oral rinse to decrease the incidence of severe OM in HNC patients receiving chemoradiation. Both parties agreed to an acceptable Brilacidin Phase 3 development pathway, including studying Brilacidin oral rinse effects on severe OM when cisplatin, the ~~United States, approximately 30 each to Brilacidin treatment or to placebo (water). Brilacidin (45 mg/15 ml oral rinse—”swish and spit”)~~preferred chemotherapy regimen in HNC care, is administered ~~3 times daily across 7 weeks (49 days). Completion~~in higher concentrations (80-100 mg/m²) every 21 days, and at lower concentrations (30-40 mg/m²) administered weekly as part of the ~~trial is anticipated later this year.~~chemoradiation regimen.

~~OM represents~~Development of an optimized oral rinse formulation is in progress, with potential to progress to Phase 3 clinical trials in 2022, pending completion of drug formulation work and securing sufficient drug supply and working capital.

ABSSSI — In February 2016, the Company submitted a ~~great area of unmet medical need and its successful treatment is potentially very important~~Special Protocol Assessment (SPA) request, along with a final protocol, to the ~~Brilacidin development program. We believe that demonstration of efficacy with localized delivery and limited systemic absorption also serves to help anchor Brilacidin~~FDA, for ~~potential use in multiple diseases.~~

~~Disease: Inflammatory bowel disease (IBD),~~[~~Ulcerative Proctitis /~~~~Proctosigmoiditis]~~

~~Given its unique immunomodulatory properties, we have also identified inflammatory bowel disease (IBD) as an indication for treatment with Brilacidin.~~

~~Brilacidin induced Clinical Remission in the majority of patients in our recently completed~~a Phase ~~2, open-label, Proof-of-Concept (PoC)~~3 clinical trial ~~evaluating Brilacidin for mild-to-moderate Ulcerative Proctitis / Ulcerative Proctosigmoiditis (UP/UPS), two types of Inflammatory Bowel Disease (IBD).~~

In this Phase 2 PoC trial, a total of 17 patients received treatment across three sequential, dose-escalated cohorts—Cohort A (6 patients); Cohort B (6 patients); and Cohort C (5 patients). Patients received Brilacidin, once daily, at 50 mg, 100 mg and 200 mg, respectively, administered per rectum as a retention enema for 42 days (6 weeks) of treatment. The Primary Efficacy Endpoint of the Brilacidin UP/UPS trial used Modified Mayo Disease Activity Index (MMDAI) scoring, a common measurement tool in managing Ulcerative Colitis preferred by many IBD specialists, to determine Clinical Remission at Day 42. Secondary Efficacy Endpoints included: change in MMDAI score, both Full and Partial, and change in patient Quality-of-Life as assessed by the Short Inflammatory Bowel Disease Questionnaire (SIBDQ).

~~Brilacidin was shown to be generally well-tolerated, with no Serious Adverse Events (SAEs) experienced by patients, which is consistent with the low levels of systemic absorption~~ of Brilacidin observed in the trial. Improvement in Quality-of-Life was reported with more than 60 percent of patients in each cohort achieving a clinically important ≥10-point (out of 70 points) or more improvement after six weeks of treatment. At least half of patients in Cohorts B and C also showed ≥20-point or more improvement.

~~This study also serves to anchor Brilacidin as a treatment that can be effective with localized delivery techniques.~~

~~Brilacidin is being developed as a novel, non-corticosteroid, non-biologic treatment, with formulation development plans including oral tablets~~ for the treatment of ~~Ulcerative Colitis and Crohn’s Disease and foam and/or gel for the treatment of UP/UPS.~~

~~The intravenous formulation of our lead antibiotic candidate, Brilacidin, has the potential to treat a variety of infections, including ABSSSI,~~ caused by ~~drug-sensitive or drug-resistant strains of~~ gram-positive bacteria, including methicillin-resistant Staphylococcus aureus ~~including Methicillin-Resistant~~ ~~Staphylococcus aureus~~(MRSA)~~, and by other Gram-positive bacteria.~~

The Phase 2b trial entitled “A Randomized, Double-Blind Study Comparing Three Dosing Regimens of Brilacidin to Daptomycin in the Treatment of Acute Bacterial Skin and Skin Structure Infections (ABSSSI)” completed enrollment in August 2014. On October 23, 2014, we announced positive top-line efficacy data from this Phase 2b ABSSSI trial.

In July 2015, at an End-of-Phase 2 Meeting, the Company and FDA discussed data supporting advancement of Brilacidin into Phase 3, as well as the basic elements of a Phase 3 program in ABSSSI. This was the first Host Defense Protein (HDP) mimic to advance through Phase 2. Because HDP mimics, such as Brilacidin, represent an entirely new class of antibiotics, there is no potential cross-resistance with currently marketed antibiotics, and due to its unique mechanism of action, resistance to Brilacidin is unlikely to develop. For this and other reasons, such as its high activity against methicillin-resistant ~~Staphylococcus aureus~~ (a leading cause of ABSSSI), Brilacidin received designation as a Qualified Infectious Disease Product (QIDP) in November 2014. The QIDP designation was established as part of the Generating Antibiotic Incentives Now (GAIN) Act, passed by the U.S. Congress in July 2012, for the purpose of encouraging pharmaceutical companies to develop new antimicrobial drugs to treat serious and life-threatening infections. Receiving QIDP designation means that Brilacidin is now eligible for additional FDA incentives in the approval and marketing path, including Fast Track designation and Priority Review for development and a potential five-year extension of market exclusivity.

The Phase 3 ABSSSI program would include two Phase 3 ABSSSI studies, as required by FDA Guidance (October 2013), of approximately 700 subjects in each study. The two studies may enroll subjects simultaneously. In addition, the first study would include an interim analysis after a portion of the patients has been enrolled. This would provide an early assessment of both safety and efficacy.

. We submitted our Phase 3 protocol under a Special Protocol Assessment (“SPA”) request to the FDA. The Phase 3 protocol SPA request included specific questions from the Company to facilitate a meaningful dialogue with the FDA on the proposed study design. We have received from the FDA comments and considerations for incorporation into our study design. ~~Contingent upon further discussion with~~Management decided to delay its response to the FDA due to the low price per share of our common stock and the many multiple million dollar costs associated with a Phase 3 ~~program~~program. Our strategy, for now, is to achieve success with other trials and attract partnering opportunities that may provide significant upfront payments and milestone payments, which can then be ~~initiated.~~used to fund the ABSSSI program. We see ABSSSI as the appropriate gateway indication in infectious diseases, enabling potential further studies of Brilacidin’s use for implant coating and biofilm infections.

~~Management estimates that~~Expenditures on Brilacidin were approximately $5.0 million and $1.2 million during the ~~cost of an ABSSSI Phase 3 program would require significantly expanded capital beyond what is currently available~~years ended June 30, 2021 and ~~we, therefore, intend to be strategic in balancing progress in this portion of our portfolio.~~2020, respectively.

For Brilacidin overall, we see significant potential in treatment of COVID-19 (by the IV route), and in treatment of Oral Mucositis (by oral rinse) and IBD (by oral capsule or tablet). The available clinical data also suggest that other inflammatory conditions including various dermatology disorders and conditions may, likewise, be treated locally and efficaciously with Brilacidin.

Kevetrin, our anti-cancer drug candidate, has completed a Phase 1 study at Dana-Farber Cancer Institute and Beth Israel Deaconess Medical Center (“BIDMC”). The clinical trial evaluated the safety and potential efficacy of Kevetrin in patients with advanced-stage solid tumors of various types. The primary endpoints for the study were safety, determining the maximum tolerated dose, and establishing the dose for future Phase 2 clinical trials.

Clinical exposure to Kevetrin as measured by plasma concentrations have been achieved which are greater than concentrations shown to induce apoptosis in non-clinical studies. While the trial was primarily to evaluate safety of repeated cycles of Kevetrin, it is encouraging that some patients have had stabilization of tumor status during treatment. Further, Kevetrin appears to be having the expected effects on p53 in a number of the patients treated, as measured by increases in the levels of the downstream protein p21 biomarker.

~~Pharmacokinetic profiles found that Kevetrin has a relatively short biological half-life (less than 2 hours) in plasma. Plasma half-life (T~~_1/2) clearance (CL) and volume of distribution (Vd) suggest that drug elimination predominantly involves hepatic mechanisms and Kevetrin undergoes rapid extensive distribution from systemic circulation into tissues. Pharmacokinetic (PK) data, as measured by area under the curve (AUC) and maximum plasma concentration (Cmax) levels, further revealed that Kevetrin exhibited a dose-dependent response, has as stated a relatively short half-life (approximately 2 hours) and clears the body within one day - on average between 8 and 10 hours - though the drug can remain in the body up to approximately 24 hours, depending upon individual patient variations. The Phase 1 trial of Kevetrin trial yielded data supporting the safety of Kevetrin.

The Company has ~~commenced~~completed a Phase 2a trial of Kevetrin in treating late-stage ovarian cancer. The main objective of the trial ~~focuses~~focused on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. ~~Presently and concurrent with the Phase 2a trial is the development~~The study was successful in demonstrating modulation of ~~an oral formulation of Kevetrin for treating cancer.~~p53 directly in ovarian cancer tumor tissue in patients. Pharmacokinetic data collected on Kevetrin during the ~~initial~~Phase 1 clinical trial ~~demonstrates~~demonstrated that the compound has a short half-life of approximately two hours. ~~Kevetrin’s~~This short half-life makes it a compelling candidate for an oral drug delivery treatment for the main purpose of allowing simple daily, or multiple-times daily administrations within or outside the hospital setting. Compared to injectable or intravenous treatments, oral therapy is the preferred drug delivery method of patients. Preliminary laboratory studies are encouraging and support the potential of developing an oral formulation, but there are no assurances made or implied that the Company will be successful in completing development of an oral formulation. Toxicology studies for the oral formulation of Kevetrin ~~began January 2017.~~are approximately half completed, with the remainder of this work to be completed when the Company secures additional financial resources. Presently we are focusing our resources on Brilacidin, our other lead candidate.

~~Resources allocated to these activities are, however, currently strategically measured in order to assure that adequate support is available for completion of critical clinical trial activities in~~Expenditures on Kevetrin were insignificant during the ~~Brilacidin~~years ended June 30, 2021 and ~~Prurisol programs.~~2020.

~~Kevetrin was granted~~We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA ~~Orphan Drug Designation~~or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Developing pharmaceutical products, however, is a lengthy and very expensive process and there can be no assurance that we will complete such development or commercialize such for ~~the treatment of ovarian cancer, retinoblastoma, and pancreatic cancer and FDA Rare Pediatric Disease Designation for the treatment of retinoblastoma.~~several years, if ever.

In further preclinical testing by independent researchers at the University of Bologna in Italy, recent data were found to be supportive of the potential for Kevetrin in treatment of Acute Myelogenous Leukemia (AML). We intend to further address this potential once we have available to us additional capital and resources.INTELLECTUAL PROPERTY

The Company owns other compounds which have been identified as possible candidates for development for treating diseases including autism (KM 391), arthritis (KM277), asthma (KM 278), MS/ALS/Parkinson’s (KM 362), cancer (KM 3174), hypertensive emergency (KM 732), and bacterial and fungal infections. Development of these compounds are paused while the Company focuses its resources on its lead compounds.

~~Set forth below are definitions of certain technical terms used in this report that are commonly used in the pharmaceutical and biotechnology industries.~~

~~Apoptosis:~~ A type of cell death in which a series of molecular steps in a cell lead to its death. This is one method the body uses to get rid of unneeded or abnormal cells. The process of apoptosis may be blocked in cancer cells. Also called programmed cell death.

~~Defensin mimetics~~~~: Small compounds that mimic the structure and function of host defense proteins.~~

~~IND~~~~: Investigational new drug. A substance that has been tested in the laboratory and has been approved by the FDA for testing in people.~~

~~In-vitro~~~~: Refers to the technique of performing a given experiment in a test tube, or, generally, in a controlled environment outside a living organism.~~

~~In-vivo~~: Refers to that which takes place inside an organism. In science, in vivo refers to experimentation done in or on the living tissue of a whole, living organism as opposed to a partial or dead one. Animal testing and clinical trials are forms of in-vivo research.

~~P21 (also known as protein 21):~~ The expression of this gene is tightly controlled by the tumor suppressor protein p53, through which this protein mediates the p53-dependent cell cycle G1 phase arrest in response to a variety of stress stimuli. Used as a biomarker to detect change in p53.

~~P53~~ (~~also known as protein 53~~~~): A tumor suppressor gene that is mutated in many human cancers and results in the loss of a cell’s ability to check for DNA damage.~~

~~Small Molecule Drug~~~~: A medicinal drug compound having a molecular weight of less than 1,000 Daltons, and typically between 300 and 700 Daltons.~~

Set forth below is a description of our patents owned and co-owned, including the current status and jurisdictions in which a patent has been issued or a patent application has been filed.

Compounds For Use In Treatment Of Mucositis

United States: issued 08/12/14, 10/13/15, 10/4/16, 10/24/17, 02/19/19, and 3/31/20;

Europe: issued 10/~~4/16; allowed 06/14/~~11/17;

Japan: issued 11/06/15;

Taiwan: issued 2/11/16;

China: issued 04/20/16;

~~South Africa: issued 04/29/15~~

Australia: issued 10/6/1616;

Israel: issued 7/31/18;

South Korea: issued 8/14/19;

Canada: issued 6/16/20.

Pending: ~~Europe, Australia, Brazil, Canada, Israel,~~ Russia, ~~and South Korea~~

Patents Expire: 2032

Category 1

Methods of treating mucositis with Brilacidin and related compounds, and compositions of Brilacidin and palifermin

~~Methods of killing or inhibiting the growth of a~~ ~~Candida~~ or ~~Aspergillus~~ ~~species or preventing or treating a mammal having oral or disseminated candidiasis or an aspergillus infection~~

Facially Amphiphilic Polymers And Oligomers And Uses Thereof

United States: issued 08/07/12; 06/04/13; 01/26/16

Australia: issued 9/22/16

Canada: issued 05/20/14

India: issued 11/10/16

Japan: issued 03/11/16

South Korea: issued 03/04/13

Taiwan: issued 05/21/15

Latest Patent Expires: foreign (2024);

United States (2027)

Category 1 & 2

In 2021, the Company filed a non-provisional patent application with the U.S. Patent and Trademark Office in support of Brilacidin’s use as an antiviral treatment including the SARS-CoV-2 virus.

Other Patent Applications filed arising from PCT: Australia (Granted), Canada (Allowed), China, Europe (Granted), Eurasian Patent Convention, India, Israel, Japan (Granted), South Korea, Malaysia, Mexico, Thailand

~~Other Patent Applications filed independent of PCT: Bangladesh, Hong Kong, Taiwan (Granted)~~

We rely on a combination of patents and trade secrets, as well as confidentiality and non-use agreements to protect our intellectual property. Our patent strategy is designed to facilitate commercialization of our current and future product candidates, and create barriers to entry.

In the latter part of April 2016, the Company wrote off its patent rights to Delparantag. Delparantag was acquired by the Company in the purchase of assets from the Polymedix estate. The Company believes the compound which had clinical activity but also safety concerns in a prior clinical trial by Polymedix, is now a low priority compound for further development among the compounds in the Company’s portfolio. The decision by management was made after factoring in today’s regulatory and litigious climate. The Company recorded impairment loss on the patent costs of Delparantag and for various patents totaling approximately $648,000 (i.e. the cost of $782,000 less $134,000 of accumulated amortization) in the fiscal year ended June 30, 2016.

The Company ~~has been assigned~~acquired all rights, title, and interest to Kevetrin from Dr. Krishna Menon, a former director and executive officer of the ~~following eight~~Company. The Company previously had similar rights to seven other pharmaceutical ~~compounds: Kevetrin,~~compounds, KM 277, KM 278, KM 362, KM 3174, KM 732, and ~~KM-391.~~KM-391, but the Company abandoned the rights to those compounds. The Company has agreed to pay the assignors 5% of net sales of ~~the compounds~~Kevetrin in countries where composition of matter patents have been issued, and 3% of net sales in other countries. Kevetrin, KM 277, KM 278 and KM 362 were acquired by the Company from Dr. Krishna Menon, a Director, the Company’s President of Research and Chief Scientific Officer, and a principal shareholder. With regard only to Kevetrin, the allocation of the 5% of net sales would be as follows:divided 2% to Dr. Menon, 2% to an unaffiliated third party, and 1% to Leo Ehrlich, our ~~CEO. With respect to KM 732, the Company has agreed to pay an individual a fixed payment if the compound is approved for sale~~CEO, and 3% of net sales in ~~the U.S. The Company owns all rights to Prurisol. For more information about the Company’s approval process relating to related party transactions, see~~ ~~“Item 13 – Certain Relationships and Related Transactions, and Director Independence~~.”other countries.

In September 2013, the Company acquired substantially all of the assets of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. (together, “Polymedix”), including Polymedix’s rights to Brilacidin under a patent license agreement with the Trustees of the University of Pennsylvania (“Penn”). Under the terms of the patent license agreement, the Company will pay to Penn a royalty on gross sales of the compounds licensed thereunder ranging from 0.5% to 3.0%, plus certain other payments as provided therein. In addition, the Company will pay Penn 10% of all consideration received from sublicensees.

The Company does not intend to establish manufacturing capabilities or facilities to produce its drug product candidates (compounds) in the near or mid-term. The Company believes it can contract or partner with third parties for the manufacturing of its investigational compounds at sites registered with the FDA and contract with third-party scientists for pharmaco-kinetic, pharmaco-dynamic and toxicology studies. Such studies generally must be completed prior to filing an investigational new drug (IND) application with the FDA, and an IND is necessary to begin the human safety and efficacy trials of its compounds (Phase 1, 2 and 3).

Our operations and activities are subject to extensive regulation by numerous government authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug, and Cosmetic Act (FDCA) and other federal and state statutes and regulations govern the testing, development, manufacture, quality control, distribution, safety, effectiveness, labeling, storage, record keeping, reporting, approval, advertising and promotion, and import and export of our investigational products. Failure to comply with FDA requirements may result in enforcement action, including warning letters, fines, civil or criminal penalties, suspension or delays in clinical development, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market. Although the discussion below focuses on regulation in the United States, which is our primary initial focus, we anticipate seeking approval to market our products in other countries. Generally, our activities in other countries will be subject to regulation that is similar in nature and scope as that imposed in the U.S., although there can be important differences.

Product development and the product approval process are very expensive and time consuming, and we cannot be certain that the FDA will grant approval for any of our drug product candidates on a timely basis, if at all. Under the FDCA, the FDA must approve any new drug before it can be sold in the United States. The general process for obtaining FDA approval of a drug is as follows:

Before we can test a drug candidate in humans, we must develop extensive preclinical data, generally derived from laboratory evaluations of product chemistry and formulation, as well as toxicological and pharmacological studies in animals, to generate data to support the drug’s quality and potential safety and benefits. Certain animal studies must be performed in compliance with the FDA’s Good Laboratory Practice, or GLP, regulations and the U.S. Department of Agriculture’s Animal Welfare Act. Presently we have ~~a number of compounds that are~~Brilacidin in ~~preclinical testing.~~antiviral studies testing against SARS-CoV-2.

We submit this preclinical data and other information to the FDA in an IND. Human clinical trials cannot commence until an IND application is submitted and becomes effective. Based on the data and information contained in the IND, the FDA must determine whether there is an adequate basis for testing the drug candidate in initial clinical studies in human volunteers. Unless the FDA raises concerns, the IND becomes effective 30 days following its receipt by the FDA.

Once the IND goes into effect, we study an investigational drug in human clinical trials to determine if the drug is safe and effective for a particular use. Clinical trials involve the administration of the drug to healthy human volunteers or to patients under the supervision of a qualified investigator. The conduct of clinical trials is subject to extensive regulation, including compliance with the FDA’s bioresearch monitoring regulations and Good Clinical Practice, or GCP, requirements, which establish standards for conducting, recording data from, and reporting the results of clinical trials, and are intended to assure that the data and reported results are credible and accurate, and that the rights, safety, and well-being of study participants are protected. Clinical trials must be conducted under protocols that detail the study objectives, parameters for monitoring safety, and the efficacy criteria, if any, to be evaluated. FDA reviews each protocol that is submitted to the IND. In addition, each clinical trial must be reviewed and approved by, and conducted under the auspices of, an Institutional Review Board, or IRB, for each institution conducting the clinical trial. Companies sponsoring the clinical trials, investigators, and IRBs also must comply with regulations and guidelines for obtaining informed consent from the study subjects, complying with the protocol and investigational plan, adequately monitoring the clinical trial, and timely reporting adverse events. Foreign studies conducted under an IND must meet the same requirements that apply to studies being conducted in the U.S. Data from a foreign study not conducted under an IND may be submitted in support of an NDA if the study was conducted in accordance with GCP and, if necessary, the FDA is able to validate the data through an on-site inspection, if the agency deems such inspection necessary.

In general, clinical trials involve three separate phases that often overlap, can take many years to complete, and are very expensive. These three phases are as follows:

Phase 1. The investigational drug is given to a small number of human subjects to test for safety, dose tolerance, pharmacokinetics, metabolism, distribution and excretion. In most disease states Phase 1 studies are performed in healthy volunteers. In cancer, Phase 1 studies generally are performed in cancer patients.

Phase 2. The investigational drug is given to a limited patient population to determine the initial effect of the drug in treating the disease, the best dose of the drug, and the possible side effects and safety risks of the drug. Phase 2 trials typically are controlled studies.

Phase 3. If Phase 2 clinical trials of a compound yield promising data regarding safety and effectiveness, the compound may be advanced to Phase 3 clinical trials to confirm those results. Phase 3 clinical trials typically are long-term, involve a significantly larger population of patients, are conducted at numerous sites in different geographic regions, and are carefully designed to provide reliable and conclusive data regarding the safety and benefits of a drug and to form the basis for labeling. It is not uncommon for a drug that appears promising in Phase 2 clinical trials to fail in the more rigorous and reliable Phase 3 clinical trials.

At any point in this process, the development of a drug could be stopped for a number of reasons, including safety concerns and lack of treatment benefit. We cannot be certain that any clinical trials that we are currently conducting, or any that we conduct in the future, will be completed successfully or within any specified time period. We may choose, or the FDA or an IRB may require us, to delay or suspend our clinical trials at any time if, for example, it appears that the patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit. Success in early-stage clinical trials does not assure success in later-stage clinical trials, and data obtained from clinical activities are not always conclusive and may be subject to alternative interpretations that could delay, limit or prevent further development and regulatory approval.

If we believe that the data from the Phase 3 clinical trials show an adequate level of safety and effectiveness, we will file a new drug application (NDA) with the FDA seeking approval to sell the drug for a particular use. When an NDA is submitted, the FDA conducts a preliminary review to determine whether the application is sufficiently complete to be accepted for filing. If it is not, the FDA may refuse to file the application and request additional information, in which case the application must be resubmitted with the supplemental information, and review of the application is delayed.

Upon accepting the NDA for filing, the FDA will review the NDA and may hold a public hearing where an independent advisory committee of expert advisors considers key questions regarding the drug. This advisory committee makes a recommendation to the FDA, which is not binding on the FDA, but is generally followed.

Under the Pediatric Research Equity Act, certain applications for approval must include an assessment, generally based on clinical study data, of the safety and effectiveness of the subject drug in relevant pediatric populations. The FDA may waive or defer the requirement for a pediatric assessment, either at the company’s request or by the agency’s initiative. The FDA may determine that a Risk Evaluation and Mitigation Strategy, or REMS, is necessary to ensure that the benefits of a new product outweigh its risks. A REMS may include various elements, ranging from a medication guide or patient package insert to limitations on who may prescribe or dispense the drug, depending on what the FDA considers necessary for the safe use of the drug.

Before approving an NDA, the FDA will inspect the facilities at which the product will be manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities for the drug, including those of companies who manufacture our drugs for us and including foreign establishments that may manufacture the product for sale in the U.S., comply with cGMP requirements (described below) and are adequate to assure consistent production of the product within required specifications.

If the FDA concludes that an NDA does not meet the regulatory standards for approval, the FDA typically issues a Complete Response letter communicating the agency’s decision not to approve the application and outlining the deficiencies in the submission. The Complete Response letter also may request further information, including additional preclinical or clinical data or improvements to manufacturing processes, procedures, or facilities. Even if such additional information and data are submitted, the FDA may decide that the NDA still does not meet the standards for approval.

The FDA may reject an application because, among other reasons, it believes that the drug is not safe enough, or effective enough, or because it does not believe that the data submitted are reliable or conclusive. FDA may interpret data differently than the sponsor. Obtaining regulatory approval often takes a number of years, involves the expenditure of substantial resources, and depends on a number of factors, including the nature of the disease or condition the drug is intended to address, the availability of alternative treatments, and the risks and benefits demonstrated in clinical trials.

If the FDA agrees that the compound has met the required level of safety and effectiveness for a particular use, it will approve the NDA, allowing the Company to sell the drug in the United States for that use. As a condition of approval, the FDA may impose restrictions that could affect the commercial success of a drug. For example, the FDA could require post-approval commitments, including completion within a specified time period of additional clinical studies, which often are referred to as “Phase 4” or “post-marketing” studies. The FDA also may limit the scope of the approved uses of the drug. Certain post-approval modifications to the drug product, such as changes in indications, labeling, or manufacturing processes or facilities, may require a sponsor to develop additional data or conduct additional preclinical or clinical trials, to be submitted in a new or supplemental NDA, which would require FDA approval.

Should our products be approved for marketing, we would also be subject to various other ~~State~~state and ~~Federal~~federal laws concerning the marketing and cost reimbursement of our products.

Major jurisdictions outside the United States, such as the European Union, Japan and Canada, have similarly rigorous regulatory processes. They may also require studies not required by the FDA, which can add to the cost and risk of development. Products approved by the FDA might not be approved in these other countries. After review by the health authorities, pricing and cost reimbursement are also subject to separate approvals in many of these countries.

Even if regulatory approval is granted, a marketed drug product is subject to continuing comprehensive requirements under federal, state and foreign laws and regulations, including requirements and restrictions regarding adverse event reporting, recordkeeping, marketing, and compliance with current good manufacturing practices (cGMP). Adverse events reported after approval of a drug can result in additional restrictions on the use of a drug or requirements for additional post-marketing studies or clinical trials. The FDA or similar agencies in other countries may also require labeling changes to products at any time based on new safety information. If ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market, the FDA or similar agencies in other countries may at any time withdraw product approval or take actions that would suspend marketing or approval.

Good Manufacturing Practices. Companies engaged in manufacturing drug products or their components must comply with applicable cGMP requirements and product-specific regulations enforced by the FDA and other regulatory agencies. If, after approval, a company makes a material change in manufacturing equipment, location, or process (all of which are, to some degree, incorporated in the NDA), additional regulatory review and approval may be required. The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product. Failure to comply with applicable cGMP requirements and conditions of product approval may lead the FDA to seek sanctions, including fines, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal of FDA approval, seizure or recall of products, and criminal prosecution.

Advertising and Promotion. The FDA and other federal regulatory agencies closely regulate the marketing and promotion of drugs through, among other things, standards and regulations for advertising, promotion to physicians and patients, communications regarding unapproved uses, and industry-sponsored scientific and educational activities. Failure to comply with applicable FDA requirements and other restrictions in this area may subject a company to adverse publicity and enforcement action by the FDA, the Department of Justice, the Office of the Inspector General of the Department of Health and Human Services, and state authorities, as well as civil and criminal fines and agreements that may materially restrict the manner in which a company promotes or distributes drug products.

Other Requirements. In addition, companies that manufacture or distribute drug products or that hold approved NDAs must comply with other regulatory requirements, including submitting annual reports, reporting information about adverse drug experiences, submitting establishment registrations and drug listings, and maintaining certain records.

Drugs that are approved for commercial marketing in the U.S. under an NDA are subject to the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, known as the “Hatch-Waxman Act.” The Hatch-Waxman Act established two abbreviated approval pathways, including the 505(b)(2) pathway, for drug products that are in some way follow-on versions of already approved NDA products. We are utilizing advantages in this 505(b)(2) pathway for the development of Prurisol. In addition, the Hatch-Waxman Act provides companies with marketing exclusivity for new chemical entities, allows companies to apply to extend for up to five additional years of patent term lost during product development and FDA review of an NDA, and provides for a period of marketing exclusivity for products that are not new chemical entities if the NDA (or supplemental NDA) contains data from new clinical investigations that were necessary for approval. It also provides a means for approving generic versions of a drug product once the marketing exclusivity period has ended and all relevant patents have expired or have been successfully challenged and defeated. The laws of other key markets likewise create both opportunities for exclusivity periods and patent protections and the possibility of generic competition once such periods or protections have either expired or have been successfully challenged by generic entrants.

The Orphan Drug Act established incentives for the development of drugs intended to treat rare diseases or conditions, which generally are diseases or conditions affecting less than 200,000 individuals in the U.S. at the time of the request for orphan designation. If a sponsor demonstrates that a drug is intended to treat a rare disease or condition and meets other applicable requirements, the FDA grants orphan drug designation to the product for that use. ~~The~~In November 2014, the FDA ~~has~~ granted orphan drug designation to Kevetrin for use in the treatment of ovarian ~~cancer, retinoblastoma and pancreatic~~ cancer. The benefits of orphan drug designation include tax credits for clinical testing expenses and exemption from user fees. A drug candidate that is approved for the orphan drug designated use typically is granted seven years of orphan drug exclusivity. During that period, the FDA generally may not approve any other application for the same product for the same indication, although there are exceptions, most notably when the later product is shown to be clinically superior to the product with exclusivity.

Section 505A of the FDCA provides for six months of additional exclusivity if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be safe and effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or Orange Book listed patent protection that cover the drug are extended by six months.

The Generating Antibiotic Incentives Now (GAIN) Act amended the FDCA to encourage pharmaceutical companies to develop new antimicrobial drugs to treat serious and life-threatening infections. Among other measures, GAIN grants an additional five years of marketing exclusivity for new antibacterial or antifungal human drugs designated under the law as a “qualified infectious disease product” (QIDP). This five-year period of exclusivity is in addition to any existing regulatory exclusivity, including Hatch-Waxman, orphan drug, or pediatric exclusivity. In addition, QIDPs are eligible for fast-track designation and priority review to facilitate expedited development and review processes with the FDA. Our investigational drug Brilacidin has been granted QIDP designation as a potential new treatment for ABSSSI.

Certain of our product candidates, such as Brilacidin ~~may qualify~~ for the indications of SARS-CoV-2 and Oral Mucositis, and Kevetrin for the indication of ovarian cancer, have been awarded Fast Track designation. The Fast Track program is intended to expedite or facilitate the process for reviewing new drugs that demonstrate the potential to address unmet medical needs involving serious or life-threatening diseases or conditions. If a drug receives Fast Track designation, the FDA may consider reviewing sections of the NDA on a rolling basis, rather than requiring the entire application to be submitted to begin the review. Products with Fast Track designation also may be eligible for more frequent meetings and correspondence with the FDA about the product’s development.

Certain of our product candidates, such as Brilacidin, also may qualify for priority review. Priority review is available to a drug that treats a serious condition and that, if approved, would provide a significant improvement in safety or effectiveness. Priority review designation provides for a six-month review goal for an NDA, rather than the standard 10-month review timeframe.

Other FDA programs intended to expedite development and review include accelerated approval, which allows the FDA to approve a drug on the basis of a surrogate endpoint that is reasonably likely to predict clinical benefit, and ~~breakthrough therapy~~Breakthrough Therapy designation, which is intended to expedite the development and review of drugs for serious or life-threatening conditions and where preliminary clinical evidence shows that the drug may have substantial improvement on at least one clinically significant endpoint over available therapy.

Even if a product qualifies for Fast Track designation or ~~breakthrough therapy~~Breakthrough Therapy designation, the FDA may later decide that the product no longer meets the conditions for qualification and may rescind the designation. Moreover, none of these programs assures ultimate approval of an investigational product. FDA may determine that the product does not meet the standards for approval.

Sometimes called “compassionate use”, expanded access is a potential pathway for a patient with an immediately life-threatening condition or serious disease or condition to gain access to an investigational medical product (drug, biologic, or medical device) for treatment outside of clinical trials when no comparable or satisfactory alternative therapy options are available.

Investigational drugs, biologics or medical devices have not yet been approved or cleared by FDA and FDA has not found these products to be safe and effective for their specific use. Furthermore, the investigational medical product may, or may not, be effective in the treatment of the condition, and use of the product may cause unexpected serious side effects.

FDA has created a special emergency program for possible coronavirus therapies, the Coronavirus Treatment Acceleration Program (CTAP). The FDA website describes the program as one that “uses every available method to move new treatments to patients as quickly as possible, while at the same time finding out whether they are helpful or harmful.” Subject to FDA approval, the Company plans to utilize this program.

During the years ended June 30, 2021 and 2020, the Company received loan proceeds in the amount of approximately $93,000 and $79,000, respectively, under the Paycheck Protection Program (“PPP”) and it was recorded under loan payable. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

The Company applied for the forgiveness of the first loan and such application is in process. The Company intends to apply for forgiveness of the second PPP loan as well.

Competition in the pharmaceutical and biotechnology industries is intense. The drugs that we are developing will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. Many pharmaceutical or biotechnology companies have products on the market and are actively engaged in the research and development of products that are competitive with our potential products. Many of these companies and institutions, either alone or together with their collaborative partners, have substantially greater financial, manufacturing, sales, distribution and technical resources and more experience in research and development, clinical trials and regulatory matters, than we do. In addition, our competitors may succeed in developing technologies and drugs that are more effective, better tolerated or less costly than any which are being developed by us or which would render our technology or potential drugs obsolete or noncompetitive.

With respect to Kevetrin, our lead compound for cancer, there are many drugs approved to treat cancers and many more in the publicly disclosed development pipeline. The same is true for our other ~~compounds~~compound in clinical ~~trials, Prurisol and~~development, Brilacidin. There are many drugs approved to treat various forms of ~~psoriasis,~~ inflammatory bowel diseases, and ABSSSI, and many more in the publicly disclosed development pipeline. ~~However, there~~There is no drug yet ~~to be~~ approved for preventing severe oral mucositis in head and neck cancer patients.

Several pharmaceutical companies have received FDA approval or an Emergency Use Authorization (EUA) for their COVID-19 treatments and vaccines, which are currently being distributed in the U.S., and abroad. While the widespread distribution of such treatments and vaccines have helped mitigate the pandemic, both in reducing the number of severely infected patients and providing relief to those infected, the virus continues to evolve. Mutations, in the form of variants, are showing signs of overcoming current COVID-19 treatments and vaccines, leading to rising case numbers and more breakthrough infections. In this broader context of the pandemic, the Company anticipates a continued need for novel antiviral therapeutics.

The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience and price, the effectiveness of alternative products, the level of competition and the availability of coverage and adequate reimbursement from government and other third-party payors.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products or therapies that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA, European Medicines Agency (EMA), or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products.

Our success depends on our ability to identify types of these respective diseases where our drugs have an advantage over existing therapies and those in the publicly disclosed development pipeline.

As of June 30, ~~2017,~~2021, the Company had 154 employees. The Company also conducts its operations using contractors and consultants.

Innovation Pharmaceuticals Inc. was incorporated on August 1, 2005 in the State of Nevada. The ~~Company’s~~Company has as its corporate headquarters ~~are located at~~301 Edgewater Place - Suite 100, ~~Cummings Center, Suite 151-B, Beverly,~~Wakefield, MA ~~01915.~~01880, a facility that maintains our virtual offices, and if needed, the use of physical offices, meeting rooms, and business support services on a fee for use basis. All our employees and consultants work remotely. The Company’s telephone number is (978) 921-4125. The Company maintains an internet website at ~~www.IPharmInc.com~~.www.IPharmInc.com. The Company makes available, free of charge, through the Investors section of its website, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information on the Company’s website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings with the SEC.

Investing in the Company’s common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this Annual Report on Form 10-K, before purchasing shares of the Company’s common stock. There are numerous and varied risks, known and unknown, that may prevent the Company from achieving its goals. The risks described below are not the only ones the Company will face. If any of these risks actually occur, the Company’s business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of the Company’s common stock could decline and investors in the Company’s common stock could lose all or part of their investment.

We need to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds when needed and on acceptable terms, which could prevent us from fully implementing our business, operating and development ~~plans and it may lead to future uncertainty about our ability to continue to operate as a going concern.~~plans.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a history of losses, primarily due to being a mid-stage developmental pharmaceutical company. The Company intends on financing its future development activities largely from a variety of sources, including applying for government grants and contracts for the development of Brilacidin for the treatment of COVID-19, the sale of ~~public~~ equity securities and seeking relationships with partners to help fund future clinical trial costs. However, there is no assurance these plans will be realized and that any additional financing will be available to us on satisfactory terms and conditions, if at all. In the event that we are unable to raise additional funds, we may be required to delay, reduce or severely curtail our operations or otherwise impede our ongoing efforts to develop our drug candidates, which could have a material adverse effect on our business, operating results, financial condition and long-term prospects.

We currently have an approximate ~~$4.1~~$11.3 million cash balance in the bank as of the date of this filing, but that is insufficient to complete the development and commercialization of any of our proposed products. We expect to incur costs of approximately ~~$15.9~~$10.2 million in the upcoming fiscal year ending June 30, ~~2018~~2022 to operate our business in accordance with our business plans and budgets.

If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, which are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.

Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including costly Phase 2 and Phase 3 clinical trials, and our business, operating results, financial condition and prospects could be materially and adversely affected and we may be unable to continue our operations. As of the date of this report, we have already delayed incurring additional expenses for Kevetrin and completing bridging toxicology work for oral dosing. In the event that we cannot obtain acceptable financing, we would be unable to complete preclinical development projects, and further clinical trials for ~~Kevetrin, Prurisol,~~Brilacidin and ~~Brilacidin.~~Kevetrin. This will delay:

The amount of capital we may require will depend on many factors, including the:

	·•	progress, timing and scope of our research and development programs;

	·•	progress, timing and scope of our preclinical studies and clinical trials;

	·•	time and cost necessary to obtain regulatory approvals;

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	·
	•	time and cost necessary to establish our own marketing capabilities or to seek marketing partners;


·	~~time and cost necessary to respond to technological and market developments;~~
	·
	•	time and cost necessary to respond to technological and market developments;


·	~~changes made or new developments in our existing collaborative, licensing and other commercial relationships; and~~
	·
	•	changes made or new developments in our existing collaborative, licensing and other commercial relationships; and


·	~~new collaborative, licensing and other commercial relationships that we may establish.~~
	·
	•	new collaborative, licensing and other commercial relationships that we may establish.

Our fixed expenses, such as ~~rent and other~~ contractual commitments, may increase in the future, as we may:

Our business could be adversely affected by the effects of health epidemics, including the global COVID-19 pandemic.

In December 2019, a novel strain of coronavirus, since named SARS-CoV-2, causing COVID-19 disease, was reported in China. Since then, COVID-19 has spread globally, including throughout the United States. The spread of COVID-19 has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease, on March 11, 2020. Many countries around the world, including the United States, have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus, and have closed non-essential businesses.

As local jurisdictions continue to put restrictions in place, our ability to plan and enroll patients in our planned clinical trials, manufacture our product candidates and pursue collaborations, may also be limited. Such events may result in a period of business and manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations.

The continued spread of COVID-19 globally could also adversely affect our planned clinical trial operations, including our ability to initiate the trials on the expected timelines and recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs in their geography. Further, the COVID-19 outbreak could result in delays in our clinical trials due to prioritization of hospital resources toward the outbreak, restrictions in travel, potential unwillingness of patients to enroll in trials at this time, or the inability of patients to comply with clinical trial protocols as quarantines or travel restrictions impede patient movement or interrupt healthcare services. In addition, we rely on independent clinical investigators, contract research organizations and other third-party service providers to assist us in managing, monitoring and otherwise carrying out our preclinical studies and clinical trials, and the outbreak may affect their ability to devote sufficient time and resources to our programs or to travel to sites to perform work for us.

Additionally, COVID-19 may also result in delays in receiving approvals from local and foreign regulatory authorities, delays in necessary interactions with local and foreign regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees, and refusals to accept data from clinical trials conducted in these affected geographies.

The global outbreak of COVID-19 continues to rapidly evolve. The extent to which COVID-19 may impact our business, operations and clinical trials will depend on future developments, including the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, the effectiveness of actions taken in the United States and other countries to contain and treat the disease and whether the United States and additional countries are required to move to complete lock-down status. The ultimate long-term impact of COVID-19 is highly uncertain and cannot be predicted with confidence.

Newly emerging SARS-CoV-2 variants could reduce the effectiveness of Brilacidin as a potential COVID-19 treatment.

Multiple variants of the virus that causes COVID-19 have been documented in the United States and globally during this pandemic. While Brilacidin is showing an ability in vitro to be resistant to SARS-CoV-2 mutations, the compound might not continue to do so based on the potential emergence of new variants in the future.

There can be no assurance that the product we are developing for COVID-19 would be granted an Emergency Use Authorization by the FDA or similar authorization by regulatory authorities outside of the United States if we were to decide to apply for such an authorization. If we do not apply for such an authorization or, if we do apply and no authorization is granted or, once granted, it is terminated, we will be unable to sell our product in the near future and instead, will be required to pursue the new drug licensure process in order to sell our product, which is lengthy and expensive.

We may seek an Emergency Use Authorization, or EUA, from the FDA or similar authorization from regulatory authorities outside of the United States, such as conditional marketing authorization from the EMA. If we apply for an EUA and it is granted, an EUA will authorize us to market and sell our COVID-19 treatment under certain conditions of authorization as long as the public health emergency exists. The FDA expects that companies which receive an EUA for COVID-19 treatments will proceed to licensure of their products under a full New Drug Application (NDA). The FDA may issue an EUA during a Public Health Emergency if the agency determines that the potential benefits of a product outweigh the potential risks and if other regulatory criteria are met. There is no guarantee that we will apply for an EUA or other similar authorization or, if we do apply, that we will be able to obtain such authorization. If an EUA or other authorization is granted, we will rely on the FDA or other applicable regulatory authority policies and guidance governing treatments authorized in this manner in connection with the marketing and sale of our product. If these policies and guidance change unexpectedly and/or materially or if we misinterpret them, potential sales of our product could be adversely impacted. An EUA authorizing the marketing and sale of our product will terminate upon expiration of the Public Health Emergency, which is a determination made by the Secretary of Health and Human Services. The FDA may also terminate an EUA if safety issues or other concerns about our product arise or if we fail to comply with the conditions of authorization. If we apply for an EUA or similar authorization from regulatory authorities outside of the United States, the failure to obtain such authorization or the termination of such an authorization, if obtained, would adversely impact our ability to market and sell our COVID-19 treatment, which could adversely impact our business, financial condition and results of operations.

We have no products approved for commercial sale ~~have never generated any revenues, and may never achieve revenues or profitability.~~to generate revenue, however we signed an Exclusive License Agreement in 2019.

We currently have no products approved for commercial ~~sale~~sale. On July 18, 2019, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Alfasigma S.p.A., a global pharmaceutical company (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and ~~to date, we have not generated any revenues.~~ commercialize locally-administered Brilacidin for the treatment of ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS).

If we and/or our licensee do not successfully develop and commercialize at least one of our compounds, we will not achieve revenues or profitability in the foreseeable future, if at all. If we are unable to generate revenues or achieve profitability, we may be unable to continue our operations.

In our existing or any future potential collaborations or partnerships, we will likely not be able to control all aspects of the development and commercialization of our compounds. This lack of control could subject us to additional risks that could harm our business.

Collaborations or license agreements involving our compounds, including our current license agreement with Alfasigma S.p.A. and any future collaboration or partnering arrangement with other pharmaceutical companies, are subject to numerous risks, which may include:

We depend on license agreements for the development and commercialization of certain compounds.

On July 18, 2019, we entered into a license agreement with Alfasigma, under which we granted Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for the treatment of ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS). Pursuant to the terms of the license agreement, Alfasigma is obligated to use commercially reasonable efforts (as defined in the license agreement) to develop, manufacture and commercialize Brilacidin for UP/UPS, and to achieve specified developmental milestones.

Under the terms of the license agreement, Alfasigma will make payments of up to $24.0 million to the Company based upon the achievement of certain milestones. In addition, Alfasigma will pay a royalty to the Company equal to six percent of net sales of Brilacidin for UP/UPS, subject to adjustment as provided in the license agreement.

The right to potential future payments under the license agreement represents a significant portion of the value of the license agreement to us. We cannot be certain that we will receive any future payments under the license agreement, which would adversely affect the trading price of our common stock and our business prospects.

Additionally, if Alfasigma were to breach or terminate the license agreement, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for Brilacidin for UP/UPS and will not be able to, or may be delayed in our efforts to, successfully commercialize Brilacidin for UP/UPS. We may not be able to seek and obtain a viable, alternative collaborator to partner for the development and commercialization of the licensed products on similar terms or at all.

In addition, on July 22, 2020, the Company granted to Fox Chase Chemical Diversity Center, Inc. (“FCCDC”) all discovery, intellectual property and commercialization rights related to its share of their joint antifungal drug program in exchange for a six percent fee tied to all potential future proceeds. Acquisitions of royalties from development-stage biopharmaceutical product candidates are subject to a number of uncertainties, and there can be no assurance that the FDA, the EMA or other regulatory authorities will approve such products or that such products will be brought to market timely or at all, or that the market will be receptive to such products.

We have limited experience in drug and formulation development and may not be able to successfully develop any drugs.

We have limited experience in drug and formulation development and may not be able to successfully develop any ~~drugs.~~drugs or drug formulations necessary to achieve a drug’s potential as seen in preclinical research and early clinical studies. Our ability to achieve revenues and profitability in our business will depend, among other things, on our ability to:

We have limited experience conducting clinical trials and obtaining regulatory approvals, and we may not be successful in some or all of these activities. We have not previously conducted a Phase 3 or later stage clinical trial such as the Phase 3 clinical trials planned for our most advanced drug candidate. We expect to spend significant amounts to recruit and retain ~~high~~highly quality personnel with clinical development experience.

We have no experience as a company in the sales, marketing and distribution of pharmaceutical products and do not currently have a sales and marketing organization. To the extent we are unable to, or determine not to develop these resources internally, we may be forced to rely on third parties for these capabilities, which could subject us to costs and to delays that are outside our control. If we are unable to establish adequate capabilities independently or with others, we may be unable to generate product revenues for certain candidates. If we are unable to achieve revenues and profitability, then we will be forced to cease operations, which could cause you to lose all of your investment.

Development of pharmaceutical products is a risky and time-consuming process subject to a number of factors, many of which are outside of our control. We are subject to regulatory authority permissions and approvals, most importantly the FDA. Many of our drug candidates are at early and ~~mid~~~~stages~~mid-stages of development. Consequently, we can provide no assurance of the successful and timely development of new drugs, and the failure to do so could cause us to cease operations.

The drug discovery and development process is highly uncertain and we have not developed, and may never develop, a drug candidate that ultimately leads to a commercially viable drug. Our drug candidates are in early and mid-stages of development, and our most advanced drug candidate has completed Phase 2 testing. Further development and extensive testing will be required to determine their technical feasibility and commercial viability.

Conducting clinical trials is a complex, time-consuming and expensive process that requires an appropriate number of trial sites and patients to support the product label claims being sought. The length of time, number of trial sites and number of patients required for clinical trials vary substantially according to their type, complexity, novelty and the drug candidate’s intended use, and we may spend several years completing certain trials. The time within which we can complete our clinical trials depends in large part on the ability to enroll eligible patients who meet the enrollment criteria and who are in proximity to the trial sites. We face competition with other clinical trials for eligible patients. As a result, there may be limited availability of eligible patients, which can result in increased development costs, delays in regulatory approvals and associated delays in drug candidates reaching the market. We ~~experience~~experienced these issues in our psoriasis and oral mucositis clinical trials.

At any time, we, the FDA (or foreign regulatory authority) or an ~~IRB,~~institutional review board (“IRB”), may temporarily or permanently stop a clinical trial, for a variety of reasons. We may experience numerous unforeseen events during, or as a result of, the clinical development process that could delay or prevent our drug candidates from being approved, including:

As our product candidates advance to later stage clinical trials, it is customary that various aspects of the development program, such as manufacturing, formulation and other processes, and methods of administration, may be altered to optimize the candidates and processes for scale-up necessary for later stage clinical trials and potential approval and commercialization. These changes may not produce the intended optimization, including production of drug substance and drug product of a quality and in a quantity sufficient for Phase 3 clinical stage development or for commercialization, which may cause delays in the initiation or completion of clinical trials and greater costs. We may also need to conduct “bridging studies” to demonstrate comparability between newly manufactured drug substance and/or drug product for commercialization relative to previously manufactured drug substance and/or drug product for clinical trials. Demonstrating comparability may require us to incur additional costs or delay initiation or completion of clinical trials and, if unsuccessful, could require us to complete additional preclinical studies or clinical trials.

We ~~are now engaged in the reformulation of Kevetrin based on PK data we~~ learned during our completed Kevetrin Phase 1 ~~study. PK results indicated~~study that, ~~with the current dose regimen,~~when administered IV, Kevetrin iswas almost completely ~~out of plasma~~cleared from the systemic circulation within 24 hours. Therefore, little drug remains for any substantial period of time afterwards. Having the patient receive multiple IV infusions per week is a difficult ~~for the patient.~~course of treatment. Therefore, an oral ~~formulations~~formulation for Kevetrin ~~are being studied.~~is needed. There is no assurance we will be successful in developing ~~a new~~an oral formulation.

We ~~are using~~used Brilacidin in a water base, administered by enema, in our ~~ulcerative proctitis~~Phase 2 UP/UPS study. However, a commercial product for IBD ulcerative colitis will need a different formulation (e.g. Brilacidin in capsule or ~~foam)~~tablet). ~~Additional formulation~~Formulation development is ~~needed.~~in progress. There is no assurance we will be successful in developing new formulations for possible commercialization.

If we fail to adequately manage the increasing number, size and complexity of clinical trials, the clinical trials and corresponding regulatory approvals may be delayed or we or our partners may fail to gain approval for our drug candidates altogether. Even if we successfully conduct clinical trials, we may not obtain favorable clinical trial results and may not be able to obtain regulatory approval on this basis. If we are unable to market and sell our drug candidates or are unable to obtain approvals in the time frame needed to execute our product strategies, our business and results of operations would be materially adversely affected.

Our success will depend on our ability to achieve scientific and technological advances and to translate such advances into reliable, commercially competitive drugs on a timely basis. The length of time required to complete clinical studies, submit an application for marketing approval, and obtain approval can vary considerably from one product to another, and may be difficult to predict or control. Drugs that we may develop are not likely to be commercially available for several years, if ever. The proposed development schedules for our drug candidates may be affected by a variety of factors, including technological difficulties, proprietary technology of others, and changes in government regulation, many of which will not be within our control.

Any delay in the development, introduction or marketing of our drug candidates could result either in such drugs being marketed at a time when their cost and performance characteristics would not be competitive in the marketplace or in the shortening of their commercial lives. In light of the long-term nature of our projects, the unproven technology involved and the other factors described elsewhere in “Risk Factors”, we may not be able to complete successfully the development or marketing of any of our drug candidates.

We may fail to successfully develop and commercialize our drug candidates for multiple reasons, including because they:

Drug development failure can occur at any stage of clinical trials and as a result of many factors and there can be no assurance that we will reach our anticipated clinical targets. Promising results in preclinical development or early clinical trials may not be predictive of results obtained in later clinical trials. Many pharmaceutical companies have experienced significant setbacks in advanced clinical trials, even after obtaining promising results in earlier preclinical studies and clinical trials. Clinical results are susceptible to varying interpretations that may delay, limit, or prevent regulatory approvals.

Even if we complete our clinical trials, we do not know what the long-term effects of exposure to our drug candidates will be. Furthermore, our drug candidates may be used in combination with other treatments and there can be no assurance that such use will not lead to unique safety issues. Failure to complete clinical trials or to prove that our drug candidates are safe and effective would have a material adverse effect on our ability to generate revenue and could require us to reduce the scope of or discontinue our operations, which could cause you to lose all of your investment.

At any time, we may decide to discontinue the development of, or to not commercialize, a drug ~~candidate.~~candidate, such as our decision in December 2018 to discontinue the Prurisol psoriasis program. If we terminate a program in which we have invested significant resources, we will not receive any return on our investment and we will have missed the opportunity to allocate those resources to potentially more productive uses.

We have limited experience in conducting or supervising clinical trials and must outsource all clinical trials, which exposes us to risks which could have a materially adverse effect on our business.

We have limited experience in conducting and supervising clinical trials that must be performed to obtain data to submit in applications for approval by the FDA. Because we have limited experience in conducting or supervising clinical trials, we outsource a significant amount of the work relating to our clinical trials to third parties. We therefore have less control over the conduct of our clinical trials, the timing and completion of the trials, the required reporting of adverse events, and the management of data developed through the trials than would be the case if we were relying entirely upon our own staff. We are now awaiting our vendors to complete the data management review before unblinding our COVID-19 study. Had we had the staff and experience to do this in house, it is likely the process would be quicker and result in cost savings.

We also have more limited control over compliance with procedures and protocols used to complete clinical trials. If these contractors fail to meet applicable regulatory standards, the testing of our drugs would be adversely affected, causing a delay in our ability to engage in revenue-generating operations that could have a materially adverse effect on our business.

Communicating with outside parties can also be challenging, potentially leading to mistakes, as well as difficulties in coordinating activities. Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay our trials and contractual restrictions may make such a change difficult or impossible. Additionally, it may be impossible to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

Success in early clinical trials may not be predictive or indicative of results in current ongoing clinical trials or potential future clinical trials. Likewise, preliminary data from clinical trials should be considered carefully and with caution since the final data may be materially different from the preliminary data, particularly as more patient data become available.

A number of new drugs and biologics have shown promising results in preclinical studies and initial clinical trials, but subsequently have failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals to initiate commercial sale. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. Product candidates in later stages of clinical trials may fail to show the desired benefit-risk profile despite having progressed through preclinical studies and initial clinical trials. As a result, data from our preclinical studies and Phase 1 and Phase 2 clinical trials of our drug candidates ~~Kevetrin, Prurisol~~Brilacidin and ~~Brilacidin,~~Kevetrin, as well as the results of the past or future internal data reviews, should not be relied upon as predictive or indicative of future clinical results. The results we have previously obtained, as well as any future results, may not predict the future therapeutic benefit of our drug candidates.

In addition, from time-to-time, preliminary or interim data from ~~current~~ clinical trials or other research, such as relating to the Brilacidin Phase 2, open-label, UP/UPS Proof-of-Concept (PoC) clinical trial, the ongoing research relating to Brilacidin as a potential therapeutic for the treatment of the novel coronavirus (SARS-CoV-2), which is responsible for COVID-19, or potential future clinical trials, may be reported or announced by us or the clinical investigators and medical institutions with which we work. Such data are preliminary and the data from any final analysis may be materially different. Even if final safety and/or efficacy data are positive, significant additional clinical testing will be necessary to advance the future development of our drug candidates. Preliminary or interim results may also not be reproduced in any potential future clinical trials. Accordingly, preliminary or interim data should be considered carefully and with caution.

We are subject to risks inherent in conducting clinical trials. Non-compliance with the ~~FDA’s~~FDA-approved good clinical practices by clinical investigators, clinical sites, or data management services could delay or prevent us from developing or commercializing our drug candidates, which could cause us to cease operations.

Agreements with clinical investigators and medical institutions for clinical testing and with other third parties for data management services place substantial responsibilities on these parties, which could result in delays in, or termination of, our clinical trials if these parties fail to perform as expected. For example, if any of our clinical trial sites fail to comply with FDA-approved good clinical practices, we may be unable to use the data gathered at those sites. If these clinical investigators, medical institutions or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for or successfully commercialize our drug candidates.

We or regulators may suspend or terminate our clinical trials for a number of reasons. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to the patients enrolled in our clinical trials. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to the patients enrolled in our clinical trials. In addition, clinical trials may have independent monitoring boards composed of experts in the field. These boards may also have the authority to suspend or terminate clinical trials.

Our clinical trial operations are and will be subject to regulatory inspections at any time. If regulatory inspectors conclude that we or our clinical trial sites are not in compliance with applicable regulatory requirements for conducting clinical trials, we may receive reports of observations or warning letters detailing deficiencies, and we will be required to implement corrective actions. If regulatory agencies deem our responses to be inadequate, or are dissatisfied with the corrective actions that we or our clinical trial sites have implemented, our clinical trials may be temporarily or permanently discontinued, we may be fined, we or our investigators may be precluded from conducting any ongoing or any future clinical trials, the government may refuse to approve our marketing applications or allow us to manufacture or market our drug candidates or we may be criminally prosecuted. If we are unable to complete clinical trials and have our products approved due to our failure to comply with regulatory requirements, we will be unable to commence revenue-generating operations, which could force us to cease operations.

We have engaged FDA with a Special Protocol Assessment (SPA) request for our planned Phase 3 clinical study of Brilacidin for treating ABSSSI. Failure to achieve an SPA agreement with FDA increases the risk of conducting a Phase 3 study and obtaining FDA approval for ~~the~~ ~~commercialization~~ of ~~Brilacidin, even if the study is successful by meeting the study endpoints at its conclusion.~~

We have completed an End-of-Phase 2 (“EOP2”) meeting with the FDA. We have submitted our Phase 3 protocol under an SPA request to the FDA. The request included specific questions to facilitate a meaningful dialogue with the FDA on the proposed study design. We have received from the FDA comments and considerations for incorporation into our study design. The FDA’s assessment of the SPA request, and all related feedback, are valuable in the development of Brilacidin for ABSSSI. Contingent upon further FDA discussion, a Phase 3 program may be initiated. The Company can offer no assurance that an SPA agreement will be ultimately reached with the FDA, and if this were not to occur, it would substantially increase the risk of Brilacidin for ABSSSI drug development. Management estimates that the cost of an ABSSSI Phase 3 program would require significantly expanded capital beyond what is currently available and therefore, have not yet submitted a revised SPA request.

Delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to generate revenues.

Delays in the commencement or completion of clinical testing of our products or products could significantly affect our product development costs and our ability to generate revenue. We do not know whether the FDA will agree with the trial designs for ongoing and planned clinical trials or whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to our ability to do the following:

Clinical trials may also be delayed as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us or our partner, the FDA, an IRB, a clinical trial site with respect to that site, or other regulatory authorities due to a number of factors, including:

Additionally, we may need to amend clinical trial protocols for a variety of reasons, including changes in regulatory requirements and guidance. Such amendments may require us to, for example, resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. We may decide to terminate a clinical study for commercial reasons including increased market availability of generic treatments. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues will be delayed and/or reduced. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.

We must comply with significant and complex government regulations, compliance with which may delay or prevent the commercialization of our drug candidates, which could have a materially adverse effect on our business.

The ~~R&D,~~Research and Development (R&D), manufacture and marketing of drug candidates are subject to regulation, primarily by the FDA in the United States, and by comparable authorities in other countries. These national agencies and other federal, state, local and foreign entities regulate, among other things, R&D activities (including testing in animals and in humans) and the testing, manufacturing, handling, labeling, storage, record keeping, approval, advertising and promotion of the products that we are developing. Noncompliance with applicable requirements can result in various adverse consequences, including approval delays or refusals to approve drug licenses or other applications, suspension or termination of clinical investigations, revocation of approvals previously granted, fines, criminal prosecution, recalls or seizures of products, injunctions against shipping drugs and total or partial suspension of production and/or refusal to allow a company to enter into governmental supply contracts.

The process of obtaining FDA approval for a drug has historically been costly and time consuming. Current FDA requirements for a new human drug or biological product to be marketed in the United States include: (i) the successful conclusion of pre-clinical laboratory and animal tests, if appropriate, to gain preliminary information on the product’s safety; (ii) filing with the FDA of an IND application to conduct human clinical trials for drugs or biologics; (iii) the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use; and (iv) filing by a company and acceptance and approval by the FDA of a New Drug Application (“NDA”), for a drug product or a biological license application (“BLA”), for a biological product to allow commercial distribution of the drug or biologic. A delay in one or more of the procedural steps outlined above could be harmful to the Company in terms of getting our drug candidates through clinical testing and to market.

The FDA reviews the results of the clinical trials and may order the temporary or permanent discontinuation of clinical trials at any time if it believes the drug candidate exposes clinical subjects to an unacceptable health risk. Investigational drugs used in clinical studies must be produced in compliance with cGMP rules pursuant to FDA regulations.

Sales outside the United States of products that we may develop will also be subject to additional regulatory requirements governing human clinical trials and marketing for drugs and biological products and devices. The requirements vary widely from country to country, but typically the registration and approval process takes several years and requires significant resources.

We also are subject to the following risks and obligations, related to the approval of our products:

If we do not have the requisite resources to comply with all applicable regulations, then we could be forced to cease operations, which could cause you to lose all of your investment.

We or third-party manufacturers we rely on may encounter failures or difficulties in manufacturing or formulating clinical development and commercial supplies of drugs, which could delay the clinical development or regulatory approval of our drug candidates, or their ultimate commercial production if approved.

Currently, third parties manufacture our drug candidates on our behalf. Third-party manufacturers may lack capacity to meet our needs, go out of business or fail to perform. In addition, supplies of raw materials needed for manufacturing or formulation of clinical supplies may not be available or in short supply. Furthermore, should we obtain FDA or EMA approval for any of our drug candidates, we expect to rely, at least to some extent, on third-party manufacturers for commercial production. Our dependence on others for the manufacture of our drug candidates may adversely affect our ability to develop and deliver such drug candidates on a timely and competitive basis.

We have ordered Brilacidin API (active pharmaceutical ingredient) for delivery in January 2022, for use in our planned oral mucositis Phase 3 clinical study. There is no assurance the order will be manufactured or received timely. We have encountered prior delays and cost overruns in ordering the production of Brilacidin API.

Any performance failure on the part of a third-party manufacturer could delay clinical development, regulatory approval or, ultimately, sales of our drug candidates. Our third-party manufacturers may encounter difficulties involving production yields, regulatory compliance, lot release, quality control and quality assurance, as well as shortages of qualified personnel. Approval of our drug candidates could be delayed, limited or denied if the FDA does not approve our or a third-party manufacturer’s processes or facilities. Moreover, the ability to adequately and timely manufacture and supply drug candidates is dependent on the uninterrupted and efficient operation of the manufacturing facilities, which is impacted by many manufacturing variables including:

In addition, our third-party manufacturers may encounter delays and problems in manufacturing our drug candidates or drugs for a variety of reasons, including accidents during operation, failure of equipment, delays in receiving materials, natural or other disasters, political or governmental changes, or other factors inherent in operating complex manufacturing facilities. Supply chain management is complex, and involves sourcing from a number of different companies and foreign countries. Commercially available starting materials, reagents and excipients may become scarce or more expensive to procure, and we may not be able to obtain favorable terms in agreements with contractors or subcontractors. Our third-party manufacturers may not be able to operate ~~our~~their respective manufacturing facilities in a cost-effective manner or in a time frame that is consistent with our expected future manufacturing needs. If we or our third-party manufacturers cease or interrupt production or if our third-party manufacturers and other service providers fail to supply materials, products or services to us for any reason, such interruption could delay progress on our programs, or interrupt the commercial supply, with the potential for additional costs and lost revenues. If this were to occur, we may also need to seek alternative means to fulfill our manufacturing needs.

We may not be able to enter into agreements for the manufacture of our drug candidates with manufacturers whose facilities and procedures comply with applicable law. Manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with cGMP and other applicable government regulations and corresponding foreign standards. We do not have control over a third-party manufacturer’s compliance with these regulations and standards. If one of our manufacturers fails to maintain compliance, we or they could be subject to enforcement, the production of our drug candidates could be interrupted or suspended, and/or our product could be recalled or withdrawn, among other consequences. Any of these events could result in delays, additional costs and potentially lost revenues.

We can provide no assurance that our drug candidates will obtain regulatory approval or that the results of clinical studies will be favorable, and if we fail to obtain such approval or if clinical studies are not favorable, we could be forced to cease operations.

Our drug candidates ~~Kevetrin, Prurisol~~Brilacidin and ~~Brilacidin~~Kevetrin will require lengthy and costly studies in humans to obtain approval from the FDA before they can be marketed. We cannot predict with any certainty that the study results will be satisfactory to the FDA for approval to ultimately be granted. Preclinical and clinical trials may reveal that one or more products are ineffective or unsafe, in which event further development of such products could be seriously delayed or terminated.

Approval of a drug candidate as safe and effective for use in humans is never certain and regulatory agencies may delay or deny approval of drug candidates for commercialization. For example, even though our product candidate Brilacidin has received QIDP designation, such designation may not result in a faster development process, review, or approval than drugs considered for approval under conventional FDA procedures; nor does such designation assure ultimate approval by the FDA or related exclusivity benefits. Regulatory agencies also may delay or deny approval based on additional government regulation or administrative action, changes in regulatory policy during the period of clinical trials in humans and regulatory review, or the availability of alternative treatments.

Delays in obtaining, or failure to obtain, FDA or any other necessary regulatory approvals of any proposed drugs would have an adverse effect on the drug’s potential commercial success and on our business, prospects, financial condition and results of operations. In addition, it is possible that a proposed drug may be found to be ineffective or unsafe due to conditions or facts that arise after development has been completed and regulatory approvals have been obtained. In this event, we may be required to withdraw such drug from the market. To the extent that our success will depend on any regulatory approvals from government authorities outside of the United States that perform roles similar to that of the FDA, uncertainties similar to those stated above will also exist.

Even if our product candidate Prurisol were to receive regulatory approval, commercialization may be adversely affected by regulatory actions requiring a boxed warning, which could have a materially adverse effect on our business.

Even if we were to receive regulatory approval for our psoriasis product candidate Prurisol, we expect an approval to include a boxed warning requiring screening for the HLA-B*5701 allele, which is a readily available test, to reduce the risk in patients of potential abacavir hypersensitivity reactions. Products with boxed warnings are subject to more restrictive regulations than products without such warnings. Boxed restrictions would make it more difficult to market Prurisol, and the added regulation could require us to expend resources that we may not have, which could delay or prevent commercialization of that product and in turn, could have a materially adverse effect on our business.

Even if we obtain regulatory approvals, our marketed drug candidates will be subject to ongoing regulation. If we fail to comply with U.S. and foreign regulations, we could be subject to adverse consequences, including loss of our approvals to market these drugs, and our business would be seriously harmed.

Following any initial regulatory approval of any of our drug candidates, we will also be subject to continuing regulation of the manufacture, labeling, storage, recordkeeping, reporting, distribution, advertising, promotion, marketing, sale, import, and export of those drugs. Such regulation includes review of adverse experiences and the results of any clinical trials completed after our drug candidates are made commercially available, including any post marketing requirements that were required as a condition of approval. The contract manufacturers that make any of our drug candidates will also be subject to periodic review and inspection by the FDA. If our products, if approved, or the manufacturing facilities for our products fail to comply with applicable regulatory requirements, a regulatory agency may suspend any ongoing clinical trials; issue warning letters or untitled letters; suspend or withdraw regulatory approval; refuse to approve pending applications or supplements to applications; suspend or impose restrictions on operations; seize or detain products, prohibit the export or import of products, or require us to initiate a product recall; or seek other monetary or injunctive remedies, or impose civil or criminal penalties. We do not have, and currently do not intend to develop, the ability to manufacture material for our clinical trials or on a commercial scale. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured drugs ourselves, including reliance on the third-party manufacturer for regulatory compliance.

Our drug promotion and advertising also would be subject to regulatory requirements and continuing FDA review. Our marketing of these drugs also may be heavily scrutinized by the Department of Justice, the Department of Health and Human Services’ Office of Inspector General, state attorneys general, members of Congress and the public. Our promotional activities will be regulated not only by the FDCA and FDA regulations, but also by federal and state laws pertaining to health care “fraud and abuse,” such as:

Many states have similar laws applicable to items or services reimbursed by commercial insurers. Violations of fraud and abuse laws can result in costly litigation, fines and/or imprisonment, exclusion from participation in federal health care programs, and burdensome reporting and compliance obligations.

Compliance with ongoing regulation consumes substantial financial and management resources and may expose us to the potential for other adverse circumstances. For example, approval for a drug may be conditioned on costly post-marketing follow-up studies. Based on these studies, if a regulatory authority does not believe that the drug demonstrates an appropriate benefit-risk profile to patients, it could limit the indications for which a drug may be sold or revoke the drug’s marketing approval. In addition, identification of certain side effects after a drug is on the market may result in the subsequent withdrawal of approval, reformulation of a drug, additional preclinical and clinical trials, changes in labeling or distribution. Alternatively, we may be required by the FDA to develop and implement a REMS to ensure the safe use of our products. REMS may include costly risk management measures such as enhanced safety surveillance, restricted distribution and use, patient education, enhanced labeling, special packaging or labeling, expedited reporting of certain adverse events, pre-approval of promotional materials and restrictions on direct-to-consumer advertising. Any of these events could delay or prevent us from generating revenue, or limit the revenue, from the commercialization of these drugs and/or cause us to incur significant additional costs.

Any of these events could prevent us from achieving or maintaining market acceptance of a particular product candidate, if approved, and could significantly harm our business, results of operations and prospects. If we are required to withdraw all or more of our drugs from the market as a result of actions or inactions on our part or that of a third party, we may be unable to continue revenue-generating operations, which could cause you to lose all of your investment.

All of our Polymedix drug product candidates are licensed from or based upon licenses from the University of Pennsylvania. Upon our purchase of the Polymedix Assets we assumed all contractual rights and obligations of the licenses. If any of these license agreements are terminated, our ability to advance our Polymedix product candidates or develop new product candidates will be materially adversely affected which could have a materially adverse effect on our business.

~~In September 2013, we purchased substantially all of the assets of Polymedix Inc. and Polymedix Pharmaceuticals, Inc. from the bankrupt estate of these entities.~~ We now depend, and will continue to depend, on our Polymedix licenses and potentially on other licensing arrangements and/or strategic relationships with third parties for the research, development, manufacturing and commercialization of our Polymedix product candidates. If any of our licenses or relationships are terminated or breached, we may:

If we experience any of the foregoing, it could have a materially adverse effect on our business and could force us to cease operations which could cause you to lose all of your investment.

We or our ~~third party~~third-party manufacturers may fail to comply with manufacturing regulations.

All facilities and manufacturing processes used in the production of active pharmaceutical ingredient, or API, and drug products for clinical use in the U.S. must be operated in conformity with cGMP as established by the FDA. Similar requirements in other countries exist for manufacture of drug products for clinical use. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. Before we can commercialize a drug, we must obtain regulatory approval of our cGMP manufacturing facility and process, if any, or the cGMP manufacturing facility and process of the third party or parties with whom we may outsource our manufacturing activities.

In connection with any application for commercial approval, and if any drug candidate is approved by the FDA or other regulatory agencies for commercial sale, a significant scale-up in manufacturing may require additional validation studies. If we are unable to successfully increase the manufacturing capacity for a drug candidate, the regulatory approval or commercial launch of that drug candidate may be delayed, or there may be a shortage of supply, which could limit our ability to develop or commercialize the drug.

Our manufacturing facilities, if any in the future, and the manufacturing facilities of our ~~third party~~third-party manufacturers will be subject to inspection by the FDA and other state, local and foreign regulatory authorities, before and after product approval. We cannot guarantee that we, or any potential ~~third party~~third-party manufacturer of our products, will be able to comply with the cGMP regulations or other applicable manufacturing regulations.

Failure on our or our third party manufacturers’ part to comply with applicable regulations and specific requirements or specifications of other countries could result in the termination of ongoing research, disqualification of data for submission to regulatory authorities, delays or denials of new product approvals, warning letters, fines, consent decrees restricting or suspending manufacturing operations, injunctions, civil penalties, recall or seizure of products and criminal prosecution. Any of these consequences could have a materially adverse effect on our business.

Controls we or our third-party service providers have in place to ensure compliance with laws may not be effective to ensure compliance with all applicable laws and regulations.

The development of our investigational products and our general operations are subject to extensive regulation in the U.S. and in foreign countries. Although we have developed and instituted controls to comply with applicable regulatory requirements, we cannot assure you that we, our employees, our consultants or our contractors will operate at all times in full compliance with all potentially applicable U.S. federal and state regulations and/or laws or all potentially applicable foreign law and/or regulations. Further, we have a limited ability to monitor and control the activities of third-party service providers, suppliers and manufacturers to ensure compliance by such parties with all applicable regulations and/or laws. We may be subject to direct liabilities or be required to indemnify such parties against certain liabilities arising out of any failure by them to comply with such regulations and/or laws. If we or our employees, consultants or contractors fail to comply with any of these regulations and/or laws a range of consequences could result, including, but not limited to, the termination of clinical trials, the failure to obtain approval of a product candidate, restrictions on our products or manufacturing processes, withdrawal of our products from the market, significant fines, exclusion from government healthcare programs or other sanctions or litigation that could adversely affect our results of operations.

The Company is exposed to product liability, clinical and preclinical liability risks which could place a substantial financial burden upon the Company should it be sued.

The Company could be exposed to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. In addition, the use in the Company’s clinical trials of its investigational products and the potential subsequent sale of these products by the Company or its potential collaborators may cause the Company to bear some or all of the associated product liability risks. A successful liability claim or series of claims brought against the Company could have a material adverse effect on its business, financial condition and results of operations.

The Company has $5,000,000 per occurrence / $10,000,000 in aggregate in liability insurance for our clinical trials. The Company cannot assure that such insurance will provide adequate coverage against the Company’s potential liabilities. Claims or losses in excess of any product liability insurance coverage obtained by the Company could have a material adverse effect on our business, financial condition and results of operations.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. Disclosure of our trade secrets or proprietary information could compromise any competitive advantage that we have, which could have a materially adverse effect on our business.

We depend upon confidentiality and non-use agreements with our officers, employees, consultants, and subcontractors to maintain the proprietary nature of the technology. These measures may not afford us sufficient or complete protection, and may not afford an adequate remedy in the event of an unauthorized disclosure of confidential information. In addition, others may independently develop technology similar to ours, otherwise avoiding the confidentiality agreements, or produce patents that would materially and adversely affect our business, prospects, financial condition, and results of operations.

We may be unable to obtain or protect intellectual property rights relating to our products, and we may be liable for infringing upon the intellectual property rights of others, which could have a materially adverse effect on our business.

Our ability to compete effectively will depend on our ability to maintain the proprietary nature of our compounds and the proprietary compounds of others with which we have entered into licensing agreements. We have filed ~~two~~ patent applications and expect to file a number of additional patent applications in the coming years. There can be no assurance that any of these patent applications will ultimately result in the issuance of a patent with respect to the proprietary compounds owned by us or licensed to us. The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards that the United States Patent and Trademark Office use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims that will be allowed in any patents issued to us or to others. Further, we rely on a combination of trade secrets, know-how, technology and nondisclosure, and other contractual agreements and technical measures to protect our rights in the proprietary compounds. If any trade secret, know-how or other proprietary information and/or compounds not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

We do not believe that any of the drug candidates we are currently developing infringe upon the rights of any third parties nor are they infringed upon by third parties; however, there can be no assurance that our proprietary compounds will not be found in the future to infringe upon the rights of others or be infringed upon by others. In such a case, others may assert infringement claims against us, and should we be found to infringe upon their patents, or otherwise impermissibly utilize their intellectual property, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, we may be required to obtain licenses from the holders of this intellectual property, enter into royalty agreements, or redesign our drug candidates so as not to utilize this intellectual property, each of which may prove to be uneconomical or otherwise impossible. Conversely, we may not always be able to successfully pursue our claims against others that infringe upon our proprietary compounds. Thus, the proprietary nature of our technology or technology licensed by us may not provide adequate protection against competitors.

Moreover, the cost to us of any litigation or other proceeding relating to our patents and other intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

Our potential collaborative relationships with third parties could cause us to expend significant resources and incur substantial business risk with no assurance of financial return, which could have a materially adverse effect on our business.

We may have to rely substantially upon strategic collaborations for marketing and the commercialization of our drug candidates, and we may rely even more on strategic collaborations for R&D of our other drug candidates. Our business will depend on our ability to sell drugs to both government agencies and to the general pharmaceutical market. We may have to sell our drugs through strategic partnerships with other pharmaceutical companies. If we are unable to establish or manage such strategic collaborations on terms favorable to us in the future, our revenue and drug development may be limited. To date, we have not ~~entered into any strategic collaboration with third parties capable of providing these services. In addition, we have not~~ yet marketed or sold any of our drug ~~candidates or entered into successful collaborations for these services in order to ultimately commercialize our drug~~ candidates.

If we determine to enter into R&D collaborations during the early phases of drug development, our success will in part depend on the performance of our research collaborators. We will not directly control the amount or timing of resources devoted by our research collaborators to activities related to our drug candidates. Our research collaborators may not commit sufficient resources to our programs. If any research collaborator fails to commit sufficient resources, our preclinical or clinical development programs related to this collaboration could be delayed or terminated. Also, our collaborators may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us. Finally, if we fail to make required milestone or royalty payments to our collaborators, or to observe other obligations in our agreements with them, our collaborators may have the right to terminate those agreements.

Establishing strategic collaborations is difficult and time-consuming. Our discussion with potential collaborators may not lead to the establishment of collaborations on favorable terms, if at all. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position. Even if we successfully establish new collaborations, these relationships may never result in the successful development or commercialization of our drug candidates or the generation of sales revenue. To the extent that we enter into collaborative arrangements, our drug revenues are likely to be lower than if we directly marketed and sold any drugs that we may develop.

We may not be able to attract and retain highly skilled personnel or consultants, which could have a materially adverse effect on our business.

Our ability to attract and retain highly skilled personnel or consultants is critical to our operations and expansion. We face competition for these types of personnel from other pharmaceutical companies and more established organizations, many of which have significantly larger operations and greater financial, technical, human and other resources than us. We may not be successful in attracting and retaining qualified personnel or consultants on a timely basis, on competitive terms, or at all. If we are not successful in attracting and retaining these personnel or consultants, our business, prospects, financial condition and results of operations will be materially adversely affected.

We depend upon our senior management and their loss or unavailability could put us at a competitive disadvantage.

We depend upon the efforts and abilities of our senior management ~~team Leo Ehrlich, Dr. Krishna Menon and Dr. Arthur Bertolino.~~team. Leo Ehrlich, the Company’s Chief Executive and Financial Officer ~~and Dr. Krishna Menon, Chief Scientific Officer,~~ presently ~~have~~has no employment agreement with the Company. The loss of a member of the senior management team could have an adverse impact on our business. Competition for senior management is intense, and we may not be successful in attracting and retaining key personnel to replace such loss of a member of the senior management team, the inability of which could have an adverse effect on our business and results of operations.

~~There are conflicts of interest among our officers, directors and stockholders.~~

Certain of our executive officers and directors and their affiliates are engaged in other activities and have interests in other entities on their own behalf or on behalf of other persons. Neither we nor any of our stockholders will have any rights in these ventures or their income or profits. In particular:

~~While the Company is not aware of any conflict that has arisen to date, the Company does not have any policy in place to deal with such should such a conflict arise.~~

The biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition. We may be unable to compete with enterprises equipped with more substantial resources than us, which could cause us to cease operations.

The biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition based primarily on scientific and technological factors. These factors include the availability of patent and other protection for technology and products, the ability to commercialize technological developments and the ability to obtain government approval for testing, manufacturing and marketing.

We compete with biopharmaceutical firms in the United States, Europe and elsewhere, as well as a growing number of large pharmaceutical companies that are applying biotechnology to their operations. Many biopharmaceutical companies have focused their development efforts in the human therapeutics area, including cancer. Many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as academic institutions, government agencies and private research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants. Our ability to compete successfully with other companies in the pharmaceutical field will also depend to a considerable degree on the continuing availability of capital on terms and conditions acceptable to us.

We are aware of numerous products under development or manufactured by competitors that are used for the prevention or treatment of certain diseases we have targeted for drug development. Various companies are developing biopharmaceutical products that potentially directly compete with our drug candidates even though their approach to such treatment is different.

For example, with respect to Kevetrin, our lead compound in development for ~~cancer,~~treating cancers, there are many drugs approved to treat various cancers and many more in the publicly disclosed pipeline. Our success depends on our ability to identify tumor types where Kevetrin has an advantage over existing therapies and those in the publicly disclosed pipeline. The same is true for our ~~compounds Prurisol and~~compound, Brilacidin. Numerous drugs are already FDA approved for the treatment of ~~psoriasis~~IBD, ABSSSI, and ~~ABSSSI.~~COVID-19. Although there is presently no drug approved for the prevention and treatment of oral mucositis for head and neck cancers, there are numerous clinical trials in progress and Kepivance is approved for limited use in patients with hematologic malignancies.

Our competition will be determined in part by the potential indications for which our investigational drugs are developed and ultimately approved by regulatory authorities. Additionally, the timing of the market introduction of some of our potential drugs or of competitors’ products may be an important competitive factor. Accordingly, the relative speed with which we can develop drugs; complete pre-clinical testing, clinical trials, and approval processes; and supply commercial quantities to market are likely to be important competitive factors. We expect that competition among drugs approved for sale will be based on various factors, including product efficacy, safety, reliability, availability, price and patent protection.

The successful development of biopharmaceuticals is highly uncertain. A variety of factors, including, but not limited to, unfavorable pre-clinical study results or failure to obtain regulatory approvals, could cause us to abandon development of our drug candidates, which could also cause us to cease operations and you may lose your entire investment.

~~A complaint entitled~~ ~~O’Connell v. Cellceutix Corp. et al.~~ (No. 1:15-cv-07194) was filed in the United States District Court for the Southern District of New York in September 2015 against the Company and its officers alleging that the defendants made materially false and misleading statements, and omitted materially adverse facts, about the Company’s business, operations and prospects. On June 9, 2016, the U.S. District Court for the Southern District of New York granted the Company’s motion to dismiss the lawsuit. The ruling dismissed all claims against the Company, denied the plaintiff’s request to file an amended complaint, and ordered that the case be closed.

Future lawsuits could have a material adverse effect on our financial position, liquidity or results of operations. The uncertainty and expense associated with a lawsuit could adversely impact our business, financial condition and reputation. Litigation is costly, time-consuming and disruptive to normal business operations. While we maintain directors’ and officers’ liability insurance, certain costs, such as those below a retention amount, are not covered by our insurance policies. In addition, our insurance carriers could refuse to cover some or all of these claims in whole or in part.

Risks Related to the Securities Markets and Investments in Our Class A Common Stock

The sale of our Class A Common Stock to Aspire Capital may cause substantial dilution to our existing stockholders and the sale of the shares of Class A Common Stock acquired by Aspire Capital could cause the price of our Class A Common Stock to decline, which could have a materially adverse effect on our business.

On July 31, 2020, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 24-month term of the Purchase Agreement. The Company also issued 6,250,000 shares of its Class A Common Stock to Aspire Capital as a commitment fee. The Company has filed a registration statement to register the resale of any shares that Aspire Capital may purchase under the Purchase Agreement. To the extent Aspire Capital purchases shares under the Purchase Agreement and subsequently sells those shares, the other holders of our Class A Common Stock may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A Common Stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

In addition to potential dilution associated with future fundraising transactions, we currently have significant numbers of securities outstanding that are exercisable for our common stock, which will result in significant additional dilution and downward pressure on our stock price.

As of September 22, 2021, there were 437.1 million shares of our Class A common stock outstanding and 15.6 million shares of our Class B common stock outstanding. In addition, as of June 30, 2021, there were outstanding stock options and a convertible note representing the potential issuance of approximately an additional 8.7 million shares of our common stock. The issuance of these shares in the future would result in significant dilution to our current stockholders and could adversely affect the price of our common stock and the terms on which we could raise additional capital. In addition, the issuance and subsequent trading of shares could cause the supply of our common stock available for purchase in the market to exceed the purchase demand for our common stock. Such supply in excess of demand could cause the market price of our common stock to decline.

Because our common stock isquoted on the OTC your ability to sell your shares in the secondary trading market may be limited.

Our Class A ~~common stock~~Common Stock is currently quoted on the OTC. Consequently, the liquidity of our Class A ~~common stock~~Common Stock is impaired, not only in the number of shares that are bought and sold, but also through delays in the timing of transactions, and coverage by security analysts and the news media, if any, of our Company. As a result, prices for shares of our Class A ~~common stock~~Common Stock may be lower than might otherwise prevail if our Class A ~~common stock~~Common Stock were listed on a national securities exchange.

Because our Class A ~~common stock~~Common Stock is considered “penny stock” you may have difficulty selling them in the secondary trading market.

Federal regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) regulate the trading of so-called “penny stocks,” which are generally defined as any security not listed on a national securities exchange, priced at less than $5.00 per share and offered by an issuer with limited net tangible assets and revenues. Since our Class A ~~common stock~~Common Stock currently is quoted on the OTC at less than $5.00 per share, our shares are “penny stocks” and may not be traded unless a disclosure schedule explaining the penny stock market and the risks associated therewith is delivered to a potential purchaser prior to any trade.

In addition, because our Class A ~~common stock~~Common Stock is not listed on any national securities exchange and currently is quoted at and trades at less than $5.00 per share, trading in our Class A ~~common stock~~Common Stock is subject to Rule 15g-9 under the Exchange Act. Under this rule, broker-dealers must take certain steps prior to selling a “penny stock,” which steps include:

If these penny stock rules are not followed by the broker-dealer, the investor has no obligation to purchase the shares. The application of these comprehensive rules will make it more difficult for broker-dealers to sell our Class A ~~common stock~~Common Stock and our stockholders, therefore, may have difficulty in selling their shares in the secondary trading market.

Our stock price may be volatile and your investment in our Class A ~~common stock~~Common Stock could suffer a decline in value.

As of June 30, ~~2017,~~2021, the last closing price of our Class A ~~common stock,~~Common Stock, as quoted on the OTC, was ~~$0.96.~~$0.22 per share, and on September 22, 2021, the last closing price was $0.23 per share. The price may fluctuate significantly in response to a number of factors, many of which are beyond our control. These factors include:

Short sellers of our stock may be manipulative and may drive down the market price of our common stock.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities, as the short seller expects to pay less in the covering purchase than it received in the sale. It is therefore in the short seller’s interest for the price of the stock to decline, and some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, often involving deliberate misrepresentations of the issuer’s business prospects and similar matters calculated to create negative market momentum. Penny stocks which do not trade on an exchange, such as our common stock, are particularly susceptible to short sales.

As a public entity in a highly digital world, we have been and in the future may be the subject of so-called “fake news,” a type of yellow journalism constructed to look legitimate while consisting of intentional misinformation and misrepresentations deliberately propagated by profiteering short sellers seeking to gain an illegal market advantage by spreading false information concerning the Company’s name, compounds, intellectual property, personnel, and affiliates. In the past, the publication of intentional misinformation concerning the Company by a disclosed short seller has been associated with the selling of shares of our common stock in the market on a large scale, resulting in a precipitous decline in the market price per share of our common stock. In addition, the publication of intentional misinformation may also result in lawsuits, the uncertainty and expense of which could adversely impact our business, financial condition and reputation. While we maintain directors’ and officers’ liability insurance, certain costs, such as those below a retention amount, are not covered by our insurance policies. In addition, our insurance carriers could refuse to cover some or all of these claims in whole or in part.

While utilizing all available tools to defend the Company and its assets against fake news, there is limited regulatory control, making fake news an ongoing concern for any public company. While we move forward in our business development strategies in good faith, there are no assurances that we will not face more fake news or similar tactics by bad actors in the future, and the market price of our common stock may decline as a result of their actions or the action of other short sellers.

Our directors and executive officers own or control a sufficient number of shares of our ~~Class A~~ common stock to control our Company, which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.

At ~~June 30, 2017,~~September 22, 2021, our directors and executive officers own or control approximately ~~19%~~27% of ~~our~~the outstanding voting power of ~~Class A~~our common stock. During the year ended June 30, 2021, Mr. Ehrlich, the Company’s Chairman and CEO, purchased all his remaining shares of the Class B common stock, par value $0.0001 per share. Mr Ehrlich holds 15,641,463 shares of our Class B common stock after this exercise. Accordingly, ~~these stockholders,~~our directors and executive officers, individually and as a group, may be able to influence the outcome of stockholder votes, involving votes concerning the election of directors, the adoption or amendment of provisions in our Articles of Incorporation and bylaws and the approval of certain mergers or other similar transactions, such as sales of substantially all of our assets. Such control by existing stockholders could have the effect of delaying, deferring or preventing a change in control of our Company.

The dual class structure of our common stock can have the effect of concentrating voting control with Dr. Menon and/ or Mr. Ehrlich, which will limit or preclude your ability to influence corporate matters.

Our Class B common stock entitles holders to ten (10) votes per share on all matters submitted to a vote of our stockholders and our Class A common stock entitles holders to one (1) vote per share on all matters submitted to a vote of our stockholders. Dr. Menon and Mr. Ehrlich each have vested options that they can exercise and convert into 18,000,000 shares of Class B common stock. That alone could result in the equivalent of 360,000,000 votes of Class A common stock. As of June 30, 2017 we had 135,274,421 shares of Class A common stock outstanding and no shares of Class B common stock outstanding. Because of the ten-to-one voting ratio between our Class B common stock and Class A common stock, upon exercise and conversion of such options into shares of Class B common stock, the Class B common stock holders can collectively control a majority of the combined voting power of our common stock (i.e., approximately 78%) and therefore be able to control all matters submitted to our stockholders for approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.

We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our Class A ~~common stock~~Common Stock must come from increases in the fair market value and trading price of the Class A ~~common stock.~~Common Stock.

We have not paid any cash dividends on our Class A ~~common stock~~Common Stock and do not intend to pay cash dividends on our Class A ~~common stock~~Common Stock in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements, which we may enter into with institutional lenders, may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and any other factors that the board of directors decides is relevant. Therefore, any return on your investment in our Class A ~~common stock~~Common Stock must come from increases in the fair market value and trading price of the Class A ~~common stock.~~Common Stock.

We may issue additional equity shares to fund the Company’s operational requirements which would dilute your share ownership.

The Company’s continued viability depends on its ability to raise capital. Changes in economic, regulatory or competitive conditions may lead to cost increases. Management may also determine that it is in the best interest of the Company to develop new services or products. In any such case additional financing is required for the Company to meet its operational requirements. There can be no assurances that the Company will be able to obtain such financing on terms acceptable to the Company and at times required by the Company, if at all. In such event, the Company may be required to materially alter its business plan or curtail all or a part of its operational plans.

The sale of our Class A common stock to Aspire Capital may cause substantial dilution to our existing stockholders and the sale of the shares of Class A common stock acquired by Aspire Capital could cause the price of our Class A common stock to decline, which could have a materially adverse effect on our business.

On September 6, 2017, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Purchase Agreement. The Company also issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The Company has registered the resale of any shares that Aspire Capital may purchase under the Purchase Agreement. To the extent Aspire Capital purchases shares under the Purchase Agreement and subsequently sells those shares, the other holders of our Class A common stock may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A common stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

~~Large amounts of our Class A common stock will be eligible for resale under Rule 144.~~

As of June 30, 2017, 37,184,614 shares of the 135,274,421 outstanding shares of our Class A common stock are restricted securities as defined under Rule 144 of the Securities Act and under certain circumstances may be resold without registration pursuant to Rule 144.

Approximately 11.8 million shares of our restricted shares of Class A common stock are held by non-affiliates who may avail themselves of the public information requirements and sell their shares in accordance with Rule 144. As a result, some or all of these shares may be sold in accordance with Rule 144 potentially causing the price of the Company’s shares to decline.

Under Rule 144, a person affiliated with the Company who has satisfied a six-month holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of Class A common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by a person who is not an affiliate of the Company and who has satisfied a one-year holding period. Any substantial sale of the Company’s Class A common stock pursuant to Rule 144 may have an adverse effect on the market price of the Class A common stock.

Our ~~principal offices are~~current Company headquarters is located at 301 Edgewater Place - Suite 100, ~~Cummings Center, Suite 151-B, Beverly,~~Wakefield, MA ~~01915. The Company signed~~01880, a ~~lease extension agreement with Cummings Properties which began~~suite that maintains our virtual offices, and if needed, the use of physical offices, meeting rooms, and business support services on ~~October 1, 2013. The lease is~~a fee for ~~a term of five years ending on September 30, 2018,~~use basis. All our employees and requires monthly payments of approximately $18,000. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease and subleases 200 square feet of space previously used by the Company and pays the Company $900 per month.consultants work remotely.

~~Management believes that the property arrangement satisfies the Company’s current needs.~~

On January 22, 2020, the Company filed a complaint against Cummings Properties, LLC in the Superior Court of the Commonwealth of Massachusetts (C.A. No. 20-77CV00101), seeking, among other things, declaratory relief that the lease for the Company’s prior principal executive offices did not automatically extend for an additional five years from September 2018, return of the Company’s security deposit, and damages. This action is in the preliminary stages and the Company is currently unable to determine the probability of the outcome or reasonably estimate the loss or gain, if any.

The information called for by this item is incorporated herein by reference to the information set forth in Note 8 ~~“Commitments~~Commitment and ~~contingencies”~~contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 ofin this ~~Report.~~Annual Report on Form 10-K.

The Company’s Class A ~~common stock~~Common Stock symbol is “IPIX” and is quoted on the OTCQB. ~~Before June 8, 2017,~~Quotations on the ~~Company’s Class A common stock traded under the symbol “CTIX”.~~

~~The table below sets forth the daily high and low prices for the Company’s Class A common stock. Quotations~~OTCQB reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions.

As of ~~August~~September 22, ~~2017,~~2021, a total of approximately ~~138 million shares~~437,096,222 of the Company’s common stock are outstanding and held by approximately 7168 shareholders of record, including Cede & Co., the nominee for the Depository Trust & Clearing Corporation and consequently that number does not include beneficial owners of our common stock who hold their stock in “street name” through their brokers.

The Company has not paid any cash dividends to our shareholders since its inception. The Company currently intends to retain any earnings for use in its business, and therefore does not anticipate paying dividends in the foreseeable future. The accrued dividend at the balance sheet represents portion of the unpaid accrued dividend to our Series B 5% convertible preferred stockholders. See Notes 14 and 15 of the Notes to Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K.

~~Repurchase activity during the three months ended June 30, 2017 was as follows:~~

~~(1) Consists of shares withheld upon the vesting of a common stock grant on June 27, 2017.~~

~~(Rounded to nearest thousand, except shares and for per share data):~~Not applicable.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our expectations related to the progress, continuation, timing and success of drug discovery and development activities conducted by the Company, other statements regarding our future product development and regulatory strategies, including with respect to specific indications such as, among others, COVID-19; our ability to obtain additional capital to fund our operations, changes in our research and development spending, realizing new revenue streams and obtaining future out-licensing or collaboration agreements that include up-front, milestone and/or royalty payments, our ability to realize up-front milestone and royalty payments under current and future agreements, future research and development spending and projections relating to the level of cash we expect to use in operations, our working capital requirements and our future headcount requirements. In some cases, forward-looking statements can be identified by the use of terms such as ~~“may,~~“anticipates,” ~~“will,~~“believes,” “hopes,” “estimates,” “looks,” “expects,” “plans,” “intends,” ~~“plans,” “anticipates,” “estimates,~~“goal,” “potential,” “may,” “suggest,” “will,” or “continue,” or the negative thereof or other comparable terms. These statements are based on current expectations, projections and assumptions made by management and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition, as well as any forward-looking statements are subject to significant risks and uncertainties including, but not limited to the factors set forth under the heading “Item 1A. Risk Factors” under Part I of this Annual Report on Form 10-K, and in other reports we file with the SEC. All forward-looking statements are made as of the date of this report and, unless required by law, we undertake no obligation to update any forward-looking statements.

The following discussion of our financial condition and results of operations should be read in conjunction with our accompanying audited financial statements and related notes to those statements included elsewhere in this Annual Report on Form 10-K.

Our fiscal year ends on June 30. When we refer to a fiscal year, we are referring to the year in which the fiscal year ends. Therefore, fiscal ~~2017~~2021 refers to the fiscal year ended June 30, ~~2017.~~2021.

The Company devotes most of its efforts and resources on ~~its~~drug development, regulatory matters, and clinical trials. ~~These trials~~Presently, our efforts are primarily focused on evaluating our drug ~~candidates: Prurisol~~candidate Brilacidin; as a therapeutic for coronaviruses, particularly SARS-CoV-2, the novel coronavirus responsible for COVID-19; for decreasing the incidence of severe oral mucositis as a complication of chemoradiation; for treatment of IBD; and for treatment of skin infections. Our other drug candidate, Kevetrin, is for the treatment of psoriasis, Kevetrin for the treatment of cancer, and Brilacidin for treatments of skin infections, prevention of oral mucositis complicating chemoradiation treatment for cancer, and ulcerative proctitis.cancer. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process, which include: (i) design and oversight of clinical trials; (ii) development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) interactions with regulatory authorities domestically and internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required for a promising compound to be identified and brought into clinical trials.

In the ordinary course of business, we engage in a continual review of opportunities to license our ~~research~~drug compounds and enter into partnering, joint development ~~efforts on Prurisol, Kevetrin,~~or similar arrangements with other companies. We currently, and ~~Brilacidin during fiscal 2017~~generally at any time, have such opportunities in various stages of active review, including, for example, entry into indications of interest and ~~through the date of this Annual Report on Form 10-K:~~term sheets and participation in preliminary discussions and negotiations. Any such transaction could be material to us.

~~Prurisol~~As a result of the advent of the COVID-19 pandemic, we were approached by several organizations, including two academic institutions having Biosafety Level 3 Laboratories (BSL-3), interested in evaluating Brilacidin as an experimental new drug for COVID-19 and its underlying coronavirus (SARS-CoV-2). Early research indicated that Brilacidin was a promising therapeutic candidate and subsequent extensive pre-clinical research in multiple human cell lines have lent further evidence and support for continued research into Brilacidin’s antiviral properties. Brilacidin has shown consistent in vitro inhibition in a cell-type independent manner in different strains of coronaviruses, alphaviruses and bunyaviruses. In light of the ongoing pandemic and drug development environment, we have prioritized development of Brilacidin for COVID-19, including the conduct of a Phase 2 randomized, blinded, placebo-controlled clinical trial of Brilacidin in patients hospitalized with moderate-to-severe COVID-19. The trial has fully enrolled, with the Company preparing for study unblinding, statistical analysis and reporting of data.

~~The Company has commenced a randomized, double-blind, parallel-group, placebo-controlled Phase 2b trial of Prurisol for subjects with moderate to severe plaque psoriasis. The treatment group arms~~Brilacidin formulation development work is in progress: For treating ulcerative colitis, we are ~~Prurisol 300mg, Placebo, Prurisol 400mg (Ratio 3:3:1) with a treatment duration of 12 weeks.~~

We have currently completed enrollment of all subjects (up to 199). Subject recruitment was slower than projected due to competitive trials. In response, we added additional investigator sites. We expect to complete the trial by calendar year end 2017. Expenditures on Prurisol were approximately $4.6 million during the year ended June 30, 2017. We expect expenditures on Prurisol to increaseengaged in future reporting periods, as we complete the study. We have entered into multiple non-disclosure agreements with large pharmaceutical companies that enable us to continue ongoing discussions regarding potential partnering should the trial results support such a relationship.

The company has commenced a Phase 2a trial of Kevetrin in treating late-stage ovarian cancer. The main objective of the trial focuses on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. Presently and concurrent with the Phase 2a trial is the development of an oral formulation ~~of Kevetrin for~~(i.e. capsule or tablet). For treating cancer. Pharmacokinetic data collected on Kevetrin during the initial Phase 1 clinical trial demonstrates that the compound has a short half-life of approximately two hours. Kevetrin’s short half-life makes it a compelling candidate fororal mucositis we are engaged in optimizing an oral drug delivery treatment for the main purpose of allowing simple daily, or multiple-times daily, administrations within or outside the hospital setting. Compared to injectable or intravenous treatments, oral therapy is the preferred drug delivery method of patients. Preliminary laboratory studies are encouraging and support the potential of developing an oralrinse formulation but there are no assurances made or implied that the Company will be successful in completing development of an oral formulation. Toxicology studies for the oral formulation of Kevetrin began January 2017.

~~Company expenditures on Kevetrin were approximately $1.0 million during the year ended June 30, 2017.~~

~~One trial of Brilacidin is ongoing, a double-blind Phase 2 clinical trial of Brilacidin-OM~~ for the treatment of severe oral mucositis (OM), and another was recently completed: an open-label Phase 2 Proof-of-Concept (PoC) trial of Brilacidin for the treatment of ulcerative proctitis /proctosigmoiditis (UP/UPS), two types of Inflammatory Bowel Diseases (IBD).mucositis.

	·	~~Oral Mucositis (OM)~~ ~~study-~~ In the ongoing randomized, double-blind Phase 2 study of Brilacidin for the prevention and control of Oral Mucositis (OM) in patients receiving chemoradiation for treatment of head and neck cancer, interim analysis of patients who received at least 55 Gy cumulative units of radiation ~~showed that Brilacidin markedly reduced the rate of Severe OM (WHO~~~~Grade~~ ≥ ~~3): Active Arm (Brilacidin): 2 of 9 patients (22.2 percent); Control Arm (Placebo): 7 of 10 patients (70 percent).~~ ~~Completion of the trial is expected by late 2017.~~

	·	UP/UPS study- This recently completed Phase 2a trial comprises three sequential cohorts , with progressive dose escalation by cohort—Cohort A (6 patients) -50 mg, Cohort B (6 patients) -100 mg, and Cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The Primary Efficacy Endpoint of Clinical Remission (accounting for Stool Frequency, Rectal Bleeding and Endoscopy Findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient Quality of Life (as assessed by the Short Inflammatory Bowel Disease Questionnaire, SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. Further analyses of data are ongoing.

	·	We see significant opportunities in treating IBD with Brilacidin. Our development programs depending on available financial resources include new formulations (oral and foam type) with potential associated toxicology studies and clinical studies to be defined.

These data suggest that other inflammatory conditions may, likewise, be treated locally and efficaciously with Brilacidin without significant systemic absorption, better ensuring a safe and well-tolerated therapeutic profile. Given Brilacidin’s low level of systemic exposure, moderate-to-high dosing of the drug by topical application to the skin might also be supported in treating various dermatology disorders and conditions.

In February 2016, the Company submitted a Special Protocol Assessment (SPA) request, along with a final protocol, to the FDA, for a Phase 3 clinical trial of Brilacidin for the treatment of Acute Bacterial Skin and Skin Structure Infection (ABSSSI) caused by Gram-positive bacteria, including methicillin-resistant Staphylococcus aureus (MRSA). We received from the FDA comments and considerations for incorporation into our study design. Management has decided to delay its response to FDA due to the low price per share of our common stock and the approximately $30 million costs required for this study which would result in significant dilution to our shareholders. Our strategy for now is to achieve success with other trials and attract partnering opportunities with significant down-payments and milestone payments which can fund these trials.

~~Company expenditures on Brilacidin were approximately $2.3 million during the year ended June 30, 2017.~~

Management’s discussion and analysis of financial condition and results of operations are based upon our accompanying financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, and which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Note ~~3 to the financial statements,~~3. Significant Accounting Policies and Recent Accounting Pronouncements, into the ~~accompanying Notes to~~ financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, describes the significant accounting policies and methods used in the preparation of the Company’s financial statements. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. Our actual results could differ significantly from these estimates under different assumptions or conditions.

Substantial portions of our preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors, or collectively “CROs”. These CROs generally bill monthly or quarterly for services performed, or bill based upon milestone achievement. For preclinical studies, we accrue expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. We monitor patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to us by the CROs, correspondence with the CROs and clinical site visits. Our estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. We periodically evaluate the estimates to determine if adjustments are necessary or appropriate based on information we receive.

The Company accounts for all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to measure the cost of employee services received in exchange for stock options and similar awards based on the grant-date fair value of the award and recognize this cost in the income statement over the period during which an employee is required to provide service in exchange for the award. The Company uses the Black-Scholes valuation model and has elected to use the ratable method to amortize compensation expense over the vesting period of the grant. The Company accounts for equity instruments issued to nonemployees by valuing them using the Black-Scholes valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest.

Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company has generated net losses since inception and accordingly has not recorded a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset the deferred tax assets. Additionally, the future utilization of the NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

The Company adopted the provisions of FASB Accounting Standards Codification (“ASC”) “Uncertainty in Income Taxes” (ASC 740-10), on January 1, 2007. The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

See Note ~~3 to the financial statements,~~3. Significant Accounting Policies and Recent Accounting Pronouncements into the ~~accompanying notes to~~consolidated financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K, for a discussion of recent accounting pronouncements and their effect, if any, on our financial statements.

We expect to incur losses from operations for the next few years. We expect to incur increasing research and development expenses, including expenses related to additional clinical trials for our proprietary programs. We ~~expect~~currently anticipate that ~~our general and administrative expenses~~future budget expenditures will also increase in the future as we expand our business development, by adding employees, consultants, additional infrastructure and incurring other additional costs. Management have put in place an equity purchase agreement with Aspire Capital to fund our clinical trials and overhead expenses over the next 12 months. Based upon our expected rate of expenditures overbe approximately $10.2 million for the next 12 months, ~~we expect~~including approximately $8.2 million for clinical activities, supportive research, and drug product. However, continuing operations for the next 12 months from the date of this filing is very much dependent upon our ability to ~~have sufficient cash reserves~~raise equity from existing or new financing sources. There can be no assurance as to the availability or terms upon which such financing and ~~financing available to us to meet all of our anticipated obligations for our current operations through our fiscal year end of June 30, 2018.~~capital might be available.

We generated no revenue of $0 and $0.4 million for the fiscal years ended June 30, 2021 and 2020, respectively. Revenue during the fiscal years ended June 30, 2020 represented the initial non-refundable payment from the exclusive license agreement signed with Alfasigma (see Note 7. Exclusive License Agreement of the Notes to Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K).

We incurred operating expenses of approximately ~~$15.3 million, $12.7~~$9.0 million and ~~$13.0~~$5.1 million for the fiscal years ended June 30, ~~2017, 2016~~2021 and ~~2015,~~2020, respectively.

Below is a summary of our research and development expenses for our proprietary programs by categories of costs for the fiscal years presented (rounded to nearest thousand):

	For the Years Ended																		Year ended				Change
	June 30,						Change						Change						June 30,				2021 Vs. 2020
	2017		2016		2015		2017 vs. 2016						2016 vs. 2015						2021		2020		$			%
	$		$		$		$			%			$			%
Clinical studies and development research		8,501,000		6,671,000		7,897,000		1,830,000			27	%		(1,226,000	)		(16	)%	$	6,056,000	$	1,616,000		4,440,000			275	%
Officers’ payroll and payroll tax expenses related to R&D department		1,087,000		433,000		876,000		654,000			151	%		(443,000	)		(51	)%		—		232,000		(232,000	)		(100	)%
Employees payroll and payroll tax expenses related to R&D department		1,428,000		1,208,000		969,000		220,000			18	%		239,000			25	%		398,000		382,000		16,000			4	%
Stock-based compensation - officers		1,147,000		33,000		230,000		1,114,000			3,376	%		(197,000	)		(86	)%
Stock-based compensation - employee		139,000		-		103,000		139,000			-	%		(103,000	)		(100	)%
Stock-based compensation - consultants		75,000		188,000		55,000		(113,000	)		(60	)%		133,000			242	%
Stock-based compensation – officer																				—		47,000		(47,000	)		(100	)%
Stock-based compensation – employee																				59,000		104,000		(45,000	)		(43	)%
Stock-based compensation – consultants																				125,000		38,000		87,000			229	%
Depreciation and amortization expenses		406,000		419,000		401,000		(13,000	)		(3	)%		18,000			4	%		378,000		373,000		5,000			1	%
Total		12,783,000		8,952,000		10,531,000		3,831,000			43	%		(1,579,000	)		(15	)%	$	7,016,000	$	2,792,000		4,224,000			151	%

Fiscal ~~201~~72021 compared to Fiscal ~~201~~6 -2020 – Research and development expenses for ~~clinical studies and development research~~proprietary programs increased during the year ended June 30, ~~2017~~2021 compared with the year ended June 30, 2020, primarily due to more spending on our ~~Kevetrin program and Prurisol~~Brilacidin program for the fiscal year ~~2017.~~

Officers’ payroll decreased during the year ended June 30, 2021 because the Company’s President and Chief Medical Officer resigned on December 19, 2019.

Employees payroll and payroll tax expenses ~~related to R&D department~~ increased during the year ended June 30, ~~2017 primarily related~~2021 compared with the year ended June 30, 2020, due to more employees engaged in preclinical development after June 30, 2020, which led to the ~~hiring of our new President and Chief Medical Officer who joined us on June 27, 2016.~~

~~Employees’~~increase in employees’ payroll ~~and payroll tax expenses related to R&D department increased primarily related to the hiring of executives, including our current Senior VP of Clinical Sciences and Portfolio Management.~~

~~Stock-based compensation – officers increased~~ during the year ended June 30, ~~2017 primarily related to the stock-based compensation granted to our new President and Chief Medical Officer, who joined us on June 27, 2016.~~2021.

Stock-based ~~compensation-~~compensation for employee increased for the year ended June 30, 2017 primarily related to the stock-based compensation given to our new VP Regulatory Affairs and our new Associate Director, whom both joined us in September 2016 and February 2017, respectively.

~~Stock-based compensation-consultants decreased for the year ended June 30, 2017 due to the decrease in stock awards granted this year.~~

~~Depreciation and amortization expenses decreased for the year ended June 30, 2017 due to less amortization expenses on patent costs that were written off last fiscal year 2016.~~

~~Fiscal 2016 compared to Fiscal 2015 -~~~~Research and development expenses for proprietary programs~~ decreased during the year ended June 30, ~~2016 primarily~~2021 due to ~~lower spending on our ABSSSI program, which~~equity-based awards issued to an employee in 2016 and in 2017 being fully expensed during the ~~trial~~year ended June 30, 2020, therefore, less stock-based compensation – employee was ~~completed in early 2015.~~ incurred during the year ended June 30, 2021.

Stock-based compensation - consultants increased during the year ended June 30, ~~2016 primarily related~~2021 due to ~~the increase in stock-based compensation~~more options being issued to consultants ~~to incentivize them with stock awards rather than monetary compensation.~~

~~The Officers’ payroll and payroll tax expenses related to R&D department decreased~~ during the year ended June 30, 2016 primarily related to the decrease in payroll paid to our Chief Operations Officer of approximately $211,000, who joined in 2014 and resigned on August 8, 2015 and a decrease in the year-end bonus of $225,000 paid to our executive officers in 2015.

~~The Employees payroll and payroll tax expenses increased primarily related to the increases in the number of employees in our research and development department.~~

~~The Stock-based compensation – officers decreased during~~2021 compared with the year ended June 30, ~~2016 primarily related to the decrease in stock-based compensation to our Chief Operations Officer and other executive officers in 2016.~~

~~The Stock-based compensation - Employee decreased during the year ended June 30, 2016 primarily related to the decrease in the year-end bonus paid to employees.~~2020.

Our research and development expenses include costs related to preclinical and clinical trials, outsourced services and consulting, officers’ payroll and related payroll tax expenses, other wages and related payroll tax expenses, stock-based compensation, depreciation and amortization expenses. Clinical studies and development expenses may increase in future reporting periods depending on the Company’s current and future financial liquidity. We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects whenever possible; however, many activities occurring simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on an individual program basis.

~~See Note 3 of the notes to our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information about our research and development expenses.~~

General and administrative expenses consist mainly of compensation and associated fringe benefits not included in the cost of research and development expenses for proprietary programs and include other management, business development, accounting, information technology and administration costs, including patent filing and prosecution, recruiting, consulting and professional services, travel and meals, sales commissions, facilities, depreciation and other office expenses.

Below is a summary of our general and administrative expenses (rounded to nearest thousand):

	For the Years Ended																		Year ended				Change
	June 30,						Change						Change						June 30,				2021 Vs. 2020
	2017		2016		2015		2017 vs. 2016						2016 vs. 2015						2021		2020		$			%
							$			%			$			%
Insurance and health expense	$	509,000	$	499,000	$	249,000		10,000			2	%		250,000			100	%	$	405,000	$	473,000		(68,000	)		(14	)%
Patent expenses		4,000		37,000		102,000		(33,000	)		(89	)%		(65,000	)		(64	)%
Impairment loss - patents		-		648,000		-		(648,000	)		(100	)%		648,000			-	%
Directors fee																				150,000		50,000		100,000			200	%
Rent and utility expense		272,000		262,000		273,000		10,000			4	%		(11,000	)		(4	)%		100,000		133,000		(33,000	)		(25	)%
Stock-based compensation – officer & directors																				—		237,000		(237,000	)		(100	)%
Business development expense																				141,000		377,000		(236,000	)		(63	)%
Other G&A		530,000		500,000		553,000		30,000			6	%		(53,000	)		(10	)%		167,000		159,000		8,000			5	%
Total	$	1,315,000	$	1,946,000	$	1,177,000		(631,000	)		(32	)%		769,000			65	%	$	963,000	$	1,429,000		(466,000	)		(33	)%

Fiscal ~~201~~72021 compared to Fiscal ~~201~~62020 -General and administrative expenses decreased induring the fiscal ~~2017~~2021, primarily ~~related~~due to the decrease in ~~impairment loss~~stock-based compensation - officers of $237,000 (see Note 13. Equity Transactions of the Notes to Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on ~~the patent costs~~Form 10-K) and decrease in business development expense of ~~Delparantag~~$236,000 due to less business development consultants’ fees and ~~various other patents.~~business events during fiscal 2021.

~~Fiscal 2016 compared to Fiscal 2015 -~~ General and administrative expenses increased in fiscal 2016 primarily related to increase in impairment loss on the patent costs of Delparantag and various other patents, D&O insurance and employee health insurance expenses and travel expenses for meetings for our clinical trials and to the FDA, to further develop our compounds.

Below is a summary of our Officers’ payroll and payroll tax expenses (rounded to nearest thousand):

Fiscal ~~201~~72021 compared to Fiscal ~~201~~62020 - There was ana slight increase ~~of $1,000~~ in ~~Officers’~~officers’ payroll and payroll tax expenses for the Company during the ~~years ended June 30, 2017 and 2016. There was no change with Officers’ payroll. The officers’~~fiscal 2021, due to the increase in payroll and payroll tax expenses represented one officer’s annual payroll and payroll tax expenses and 10% of payroll and payroll tax expenses paid to Dr. Menon. The Company recorded 90% of annual payroll paid to Dr. Menon and the related payroll tax expenses under Research and Development Expense.taxes.

~~Fiscal 2016 compared to Fiscal 2015 -~~ Officers’ payroll and payroll tax expenses decreased during fiscal 2016 primarily related to a decrease in bonus paid. The officers’ payroll and payroll tax expenses represented one officer’s annual payroll and payroll tax expenses and 10% of payroll and the related payroll tax expenses paid. The Company recorded 90% of annual payroll paid to Mr. Menon and the related payroll tax expenses under Research and Development Expense.

Fiscal ~~201~~72021 compared to Fiscal ~~201~~62020 - ~~Professional fees decreased during fiscal 2017 primarily related to decrease in stock-based compensation paid to a law firm for services.~~

~~Fiscal 2016 compared to Fiscal 2015 -~~ Professional fees increased during the fiscal ~~2016~~2021 primarily related to ~~increase~~the increases in legal fees and ~~the one million stock options issued to a law firm for services, valued at approximately $432,000 on November 5, 2015.~~other professional fees in 2021.

Fiscal ~~201~~72021 compared to Fiscal ~~201~~6 - ~~Other expense, net increased during fiscal 2017 primarily related to the decrease in interest income of $2,000.~~ 2020

There was ~~no change~~a decrease in interest expenses paid toon the note payable -– related party, because of the decrease in the note payable balance due to the Company’s Chairman and CEO. He exercised his options to purchase 3.1 million shares of Class B common stock by the cancellation of debt during the year ended June 30, 2021 compared to the year ended June 30, 2020 (see Note 1011. Convertible Note Payable – Related Party of the Notes to Consolidated Financial Statements included in ~~the accompanying notes to the financial statements)~~Part II, Item 8 in this Annual Report on Form 10-K).

~~Fiscal 2016~~There was an increase in interest expense – preferred stock liability during the year ended June 30, 2021 compared ~~to Fiscal 2015 -~~ ~~Other expense, net increased slightly during fiscal 2016 primarily~~with the year ended June 30, 2020 related to the ~~decrease~~new issuances of Series B-2 preferred stock in ~~sundry income~~January and February, 2021. The interest expense – preferred stock liability of ~~$9,000. There was no change in interest expenses~~2021 consists mainly of beneficial conversion feature and warrant discounts of $4,663,000 and issuance costs paid ~~to the note payable - related party (see Note 10 in the accompanying notes to the financial statements).~~of $25,000 and accrued dividend of $15,000.

There was a decrease in change in fair value related to the Series B preferred stock during the year ended June 30, 2021 compared with the year ended June 30, 2020, due to the valuation of the warrants to purchase Preferred stock performed in 2020.

There was a decrease in warrants modification expense of approximately $1,212,000 during the year ended June 30, 2021 compared with the year ended June 30, 2020, due to modification expense in connection with the extension of the termination date for each warrant in 2020. The Company did not have this expense in the year ended June 30, 2021.

There was a decrease in impairment expense of operating lease of approximately $643,000, related to the operating lease right-of-use asset associated with the office space vacated by the Company in December 2019.

We incurred net losses of ~~$15.5 million, $12.9~~$13.9 million and ~~$13.1~~$6.6 million for the years ended June 30, ~~2017, 2016~~2021 and ~~2015,~~2020, respectively, because of the ~~above mentioned~~above-mentioned factors.

As of June 30, ~~2017,~~2021, we had approximately ~~$4.1~~$10.2 million in cash compared to ~~$6.3~~$6.0 million of cash as of June 30, ~~2016.~~2020, and as of the date of this filing, we have approximately $11.3 million in cash. We currently anticipate that future budget expenditures will be approximately ~~$15.9~~$10.2 million for the ~~fiscal year ending June 30, 2018,~~next 12 months, including approximately ~~$10.9~~$8.2 million for clinical activities, supportive research, and drug product.

Alternatively, if we decide to pursue a more aggressive plan with our clinical trials, we will require additional sources of ~~equity~~ capital during the fiscal year ~~2018,~~2022 to meet our working capital requirements for our planned clinical trials. Potential sources for capital include grant funding for COVID-19 research and equity financings (see below). There can be no assurances that we will be successful in receiving any grant funding for our programs.

This assessment is based on current estimates and assumptions regarding our clinical development programs and business needs. Actual working capital requirements could differ materially from this above working capital projection.

On ~~September 6, 2017,~~July 31, 2020, the Company entered into a new common stock purchase agreement (the “2020 Agreement”) with Aspire Capital which ~~replaces the prior $30 million Aspire Capital stock purchase agreement and~~ provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the ~~36-month~~24-month term of the ~~Purchase~~2020 Agreement. ~~The Company also issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee.~~

Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading “Risk Factors” in Part I, Item 1A and elsewhere in this Annual Report on Form 10-K.

If we are unable to generate enough working capital from our current or future financing agreements with Aspire Capital when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including more costly Phase 2 and Phase 3 clinical trials on our wholly-owned development programs as these programs progress into later stage development. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us and our stockholders than we would otherwise choose in order to obtain up-front license fees needed to fund operations. These events could prevent us from successfully executing our operating plan.

The Company has an effective shelf registration statement on Form S-3, registering the sale of up to $60 million of the Company’s securities. However, in the future, the Company may not satisfy the conditions for use of Form S-3 for primary offerings of securities, in which case the Company may utilize Form S-1 to register the sale of its securities, although Form S-1 offers less flexibility on the timing and types of offerings compared to Form S-3.

The following table provides information regarding our cash position, cash flows and capital expenditures for the years ended June 30, 2021 and 2020 (rounded to nearest thousand):

The increase in net cash used in operating activities of $5.3 million versus the prior-year was mainly due to the increase in our loss from operations of $7.2 million, largely attributable to an increase in spending for clinical research and development expenses of $4.4 million. This also included the repayment of accrued officers’ salaries of $1.2 million.

The use of cash principally resulted from our losses from operations, mentioned above, as adjusted for non-cash charges for stock-based compensation of $0.2 million, patent amortization of $0.4 million, interest expense on preferred stock of $4.6 million, and changes in our working capital accounts.

The decrease in net cash used in investing activities versus the prior-year was due to decrease in spending in patent costs.

In 2021, we raised approximately $14.6 million in net cash proceeds, from exercise of warrants to purchase preferred stock and the issuance of common stock, offset by purchase of treasury stock of $0.7 million and repayment of note payable to officer of $0.2 million.

In 2020, we raised approximately $9.7 million in net cash proceeds, from exercise of warrants to purchase preferred stock and the issuance of common stock, offset by purchase of treasury stock of $0.06 million.

The Company, contingent on future sales of its securities, currently expects to incur total operating expenses of approximately $10.2 million for the next 12 months, including approximately $8.2 million for clinical activities, supportive research, and drug product development. The Company has limited experience with pharmaceutical drug development. As such, this budget estimate may change in the future. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or a change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget and on our projected timeline of drug development.

In the event that we are unable to generate sufficient cash from our 2020 Agreement with Aspire Capital or raise additional funds from others, we may be required to delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could have a material adverse effect on our future business, operating results, financial condition and long-term prospects. The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships) and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available to us.

Please see Note 9. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K, for a discussion of recent contractual commitments and contingent liability - disputed invoices.

From July 31, 2020 (date of agreement) to September 14, 2020, the Company has generated additional proceeds of approximately $1.8 million under the 2020 Agreement with Aspire Capital from the sale of approximately 8.5 million shares of its common stock. Since September 14, 2020, we have not obtained financing through Aspire Capital.

During the year ended June 30, 2021, the Company issued 3,053 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of $3.0 million, upon exercise of 3,053 Series 1 warrants issued by the Company. In addition, the Company issued 2,053 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of $2.0 million, upon exercise of 2,053 Series 2 warrants issued by the Company.

From July 1, 2021 to the date of the issuance of the accompanying financial statements, the Company issued 2,036 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of $2.0 million, upon exercise of 2,036 Series 1 warrants issued by the Company. In addition, the Company issued 1,000 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of $1.0 million, upon exercise of 1,000 Series 2 warrants issued by the Company. At the same time, there were 3,036 preferred stock shares converted to approximately 18.9 million shares of common stock.

The Company does not have any off-balance sheet arrangements, as defined in ~~other reports we filed~~Item 304(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

We have audited the accompanying consolidated balance sheets of Innovation Pharmaceuticals, Inc. (the Company) as of June 30, 2021 and 2020, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended, 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 June 30, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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 ~~SEC.~~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 audits to obtain reasonable assurance about whether the consolidated 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 audit, 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

The critical audit matter communicated below is a matter arising from the audits of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

As described in Note 13 and 14 to the consolidated financial statements, the Company recorded stock-based compensation related to the issuance of common stock, stock options and warrants. Management establishes their estimates for the value of the stock-based compensation related to common stock issued for services using historical stock price information. Management uses a valuation model requiring various inputs to establish their estimates for the value of stock options and warrants.

The principal considerations for our determination that performing procedures relating to stock-based compensation is a critical audit matter are due to the material impact it has on the consolidated financial statements.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating the reasonableness of the historical stock price information used by management for the valuation of the common stock along with evaluating the reasonableness of the input’s management used in the valuation model related to the stock options and warrants to determine the stock-based compensation expense.

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

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

Innovation Pharmaceuticals Inc. was incorporated on August 1, 2005 in the State of Nevada. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. On February 15, 2019, the Company formed IPIX Pharma Limited (“IPIX Pharma”), a wholly-owned subsidiary incorporated under the Companies Act 2014 of Ireland. IPIX Pharma is a Private Company Limited by Shares. The subsidiary is intended to serve as a key hub for strategic collaboration with European companies and medical communities in addition to providing cost-saving efficiencies and flexibility with respect to developing Brilacidin under European Medicines Agency standards.

The Company is a clinical stage biopharmaceutical company. The Company’s common stock is quoted on OTCQB, symbol “IPIX.”

These consolidated financial statements include the accounts of Innovation Pharmaceuticals Inc., a Nevada corporation, and our wholly-owned subsidiary, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. There was no translation gain and loss for the year ended June 30, 2021 and 2020.

We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of inflammatory diseases, cancer, dermatology and anti-infectives. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Brilacidin and Kevetrin, and advancing them as quickly as possible along the regulatory pathway. We aim to develop the highest quality data and broadest intellectual property to support our compounds.

In December 2020, the U.S. Food and Drug Administrations (FDA) approved the Company’s Investigational New Drug (IND) application to proceed with initiation of a randomized, placebo-controlled Phase 2 clinical trial of Brilacidin in moderate-to-severe hospitalized patients with COVID-19. Similar regulatory approval was obtained from the Russian Ministry of Health. The clinical trial is in progress.

We currently own all development and marketing rights to our products, other than the license rights granted to Alfasigma S.p.A. in July 2019 for the development, manufacturing and commercialization of locally-administered Brilacidin for ulcerative proctitis/ulcerative proctosigmoiditis (“UP/UPS”). In order to successfully develop and market our products, we may have to partner with additional companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.

As of June 30, 2021, the Company’s cash amounted to $10.2 million and current liabilities amounted to $6.5 million. The Company has expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. Our net losses incurred for the years ended June 30, 2021 and 2020, amounted to $13.9 million and $6.6 million, respectively, and we had working capital of approximately $4.2 million at June 30, 2021 and a working capital deficit of approximately $(1.3) million at June 30, 2020.

On July 31, 2020, the Company entered into a new common stock purchase agreement (the “2020 Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 24-month term of the 2020 Agreement. In consideration for entering into the 2020 Agreement, the Company issued to Aspire Capital 6,250,000 shares of its Class A Common Stock as a commitment fee. The commitment fee of approximately $1.4 million was recorded as deferred financing costs and additional paid-in capital and this asset will be amortized over the life of the 2020 Agreement. As of June 30, 2021, the available balance was $25.4 million.

We anticipate that future budget expenditures will be approximately $10.2 million for the next 12 months, including approximately $8.2 million for clinical activities, supportive research, and drug product. Alternatively, if we decide to pursue a more aggressive plan with our clinical trials, we will require additional sources of capital during the fiscal year 2022 to meet our working capital requirements for our planned clinical trials. Potential sources for capital include grant funding for COVID-19 research and equity financings. There can be no assurances that we will be successful in receiving any grant funding for our programs.

Management believes that the amounts available from Aspire Capital and under the Company’s effective shelf registration statement will be sufficient to fund the Company’s operations for the next 12 months.

~~$75 Million Shelf Registration Statement~~3. Significant Accounting Policies and Recent Accounting Pronouncements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include contract research accruals, recoverability of long-lived assets, valuation of equity grants and income tax valuation. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Basic and diluted loss per share is computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, restricted stock, warrants and convertible related party notes payable. Common share equivalents were excluded from the computation of diluted earnings per share for the years ended June 30, 2021 and 2020, because their effect was anti-dilutive.

Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:

The Company accounts for treasury stock using the cost method. There were 8,516,056 shares of Class A common stock and 2,358,537 shares of Class B common stock held in treasury, purchased at a total cumulative cost of approximately $2.3 million as of June 30, 2021. There were 659,448 shares of Class A common stock held in treasury, purchased at a total cumulative cost of $146,000 as of June 30, 2020 (see Note 14. Equity Transactions).

Treasury stock, representing shares of the Company’s common stock that have been acquired for payroll tax withholding on vested stock grants, is recorded at its acquisition cost and these shares are not considered outstanding.

On July 1, 2019, the Company adopted the new accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers, and all the related amendments using the modified retrospective method applied to those contracts which were not completed as of July 1, 2019. The adoption of ASC 606 did not have an impact on the Company’s consolidated financial statements or cash flows, for the Company had no revenue and no contracts which were not completed as of July 1, 2019.

The Company has acquired and further developed license rights to Functional Intellectual Property (“functional IP”) that it licenses to customers for defined license periods. A functional IP license is a license to intellectual property that has significant standalone functionality that does not include supporting or maintaining the intellectual property during the license period. The Company’s patented drug formulas have significant standalone functionality in their abilities to treat a disease or condition. Further, there is no expectation that the Company will undertake any activities to change the functionality of the drug formulas during the license periods (see Note 7. Exclusive License Agreement to the consolidated financial statements).

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

Pursuant to ASC 606, a customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.

To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps:

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. If a promised good or service is not distinct, it is combined with other performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

License of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. If not distinct, the license is combined with other performance obligations in the contract. For licenses that are combined with other performance obligations, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone Payments: At the inception of each arrangement that includes developmental and regulatory milestone payments, the Company evaluates whether the achievement of each milestone specifically relates to the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service within a performance obligation. If the achievement of a milestone is considered a direct result of the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service and the receipt of the payment is based upon the achievement of the milestone, the associated milestone value is allocated to that distinct good or service. If the milestone payment is not specifically related to the Company’s effort to satisfy a performance obligation or transfer a distinct good or service, the amount is allocated to all performance obligations using the relative standalone selling price method. The Company also evaluates the milestone to determine whether they are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price to be allocated, otherwise, such amounts are constrained and excluded from the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the transaction price. Any such adjustments to the transaction price are allocated to the performance obligations on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied) in accordance with the royalty recognition constraint.

The stock-based compensation expense incurred by the Company for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. tax regulations.”

On July 1, 2019, the Company adopted ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Beginning with the adoption of ASU 2018-07 options granted to our consultants are accounted for in the same manner as options issued to employees.

Awards with service-based vesting conditions only – Expense recognized on a straight-line basis over the requisite service period of the award.

Awards with performance-based vesting conditions – Expense is not recognized until it is determined that it is probable the performance-based conditions will be met. When achievement of a performance-based condition is probable, a catch-up of expense will be recorded as if the award had been vesting on a straight-line basis from the award date. The award will continue to be expensed on a straight-line basis over the requisite service period basis until a higher performance-based condition is met, if applicable.

Awards with market-based vesting conditions – Expense recognized on a straight-line basis over the requisite service period, which is the lesser of the derived service period or the explicit service period if one is present. However, if the market condition is satisfied prior to the end of the requisite service period, the Company will accelerate all remaining expense to be recognized.

Awards with both performance-based and market-based vesting conditions – if an award vesting or exercisability is conditional upon the achievement of either a market condition or performance or service conditions, the requisite service period is generally the shortest of the explicit, implicit, and derived service period.

We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line method.

The patents are amortized on a straight-line basis over the useful lives of the assets, determined to be 12-17 years from the date of acquisition.

Amortization expense for the years ended June 30, 2021 and 2020 was approximately $378,000 and $372,000, respectively.

At June 30, 2021, the future amortization period for all patents was approximately 4.18 years to 16.75 years. Future estimated amortization expenses are approximately $379,000 for each year from 2022 to 2026, and a total of $859,000 for the year ending June 30, 2027 and thereafter.

Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):

On July 18, 2019, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Alfasigma S.p.A., a global pharmaceutical company (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for the treatment of UP/UPS.

Under the terms of the License Agreement, Alfasigma made an initial upfront non-refundable payment of $0.4 million to the Company in July, 2019 and will make additional payments of up to $24.0 million to the Company based upon the achievement of certain milestones, including a $1.0 million payment due following commencement of the first Phase 3 clinical trial of Brilacidin for UP/UPS and an additional $1.0 million payment upon the filing of a marketing approval application with the U.S. Food and Drug Administration or the European Medicines Agency. At this time, Alfasigma has completed a Phase 1 clinical trial with Brilacidin. In addition to the milestones, Alfasigma will pay a royalty to the Company equal to six percent of net sales of Brilacidin for UP/UPS, subject to adjustment as provided in the License Agreement.

The Company generated revenue of $0 million and $0.4 million for the years ended June 30, 2021 and 2020, respectively. Revenue during the years ended June 30, 2020 represented the initial non-refundable payment of $0.4 million received from Alfasigma.

Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives. Our variable lease payments primarily consist of maintenance and other operating expenses from our real estate leases. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components. We have elected to account for these lease and non-lease components as a single lease component. We are also electing not to apply the recognition requirements to short-term leases of twelve months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term.

The Company determined that the operating lease right-of-use asset was fully impaired on December 31, 2019. As such, the Company recognized an impairment loss of approximately $643,000, after recording amortization of the right-of-use asset for July, August, and September 2019 totaling approximately $27,000, resulting in a carrying value of $0 since December 31, 2019. The Company vacated the leased office space in December 2019, and in January 2020 the Company initiated a lawsuit against the lessor relating to an automatic extension of the lease for the office space and related matters (See Note 9. Commitments and Contingencies).

The components of lease expense and supplemental cash flow information related to leases for the year are as follows:

The supplemental balance sheet information related to leases for the year is as follows:

The following table provides maturities of the Company’s lease liabilities at June 30, 2021 as follows:

Operating lease cost for the years ended June 30, 2021 was approximately $86,000. Operating lease cost for the years ended June 30, 2020 was approximately $117,000.

On January 22, 2020, the Company filed a complaint against Cummings Properties, LLC in the Superior Court of the Commonwealth of Massachusetts (C.A. No. 20-77CV00101), seeking, among other things, declaratory relief that the lease for the Company’s prior principal executive offices did not automatically extend for an additional five years from September 2018, return of the Company’s security deposit, and damages. The Company is currently unable to determine the probability of the outcome or reasonably estimate the loss or gain, if any.

The Company has total non-cancellable contractual minimum commitments of approximately $4.8 million to contract research organizations as of June 30, 2021. Expenses are recognized when services are performed by the contract research organizations.

As described in Note 6. Accrued Salaries and Payroll Taxes, the Company accrued payroll to Dr. Krishna Menon, ex-President of Research of approximately $1,443,000 for his past services with the Company, and this amount was included in accrued salaries and payroll taxes. As described in Note 10. Related Party Transactions, the Company has a payable to Kard Scientific, Inc. (“KARD”) of approximately $1,486,000 for its research and development expenses and this amount was included in accounts payable. KARD is a company owned by Dr. Menon. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon resigned from the Company’s Board of Directors on December 11, 2018. Dr. Menon, on behalf of himself and KARD, demanded payment of these amounts in October 2019; however, the Company disputes the underlying basis for these amounts and notified Dr. Menon in November 2019 of the Company’s intent not to pay them.

All of the above disputed invoices were reflected as current liabilities as of June 30, 2021.

The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company no longer uses KARD. At June 30, 2021 and 2020, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable. Dr. Menon, on behalf of himself and KARD, demanded payment of these amounts in October 2019; however, the Company disputes the underlying basis for these amounts and notified Dr. Menon in November 2019 of the Company’s intent not to pay them.

On February 23, 2020, the Company issued (i) options for the purchase of 500,000 shares of Class A common stock at an exercise price of $0.10 per share, which is 110% of the previous per share closing price of $0.09 on February 21, 2020, and (ii) 500,000 shares of Class A common stock to each member of the Company’s Board of Directors, consisting of Leo Ehrlich, Barry Schechter and Zorik Spektor.

Other related party transactions are disclosed in Note 11. Convertible Note Payable - Related Party below.

The Ehrlich Promissory Note C is an unsecured demand note with Mr. Ehrlich, the Company’s Chairman and CEO, that originated in 2010, bears 9% simple interest per annum and is convertible into the Company’s Class A common stock at $0.50 per share.

On December 29, 2010, the Company issued 18,000,000 Equity Incentive Options to Mr. Ehrlich, which are exercisable at $0.11 per share. On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan of approximately $2,022,000 and agreed to change the interest rate from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten years from the date of issuance.

On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).

On March 30, 2020, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).

On September 8, 2020, the Company issued 1,787,762 shares of Class B common shares (net of 412,238 shares of Class B common shares withheld to satisfy taxes) at the option exercise price of $0.11 per share to Mr. Ehrlich for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $242,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).

As of June 30, 2021 and 2020, the principal balance of this convertible note payable to Mr. Ehrlich, the Company’s Chairman and CEO was approximately $1,283,000 and $1,822,000, respectively.

As of June 30, 2021 and 2020, the balance of accrued interest payable was $0 and $11,000, respectively (see Note 5. Accrued Expenses – Related Parties and Other).

As of June 30, 2021 and 2020, the total outstanding balances of principal and interest were approximately $1,283,000 and $1,833,000, respectively.

On May 10, 2020 and April 19, 2021, the Company received loan proceeds in the amount of approximately $93,000 and $79,000, respectively, under the Paycheck Protection Program (“PPP”) and it was recorded under loan payable. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.

The Company applied for the forgiveness of the first loan and such application is in process. The Company intends to apply for forgiveness of the second PPP loan during fiscal 2022.

13. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding

On June 30, 2016, the Board of Directors adopted the Company’s 2016 Plan. The 2016 Plan became effective ~~shelf registration statement~~upon adoption by the Board of Directors on ~~Form S-3, registering~~June 30, 2016.

On February 23, 2020, the Board of Directors approved an amendment to Section 4.1 of the 2016 Plan to increase the annual limit on the number of awards under such Plan to outside directors from 250,000 to 1,500,000.

Up to 20,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan).

The fair value of options granted for the years ended June 30, 2021 and 2020 was estimated on the date of grant using the Black-Scholes-Merton Model that uses assumptions noted in the following table.

The components of stock-based compensation expense included in the Company’s Consolidated Statement of Operations for the years ended June 30, 2021 and 2020 are as follows (rounded to nearest thousand):

On June 11, 2021, the Company agreed to issue 105,000 stock options to purchase shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.22 per share and vested immediately. The value of these options was approximately $15,000. During the year ended June 30, 2021, the Company recorded approximately $15,000 of related stock-based compensation. The assumptions we used in the Black Scholes option-pricing model were disclosed above.

On February 10, 2021, the Company agreed to issue 75,000 stock options to purchase shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.38 per share and vest 33 1/3% on February 10, 2021, 33 1/3% on July 1, 2021, and 33 1/3% on January 1, 2022. The value of these options was approximately $20,000. During the year ended June 30, 2021, the Company recorded approximately $13,000 of related stock-based compensation. The assumptions we used in the Black Scholes option-pricing model were disclosed above.

On September 11, 2020, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options with 3 years vesting period were valued at approximately $33,000 and these 58,394 shares of the Company’s common stock were valued at approximately $13,000, based on the closing bid price as quoted on the OTC on September 11, 2020 at $0.22 per share. During the year ended June 30, 2021, the Company recorded approximately $12,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $9,000 of stock option expense and $3,000 of stock awards.

On July 23, 2020, the Company agreed to issue 100,000 stock options to purchase shares of the Company’s common stock to two consultants for their one-year contracts. These options were issued with an exercise price of $0.32 per share and vest 33 1/3% on July 23, 2020, 33 1/3% on January 23, 2021, and 33 1/3% on July 23, 2021. The value of these options was approximately $28,000. During the year ended June 30, 2021, the Company recorded approximately $27,000 of related stock-based compensation. The assumptions we used in the Black Scholes option-pricing model were disclosed above.

On May 18, 2020, the Company agreed to issue 500,000 stock options to purchase shares of the Company’s common stock each to two consultants for their one-year contracts. These options were issued with an exercise price of $0.14 per share and vest 33 1/3% on July 1, 2020, 33 1/3% on January 1, 2021, and 33 1/3% on July 1, 2021. The value of these options was approximately $78,000. During the years ended June 30, 2021 and 2020, the Company recorded approximately $53,000 and $25,000 of related stock-based compensation, respectively. The assumptions we used in the Black Scholes option-pricing model were disclosed above.

On March 20, 2020, the Company agreed to issue 250,000 stock options to purchase shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.086 per share and vested immediately. The value of these options was approximately $12,000. During the year ended June 30, 2020, the Company recorded approximately $12,000 of related stock-based compensation. The assumptions we used in the Black Scholes option-pricing model were disclosed above.

On February 23, 2020, the Company issued 500,000 options each to our Chairman and CEO and two other Board members, with 1,500,000 options in total, which are exercisable for 10 years at $0.10 per share of common stock. These stock options, which were vested immediately, were valued at approximately $102,000 and we recognized approximately $102,000 of stock-based compensation costs and charged to additional paid-in capital as of June 30, 2020. The assumptions we used in the Black Scholes option-pricing model were disclosed above. The Company also issued 500,000 shares of Class A common stock each to our Chairman and CEO and two other Board members, which shares were vested on June 30, 2020 (See Note 14. Equity Transactions).

On September 1, 2019, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options with 3 years vesting period were valued at approximately $20,000, based on the closing bid price as quoted on the OTC on August 30, 2019 at $0.132 per share. During the year ended June 30, 2021, the Company recorded approximately $9,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $7,000 of stock option expense and $2,000 of stock awards. During the year ended June 30, 2020, the Company recorded approximately $7,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $5,000 of stock option expense and $2,000 of stock awards.

On September 1, 2019, the Company issued to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, 1,066,667 shares of common stock. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options were valued at approximately $71,000, based on the closing bid price as quoted on the OTC on August 30, 2019 at $0.132 per share. Due to the fact that Dr. Bertolino resigned on December 19, 2019, the Company recorded the forfeiture of this 2019 options and shares after 60 days of his resignation. During the year ended June 30, 2020, the Company reversed the stock-based compensation expenses of approximately $251,000 in total based on the amount of those unvested options and stock awards we expensed in the current year (see below Note to Forfeiture of options).

On September 1, 2018, the Company also issued to Ms. Harness 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $63,000, based on the closing bid price as quoted on the OTCQB on August 31, 2018 at $0.40 per share. During the year ended June 30, 2021, the Company recorded approximately $29,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $21,000 of stock option expense and $8,000 of stock awards. During the year ended June 30, 2020, the Company recorded approximately $29,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $21,000 of stock option expense and $8,000 of stock awards.

On September 1, 2017, the Company agreed to grant to Ms. Harness under the 2016 Plan (i) 58,394 shares of restricted stock and (ii) a ten-year option to purchase 172,987 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. The 58,394 shares were valued at approximately $41,000 and the 172,987 stock options valued at approximately $112,000. Both shares and options were planned to be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the year ended June 30, 2021, the Company recorded approximately $8,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $6,000 of stock option expense and $2,000 of stock awards. During the year ended June 30, 2020, the Company recorded approximately $51,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $37,000 of stock option expense and $14,000 of stock awards.

On September 1, 2016, the Company and Ms. Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Project Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness under the Company 2016 Equity Incentive Plan 58,394 shares of restricted stock. Ten-year options to purchase 172,987 shares of the Company’s common stock were also granted at an exercise price of $1.37 per share. The 58,394 shares were valued at approximately $80,000, which were amortized over three years to September 1, 2019. The 172,987 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They were amortized over 3 years to September 1, 2019. During the year ended June 30, 2021, the Company recorded approximately $0 of stock-based compensation expense in connection with the foregoing equity awards. During the year ended June 30, 2020, the Company recorded approximately $17,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $12,000 of stock option expense and $5,000 of stock awards.

There were exercises of options to purchase Class B common stock during the years ended June 30, 2021 and 2020. The details of exercises of options to purchase Class B common stock are disclosed in Note 14. Equity Transactions.

There was forfeiture of 294,330 options to purchase Class A common stock during the years ended June 30, 2021 relating to the expiry of options of 12 consultants. Dr. Bertolino resigned as President and Chief Medical Officer and as a member of the Board of Directors of the Company on December 19, 2019. On February 17, 2020, all 2,471,356 options he held were forfeited, representing the options he was granted since June 27, 2016 to September 1, 2019. During the year ended June 30, 2020, the Company reversed the $251,000 of unvested options and shares that were expensed in the current year and prior years.

The following table summarizes all stock option activity under the Company’s equity incentive plans:

Scheduled vesting for outstanding restricted stock awards at June 30, 2021 is as follows:

As of June 30, 2021, there was approximately $14,000 of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately $8,000 of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 1.78 years.

Warrants to Purchase Series B 5% convertible preferred stock (“2018 Series B 5% convertible preferred stock”)

On October 5, 2018, the Company entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) with one multi-family office for the sale of ~~up to $75 million~~2,000 shares of the Company’s ~~securities. The~~newly-created Series B 5% convertible preferred stock (“Series B preferred stock” or “preferred stock”), for aggregate gross proceeds of approximately $2.0 million. Each share of preferred stock was initially sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance (later extended to 15 months following issuance), (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance.

On May 9, 2019, the Company ~~filed~~entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the ~~Securities~~holders of the Series B preferred stock and ~~Exchange Commission (i) a prospectus supplement, dated March 31, 2015, registering~~warrants pursuant to which the Company issued an additional 100 shares of Series B preferred stock and Series 4 warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to ~~$30~~$2.0 million of ~~our~~Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. The Series 4 warrant entitles the holder thereof to purchase 2,500 shares of preferred stock at $982.50 per share for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance. In addition, the Company extended the termination date for the Series 1 warrants by six months, and agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock. All 400 shares of preferred stock were issued from May 2019 to September, 2019.

On December 26, 2019, the Company extended the termination date for each series of warrants to December 31, 2021 and decreased the exercise price for each series of warrants to $850.00 per share of preferred stock. The warrants modification expense of $1,212,000 was computed as the incremental value of the modified warrants over the unmodified warrants on the modification date using a per share price of $0.05 per share, which was the market price on December 26, 2019. Assumptions used in the Black Scholes option-pricing model for these warrants were as follows:

The warrants issued in connection with the Series B preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B preferred stock fair value (without the warrants)) with an offsetting discount to the Series B preferred stock.

During the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2020, the Company issued all 10,500 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $9.43 million. As of June 30, 2021 and 2020, all Series 1-4 warrants to purchase shares of Series B preferred stock were exercised, and no Series 1-4 warrants were outstanding.

See Note 14 for a description of the warrants to purchase shares of the Company’s Series B-2 5% convertible preferred stock.

On June 28, 2018, the Company entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC (“Aspire Capital”), pursuant to which the Company agreed to sell up to $7.0 million of shares of the Company’s Class A common stock ~~that have been or may be offered and sold~~ to Aspire Capital, ~~from time~~without an underwriter or placement agent. The Company issued to ~~time, and (ii) a prospectus supplement, dated March 28, 2017, registering $2.2 million~~Aspire Capital warrants to purchase 8,000,000 shares of ~~our~~its common stock exercisable for 5 years at an exercise price of $0.38 per share. The warrants were recorded within stockholders’ deficiency. The fair value of the warrants issued on June 28, 2018 was estimated on the date of issuance using the Black-Scholes-Merton Model. The value of the warrants issued was approximately $1.7 million. Assumptions used in ~~a registered direct offering, leaving approximately $42.8 million available under~~the Black Scholes option-pricing model for these warrants were as follows:

All 8,000,000 warrants to purchase shares of the Company’s ~~effective shelf registration statement. Depending~~common stock were exercised at an exercise price of $0.38 per share on ~~the Company’s public float~~June 18, 2020 and the timing of the filing of Form S-3, the Company may not be eligible to utilize Form S-3 for future primary offerings of its securities following the expiration of its current effective shelf registration statement in November 2017. The Company anticipates that, if it were to no longer eligible to use Form S-3, that it may utilize Form S-1 to register the sale of its securities, including through future financing agreements with Aspire Capital.June 23, 2020.

~~Aspire Capital~~ ~~Stock Purchase~~ ~~Agreement~~s ~~and Other~~14. Equity ~~Issuances~~Transactions

$3030 million Class A Common Stock Purchase Agreement with Aspire Capital~~(See Part II, Item 9B of this Form 10-K)~~

On ~~September 6, 2017,~~July 31, 2020, the Company entered into ~~a common stock purchase agreement~~the 2020 Agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the ~~36-month~~24-month term of the ~~Purchase Agreement. The Company also issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee.~~

~~$30 million Class A Common Stock Purchase Agreement with Aspire Capital - For the period from March 30, 2015 to~~ ~~August 2017~~

On March 30, 2015, the Company entered into a common stock purchase agreement (the “March 2015 Agreement”) with Aspire Capital which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the March 2015 Agreement. In consideration for entering into the ~~March 2015~~2020 Agreement, the Company issued to Aspire Capital ~~160,000~~6,250,000 shares of its Class A ~~common stock~~Common Stock as a commitment fee. The commitment fee of approximately ~~$499,000~~$1.4 million was recorded as deferred financing costs and additional paid-in capital and this asset will be amortized asover the ~~funding is received.~~life of the 2020 Agreement. The amortized amount of ~~$131,000, $136,000 and $5,000 were debited~~approximately $0.6 million was recorded to additional paid-in capital ~~during~~for the ~~year~~years ended June 30, ~~2017, 2016 and 2015.~~2021. The unamortized portion ~~which was~~is carried on the balance sheet as deferred offering costs and was ~~$227,000, $358,000 and $494,000~~approximately $0.8 million at June 30, 2017, 2016 and 2015, respectively. The unamortized portion will be fully expensed in the first quarter of 2018. On September 6, 2017, the March 2015 Agreement was replaced by a new common stock purchase agreement with Aspire Capital relating to $30 million of our Class A common stock (See Part II, Item 9B of this Form 10-K).2021.

During the period from ~~March 30, 2015~~July 31, 2020 to June 30, ~~2017,~~2021, the Company ~~had completed sales to Aspire Capital totaling 14.7 million shares of common stock generating gross~~generated proceeds of approximately $16 million relating to this $30 million purchase agreement. The Company had approximately $14 million remaining available for stock sales under the terms of the purchase agreement with Aspire Capital at June 30, 2017. Other Equity Issuances are disclosed in Note 13 in the accompanying Notes to the Financial Statements.

~~$20 million Class A Common Stock Purchase Agreement with Aspire Capital - For the period from October 25, 2013 to March 31, 2015~~

On October 25, 2013, we terminated a previous agreement with Aspire Capital and entered into a new Class A Common Stock Purchase Agreement (the “October 2013 Agreement”) with Aspire Capital, which provides that upon meeting the terms of the agreement, Aspire Capital was committed to purchase up to an aggregate of $20,000,000 of our shares of Class A common stock over the approximately 36-month term of the October 2013 Agreement. In consideration for entering into the October 2013 Agreement, the Company issued to Aspire Capital 210,523 shares of our Class A common stock as a commitment fee. The commitment fee of $373,000 for these 210,523 shares was fully amortized as the aggregate of $20,000,000 of our shares of Class A common stock was completed in March 2015. The amortized amount of $295,000 and $77,000 were debited to additional paid-in capital during the year ended June 30, 2015 and 2014, respectively.

On March 28, 2017, the Company entered into stock purchase agreements with certain investors, pursuant to which the Company agreed to sell 2,471,912 shares of its Class A common stock at $0.89 per share in a registered direct offering, without an underwriter or placement agent. The offering closed on March 31, 2017. The total proceeds to the Company from the offering were $2.2 million.

~~The following table provides information regarding our cash position, cash flows and capital expenditures for the years ended June 30, 2017, 2016 and 2015 (rounded to nearest thousand):~~

Our total operating activities used cash of $11.7 million, $9.9 million and $13.1 million in 2017, 2016 and 2015, respectively. The use of cash in these periods principally resulted from our losses from operations, mentioned above, as adjusted for non-cash charges for stock-based compensation and depreciation, and changes in our working capital accounts.

In 2017, our total investing activities used cash of $0.3 million, including the purchases of patents of $0.3 million and the purchases of property and equipment of $0.1 million. In 2016, our investing activities used cash of $0.4 million, including the purchases of patents of $0.4 million and the purchases of equipment of $0.1 million. In 2015, our investing activities used cash of $0.5 million, including the purchase of patents of $0.5 million and the purchases of equipment of $0.01 million.

~~Our total net financing activities provided cash of $9.9 million, $8.2 million and $17.0 million in 2017, 2016 and 2015, respectively.~~

In 2017, we raised approximately $10.1 million in net cash proceeds from the sale of our stock, including $7.8 million in net proceeds from the sale of 8.9 million shares of our common stock and $2.2 million in net proceeds from the sale of 2.5 million shares of our common stock at $0.89 per share, in a registered direct offering without an underwriter or placement agent on March 28, 2017.

In 2016, we raised approximately $8.2 million in net cash proceeds from the sale of our stock, including $8.2 million in net proceeds from the sale of 5.7 million shares of our common stock and $0.03 million from the exercise of stock options and warrants.

In 2015, we raised approximately $17.0 million in net cash proceeds from the sale of our stock, including $16.1 million in net proceeds from the sale of 6.5 million shares of our common stock and $0.85 million from the exercise of stock options and warrants.

The Company plans to incur total expenses of approximately $15.9 million for the fiscal year ending June 30, 2018, including approximately $10.9 million for clinical activities, supportive research, and drug product development. The Company has limited experience with pharmaceutical drug development. As such, the budget estimate may not be accurate. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or a change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget and on our projected timeline of drug development.

The Company will be unable to proceed with its planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without accessing its financing available with Aspire Capital of approximately $30 million as of the date of this filing. Management has put in place a new equity purchase agreement (see Part II, Item 9B of this Form 10-K) with Aspire Capital to fund its future clinical trial expenses and overhead expenses over the next 12 months. This purchase agreement provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Purchase Agreement. Management believes, as of the date of this filing that the funding amount from Aspire Capital will be available as needed by the Company and that adverse market conditions in the Company’s common stock price and trading volume, will not prevent the Company from funding its working capital requirements for the next 12 months from the date of this filing.

In the event that we are unable to generate sufficient cash from our Aspire Capital purchase agreement or raise additional funds from others, we may be required to delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could have a material adverse effect on our future business, operating results, financial condition and long-term prospects. . The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships) and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available to us.

~~Below is a table that presents our contractual obligations and commercial commitments as of June 30, 2017 (rounded to the nearest thousand):~~

~~From July 1, 2017 to September 1, 2017, the Company generated additional proceeds of approximately $2.1~~$4.6 million under the ~~March 2015 common stock purchase agreement~~2020 Agreement with Aspire Capital from the sale of approximately ~~2.6~~22.5 million shares of its common stock. As of June 30, 2021, the available balance under the 2020 Agreement was approximately $25.4 million.

On September 8, 2020, Mr. Ehrlich exercised 2.2 million options to purchase 2.2 million shares of Class B common stock at the option exercise price of $0.11 per share. Mr. Ehrlich paid for this exercise of his option by the cancellation of debt to Mr. Ehrlich of $242,000 to satisfy the exercise price (See Note 11. Convertible Note Payable). The Company issued 1,787,762 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 412,238 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes.

On October 2, 2020, Mr. Ehrlich exercised 909,090 options to purchase 909,090 shares of Class B common stock at the option exercise price of $0.11 per share. Mr. Ehrlich paid for this exercise of his option by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (See Note 11. Convertible Note Payable to the consolidated financial statements). The Company issued 727,994 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 181,096 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes.

On December 28, 2020, Mr. Ehrlich exercised his option to purchase 13,072,730 shares of Class B common stock, at the option exercise price at $0.11 per shares for the shares, paid by the cancellation of 6,980,583 shares of Class A common stock held by Mr. Ehrlich of $1,438,000 to satisfy the exercise price. The total taxable compensation to Mr. Ehrlich for the 13,072,730 shares was approximately $540,000, based upon the closing stock price on December 29, 2020 of $0.21 a share. The Company withheld 1,765,203 shares of Class B common stock and cancelled additional 854,419 shares of Class A common stock held by Mr. Ehrlich. As a result, the Company issued 11,307,527 shares of Class B common shares (net of 1,765,203 shares of Class B common shares withheld to satisfy taxes), and cancelled 7,835,002 shares of Class A common stock held by Mr Ehrlich. These shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

As of June 30, 2021 and 2020, the total issued number of Class B common stock were 18 million shares and 1,818,180 shares, respectively, and the total outstanding number of Class B common stock were 15,641,463 shares and 1,818,180 shares, respectively.

On February 23, 2020, the Company issued 500,000 options each to our Chairman and CEO and two other Board members (see Note 13) and the Company also issued 500,000 shares of Class A common stock each to our Chairman and CEO and two other Board members, which shares were vested on February 24, 2020. During the year ended June 30, 2020, the Company recorded approximately $237,000 of stock-based compensation expense to our Chairman and CEO and two other Board members including approximately $102,000 of stock option expense and $135,000 of stock awards.

Series B 5% convertible preferred stock purchase agreement (“2018 Series B 5% convertible preferred stock”)

On October 5, 2018, as modified on May 9, 2019 (see Warrant Restructuring and Additional Issuance Agreement as described above), the Company entered into a Securities Purchase Agreement with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B preferred stock, for aggregate gross proceeds of approximately $2.0 million. An initial closing for the sale of 1,250 shares of the Series B preferred stock closed on October 9, 2018, and a second closing for the sale of 750 shares of the Series B preferred stock closed on October 12, 2018. Under the Securities Purchase Agreement, the Company also issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock.

The issuance costs associated with the Series B preferred stock transaction were attributed to the Series B preferred stock (without the warrants) and to the Series 1, Series 2 and Series 3 warrants based on their relative fair values. The issuance costs attributed to the warrants of $32,000 were reflected as a reduction to additional paid-in capital. The issuance costs associated with the Series B preferred stock liability of $41,000 was recorded immediately as an element of interest cost, which is reflected in interest expense - preferred stock. The Company recognized change in fair value of preferred stock liabilities of $0 and $102,000 under Other (income) expense in the accompanying consolidated Statements of Operations for the years ended June 30, 2021 and 2020, respectively.

Underlying Series B preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B preferred stock) on a daily basis given fixed dividend terms under the Series B preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B preferred stock up to June 30, 2020. The total dividends of approximately $0 and $52,000 are treated as interest expense – preferred stock during the years ended June 30, 2021 and 2020, respectively. Balance of unpaid dividends of $0 and $13,000 relating to 2018 Series B 5% convertible preferred stock was included at accrued dividend under current liabilities as of June 30, 2021 and 2020, respectively.

The rights and preferences of the preferred stock are set forth in a Certificate of Designation of Preferences, Rights and Limitations of Series B 5% Convertible Preferred Stock filed with the Nevada Secretary of State on October 5, 2018 (the “Certificate of Designation”). Each share of preferred stock has an initial stated value of $1,080 and may be converted at any time at the holder’s option into shares of the Company’s common stock at a conversion price equal of the lower of (i) $0.32 per share and (ii) 85% of the lowest volume weighted average price of the Company’s common stock on a trading day during the ten trading days prior to and ending on, and including, the conversion date. The conversion price may be adjusted following certain triggering events and subsequent equity sales and is subject to appropriate adjustment in the event of stock splits, stock dividends, recapitalization or similar events affecting the Company’s common stock.

See Note 13 for a description of the Series 1-4 warrants issued in connection with the 2018 Series B 5% convertible preferred stock.

No Series 1-4 warrants issued in connection with the 2018 Series B 5% convertible preferred stock were outstanding as of June 30, 2020.

Conversion of 2018 Series B 5% convertible preferred stock to common stock

During the year ended June 30, 2020, the two preferred stockholders converted 9,190 shares of 2018 Series B 5% convertible preferred stock into 116.3 million shares of common stock. As of June 30, 2020, all preferred stock to common stock were converted into common stock and there was no 2018 preferred stock was outstanding.

Series B-2 5% convertible preferred stock (“2020 Series B-2 5% convertible preferred stock”)

On December 4, 2020, the Company entered into a securities purchase agreement (the “Series B-2 Securities Purchase Agreement”) with KIPS Bay Select LP for the sale of an aggregate of 5,089 shares of the Company’s Series B-2 5% convertible preferred stock (the “Series B-2 preferred stock”), for aggregate gross proceeds of approximately $5.0 million. An initial closing for the sale of 3,053 shares of the Series B-2 preferred stock closed on December 9, 2020 for aggregate gross proceeds of approximately $3.0 million, and a second closing for the sale of 2,036 shares of the Series B-2 preferred stock closed on February 8, 2021 for aggregate gross proceeds of approximately $2.0 million. Under the Series B-2 Securities Purchase Agreement, the Company also issued to the investors warrants to purchase up to an additional 10,178 shares of preferred stock.

The Series B-2 preferred stock is mandatorily redeemable under certain circumstances and, as such, is presented as a liability on the consolidated balance sheets. The Company has elected to measure the value of its preferred stock using the fair value method with offsetting discounts associated with the fair value allocated to the warrants and for the intrinsic value attributed to the beneficial conversion feature (“BCF”). The fair value of the Series B-2 preferred stock (without the warrants) will be assessed at each subsequent reporting date with changes in fair value recorded in the profit and loss as a separate line item below the “loss from operations” section (See ASC 480-10-35-5).

The warrants issued in connection with the Series B-2 preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B-2 preferred stock fair value (without the warrants)) with an offsetting discount to the Series B-2 preferred stock. Given that the Series B-2 preferred stock is convertible at any time under these features, the underlying warrant discounts were accreted upon issuance and recorded as interest (resulting in no remaining discount to the Series B-2 preferred stock liability after the issuance).

The Company ~~does not have~~recorded the December 9, 2020 issuance of 3,053 shares Series B-2 Preferred Stock at approximately $2.1 million and the underlying Series 1 and Series 2 warrants at approximately $0.9 million in total by allocating the gross proceeds to Series B-2 preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.8 million associated with the issuance of the 3,053 shares of Series B-2 preferred stock to additional paid-in capital. The Company then recorded interest of approximately $2.7 million for the BCF and warrant discounts as a first day interest given that the Series B-2 preferred shares can be converted at any ~~off-balance sheet arrangements, as defined in Item 304(a)(4)(ii) of Regulation S-K.~~

The Company ~~maintains an investment portfolio~~recorded the February 8, 2021 issuance of 2,036 shares Series B-2 Preferred Stock at approximately $1.5 million and the underlying Series 1 and Series 2 warrants at approximately $0.5 million in ~~accordance with our investment policy. The primary objectives of our investment policy is~~total by allocating the gross proceeds to ~~preserve principal, maintain proper liquidity to meet operating needs~~Series B-2 preferred stock (without the warrants) and ~~maximize yields.~~warrants based on their relative fair values or direct valuation as appropriate. The Company ~~holds investments~~recorded BCF of approximately $1.5 million associated with the issuance of the 2,036 shares of Series B-2 preferred stock to additional paid-in capital. The Company then recorded interest of approximately $2.0 million for the BCF and warrant discounts as a first day interest given that the Series B-2 preferred shares can be converted at any time to common stock and given no set term.

The issuance costs associated with the Series B-2 preferred stock transaction were attributed to the Series B-2 preferred stock (without the warrants) and to the Series 1 and Series 2 warrants based on their relative fair values. The issuance costs attributed to the warrants of approximately $10,000 were reflected as a reduction to additional paid-in capital. The issuances costs associated with the Series B-2 preferred stock liability of $25,000 was recorded immediately as an element of interest cost, which are reflected in interest expense - preferred stock. The change in fair value of the total Series B-2 preferred stock was $0 during the years ended June 30, 2021.

Underlying Series B-2 preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B-2 preferred stock) on a daily basis given fixed dividend terms under the Series B-2 preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B-2 preferred stock and the total dividends accrued of approximately $15,000 are treated as interest during the year ended June 30, 2021, respectively.

The rights and preferences of the preferred stock are set forth in a Certificate of Designation of Preferences, Rights and Limitations of Series B-2 5% Convertible Preferred Stock filed with the Nevada Secretary of State on December 4, 2020 (the “Certificate of Designation”). Each share of preferred stock has an initial stated value of $1,080 and may be converted at any time at the holder’s option into shares of the Company’s common stock at a conversion price equal of the lower of (i) $0.35 until August 15, 2021 and $0.50 thereafter, and (ii) 85% of the lowest volume weighted average price of the Company’s common stock on a trading day during the ten trading days prior to and ending on, and including, the conversion date. The conversion price may be adjusted following certain triggering events and subsequent equity sales and is subject to ~~credit risk,~~appropriate adjustment in the event of stock splits, stock dividends, recapitalization or similar events affecting the Company’s common stock.

The holders of the preferred stock are limited in the amount of stated value of the preferred stock they can convert on any trading day. The conversion cap limits conversions by the holders to the greater of $75,000 and an amount equal to 30% of the aggregate dollar trading volume of the Company’s common stock for the five trading days immediately preceding, and including, the conversion date. However, the conversion cap will be increased if the trading volume in the first 30 minutes of any trading session exceeds certain trailing average daily volume amounts. In addition, the holders of the preferred stock may not convert shares of preferred stock if, after giving effect to the conversion, a holder together with its affiliates would beneficially own in excess of 9.99% of the outstanding shares of the Company’s common stock.

Following 90 days after the scheduled date for the second closing date, the Company may elect to redeem the preferred stock for 120% of the aggregate stated value then outstanding, plus all accrued but unpaid dividends and all liquidated damages and other amounts due in respect of the preferred stock. The Company’s right to redeem the preferred stock is contingent upon it having complied with a number of conditions, including compliance with its obligations under the Certificate of Designation. Shares of preferred stock generally have no voting rights, except as required by law and except that the Company shall not ~~interest rate risks.~~take certain actions without the consent of the holders of the preferred stock.

Each share of preferred stock was sold together with two warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase one share of preferred stock at $982.50 per share, or 5,089 shares of preferred stock in the aggregate for approximately $5.0 million in aggregate exercise price, for a period of up to 18 months following issuance, and (ii) a Series 2 warrant, which entitles the holder thereof to purchase one shares of preferred stock at $982.50 per share, or 5,089 shares of preferred stock in the aggregate for approximately $5.0 million in aggregate exercise price, for a period of up to 24 months following issuance.

Subject to the satisfaction of certain circumstances, the Company may call for cancellation any or all of the warrants following 90 days after their issuance, for a payment in cash equal to 8% of the aggregate exercise price of the warrants being called. The warrants subject to any such call notice will be cancelled 10 days following the Company’s payment of the call fee, provided that the warrant holders have not exercised the warrants prior to cancellation.

During the year ended June 30, 2021, the Company issued 3,053 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of $2,999,573, upon exercise of 3,053 Series 1 warrants issued by the Company. In addition, the Company issued 2,053 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of $2,017,073, upon exercise of 2,053 Series 2 warrants issued by the Company.

With regard to the exercise of these 5,106 warrants, the Company recorded gross proceeds of approximately $5,017,000 to the preferred stock liability. As of June 30, 2021, 5,072 Series 1 and 2 warrants to purchase 5,072 shares of Series B-2 5% convertible preferred stock were outstanding.

Conversion of 2020 Series B-2 5% convertible preferred stock to common stock

During the year ended June 30, 2021, the 2020 Series B-2 5% convertible preferred stockholder converted a total of 10,207 shares of Series B-2 preferred stock into a total of 68,034,812 shares of common stock.

With regard to conversions, the Company reversed Series B-2 5% convertible preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company ~~does not own derivative~~reversed the amount of approximately $10,017,000 based on the proportion of Series B-2 5% convertible preferred stock converted relative to the original total issued.

As of June 30, 2021, there are no 2020 Series B-2 5% convertible preferred stock outstanding and the 2020 Series B-2 5% convertible preferred stock liability is $0.

Regarding the exercise of options to purchase 2.2 million shares of Class B common stock on September 8, 2020 by Mr. Ehrlich, the Company issued 1,787,762 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 412,238 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes and were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

Regarding the exercise of options to purchase 909,090 shares of Class B common stock on October 2, 2020, the Company issued 727,994 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 181,096 shares of Class B common stock were withheld were withheld from Mr. Ehrlich for the payment of payroll taxes and were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

Regarding the exercise of options to purchase 13,072,730 shares of Class B common stock on December 28, 2020, the Company cancelled 6,980,583 shares of Class A common stock held by Mr. Ehrlich of $1,438,000 to satisfy the exercise price. The Company withheld 1,765,203 shares of Class B common stock and cancelled additional 854,419 shares of Class A common stock held by Mr. Ehrlich. As a result, the Company issued 11,307,527 shares of Class B common shares (net of 1,765,203 shares of Class B common shares withheld to satisfy taxes), and cancelled 7,835,002 shares of Class A common stock held by Mr Ehrlich. Both the 1,765,203 shares of Class B common stock and the 7,835,002 shares of Class A common stock were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

There were 8,516,056 shares of Class A common stock and 2,358,537 shares of Class B common stock held in treasury, purchased at a total cumulative cost of approximately $2.3 million as of June 30, 2021.

There were 659,448 shares of Class A common stock and 0 shares of Class B common stock held in treasury, purchased at a total cumulative cost of approximately $146,000 as of June 30, 2020.

A financial ~~instruments~~asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

The Company has elected to measure its preferred stock using the fair value method. The fair value of the preferred stock is the estimated amount that would be paid to redeem the liability in ~~our investment portfolio.~~an orderly transaction between market participants at the measurement date. The Company calculates the fair value of the Series B-2 Preferred stock using a lattice model that takes into consideration the future redemption value on the instrument, which is tied to the Company’s stock price.

These valuations are considered to be Level 3 fair value measurements as the significant inputs are unobservable and require significant management judgment or estimation. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, ~~does not believe there is any~~or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material ~~market risk exposure that would require disclosure under this item.~~effect on the estimated fair values.

~~ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA~~The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 Series B-2 preferred stock liability balance for the year ended June 30, 2021:

~~See Index~~Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.

The Company has incurred operating losses since its inception and therefore no tax liabilities have been incurred for the periods presented. The amount of unused tax losses (“NOL”) available for carryforward and to be applied against taxable income in future years totaled approximately $98.7 million at June 30, 2021. The Tax Cuts and Jobs Act changes the rules on NOL carryforwards. The 20-year limitation was eliminated for losses incurred for the 2018 tax year, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January 1, 2018, will now be limited to 80% of taxable income. Internal Revenue Code Sec. 382 places limitations on the utilization of net operating losses.

The income tax provision benefit differs from the amount of tax determined by applying the Federal and States statutory rates as follows:

There was no current or deferred provision or benefit for income taxes for the fiscal years ended June 30, 2021 and 2020. The components of deferred tax assets as of June 30, 2021 and 2020 are as follows (rounded to nearest thousand):

From July 1, 2021 to the date of the issuance of these financial statements, the Company issued 2,036 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of $2.0 million, upon exercise of 2,036 Series 1 warrants issued by the Company. In addition, the Company issued 1,000 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of $1.0 million, upon exercise of 1,000 Series 2 warrants issued by the Company. At the same time, there were 3,036 preferred stock shares converted to approximately 18.9 million shares of common stock.

The Company has evaluated events subsequent to June 30, 2021 through the issuance of these financial statements and ~~supplemental data immediately following the signature page hereto.~~determined that there were no additional events requiring disclosure.

There have been no changes in or disagreements with the Company’s accountants on accounting and financial disclosure.

We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As of June 30, ~~2017,~~2021, management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on such evaluation, as of June 30, ~~2017,~~2021, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures are effective.

Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of external financial statements in accordance with generally accepted accounting principles.

Internal controls over financial reporting, no matter how well designed, have inherent limitations. Therefore, internal control over financial reporting, even if determined to be effective, can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, ~~2017.~~2021. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (2013).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting.

Based on the Company’s processes and assessment, as described above, management has concluded that, as of June 30, ~~2017,~~2021, the Company’s internal control over financial reporting was effective.

~~The effectiveness~~This Annual Report on Form 10-K does not include an attestation report of the Company’s independent public accounting firm regarding internal control over financial ~~reporting as of June 30, 2017 has been audited~~reporting. Management’s report was not subject to attestation by ~~Baker Tilly Virchow Krause, LLP, an~~the Company’s independent ~~registered~~ public accounting firm ~~as stated~~pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in ~~their report, which appears herein.~~this Annual Report on Form 10-K.

There have been no changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended June 30, ~~2017,~~2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On September 6, 2017, the Company entered into a new common stock purchase agreement (the “September 2017 Agreement”) with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the September 2017 Agreement. The Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), in which the Company agreed to file one or more registration statements, as permissible and necessary to register, under the Securities Act of 1933, as amended (the “Securities Act”), the sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the September 2017 Agreement. The Company has filed with the SEC a prospectus supplement, dated September 8, 2017, to the Company’s prospectus filed as part of the Company’s effective $75 million shelf registration statement on Form S-3, File No. 333-199725, registering all of the shares of common stock that have been or may be offered and sold to Aspire Capital from time to time. The September 2017 Agreement replaces the common stock purchase agreement between the parties dated March 30, 2015.Not applicable.

There are no trading volume requirements or restrictions under the September 2017 Agreement, and the Company will control the timing and amount of sales of the Company’s common stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the September 2017 Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the September 2017 Agreement. The September 2017 Agreement may be terminated by the Company at any time, at its discretion, without any penalty or cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of the Company’s common stock during any time prior to the termination of the September 2017 Agreement. Any proceeds the Company receives under the September 2017 Agreement are expected to be used for general working capital. The September 2017 Agreement also provides for customary events of default, upon the occurrence of which Aspire Capital may terminate the September 2017 Agreement.

The foregoing is a summary description of certain terms of the September 2017 Agreement and the Registration Rights Agreement. For a full description of all terms, please refer to copies of the September 2017 Agreement and the Registration Rights Agreement that are filed herewith as Exhibits 10.6 and 10.7, respectively. All readers are encouraged to read the entire text of the September 2017 Agreement and the Registration Rights Agreement.

The legal opinion, including the related consent, of Gary R. Henrie relating to the issuance of shares of the Company’s common stock pursuant to the September 2017 Agreement is filed as Exhibit 5.1 to this report.

The following provides information regarding current members of the Company’s Board of Directors (the “Board”), which consists of ~~five members.~~three members, and the Company’s executive officers. Each director is elected for a term ending at the next annual meeting of stockholders or until his or her successor is elected and qualified. Our executive officers are appointed by, and serve at the discretion of, the Board.

Leo Ehrlich, has served as the Company’s Chief Executive Officer and Chief Financial Officer since November 5, 2010. Previously, he served as Chief Financial Officer of Cellceutix Pharma since its inception in June 2007. ~~Following the Company’s acquisition of Cellceutix Pharma in 2007, Mr. Ehrlich served as Chief Financial Officer and a director of Innovation Pharmaceuticals Inc. until November 5, 2010.~~ Mr. Ehrlich previously practiced as a Certified Public Accountant and received his BBA from Bernard Baruch College of the City University of New York.

The Board has determined that Mr. Ehrlich’s extensive knowledge of the Company, financial and industry knowledge and executive management experience make him a suitable member of the Company’s Board of Directors.

~~Krishna Menon,~~ RCM, PhD, VMD, served as President of Cellceutix Pharma since inception in June 2007. Following the Company’s acquisition of Cellceutix Pharma in 2007, Dr. Menon served as Chief Scientific Officer and President of the Company, becoming President of Research in June 2016. Dr. Menon also serves as the Chief Operating Officer at Kard Scientific, Inc. Dr. Menon has more than 35 years in drug development for academia and industry. Originally trained as a veterinary surgeon, Dr. Menon began his career as Chief Government Veterinarian for a large parish in Jamaica. He segued to a three-year stint as Director of Agriculture for the Cayman Islands, in the British Caribbean and, in 1982, moved to the Dana Farber Cancer Research Institute under the direction of the chief physician, Dr. Emil Tom Frye. From 1985 to 1990, Dr. Menon was a Research Scientist at Dana Farber Cancer Research Institute. He then worked as a Senior Research Scientist, In Vivo Research (Cancer), at Bayer Pharmaceuticals (Miles Laboratories) until 1993. Dr. Menon then operated his own veterinary oncology and drug development consultancy practice, and one year later, he was asked to be a Group Leader, Cancer In Vivo Research and Clinical Development, for Eli Lilly, where he played a key role in pre-clinical development of the blockbuster drugs Gemzar and Alimta. Dr. Menon served in such position at Eli Lilly until 2001. In 1999, Eli Lilly honored him with the “President’s Recognition Award.” Dr. Menon earned his PhD in Pharmacology from Kerala University, where his work focused on anti-folate therapy of various cancers.

~~The Board has determined that Dr. Menon’s decades of research in academia and industry and extensive knowledge of the Company make him a suitable member of the Company’s Board of Directors.~~

Barry Schechter, M.D., F.A.A.O., joined the Board on October 1, 2014 as an independent member. Dr. Schechter has been the Director of Department of Cornea and External Disease at Florida Eye Microsurgical Institute since 2005. Dr. Schechter’s practice involves diseases of the ocular surface including dry eyes, allergies, infection, the latest in corneal, refractive, and cataract surgery, and glaucoma. In addition, Dr. Schechter is an expert consultant for Gerson Lehrman and Guidepoint Global regarding the business and technology of eye care and consults for several ophthalmic pharmaceutical companies. He is on the executive committee and heads the Scientific advisory board for Aperta Biosciences. He is the Medical Director for Amniochor. He is also on the editorial board for Advanced Ocular Care, a journal that reaches the top 10% of ophthalmologists and select optometrists. Dr. Schechter has reviewed articles for Cornea, the British Journal of Ophthalmology, and the Journal of the American Academy of Ophthalmology. He has lectured internationally and published on the subjects of treatment of ocular tumors, lens implants and dry eyes. Dr. Schechter has also written a textbook chapter on surgical techniques. Dr. Schechter is involved in clinical research and consults for several ophthalmic pharmaceutical companies.

The Board has determined that Dr. Schechter’s extensive medical knowledge and consulting work make him a suitable member of the Company’s Board of Directors.

Zorik Spektor, M.D., F.A.A.P. was appointed as an independent member of the Board in April 2015. Dr. Spektor is a fellowship trained Pediatric Otolaryngologist and Head and Neck Surgeon and has been the Director of The Center for Pediatric ENT – Head and Neck Surgery in Boynton Beach, Florida since 1995. In addition, he is a Voluntary Assistant Professor of Surgery at the Department of Otolaryngology, University of Miami Leonard M. Miller School of Medicine, and an Affiliate Clinical Assistant Professor of Biomedical Science at Florida Atlantic University in Boca Raton, Florida. Dr. Spektor received his Bachelor’s Degree from Cornell University, and his Medical Doctorate at Albany Medical College of Union University in Albany, New York. Following Dr. Spektor’s completion of his residency training in Otolaryngology – Head and Neck Surgery at the University of Connecticut, he completed his fellowship in Pediatric Otolaryngology – Head and Neck Surgery at LeBonheur Children’s Medical Center in Memphis, Tennessee. Dr. Spektor is board certified in Otolaryngology – Head and Neck Surgery. He is a Fellow of the American Academy of Otolaryngology – Head and Neck Surgery and American Academy of Pediatrics. He is also a member of the American Society of Pediatric Otolaryngology and Society for Ear, Nose & Throat Advances in Children.

Prior to establishing the Center for Pediatric ENT – Head and Neck Surgery in 1995, Dr. Spektor was on the faculty of the University of Connecticut Health Science Center, Hartford Hospital and Newington Children’s Hospital, now known as Connecticut Children’s Hospital. He has lectured and presented extensively in the field of pediatric otolaryngology, and has authored numerous peer-reviewed publications. Dr. Spektor has been a presenter as well as an invited speaker at local, national and international conferences. He continually conducts clinical research studies, which have produced significant advances in the field of otolaryngology and pediatric otolaryngology. During the past decade he has been selected as one of the nation’s top doctors by several independent rating agencies for many consecutive years. Dr. Spektor has served on advisory boards for several medical device and pharmaceutical companies and has been involved in significant advances in the field of otolaryngology and Pediatric Otolaryngology.

The Board has determined that Dr. Spektor’s extensive medical knowledge, research experience and broad industry exposure make him a suitable member of the Company’s Board of Directors.

~~Mark R. Tobin,~~ MBA, was appointed as an independent member of the Board in April 2015. Mark Tobin is currently the Senior Director, Corporate Strategy at Printronix, LLC, a leading manufacturer of industrial printers. From 2013 to 2017, Mr. Tobin served in various roles of increasing responsibility with NanoFlex Power Corporation, a publicly-listed advanced solar technology company, culminating as Executive Vice President and Chief Financial Officer. From 2013 to 2015, Mr. Tobin served as a Managing Director at Digital Offering, a merchant bank. Previously, from 2005 to 2013, he served as Director of Research and as a Senior Research Analyst at Roth Capital Partners, a leading boutique investment bank, where he oversaw equity research on hundreds of small-cap public companies across a variety of sectors. Prior to that, he was a Program Manager and Senior Systems Engineer at Science Applications International Corporation, a FORTUNE 500® scientific, engineering, and technology applications company. Mr. Tobin began his career as an officer in the United States Air Force, overseeing advanced technology development programs and representing the U.S. as a NATO delegate, and ultimately achieving the rank of Major. He graduated with honors from the U.S. Air Force Academy with a Bachelor’s of Science in Management and received an MBA from the University of Pittsburgh.

~~The Board has determined that Mr. Tobin’s knowledge of capital markets and public companies and executive management experience make him a suitable member of the Company’s Board of Directors.~~

The following provides information regarding the Company’s current executive officers. Our executive officers are appointed by, and serve at the discretion of, the Board. Set forth below is a brief description of the business experience of all executive officers other than Mr. Ehrlich and Dr. Menon, each of whom is also a director and whose business experience is set forth above in the section of this Form 10-K entitled “Directors of Innovation Pharmaceuticals Inc.”

~~Arthur P. Bertolino,~~ MD, PhD, MBA, joined the Company as President and Chief Medical Officer in June 2016. Dr. Bertolino held several key positions at Novartis Institutes for Biomedical Research (“NIBR”) from 2008 to 2013, including Vice President of Dermatology and Vice President & Global Head of Translational Medicine for Dermatology. During his time at NIBR, Dr. Bertolino was integral to the marketing approval of Ilaris (canakinumab) in the United States, European Union and Switzerland. He also led the early clinical program of Cosentyx™ (secukinumab) and late stage supportive submission studies. In addition, Dr. Bertolino held positions as Senior Medical Director and Senior Director of Dermatology at Pfizer, Inc. from 2003 to 2007. Among other accomplishments at Pfizer, he led clinical programs for over a half-dozen new chemical entities involving Phase 1 and Phase 2 studies and contributed to planning for Phase 3 studies. Dr. Bertolino led FDA clinical interactions at entitlement meetings for Pfizer’s dermatology products and served as Pfizer’s dermatology spokesperson. Dr. Bertolino served as Chief Medical Officer and Vice President of Medical Affairs at Peplin, Inc. from 2007 to 2008, where he led Phase 2 programs and designed and drove initial Phase 3 programs that contributed to FDA approval of Picato (ingenol mebutate). Dr. Bertolino also held the position of Executive Vice President and Chief Medical Officer at Revance Therapeutics from 2014 to 2016, where he, among other responsibilities, supervised all aspects of clinical staff and programs and regulatory affairs. Dr. Bertolino earned a BS in Chemistry/Biochemistry from SUNY Stony Brook, an MD and PhD in Pharmacology from The Johns Hopkins University School of Medicine, and an MBA from the University of Michigan Stephen M. Ross School of Business.

Jane Harness, MP, MS is Senior Vice President, Clinical Sciences and Portfolio Management and joined the Company on September 1, 2016. Ms. Harness has over 20 years in domestic and international clinical drug development experience. Before joining the Company, she served as Vice President, Clinical Operations, at Revance Therapeutics in ~~2016~~2015 and as Head of Clinical Sciences, Dermatology and ATI Translational Research, at Novartis Institutes for Biomedical Research from ~~2014~~2010 to ~~2015.~~2014. Before joining Novartis, Ms. Harness held the following notable positions at Pfizer over the prior 15 years: Global Clinical Lead, Inflammation and Immunology, Early Clinical Lead, Dermatology, and Clinical Trial Head and Process Improvement Lead, Experimental Medicine. Ms. Harness received a BS and MP (Protein Biochemistry) degree from University of Leicester, and a MS (Clinical Pharmacology) from University of Aberdeen.

We and our Board are committed to high standards of corporate governance as an important component in building and maintaining stockholder value. To this end, we have adopted corporate governance policies and practices to promote the effective functioning of the Board and its committees and to set forth a common set of expectations as to how the Board should manage its affairs and perform its responsibilities. We also closely monitor guidance issued or proposed by the SEC and the provisions of the Sarbanes-Oxley Act, as well as the emerging best practices of other companies. The current corporate governance guidelines are available on the Company’s website at http://www.ipharminc.com. Printed copies of our corporate governance guidelines may be obtained, without charge, by contacting the Corporate Secretary, Innovation Pharmaceuticals Inc., 301 Edgewater Place - Suite 100, ~~Cummings Center, Suite 151-B, Beverly, Massachusetts 01915.~~Wakefield, MA 01880.

The Company is governed by the Board, which currently consists of ~~five~~three members: Mr. Leo Ehrlich, Dr. ~~Krishna Menon, Dr.~~ Barry Schechter, and Dr. Zorik ~~Spektor and Mr. Mark R. Tobin.~~Spektor. The Board has established three committees: the Audit Committee, the Compensation Committee and the Nominating and Governance Committee. Each of the Audit Committee, Compensation Committee and Nominating and Governance Committee is comprised entirely of independent directors. The Board has adopted written charters for each of its committees which are available on the Company’s website at http://www.ipharminc.com. A copy of the Company’s corporate governance guidelines is also available on the Company’s website. Printed copies of these charters may be obtained, without charge, by contacting the Corporate Secretary, Innovation Pharmaceuticals Inc., 301 Edgewater Place - Suite 100, ~~Cummings Center, Suite 151-B, Beverly, Massachusetts 01915.~~Wakefield, MA 01880. All directors are encouraged to attend ~~the Company’s annual~~ meetings of stockholders, either in person or remotely, absent an unavoidable and irreconcilable conflict. Each director attended more than 75% of the aggregate number of Board meetings, except Dr. Zorik Spektor and the number of meetings held by all of the committees on which he served.

The Board has the responsibility to verify that the assets of the Company are properly safeguarded, that the appropriate financial and other controls are maintained, and that the Company’s business is conducted wisely and in compliance with applicable laws and regulations and proper governance. Included in these responsibilities is the Board’s oversight of the various risks facing the Company. In this regard, the Board seeks to understand and oversee critical business risks. The Board does not view risk in isolation. Risks are considered in virtually every business decision and as part of the Company’s business strategy. The Board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for the Company to be competitive ~~on a global basis~~ and to achieve its objectives.

While the Board oversees risk management, Company management is charged with managing risk. The Company has robust internal processes to identify and manage risks and to communicate with the Board. The Board and the Audit Committee monitor and evaluate the effectiveness of the internal controls and the risk management program at least annually. Management communicates routinely with the Board, Board committees and individual directors on the significant risks identified and how they are being managed. Directors are free to communicate directly with senior management.

The Board implements its risk oversight function both as a whole and through committees. Much of the work is delegated to various committees, which meet regularly and report back to the full Board. All committees play or are anticipated to play significant roles in carrying out the risk oversight function. In particular:

The Audit Committee met ~~four~~two times in fiscal year ~~2017.~~2021. The Audit Committee consists of Dr. Barry Schechter and Dr. Zorik Spektor, ~~and Mr. Mark R. Tobin,~~ each of whom is “independent” as that term is defined under the Nasdaq Listing Rules. The Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements. ~~Mr. Tobin serves as Chairman of the Audit Committee and is an “audit committee financial expert” as that term is defined by the applicable SEC rules.~~ The Audit Committee is responsible for, among other things:

The Compensation Committee did not hold any ~~meetings~~meeting in fiscal ~~2017.~~2021. The Compensation Committee consists of Dr. Barry Schechter and Dr. Zorik Spektor, ~~and Mr. Mark R. Tobin,~~ each of whom is “independent” as that term is defined under the Nasdaq Listing Rules. The Compensation Committee assists the Board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Our Chief Executive Officer and Chief Financial Officer may not be present at any committee meeting during which his compensation is deliberated. The Compensation Committee is responsible for, among other things:

Under its charter, the Compensation Committee has sole authority to retain and terminate outside counsel, compensation consultants for the purpose of assisting the Compensation Committee in determining the compensation of the Chief Executive Officer or senior executive officers, or other experts or consultants, in each case, as it deems appropriate and including sole authority to approve such parties’ fees and other retention terms. The Compensation Committee may also form and delegate authority to subcommittees and may delegate authority to one or more designated members of the Compensation Committee. The Compensation Committee may from time to time seek recommendations from the executive officers of the Company regarding matters under the purview of the Compensation Committee, though the authority to act on such ~~recommendations~~recommendation rests solely with the Compensation Committee.

The Nominating and Governance Committee did not hold any meetings in fiscal ~~2017.~~2021. Our Nominating and Governance Committee consists of Dr. Barry Schechter and Dr. Zorik Spektor, ~~and Mr. Mark R. Tobin,~~ each of whom is “independent” as that term is defined under the Nasdaq Listing Rules. The Nominating and Governance Committee assists the Board of Directors in identifying individuals qualified to become our directors and in determining the composition of the Board and its committees. The Nominating and Governance Committee is responsible for, among other things:

The Nominating and Governance Committee also oversees all aspects of the Company’s corporate governance functions on behalf of the Board and make recommendations to the Board regarding corporate governance issues.

Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on the Board that are applicable to all directors and that there are other skills and experience that should be represented on the Board as a whole but not necessarily by each director. The Board and the Nominating and Governance Committee of the Board consider the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs.

In its assessment of each potential candidate, including those recommended by stockholders, the Nominating and Governance Committee considers the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries and such other factors the Nominating and Governance Committee determines are pertinent in light of the current needs of the Board. The Nominating and Governance Committee also takes into account the ability of a director to devote the time and effort necessary to ~~fulfill~~fulfil his or her responsibilities to the Company.

The Board and the Nominating and Governance Committee require that each director be a recognized person of high integrity with a proven record of success in his or her field. In addition to the qualifications required of all directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.

The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. ~~Diversity is important because a variety of points of view contribute to a more effective decision-making process.~~

The Nominating and Governance Committee does not have a specific policy with regard to the consideration of candidates recommended by stockholders; however any nominees proposed by our stockholders will be considered on the same basis as nominees proposed by the Board. If a stockholder wants to submit a candidate for consideration to the Board, that stockholder may submit his or her proposal to our Corporate Secretary:

The Board has adopted a Code of Ethics that applies to the Company’s directors, officers and employees. A copy of this policy is available via our website at http://~~www.ipharminc.com~~.www.ipharminc.com. Printed copies of our Code of Ethics may be obtained, without charge, by contacting the Corporate Secretary, Innovation Pharmaceuticals Inc, 301 Edgewater Place - Suite 100, ~~Cummings Center, Suite 151-B, Beverly, Massachusetts 01915.~~Wakefield, MA 01880. During the fiscal year ended June 30, ~~2017,~~2021, there were no waivers of our Code of Ethics.

Stockholders may communicate with the Board, including non-management directors, by sending a letter to our Board, c/o Corporate Secretary, Innovation Pharmaceuticals Inc, 301 Edgewater Place - Suite 100, ~~Cummings Center, Suite 151-B, Beverly, Massachusetts 01915~~Wakefield, MA 01880 for submission to the Board or committee or to any specific director to whom the correspondence is directed. Stockholders communicating through this means should include with the correspondence evidence, such as documentation from a brokerage firm, that the sender is a current record or beneficial stockholder of the Company. All communications received as set forth above will be opened by the Corporate Secretary or his designee for the sole purpose of determining whether the contents contain a message to one or more of our directors. Any contents that are not advertising materials, promotions of a product or service, patently offensive materials or matters deemed, using reasonable judgment, inappropriate for the Board will be forwarded promptly to the Chairman of the Board, the appropriate committee or the specific director, as applicable.

~~COMPLIANCE WITH SECTION~~Delinquent Section 16(a) ~~OF THE EXCHANGE ACT~~Reports

Under U.S. securities laws, directors, executive officers and persons beneficially owning more than 10% of our common stock must report their initial ownership of the common stock, and any changes in that ownership, to the SEC. The SEC has designated specific due dates for these reports. Based solely on our review of copies of such reports filed with the SEC and written representations of our directors and executive officers, we believe that all persons subject to reporting filed the required reports on time in fiscal 2017, other than (i) a Form 5 for Arthur Bertolino which was filed on August 8, 2017 relating to 262,080 shares withheld upon the vesting of a common stock grant on June 27, 2017, and (ii) a Form 3 relating to Jane Harness joining the Company on September 1, 2016 and Form 5 for Ms. Harness which was filed on August 8, 2017 relating to a 58,394 common share grant and 172,987 stock options granted on September 1, 2016.2021.

Our Board of Directors is responsible for establishing and implementing our compensation programs. The Board of Directors has sought to ensure that the total compensation paid to our executive officers is fair, reasonable and competitive. This Compensation Discussion and Analysis (“CD&A”) provides information about our compensation objectives and policies for our named executive officers, who are identified in the Summary Compensation Table below, and is intended to place in perspective the information contained in the executive compensation tables that follow this discussion. This CD&A provides a general description of our compensation programs and specific information about its various components.

We believe our success depends on the continued contributions of our named executive officers. While we have not historically maintained a formal compensation philosophy, our executive compensation programs are designed for the purpose of attracting, motivating and retaining experienced and qualified executive officers with compensation that recognizes individual merit and overall business results. Our compensation programs are also intended to support the attainment of our strategic objectives by tying the interests of our named executive officers to those of our stockholders, although the significant beneficial ownership of the Company’s securities by Mr. Leo Ehrlich, the Company’s Chief Executive Officer and Chief Financial Officer, and Dr. Krishna Menon, Chief Scientific Officer and President of Research, has generally served to align the interests of such officers with the interests of the Company’s stockholders.

~~As the Compensation Committee of the Board was formed in October 2015, all compensation decisions before October 2015 discussed in this CD&A were made by the Board of Directors.~~

~~Employment Arrangements with Mr. Ehrlich and Dr. Menon~~. In establishing and implementing our compensation programs, the responsibility of the Board of Directors has historically consisted of reviewing or ratifying employment agreements with our named executive officers. On December 29, 2010, the Company entered into employment agreements with Mr. Ehrlich and Dr. Menon for a period of three years ending on December 31, 2013. On January 1, 2014, the Board approved an extension of the employment agreements with Mr. Ehrlich and Dr. Menon for a one-year period with a 10% increase in salary from the previous annual salary of $423,500 each, to an annual salary of $465,850, which expired on December 31, 2014. The Company has not extended the employment agreements with Mr. Ehrlich and Dr. Menon, and the Company anticipates any such extension or any new employment agreements with Mr. Ehrlich and Dr. Menon would be subject to prior approval by the Compensation Committee.

~~Employment Agreement with Dr. Bertolino~~. On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement providing for Dr. Bertolino to serve as Chief Medical Officer and President of the Company. The employment agreement provides for an annual salary of $440,000. In addition, the Company granted to Dr. Bertolino under the Innovation Pharmaceuticals Inc. 2016 Equity Incentive Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $1.39 per share. Both shares and options will vest upon the earliest to occur of the following: (1) 50% upon June 27, 2017, and the remaining 50% upon June 27, 2018; (2) completion of both a Phase 2b psoriasis study and a Phase 2 oral mucositis study; (3) the Company’s common stock closes above $3.00 per share (as may be adjusted for any stock splits or similar actions); (4) the commencement of trading of the Company’s common stock on a national securities exchange (e.g. Nasdaq or the NYSE); or (5) upon a “change in control” of the Company, as defined in Dr. Bertolino’s employment agreement. The Company also agreed that, with respect to each fiscal year of the Company ending during the term of Dr. Bertolino’s employment and commencing with the fiscal year ending June 30, 2017, Dr. Bertolino shall be eligible to receive annual equity awards under the Innovation Pharmaceuticals Inc. 2016 Equity Incentive Plan or any successor plan, with a target award of options to purchase 150,000 shares of the Company’s common stock with an exercise price equal to the last closing price of the Company’s common stock prior to the date of grant, which options shall vest ratably each month over the 24 months following the date of grant.

~~Employment Agreement with~~ ~~Ms. Harness~~. On September 1, 2016, the Company and Jane Harness entered into an executive employment agreement pursuant to which Ms. Harness joined the Company as its VP, Clinical Sciences and Portfolio Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness, under the Innovation Pharmaceuticals Inc. 2016 Equity Incentive Plan (i) 58,394 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3%) upon the first anniversary of the effective date, one third (33 1/3%) upon the second anniversary of the effective date, and the remaining one third (33 1/3%) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 172,987 shares of the Company’s common stock were also granted at an exercise price of $1.37 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3%) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company.

~~On June 30, 2016, the Board adopted the Innovation Pharmaceuticals Inc. 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan became effective upon adoption by the Board on June 30, 2016.~~

Up to 20,000,000 shares of the Company’s common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that, no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.

~~The Company previously awarded grants under its 2010 Equity Incentive Plan, which had been approved by the Company’s stockholders.~~

The Board historically selected the recipients of equity grants and determined the terms and type of such grants under the Company’s equity incentive plans. The Compensation Committee assumed the role of administrator of the Company’s equity incentive plans in October 2015.

During fiscal 2017, the Company did not retain the services of a compensation consultant or conduct benchmarking or specific market review of our compensation levels or practices. Instead, our compensation levels and practices were established by the Compensation Committee and Board of Directors.

The Compensation Committee of the Board of Directors has reviewed and discussed with management the foregoing Compensation Discussion and Analysis. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for fiscal 2017, and the Board of Directors has approved that recommendation.

~~This Report has been submitted by the following independent directors, who comprise the Compensation Committee of the Board of Directors:~~

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our Chief Executive Officer and Chief Financial ~~Officer, our Chief Scientific Officer and President of Research, our President and Chief Medical~~ Officer and our Senior Vice President, Clinical Sciences and Portfolio Management, whom we refer to collectively as our named executive officers, for services rendered in all capacities during the noted periods.

~~The following table sets forth stock-based awards granted to our named executive officers during fiscal year 2017.~~

The following table sets forth all outstanding equity awards held by our named executive officers as of June 30, ~~2017.~~2021.

~~The following table sets forth information concerning the exercise of stock options and vesting of restricted stock during fiscal 2017 for each of our named executive officers.~~

~~Neither~~ Mr. Ehrlich ~~nor Dr. Menon has~~does not have a current employment agreement with the Company, and all of the stock options held by Mr. Ehrlich ~~and Dr. Menon~~ are fully vested.

Pursuant to the employment ~~agreements~~agreement between ~~each of Dr. Bertolino and~~ Ms. Harness and the Company, the ~~executives~~executive would be entitled to the following termination benefits:

For purposes of the employment ~~agreements,~~agreement with Ms. Harness, a “change of control” means the occurrence of any of the following:

Notwithstanding the foregoing, a “change in control” shall not occur unless such transaction constitutes a change in the ownership of the Company, a change in effective control of the Company, or a change in the ownership of a substantial portion of the Company’s assets under Section 409A.

The following table sets forth certain information concerning the compensation paid to our independent directors for services rendered to us during the fiscal year ended June 30, ~~2017. Neither~~2021. Mr. ~~Menon nor Mr. Ehrlich was compensated for their service as directors in 2017.~~Ehrlich’s compensation is disclosed under “Summary Compensation Table” above.

~~As of June 30, 2017, each of Dr. Schechter, Dr. Spektor and Mr. Tobin held an option to purchase 19,655 shares of the Company’s common stock.~~

~~Each of our independent directors has entered into agreements~~Commencing with the first quarter of fiscal 2021, the Company ~~pursuant to which each director will receive~~increased the quarterly cash ~~fees in the amount of $6,250, in addition~~payment to ~~20,000 shares of restricted stock upon the successful listing of~~$12,500 per quarter, which payments will be made to all directors serving on the Company’s ~~common stock on~~Board of Directors, rather than only the Nasdaq Capital Market and options with a five-year term and a Black-Scholes value of $20,000 on the date of issuance, which options were issued in June 2016. Our inside directors do not receive any additional compensation for the services they provide to us asindependent directors. Directors are reimbursed for out-of-pocket expenses incurred as a result of their participation on our Board and committees.

~~COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION~~As of June 30, 2021, each of Dr. Schechter and Dr. Spektor held options to purchase 500,000 shares of the Company’s Class A common stock.

No member of the Compensation Committee is or has been an officer or employee of the Company. No interlocking relationship existed between our Board of Directors or our Compensation Committee and the Board of Directors or compensation committee of any other company during fiscal year 2017.

The following table sets forth information known to us with respect to the beneficial ownership of our ~~Class A~~ common stock as of ~~June 30, 2017,~~September 22, 2021, for: (i) each person known by us to beneficially own more than 5% of our voting securities, (ii) each named executive officer, (iii) each of our directors, and (iv) all of our current executive officers and directors as a group. ~~Unless otherwise specified, the~~The address of each of the persons set forth below is in care of Innovation Pharmaceuticals Inc., 301 Edgewater Place - Suite 100, ~~Cummings Center, Suite 151-B, Beverly, Massachusetts 01915.~~Wakefield, MA 01880.

*	Denotes less than 1% ~~of the outstanding shares of common stock.~~.

(1)	“Beneficial owner” means having or sharing, directly or indirectly (i) voting power, which includes the power to vote or to direct the voting, or (ii) investment power, which includes the power to dispose or to direct the disposition, of shares of the common stock of an issuer. The definition of beneficial ownership includes shares underlying options or warrants to purchase common stock, or other securities or convertible debt convertible into common stock, that are exercisable or convertible or that will become exercisable or convertible within 60 days. Unless otherwise indicated, the beneficial owner has sole voting and investment power.

~~(2)~~	For each stockholder, the calculation of percentage of beneficial ownership is based upon ~~135,274,421~~437,096,222 shares of Class A common stock and 15,641,463 shares of Class B common stock outstanding as of ~~June 30, 2017,~~September 22, 2021, and shares of common stock subject to options, warrants and/or conversion rights held by the stockholder that are currently exercisable or ~~were~~are exercisable within 60 days of ~~June 30, 2017,~~September 22, 2021, which are deemed to be outstanding and to be beneficially owned by the stockholder holding such options, warrants or conversion rights. The percentage ownership of any stockholder is determined by assuming that the stockholder has exercised all options, warrants and conversion rights to obtain additional securities and that no other stockholder has exercised such rights.

(2)	Percentage total voting power represents voting power with respect to all shares of our Class A common stock and Class B common stock, voting together as a single class. Each holder of Class B common stock is entitled to ten votes per share of Class B common stock, and each holder of Class A common stock is entitled to one vote per share of Class A common stock on all matters submitted to our stockholders for a vote. The Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of our stockholders, except as may otherwise be required by law. The Class B common stock is convertible at any time by the holder into shares of Class A common stock on a share-for-share basis.

(3)	Includes (i) ~~7,335,002 shares of Class A common stock held directly by Mr. Ehrlich, (ii)~~ 2,752,310 shares of Class A common stock held by Mr. Ehrlich’s spouse, ~~(iii) 4,078,232~~(ii) 2,567,476 shares of Class A common stock into which a convertible loan and accrued interest in the amount of ~~$2,022,264 and accrued interest $16,852~~$1.3 million may be converted at $0.50 per share, ~~(iv)~~(iii) vested options to purchase 2,000,000 shares of Class A common stock granted to Mr. Ehrlich under the 2010 Equity Incentive Plan, ~~and (v)~~(iv) vested options to purchase ~~18,000,000~~500,000 shares of Class BA common stock granted to Mr. Ehrlich under the ~~2010~~2016 Equity Incentive ~~Plan.~~Plan, and (v) 15,641,463 shares of Class B common stock held directly by Mr. Ehrlich. Each share of Class A common stock carries one vote and each share of Class B common stock carries ten votes on all matters before the Company’s stockholders. Class B common stock is convertible into shares of Class A common stock at the holder’s election.

(4)	~~Includes (i) 15,048,286~~For each of Messrs. Schechter and Spektor, includes 500,000 shares of Class A common stock ~~held by~~issuable upon the ~~Menon Family Trust, for which Dr. Menon serves as trustee, and (ii) vested~~exercise of stock options ~~to purchase 18,000,000 shares~~that are currently exercisable or are exercisable within 60 days of Class B common stock granted to Dr. Menon under the 2010 Equity Inventive Plan. Each share of Class A common stock carries one vote and each share of Class B common stock carries ten votes on all matters before the Company’s stockholders. Class B common stock is convertible intoSeptember 22, 2021.

(5)	Includes 518,962 shares of Class A common stock atissuable upon the ~~holder’s election.~~

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~~(5)~~	Includes 804,587 shares of restricted stock. See “—Role of the Board of Directors; Employment Agreements—Employment Agreement with Dr. Bertolino” above for a description of the vesting conditions for the restricted stock and a vested option to purchase 308,920 shares of common stock.September 22, 2021.
	~~ ~~

~~(6)~~	~~Includes 250,000 shares of common stock held directly and a vested option to purchase 19,665 shares of common stock.~~
(6)	Includes ~~250,000~~6,586,438 shares of Class A common stock, ~~held directly and a vested option to purchase 19,665 shares~~in each case that are currently exercisable or are exercisable within 60 days of ~~common stock.~~September 22, 2021.

The following table sets forth certain information about the securities authorized for issuance under our equity incentive plans as of June 30, ~~2017.~~2021.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by stockholders ⁽¹⁾		38,826,889	$	0.16		3,869,111		2,210,000	$	0.54		19,790,000
Equity compensation plans not approved by stockholders ⁽²⁾		828,326	$	1.37		16,864,052		4,569,935	$	0.26		10,554,882
Total		39,655,215	$	0.19		20,733,163		6,779,935	$	0.35		30,344,882

The Audit Committee’s charter requires it to approve or ratify certain transactions involving the Company and “related persons,” as defined under the relevant SEC rules. Any transaction with a related person, other than transactions available to all employees generally or involving aggregate amounts of less than $120,000, must be approved or ratified by the Audit Committee. The policy applies to all executive officers, directors and their family members and entities in which any of these individuals has a substantial ownership interest or control. None of such related persons has been involved in any transactions with us since the beginning of fiscal ~~2017~~2020 which are required to be disclosed pursuant to Item 404 of SEC Regulation S-K. For information about transactions with related persons that were entered into before fiscal ~~2017,~~2021, see Notes 9 and 10 in the accompanying notes to the financial statements.

In considering and making decisions as to the independence of each of the directors of the Company, the Board considered transactions and relationships between the Company (and its subsidiaries) and each director (and each member of such director’s immediate family and any entity with which the director or family member has an affiliation such that the director or family member may have a material indirect interest in a transaction or relationship with such entity). The Board has determined that the following members of the Board are independent as defined in applicable SEC and Nasdaq rules and regulations, and that each constitutes an “Independent Director” as defined in Nasdaq Listing Rule ~~5605, and that such members constitute a majority of the entire Board:~~5605: Dr. Barry Schechter and Dr. Zorik ~~Spektor and Mr. Mark R. Tobin.~~Spektor.

The following table sets forth the aggregate fees for professional audit services rendered by ~~Baker Tilly Virchow Krause, LLP~~Heaton & Company, PLLC (d/b/a Pinnacle Accountancy Group of Utah) (“Pinnacle”) for the audit of the Company’s annual financial statements for the fiscal ~~years~~year ended June 30, ~~2017~~2021 and ~~2016,~~2020, and fees billed for other services provided by ~~Baker Tilly Virchow Krause, LLP~~Pinnacle in the fiscal ~~years~~year ended June 30, ~~2017~~2021 and ~~2016.~~2020. The Board of Directors has approved all of the following fees.

	Fiscal Year Ended
(Rounded to nearest thousand)	2017		2016
						2021		2020
Audit Fees	$	134,000	$	113,000	(1)	$	67,000	$	56,000
Audit related Fees		—		—
Audit Related Fees							—		—
Tax Fees		—		—			—		—
All Other Fees		—		—			—		—
Total Fees	$	134,000	$	113,000
Total						$	67,000	$	56,000

(1) Audit Fees consist of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided by ~~Baker Tilly Virchow Krause, LLP~~Pinnacle in connection with our statutory and regulatory filings or engagements.

Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining auditor independence and determined that such services are appropriate. Before auditors are engaged to provide us audit or non-audit services, such engagement is (without exception, required to be) approved by the Audit Committee of our Board.

Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit service performed by ~~Baker Tilly Virchow Krause, LLP~~Pinnacle for our financial statements as of and for the year ended June 30, ~~2017.~~2021.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Leo Ehrlich, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

We have audited the accompanying balance sheets of Innovation Pharmaceuticals Inc. (formerly Cellceutix Corporation) as of June 30, 2017 and 2016, and the related statements of operations, stockholders’ equity (deficiency) and cash flows for each of the years in the three-year period ended June 30, 2017. We also have audited Innovation Pharmaceuticals, Inc.’s internal control over financial reporting as of June 30, 2017, based on criteria established in ~~Internal Control - Integrated Framework~~ issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). The company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Innovation Pharmaceuticals Inc. as of June 30, 2017 and 2016 and the results of its operations and cash flows for each of the years in the three-year period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Innovation Pharmaceuticals Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on criteria established in ~~Internal Control - Integrated Framework~~ ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework).~~

Preferred Stock

Common Stock

Additional

Treasury Stock

Par Value

Par Value

Paid-in

Accumulated

Shares

$ 0.001

Shares

$ 0.0001

Capital

Deficit

Shares

Amount

Total

Balance at June 30, 2014

-

$ -

109,787,129

$ 11,000

$ 29,215,000

$ (28,020,000 )

-

$ -

$ 1,206,000

Shares sold to Aspire Capital under Oct 2014 Agreement at $1.62-4.21

-

-

6,390,379

1,000

15,845,000

-

-

-

15,846,000

Shares sold to Aspire Capital under March 2015 Agreement at $2.95, net of financing cost $44,000

-

-

100,000

-

251,000

-

-

-

251,000

Offering cost

-

-

-

-

(299,000 )

-

-

-

(299,000 )
Expiration from Redeemable Common Stock liability

-

-

-

-

1,400,000

-

-

-

1,400,000

Exercise of warrants

-

-

941,000

-

756,000

-

-

-

756,000

Exercise of options

-

-

320,000

-

111,000

-

-

-

111,000

Shares issued to officer for bonus at $2.93

-

-

50,000

-

146,000

-

-

-

146,000

Stock options issued to employees for bonus at $2.93-$4.71

-

-

-

-

198,000

-

-

-

198,000

Shares issued to consultant for services at $2.56

-

-

15,000

-

38,000

-

-

-

38,000

Stock options issued to consultant for services

-

-

-

-

17,000

-

-

-

17,000

Shares issued as commitment fee, 3/30/2015 at $3.12

-

-

160,000

-

499,000

-

-

-

499,000

Net loss

-

-

-

-

-

(13,145,000 )

-

-

(13,145,000 )

-

Balance at June 30, 2015

-

$ -

117,763,508

$ 12,000

$ 48,177,000

$ (41,165,000 )

-

$ -

$ 7,024,000

Shares sold to Aspire Capital under April 2015 Agreement at $1.01 - $2.53 range

-

-

5,700,000

-

8,174,000

-

-

8,174,000

Offering cost

-

-

-

-

(135,000 )

-

-

-

(135,000 )
Exercise of options

-

-

74,000

-

40,000

-

-

40,000

Shares issued to consultant for services at $1.12-$2.49

-

-

52,028

-

86,000

-

-

86,000

Shares issued to officer as equity awards at $1.40

-

-

-

-

8,000

-

-

8,000

Stock options issued to consultant for services

-

-

-

-

555,000

-

-

555,000

Stock options issued to directors as compensation at $1.58

60,000

-

-

60,000

Stock options issued to officer as equity awards at $1.39

-

-

-

-

4,000

-

-

4,000

Net loss

-

-

-

-

-

(12,852,000 )

-

(12,852,000 )

Balance at June 30, 2016

-

$ -

123,589,536

$ 12,000

$ 56,969,000

$ (54,017,000 )

-

$ -

$ 2,964,000

Shares sold to Aspire Capital under April 2015 Agreement at $0.66 - $1.32 range

-

-

8,900,000

1,000

7,897,000

-

-

-

7,898,000

Offering cost

-

-

-

-

(131,000 )

-

-

-

(131,000 )

Preferred Stock

Common Stock

Additional

Treasury Stock

Par Value

Par Value

Paid-in

Accumulated

Shares

$ 0.001

Shares

$ 0.0001

Capital

Deficit

Shares

Amount

Total

Shares issued to consultant for services at $0.84 - $1.38

-

-

41,720

-

44,000

-

-

-

44,000

Shares issued to officer as equity awards at $1.40

-

-

-

-

747,000

-

-

-

747,000

Stock options issued to consultant for services at $1.12 - $1.77

-

-

-

-

31,000

-

-

-

31,000

Stock options issued to officer as equity awards at $1.39

-

-

-

-

400,000

-

-

-

400,000

Stock purchases

-

-

2,471,912

1,000

2,199,000

-

-

-

2,200,000

Issuance of 533,333 vested shares to an Officer

-

-

533,333

-

-

-

-

-

-

Withholding and Purchase of 262,080 Treasury shares from vested shares issued – at cost

-

-

(262,080 )

-

-

-

262,080

(220,000 )

(220,000 )
Shares issued to employees for services at $1.03 - $1.37

-

-

-

-

37,000

-

-

-

37,000

Stock options issued to employees for services at $1.03-$1.37

-

-

-

-

102,000

-

-

-

102,000

Net loss

-

-

-

-

-

(15,536,000 )

-

-

(15,536,000 )

Balance at June 30, 2017

-

$ -

135,274,421

$ 14,000

$ 68,295,000

$ (69,553,000 )

262,080

$ (220,000 )

$ (1,464,000 )

Innovation Pharmaceuticals Inc. (the “Company”) was incorporated as Econoshare, Inc. on August 1, 2005, in the State of Nevada. On December 6, 2007, the Company acquired Cellceutix Pharma, Inc., a privately owned corporation formed under the laws of the State of Delaware on June 20, 2007. Following the acquisition, the Company changed its name to Cellceutix Corporation. The Company’s subsidiary Cellceutix Pharma, Inc. was dissolved in 2014. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the name change was not required.

~~The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. The Company’s common stock is quoted on OTCQB, symbol “IPIX”.~~

We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of cancer, antibiotics and inflammatory disease. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Brilacidin, Kevetrin and Prurisol and advancing them as quickly as possible along the regulatory pathway. We will develop the highest quality data and broadest intellectual property to support our compounds.

We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.

As of June 30, 2017, the Company adopted Accounting Standards Codification 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of management’s assessment, plans and conclusion of the Company’s ability to continue as a going concern.

As of June 30, 2017, the Company has an accumulated deficit of $69.6 million, representative of recurring losses since inception. The Company have incurred recurring losses since inception due to the fact that it is a development stage pharmaceutical company that has no sales since inception since no products have obtained the necessary Federal Drug Administration approval in order to market products. The Company expects to continue to incur losses as a result of costs and expenses related to the Company’s clinical trials and corporate general and administrative expenses.

At June 30, 2017, the Company had $4.1 million in cash and had a working capital deficit of $6.1 million. The Company had expended substantial funds on its clinical trials and expects to increase this spending. The Company’s net cash used in operating activities during the year ended June 30, 2017 was approximately $11.7 million, and current projections indicate that the Company will have continued negative cash flows for the foreseeable future. Net losses incurred for the year ended June 30, 2017, 2016 and 2015, amounted to $(15.5) million, $(12.9) million and $(13.1) million, respectively, and working capital (deficits) was approximately $(6.1) million and $(1.9) million, respectively, at June 30, 2017 and 2016. At June 30, 2017, the Company’s cash amounted to $4.1 million and current liabilities amounted to $10.6 million, of which $6.3 million were with related parties with no immediate payment terms.

Accordingly, the Company’s planned operations for the next 12 months raise doubt about its ability to continue as a going concern. The Company’s plans to alleviate the doubt of its ability to continue as a going concern, which are probable to be effectively implemented and alleviate these conditions, primarily include its ability to control the timing and spending on its research and development programs and raising additional funds through equity financings from its Common Stock Purchase Agreement with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”). The Company also may consider other plans to fund operations including: (1) raising additional capital through debt financings or from other sources; (2) additional funding through new relationships to help fund future clinical trial costs (i.e. licensing and partnerships); (3) reducing spending on one or more research and development programs by discontinuing development; and/or (4) restructuring operations to change its overhead structure. The Company may issue securities, including common stock, preferred stock and stock purchase contracts through private placement transactions or registered public offerings, pursuant to its registration statement on Form S-3 initially filed with the Securities and Exchange Commission (“SEC”) on October 30, 2014. The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of its product candidates and key development and regulatory events and its decisions in the future.

The Company believes that the actions discussed above are probable of occurring and alleviating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements.

As discussed in Note 15, subsequent to June 30, 2017, the Company entered into a new $30 million common stock purchase agreement with Aspire Capital to replace the prior $30 million Aspire Capital agreement and additional proceeds of approximately $2.1 million was generated from the April 2015 agreement with Aspire Capital from July 1, 2017 to September 1, 2017.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include contract research accruals, recoverability of long-lived assets, measurement of stock-based compensation, and the periods of performance under collaborative research and development agreements. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

~~Cash consist of bank deposits. There were no cash equivalents at June 30, 2017 and 2016.~~

Equipment is stated at cost, net of accumulated depreciation. Expenditures that extend the life, increase the capacity, or improve the efficiency of property and equipment are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation is recognized using the straight-line method over the following approximate useful lives:

Costs incurred to file patent applications and acquired intangibles are capitalized when the Company believes that there is a high likelihood that the patent will be issued and there will be future economic benefit associated with the patent. These costs will be amortized on a straight-line basis over a 12 - 17 years life from the date of patent filing. All costs associated with abandoned patent applications are expensed. In addition, the Company will review the carrying value of patents for indicators of impairment on a periodic basis and if it determines that the carrying value is impaired, it values the patent at fair value. As of June 30, 2017 and 2016, carrying value of patent was approximately $4,212,000 and $4,311,000, respectively. Amortization expense for the fiscal years ended June 30, 2017, 2016 and 2015, was approximately $372,000, $404,000 and $394,000, respectively.

As of June 30, 2017, the Company expensed the costs associated with obtaining patents that have not yet developed products nor which have gained market acceptance and the Company has or will let these patents go abandoned. For the fiscal years ended June 30, 2017, 2016 and 2015, the Company has charged to operations approximately $4,000, $37,000 and $102,000, respectively as patent expenses included in general and administrative expenses.

In accordance with the provisions of the applicable authoritative guidance, the Company’s long-lived assets and amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company assesses the recoverability of such assets by determining whether their carrying value can be recovered through undiscounted future operating cash flows, including its estimates of revenue driven by assumed market segment share and estimated costs. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. During the fiscal years ended June 30, 2017, 2016 and 2015, the Company has recorded impairment on patent costs of Delparantag and various patents of approximately $0, $648,000 and $0, respectively and included in general and administrative expenses.

The Company’s financial instruments include cash, accounts payable and accrued liabilities. The carrying amounts of these financial instruments approximate their fair value, due to the short-term nature of these items. The fair value hierarchy has the following three levels:

~~Level 1-quoted prices in active markets for identical assets and liabilities.~~

Level 2-observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.

~~Level 3-unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.~~

We devote significant resources to research and development programs in an effort to discover and develop potential future product candidates. The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes three phases of clinical trials in which we collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease. There are many difficulties and uncertainties inherent in research and development of new products, resulting in a high rate of failure. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and significant cost. Failure can occur at any point in the process, including after the product is approved, based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs of manufacture, alternative therapies or infringement of the patents or intellectual property rights of others. Uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval and which will be commercially viable and generate profits. Successful results in preclinical or clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.

Expenditures for research, development, and engineering of products are expensed as incurred. For the fiscal years ended June 30, 2017, 2016 and 2015, the Company incurred approximately $12,783,000, $8,952,000 and $10,531,000 of research and development costs, respectively.

The Company maintains its cash in bank deposit and checking accounts that at times exceed federally insured limits. Approximately $4 million is subject to credit risk at June 30, 2017. However, these cash balances are maintained at creditworthy financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.

The Company follows the provisions of FASB ASC 740-10 “Uncertainty in Income Taxes” (ASC 740-10). The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

~~The Company has identified its U.S. Federal income tax return and its State return in Massachusetts as its major tax jurisdictions. The fiscal 2014 and forward years are still open for examination.~~

Basic and diluted loss per share are computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, restricted stock, warrants and convertible related party notes payable. Common share equivalents were excluded from the computation of diluted earnings per share for the years ended June 30, 2017, 2016 and 2015, because their effect was anti-dilutive (See Note 11 - Weighted Average Shares Outstanding).

The Company accounts for treasury stock using the cost method. There were 262,080 shares of treasury stock purchased at a cost of $220,000 at June 30, 2017 (see Note 13). There were no treasury shares held at June 30, 2016.

Treasury stock, representing shares of the Company’s common stock that have been acquired after having been issued, is recorded at its acquisition cost and these shares are no longer considered outstanding.

ASC 505-50-30-11 (previously EITF 96-18) further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:

The components of stock-based compensation related to stock options and restricted stock grants in the Company’s Statement of Operations for the fiscal years ended June 30, 2017, 2016 and 2015 are as follows (rounded to nearest thousand):

~~Going Concern~~ — In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). The ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual periods, and interim periods within those annual periods, starting after December 15, 2016. We have implemented this new accounting standard and updated our liquidity disclosures, as required.

~~Deferred Taxes –~~ During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified on a net basis as non-current in a statement of financial position. Early adoption of this ASU did not have an effect on our deferred tax assets and deferred tax liabilities on our accompanying balance sheets.

~~Debt Issuance Costs -~~ In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The new standard will more closely align the presentation of debt issuance costs under U.S. generally accepted accounting principles with the presentation under comparable IFRS standards. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the balance sheet as assets and amortized as interest expense. The costs will continue to be amortized to interest expense using the effective interest method. Subsequent to the issuance of ASU 2015-03 the Securities and Exchange Commission staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance, which clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03, is effective upon adoption of ASU 2015-03. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.

~~Stock Compensation -~~ In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will simplify the income tax consequences, accounting for forfeitures and classification on the Statement of Cash Flows (i) excess tax benefits be classified as cash inflows provided by operating activities, and (ii) cash paid to taxing authorities arising from the withholding of shares from employees be classified as cash outflows used in financing activities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This new pronouncement has been adopted on July 1, 2016 and did not have a material effect on the Company’s financial position, results of operations, but had an effect of the classification of cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation. The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This ASU is the final version of Proposed ASU EITF-13D--Compensation--Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.

In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a single comprehensive five-step principles based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until 2019. In addition, the FASB is allowing companies to early adopt this guidance for non-public entities beginning in fiscal year 2017. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply this new guidance when it becomes effective and has not yet selected a transition method. The Company, due to not having any revenue currently and in the foreseeable future, has concluded that the impact of the adoption of this accounting standard on its financial statements will not be material.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. For finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments in Topic 842 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management has determined that based on current accounting and lease contract information the adoption of ASU No. 2016-02 is not expected to have a significant impact on the Company’s financial position, results of operations and disclosures. However, management is continually evaluating the future impact of ASU No. 2016-02 based on changes in the Company’s financial statements through the period of adoption.

~~The patents are amortized on a straight-line basis over the estimated remaining useful lives of the assets, determined 12-17 years from the date of acquisition.~~

Amortization expense for the fiscal years ended June 30, 2017, 2016 and 2015, was approximately $372,000, $404,000 and $394,000, respectively. In fiscal year 2016, $134,000 of accumulated amortization on patents was written off related to the impairment of patents.

Based on managements’ assessment of certain business factors, it was determined that certain particular patents held by the Company would not be used in the future and were therefore impaired at June 30, 2016. The Company recorded a full impairment of its patent rights to Delparantag and other patents in the latter part of April 2016. Delparantag was acquired by the Company in the purchase of the patent assets from the Polymedix Estate. The Company believes that the Delparantag compound, which had clinical activity but also safety concerns in a prior clinical trial by Polymedix, is now a low priority compound for further development, among the compounds held in the Company’s patent portfolio and will not be placed into future clinical trials. The decision by management was also made after factoring in today’s potential regulatory and litigious climate in commercializing these compounds. During the fourth quarter of its fiscal year ended June 30, 2016, the Company recorded an impairment on the patent costs for Delparantag of approximately $377,000 (the patent cost of $480,000 less $103,000 of accumulated amortization) and recorded an impairment on the patent costs of various patents held (included in the above table under the heading Patents - Kevetrin and related compounds) of approximately $271,000 (the patent cost of $302,000 less $31,000 of accumulated amortization). As a result, a total impairment of $0, $648,000 and $0 was recorded on the accompanying statement of operations for the year ended June 30, 2017, 2016 and 2015, respectively.

At June 30, 2017, the future amortization period for all patents was approximately 8.18 years to 17 years. Future estimated annual amortization expenses are approximately $377,000 for each year from 2018 to 2025, $367,000 for the year ending June 30, 2026, $365,000 for the year ending June 30, 2027, $127,000 for the year ending June 30, 2028, $74,000 for the years ending June 30, 2029 through the years ended 2032, $34,000 for the year ending June 30, 2033 and $7,000 for the year ending June 30, 2034.

~~Property, plant and equipment, net consisted of the following (rounded to nearest thousand):~~

~~Depreciation expense for the fiscal years ended June 30, 2017, 2016 and 2015 was approximately $33,000, $16,000 and $10,000, respectively.~~

~~Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):~~

On December 29, 2010, the Company entered into employment agreements with its two executive officers, Leo Ehrlich, the Company’s Chief Executive Officer, and Krishna Menon, Chief Scientific Officer. Both agreements provide for a three year term with each executive receiving an annual base salary of $350,000 per year commencing January 1, 2011, with an annual increase of 10% for each year commencing January 2012. The Board, at its discretion, may increase the base salary based upon relevant circumstances. On January 1, 2014 the Board approved the extension of the employment agreements for a one year period with a 10% increase in salary from the calendar year 2013 annual salary of $423,500, to an annual salary of $465,850. Until new employment agreements are entered into, we will continue paying the officer’s salaries at this rate per annum.

As of June 30, 2017, the Company accrued bonus payments to (1) Ms. Jane Harness of approximately $76,000, (2) Ms. Anne Ponugoti of approximately $10,000, and (3) a deferred bonus payment to Dr. Bertolino, in accordance with his employment agreement target bonus amount of 40% of his base salary of $440,000. These bonus payments were approved by Compensation Committee of the Board on August 31, 2017.

The Company signed a lease extension agreement with Cummings Properties which began on October 1, 2013. The lease is for a term of five years ending on September 30, 2018, and requires monthly payments of $18,000. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease and subleases 200 square feet of space previously used by the Company and pays the Company $900 per month.

~~As of June 30, 2017, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):~~

Rent expense, net of lease income, under this operating lease agreement was approximately $205,000, $203,000 and $207,000 for the years ended June 30, 2017, 2016 and 2015, respectively. Before September, 2013, the Company paid rent to KARD for share of office space and details are shown at Note 9. Related Party Transactions.

We lease equipment under a non-cancelable operating lease that expires in April, 2018. The future minimum rental commitment for our operating lease for the next 12 months is $34,000, as of June 30, 2017.

The Company has total contractual minimum commitments of approximately $6 million to Contract Research Organizations as of June 30, 2017. Expenses are recognized when services are performed by the Contract Research Organizations.

~~On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement as the President and Chief Medical Officer of the Company, effective on June 27, 2016 (See Note 12).~~

~~A complaint entitled~~ ~~O’Connell v. Cellceutix Corp. et al.~~ (No. 1:15-cv-07194) was filed in the United States District Court for the Southern District of New York in September 2015 against the Company and its officers alleging that the defendants made materially false and misleading statements, and omitted materially adverse facts, about the Company’s business, operations and prospects. On June 9, 2016, the U.S. District Court for the Southern District of New York granted the Company’s motion to dismiss the lawsuit. The ruling dismissed all claims against Cellceutix, denied the plaintiff’s request to file an amended complaint, and ordered that the case be closed. The action was subject to a potential appeal which was withdrawn on September 2, 2016.

Dr. Menon, the Company’s principal shareholder, President of Research, and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007, the Company began renting office space from KARD, and since September 1, 2013, the Company no longer leases space from Kard. At June 30, 2017 and June 30, 2016, rent payable to KARD of approximately $21,000 and $32,000, respectively, were included in accrued expenses.

In September 2013, the Company signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $18,000. The Company had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., (“Innovative Medical”) a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease and rents approximately 200 square feet of office space, the space previously used by the Company and pays the Company $900 per month, the same amount the Company previously paid KARD. Innovative Medical paid rent of $11,000 for the years ended June 30, 2017 and 2016 and 2015. The rental payment was offset with the accrued rent owed to KARD.

The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company now has its own research study capabilities and no longer uses KARD. At June 30, 2017 and June 30, 2016, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable.

During the year ended June 30, 2010, Mr. Ehrlich loaned the Company a total of approximately $973,000. A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note, Ehrlich Promissory Note C. The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s Class A common stock at $0.50 per share. The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the Ehrlich Promissory Note C and agreed to retroactively convert accrued interest of approximately $97,000 through December 31, 2010 into additional principal. During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional (approximate) $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of this demand note to approximately $2,022,000.

On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principal and interest of approximately $2,248,000, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten (10) years from the date of issuance.

~~At June 30, 2017 and June 30, 2016, approximately $17,000 and $40,000, respectively, is the accrued interest payable on this note.~~

~~At June 30, 2017 and June 30, 2016, principal balance of this demand note was approximately $2,022,000.~~

~~Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:~~

~~12.~~ ~~Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding~~

On April 5, 2009 the Board of Directors of the Company adopted the 2009 Stock Option Plan (“the 2009 Plan”). The 2009 Plan permits the grant of 2,000,000 shares of both Incentive Stock Options (“ISOs”), intended to qualify under section 422 of the Code, and Non-Qualified Stock Options.

Under the 2010 Equity Incentive Plan (the “2010 Plan”) adopted by the Board of Directors in December 2010, the total number of shares of Class A or Class B common stock reserved and available for issuance under the 2010 Plan is 45,000,000 shares. Shares of common stock under the 2010 Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. The term of each stock option shall be fixed as provided, however, an ISO may be granted only within the ten-year period commencing from the effective date of the 2010 Plan and may only be exercised within ten years of the date of grant (or five years in the case of an ISO granted to an optionee who, at the time of grant, owns common stock possessing more than 10% of the total combined voting power of all classes of voting stock of the Company).

On June 30, 2016, the Board of Directors adopted the Cellceutix Corporation 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan became effective upon adoption by the Board of Directors on June 30, 2016.

Up to 20,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that, no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of ISOs, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.

In connection with adoption of the 2016 Plan, the Board of Directors also approved forms of Incentive Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Non-Employee Directors, Restricted Stock Award Agreement for Employees and Restricted Stock Award Agreement for Non-Employee Directors that will be utilized by the Company to grant options and restricted shares under the 2016 Plan.

~~The following table summarizes all stock option activity under the Company’s equity incentive plans:~~

~~The fair value of options granted for the years ended June 30, 2017, 2016 and 2015 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.~~

The Company recognized approximately $1,361,000, $713,000 and $400,000 of total stock-based compensation expense for the years ended June 30, 2017, 2016 and 2015 respectively. The $1,361,000 of stock- based compensation expense for the year ended June 30, 2017 included approximately $533,000 of stock options expense and $828,000 of stock awards (see Note 13).

On July 18, 2016, the Company issued 7,500 stock options to purchase shares of the Company’s common stock to a consultant for services rendered, exercisable for 3 years at $1.38 per share of common stock. The value of these 7,500 options was approximately $4,000. During the year ended June 30, 2017, the Company recorded approximately $4,000 of stock option expense for this option grant.

On September 1, 2016, the Company and Jane Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Portfolio Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness, under the 2016 Plan (i) 58,394 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 172,987 shares of the Company’s common stock were also granted at an exercise price of $1.37 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 58,394 shares were valued at approximately $80,000, which will be amortized over three years to September 1, 2019. The 172,987 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 1, 2019. During the year ended June 30, 2017, the Company recorded approximately $83,000 of stock-based compensation expense for these equity grants, including approximately $61,000 of stock option expense and $22,000 for the stock awards.

On September 15, 2016, the Company and LaVonne Lang entered into an employment agreement as the Company’s VP, Regulatory Affairs, effective on September 15, 2016. Commencing on September 15, 2016, the Company agreed to pay Dr. Lang an annual salary of $250,000. In addition, the Company agreed to grant to Dr. Lang under the 2016 Plan (i) 63,492 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 188,262 shares of the Company’s common stock were also granted at an exercise price of $1.26 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 63,492 shares were valued at approximately $80,000, which will be amortized over three years to September 15, 2019. The 188,262 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 15, 2019. During the year ended June 30, 2017, the Company recorded approximately $50,000 of stock-based compensation expense for these equity grants, including approximately $37,000 of stock option expense and $13,000 for the stock awards. Dr. Lang resigned on March 17, 2017 and the 63,492 restricted shares and the 188,262 stock options were forfeited.

On January 9, 2017, the Company and Anne Ponugoti entered into an employment agreement as the Company’s Associate Director, Clinical Sciences, effective on February 1, 2017. Pursuant to the employment agreement, the Company issued 10,000 shares of restricted stock and options to purchase 30,000 shares of common stock under the 2016 Plan. During the year ended June 30, 2017, the Company recorded approximately $6,000 of stock-based compensation expense for these equity grants, including approximately $4,000 of stock option expense and $2,000 for the stock awards.

On July 10, 2015, the Company issued 7,028 shares and 50,000 stock options to purchase shares of the Company’s common stock to a consultant for services rendered. The stock options were valued at approximately $60,000, based on the closing bid price as quoted on the OTC on July 10, 2015 at $2.64 per share. These options were issued with an exercise price of $2.49 and vested immediately, with a three year option term. These options have piggyback registration rights. During the year ended June 30, 2016, the Company recorded approximately $60,000 of stock option expense for this equity grant.

On September 30, 2015, the Company recorded approximately $20,000 of stock option expense regarding the 50,000 stock options to purchase shares of the Company’s common stock at $2.93 per share to Dr. William James Alexander.

On November 5, 2015, the Company issued one million stock options to purchase shares of the Company’s common stock to a law firm for services, valued at approximately $432,000, based on the closing bid price as quoted on the OTC on November 5, 2015 at $1.36 per share. These options were issued with an exercise price of $1.70 and vested immediately, with a three year option term. These options have piggyback registration rights. During the year ended June 30, 2016, the Company recorded approximately $432,000 of stock option expense for this equity grant.

On February 16, 2016, the Company issued 119,424 stock options to purchase shares of the Company’s common stock to two consultants for services, valued at approximately $55,000, based on the closing bid price as quoted on the OTC on February 16, 2016 at $1.15 per share. These options were issued with an exercise price of $1.105. One third of these stock options vested immediately, one third vested in six months (August 11, 2016), and the balance vested on February 11, 2017, and will be valid for a period of three years. These options have piggyback registration rights. During the year ended June 30, 2017 and 2016, the Company recorded approximately $16,000 and $39,000 of stock options expense, respectively, for these equity awards.

On April 6, 2016, the Company issued 25,000 shares and 25,000 stock options to purchase shares of the Company’s common stock to a consultant for service. The stock options were valued at approximately $14,000, based on the closing bid price as quoted on the OTC on April 6, 2016 at $1.61 per share. These options were issued with an exercise price of $1.77 and vested on April 30, 2017, with a three year option term. These options have piggyback registration rights. During the year ended June 30, 2017 and 2016, the Company recorded approximately $11,000 and $3,000 of stock option expenses for these equity grants, respectively. The value of these 25,000 shares at $1.61 per share was approximately $40,250 (see Note 13).

On June 10, 2016, the Company issued 19,665 stock options to purchase shares of the Company’s common stock each to three directors for service, valued at approximately $60,000, based on the closing bid price as quoted on the OTC on June 10, 2016 at $1.58 per share. These stock options were issued with an exercise price of $1.58 and vested immediately, with a five year option term. These options have piggyback registration rights. During the year ended June 30, 2016, the Company recorded approximately $60,000 of stock option expense for these equity grants.

On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement as our President and Chief Medical Officer, effective on June 27, 2016. Commencing on June 27, 2016, the Company agreed to pay Dr. Bertolino an annual salary of $440,000. In addition, the Company agreed to grant to Dr. Bertolino under the 2016 Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $1.39 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) 50% upon the first anniversary of the effective date, and the remaining 50% upon the second anniversary of the effective date (2) completion of both a Phase 2b psoriasis study and a Phase 2 oral mucositis study; (3) the Company’s common stock closes above $3.00 per share (as may be adjusted for any stock splits or similar actions); (4) the commencement of trading of the Company’s common stock on a national securities exchange (e.g. Nasdaq or the NYSE); or (5) upon a Change in Control (as defined in the employment agreement) of the Company. The Company could not conclude that it was probable that these awards will fully vest until the second anniversary of the effective date, because such events listed above are outside the Company’s control. The Company will evaluate the probability of these events occurring for each reporting period. The 1,066,667 shares were valued at approximately $1.5 million, which will be amortized over two years to June 27, 2018. The 617,839 stock options were valued at approximately $800,000 and will be exercisable for 10 years at an exercise price of $1.39 per share. They will be amortized over 2 years to June 27, 2018 or sooner if the Company determines that it is probable that one of the events listed above will occur. During the year ended June 30, 2017 and 2016, the Company recorded approximately $1,147,000 and $13,000 of stock-based compensation expense – Officer, for these equity grants, respectively. The $1,147,000 of stock-based compensation – Officer in 2017 included approximately $400,000 of stock option expense and $747,000 of stock awards. The $13,000 of stock-based compensation – Officer in 2016 included approximately $5,000 of stock option expense and $8,000 of stock awards.

The Company may award Dr. Arthur P. Bertolino an annual bonus at the sole discretion of the Board of Directors of the Company. The Company may accelerate the amortization of the $0.7 million stock-based compensation expense if there are conditions which will accelerate the vesting, as mentioned above. At June 30, 2017, it was determined by management that it was not probable that these accelerated vesting conditions would occur and therefore there was no accrual recorded for the contingent acceleration and recording of this stock-based compensation expense.

On October 20, 2014 the Board of Directors approved the appointment of Dr. William James Alexander as the Chief Operations Officer of the Company for the term of one year effective October 27, 2014. Pursuant to his employment agreement, Dr. Alexander received immediately 50,000 shares of the Company’s common stock as a sign-on bonus and 50,000 stock options to purchase shares of the Company’s common stock at $2.93 per share. Such options vest in equal installments on July 27, 2015 and October 27, 2015 and the option life is 3 years and expires on July 27, 2018 and October 27, 2018, respectively.

On December 26, 2014 the Board of Directors approved the cash and option bonus payments to officers and employees, including cash of $250,000 each to Mr. Leo Ehrlich, our CEO and Dr. Krishna Menon, our President at the time, and 25,000 options exercisable for 3 years at $4.71 per share of common stock to Dr. William James Alexander, our COO and 65,000 options exercisable for 3 years at $4.29 per share of common stock, to our employees.

On May 12, 2015, the Company issued 15,000 options to a consultant for his one year contract and exercisable for 3 years at $2.56 per share of common stock. The total value of these 15,000 shares of stock option was approximately $17,000 and we recognized approximately $17,000 of stock based compensation costs and charged to additional paid-in capital as of June 30, 2015. The assumptions we used in the Black Scholes option-pricing model were disclosed as above.

During the year ended June 30, 2016, the Company received an aggregate of approximately $28,000 in total, including the $12,000 of subscription receivable of 2015 and the $16,000 for the exercise of 14,000 common stock options at $1.105 per share. In addition, the Company recorded a subscription receivable of approximately $26,000 for the exercise of 60,000 options at a price from $0.17 to $0.64 per share (See Note 13).

During the year ended June 30, 2015, the Company received an aggregate of approximately $100,000 in total and recorded subscription receivable of approximately $12,000 for the exercise of 320,000 options at a price from $0.20 to $0.47 per share (See Note 13).

~~During the year ended June 30, 2017, there were no warrants issued and 25,000 expired.~~

~~During the year ended June 30, 2016, there were no warrants issued and there were 1,482,000 warrants expired.~~

On July 11, 2014, the Company issued 200,000 shares of Class A common stock to a warrant holder upon exercise of common stock purchase warrants exercisable at $1 per share. The Company received an aggregate of $200,000 in total for the exercise of 200,000 warrants. The issuance was exempt from registration under Section 4(a)(2) of the Securities Act.

On November 24, 2014, the Company issued 370,500 shares of Class A common stock to a warrant holder upon exercise of common stock purchase warrants exercisable at $1 per share and 370,500 shares of Class A common stock to a warrant holder upon exercise of common stock purchase warrants exercisable at $0.50 per share. The Company received an aggregate of $556,000 in total for the exercise of 741,000 warrants. The issuance was exempt from registration under Section 4(a)(2) of the Securities Act.

On March 30, 2015, the Company entered into a common stock purchase agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 is amortized as the funding is received. The amortized amounts of $131,000 and $136,000 were recorded to additional paid-in capital during the years ended June 30, 2017 and 2016. The unamortized portion is carried on the balance sheet as deferred offering costs and was $227,000 and $358,000 at June 30, 2017 and 2016, respectively. During the period from March 30, 2015 to June 30, 2017, the Company had completed sales to Aspire totaling 14.7 million shares of common stock generating gross proceeds of approximately $16 million. As of June 30, 2017, the available balance is approximately $14 million under this stock purchase agreement.

Concurrently with entering into the Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital, in which the Company agreed to file one or more registration statements, as permissible and necessary to register, under the Securities Act of 1933, as amended, the sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the Purchase Agreement. The Company has filed with the Securities and Exchange Commission a prospectus supplement, dated March 31, 2015, to the Company’s prospectus filed as part of the Company’s effective $75 million shelf registration statement on Form S-3, File No. 333-199725, registering all of the shares of common stock that have been or may be offered and sold to Aspire Capital from time to time.

During the year ended June 30, 2017 and 2016, the Company had completed sales to Aspire Capital totaling 9 million shares and 5.7 million shares of common stock generating gross proceeds of approximately $7.9 million and $8.2 million, respectively.

On March 28, 2017, the Company entered into stock purchase agreements with certain investors (“Offering”), pursuant to which the Company agreed to sell 2,471,912 shares of its Class A common stock at $0.89 per share in a registered direct offering, without an underwriter or placement agent. The offering closed on March 31, 2017. The total proceeds to the Company from the Offering were $2.2 million. The Company intends to use the proceeds from the Offering for general corporate purposes.

~~On July 18, 2016, the Company issued 7,500 shares to a consultant for service rendered. The value of these 7,500 shares at $1.38 per share was approximately $10,000.~~

~~On August 1, 2016, the Company issued 11,720 shares to a consultant for service rendered. The value of these 11,720 shares at $1.28 per share was approximately $15,000.~~

~~On June 2, 2017, the Company issued 22,500 shares to a consultant for service rendered. The value of these 22,500 shares at $0.84 per share was approximately $19,000.~~

~~Issuances of Common Stock and Stock Options – Pursuant to~~ ~~New~~ ~~Employment Agreements~~

On September 1, 2016, the Company and Jane Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Project Management, effective on September 1, 2016. Pursuant to the employment agreement, the Company issued 58,394 shares of restricted stock and options to purchase 172,987 shares of common stock to Ms. Harness under the Company’s 2016 Plan. See Note 10 for additional information concerning the restricted stock and stock options granted to Ms. Harness.

On September 15, 2016, the Company and LaVonne Lang entered into an employment agreement as the Company’s VP, Regulatory Affairs, effective on September 15, 2016. Pursuant to the employment agreement, the Company issued 63,492 shares of restricted stock and stock options to purchase 188,262 shares of common stock to Dr. Lang under the Company’s 2016 Plan. See Note 10 for additional information concerning the restricted stock and stock options granted to Dr. Lang. Dr. Lang resigned on March 17, 2017 and the 63,492 shares and the 188,262 stock options granted were forfeited.

On January 9, 2017, the Company and Anne Ponugoti entered into an employment agreement as the Company’s Associate Director, Clinical Sciences, effective on February 1, 2017. Pursuant to the employment agreement, the Company issued 10,000 shares of restricted stock and options to purchase 30,000 shares of common stock to Anne Ponugoti under the Company’s 2016 Plan. See Note 10 for additional information concerning the restricted stock and stock options granted to Anne Ponugoti.

~~Purchase of Treasury Stock~~~~- cash paid to Federal and State Taxing Authorities arising from the withholding of common shares from an officer’s vested restricted stock grant issuance~~

On June 27, 2017, 533,333 shares of the Company’s restricted stock vested to Dr. Bertolino according to Dr. Bertolino’s employment agreement. The total taxable compensation to Dr. Bertolino for the 533,333 vested shares was $448,000, which is priced at the closing stock price on June 26, 2017 at $.84 a share.

The Company issued 271,253 common shares (net share issuance amount), which is approximately 51% of the total vested common share amount of 533,333 common shares due to be issued to Dr. Bertolino. The remaining 262,080 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as Treasury Stock, at cost, on the Company’s accompanying balance sheets.

~~The following summarizes our restricted stock activity for the above restricted stock issuances:~~

~~Scheduled vesting for outstanding restricted stock at June 30, 2017 is as follows:~~

As of June 30, 2017, there was $0.8 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately $0.8 million of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 1.09 years.

During the year ended June 30, 2016, the Company had completed sales to Aspire Capital totaling 5,700,000 shares of common stock generating gross proceeds of approximately $8.2 million. The amortized amount of $136,000 and $5,000 were debited to additional paid-in capital during the year ended June 30, 2016 and 2015. The unamortized portion is carried on the balance sheet as deferred offering costs and was $358,000 at June 30, 2016.

During the year ended June 30, 2016, the Company received cash of $15,000 in total and recorded subscription receivable of $25,400 for the exercise of 74,000 common stock options at a range of $0.42 to $1.11 per share.

On July 10, 2015, the Company issued 7,028 restricted shares of Class A common stock and 50,000 stock options to purchase shares of the Company’s common stock to a consultant for services rendered. The shares were granted and vested on July 10, 2015. The shares were valued at $17,500.

On February 9, 2016, the Company issued 10,000 shares of Class A common stock to a consultant for services rendered. The shares were granted and vested on February 9, 2016. The shares were valued at $11,200.

On April 6, 2016, the Company issued 25,000 shares of Class A common stock and 25,000 stock options to purchase shares of the Company’s common stock, to a consultant for services rendered. The shares were granted and vested on April 6, 2016 and the options were exercisable for 3 years at $1.77 per share of common stock (see Note 12). These shares were valued at $40,000.

On May 22, 2016, the Company issued 5,000 shares of Class A common stock each to two consultants for services rendered. The shares were granted and vested on May 22, 2016. These shares were valued at $16,400.

On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement as our Chief Medical Officer of the Company, effective on June 27, 2016 and the Company agreed to grant to Dr. Bertolino under the Company’s 2016 Equity Incentive Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $1.39 per share. See Note 10 for additional information concerning the restricted stock and stock options granted to Dr. Bertolino.

~~$20 million Class A Common Stock Purchase Agreement with Aspire Capital Fund, LLC~~

During the period from October 25, 2013 to March 5, 2015, the Company had completed sales to Aspire Capital totaling 8,890,379 shares of common stock generating gross proceeds of approximately $20 million. The amortized amount of the commitment fee of $295,000 was debited to additional paid-in capital during the year ended June 30, 2015.

~~$30 million Class A Common Stock Purchase Agreement with Aspire Capital Fund, LLC~~

On March 30, 2015, the Company entered into a common stock purchase agreement (the “March 2015 Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the March 2015 Agreement. In consideration for entering into the March 2015 Agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 is amortized as the funding is received. The amortized amount of $5,000 was debited to additional paid-in capital during the year ended June 30, 2015.

During the period from March 30, 2015 to June 30, 2015, the Company had completed sales to Aspire Capital totaling 100,000 shares of common stock generating gross proceeds of approximately $0.3 million.

Concurrently with entering into the March 2015 Agreement, the Company also entered into a registration rights agreement with Aspire Capital, in which the Company agreed to file one or more registration statements, as permissible and necessary to register, under the Securities Act of 1933, as amended, the sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the March 2015 Agreement. The Company has filed with the Securities and Exchange Commission a prospectus supplement, dated March 31, 2015, to the Company’s prospectus filed as part of the Company’s effective $75,000,000 million shelf registration statement on Form S-3, File No. 333-199725, registering all of the shares of common stock that have been or may be offered and sold to Aspire Capital from time to time.

~~The Board of Directors approved the exercise of 320,000 common stock options at a range of $0.20 - $0.45 per share for $112,000 during the year ended June 30, 2015.~~

On May 12, 2015, the Company issued 15,000 restricted shares of Class A common stock and 15,000 options to a consultant for services rendered. The shares were granted on May 12, 2015 and vested on May 31, 2015. The shares were valued at $38,400 which were charged to additional paid-in capital as of June 30, 2015. The Company recognized approximately $55,000 of stock-based compensation costs related to the common stock and the stock option issued to this consultant for the year ended June 30, 2015.

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.

The Company has incurred operating losses since its inception and therefore no tax liabilities have been incurred for the periods presented. The amount of unused tax losses available for carryforward and to be applied against taxable income in future years totaled approximately $54,078,000 at June 30, 2017. The tax loss carryforwards expire beginning in 2028. Internal Revenue Code Sec. 382 places limitations on the utilization of net operating losses. Due to the potential limitation and the Company’s historical losses, the Company has recorded a full valuation allowance against this deferred tax asset. The valuation allowance increased by approximately $7,047,000 at June 30, 2017 and $5,383,000 at June 30, 2016.

~~The income tax provision benefit differs from the amount of tax determined by applying the Federal and States statutory rates as follows:~~

There was no current or deferred provision or benefit for income taxes for the years ended June 30, 2017 and 2016. The components of deferred tax assets as of June 30, 2017 and 2016, at an effective tax rate of 40%, are as follows (~~rounded to nearest thousand~~):

From July 1, 2017 to September 1, 2017, the Company has generated additional proceeds of approximately $2.1 million under the Common Stock Purchase Agreement with Aspire Capital from the sale of approximately 2.6 million shares of its common stock.

On September 1, 2017, the Company issued to Dr. Bertolino for his services rendered 1,066,667 shares of common stock, vesting 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $399,000, based on the closing bid price as quoted on the OTC on August 31, 2017 at $0.705 per share. These options were issued with an exercise price of $0.705 and vest 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration as defined in award agreement, with a three year option term. These options have piggyback registration rights.

On September 1, 2017, the Company also issued to Ms. Harness 58,394 shares of the Company’s common stock, 33 1/3% vesting upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date and 33 1/3% upon the third anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $112,000, based on the closing bid price as quoted on the OTC on August 31, 2017 at $0.705 per share. These options were issued with an exercise price of $0.705 and vest 33 1/3% upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and 33 1/3% upon the third anniversary of the grant date, with acceleration of vesting upon certain events.

On September 6, 2017, the Company entered into a common stock purchase agreement with Aspire Capital which replaces the prior $30 million Aspire Capital stock purchase agreement and provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Purchase Agreement. The Company also issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The Company will register the resale of any shares that Aspire Capital may purchase under this Purchase Agreement. To the extent Aspire Capital purchases shares under the Purchase Agreement and subsequently sells those shares, the other holders of our Class A common stock may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A common stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.

~~A summary of the Company’s quarterly results of operations for the years ended June 30, 2017 and 2016 is as follows~~ (~~rounded to nearest thousand, except for shares and per share data):~~

~~Nevada~~	~~001-37357~~	~~30-0565645~~INNOVATION PHARMACEUTICALS INC.
(~~State or Other Jurisdiction~~	~~(Commission File Number)~~	~~(IRS Employer~~
Exact name of ~~Incorporation)~~		~~Identification No.)~~registrant as specified in its charter)

Large Accelerated Filer	¨☐	Accelerated Filer	x☐
Non-Accelerated Filer	¨☒	Smaller reporting company	¨☒
~~(Do not check if a smaller reporting company)~~		Emerging growth company	¨ ☐

Class of Securities		Shares Outstanding
Common Stock Class A, $0.0001 par value		437,096,222
Common Stock Class B, $0.0001 par value		15,641,463

			PAGE NO
PART I
ITEM 1	BUSINESS	48
ITEM 1A	RISK FACTORS	1923
ITEM 1B	UNRESOLVED STAFF COMMENTS	4046
ITEM 2	PROPERTIES	4046
ITEM 3	LEGAL PROCEEDINGS	4046
ITEM 4	MINE SAFETY DISCLOSURES	4046

PART II
ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	4147
ITEM 6	SELECTED FINANCIAL DATA	4247
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	4248
ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5456
ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	5457
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	5458
ITEM 9A	CONTROLS AND PROCEDURES	5458
ITEM 9B	OTHER INFORMATION	5558


PART III
ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	5659
ITEM 11	EXECUTIVE COMPENSATION	6364
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	6967
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	7168
ITEM 14	PRINCIPAL ACCOUNTANT FEES AND SERVICES	7169


PART IV
ITEM 15	EXHIBITS AND FINANCIAL STATEMENTS	7270
ITEM 16	FORM 10-K SUMMARY	7271

SIGNATURES		7372

~~INDEX TO FINANCIAL STATEMENTS~~		~~F-1~~

Compound	Target/Indication	~~Target/Indication~~		Clinical Status
~~Prurisol~~		~~Psoriasis~~		~~Phase 2b~~
Brilacidin	Oral Mucositis (OM)	*ABSSSIPhase 2 Study (completed) Phase 3 in preparation
	Inflammatory Bowel Disease (IBD)	Phase 2 UP/UPS Proof of Concept Study (completed) Phase 1 Safety/toleration/PK of oral dosage form (completed) Phase 2 UC Safety/toleration/PK and Proof of Concept in preparation
	ABSSSI (Acute Bacterial Skin and Skin Structure Infection)	Phase 2 (completed)
		~~Oral Mucositis~~	COVID-19	Phase 2 ~~(Fast Track)~~
		~~Inflammatory Bowel Disease~~		~~Phase 2 (Proof of Concept)~~ Study ~~(completed)~~
Kevetrin		Ovarian Cancer		Phase 2
~~____________~~
*ABSSSI- Acute Bacterial Skin and Skin Structure Infection Study (completed)

	·	We need to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds.

	·	Our business could be adversely affected by the effects of health epidemics, including the global COVID-19 pandemic.

	·	Newly emerging SARS-CoV-2 variants could reduce the effectiveness of Brilacidin as a potential COVID-19 treatment.

	·	There can be no assurance that the product we are developing for COVID-19 would be granted an Emergency Use Authorization by the FDA or similar authorization by regulatory authorities outside of the United States.

	·	We have no products approved for commercial sale to generate revenue.

	·	In our existing or any future potential collaborations or partnerships, we will likely not be able to control all aspects of the development and commercialization of our compounds.

	·	We depend on license agreements for the development and commercialization of certain compounds.

	·	We have limited experience in drug and formulation development and may not be able to successfully develop any drugs.

	·	Development of pharmaceutical products is a risky and time-consuming process subject to a number of factors, many of which are outside of our control and we are subject to regulatory authority permissions and approvals, most importantly the FDA.

	·	We have limited experience in conducting or supervising clinical trials and must outsource all clinical trials.

	·	Success in early clinical trials may not be predictive or indicative of results in current ongoing clinical trials or potential future clinical trials.

	·	We are subject to risks inherent in conducting clinical trials.

	·	Delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to generate revenues.

	·	We must comply with significant and complex government regulations.

	·	We or third-party manufacturers we rely on may encounter failures or difficulties in manufacturing or formulating clinical development and commercial supplies of drugs.

	·	We can provide no assurance that our drug candidates will obtain regulatory approval or that the results of clinical studies will be favorable.

	·	Even if we obtain regulatory approvals, our marketed drug candidates will be subject to ongoing regulation.

	·	All of our Polymedix drug product candidates are licensed from or based upon licenses from the University of Pennsylvania.

	·	We or our third-party manufacturers may fail to comply with manufacturing regulations.

	·	Controls we or our third-party service providers have in place to ensure compliance with laws may not be effective to ensure compliance with all applicable laws and regulations.

	·	The Company is exposed to product liability, clinical and preclinical liability risks which could place a substantial financial burden upon the Company should it be sued.

	·	Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

	·	We may be unable to obtain or protect intellectual property rights relating to our products, and we may be liable for infringing upon the intellectual property rights of others.

	·	Our potential collaborative relationships with third parties could cause us to expend significant resources and incur substantial business risk.

	·	We may not be able to attract and retain highly skilled personnel or consultants.

	·	We depend upon our senior management and their loss or unavailability could put us at a competitive disadvantage.

	·	The biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition.

	·	The sale of our Class A Common Stock to Aspire Capital may cause substantial dilution to our existing stockholders.

	·	In addition to potential dilution associated with future fundraising transactions, we currently have significant numbers of securities outstanding that are exercisable for our common stock.

	·	Because our common stock is quoted on the OTC, your ability to sell your shares in the secondary trading market may be limited.

	·	Because our Class A Common Stock is considered “penny stock” you may have difficulty selling them in the secondary trading market.

	·	Our stock price may be volatile and your investment in our Class A Common Stock could suffer a decline in value.

	·	Short sellers of our stock may be manipulative and may drive down the market price of our common stock.

	·	Our directors and executive officers own or control a sufficient number of shares of our common stock to control our Company.

	·	We do not intend to pay any cash dividends in the foreseeable future.

	·	We may issue additional equity shares to fund the Company’s operational requirements which would dilute your share ownership.

☐	·	~~Prurisol~~ ~~— Our lead anti-psoriasis drug candidate, is a small molecule compound acting on the principles of immune modulation and PRINS (~~P~~soriasis susceptibility-related~~ R~~NA Gene~~ In~~duced by~~ S~~tress) reduction that has been found to be effective against psoriasis~~Brilacidin potently inhibits SARS-CoV-2 in ~~animal models, both in induced psoriasis as well as a xenograft model with~~an ACE2 positive human ~~psoriatic tissue. It is currently in the Phase 2 clinical development study below:~~lung cell line.
☐		Brilacidin achieved a high Selectivity Index of 426 (CC50=241μM/IC50=0.565μM).
	☐	~~Active Clinical Trials: A Randomized, Double Blind, Parallel Group, Placebo-controlled Trial~~Brilacidin’s main mechanism appears to ~~Study the Efficacy~~disrupt viral integrity and ~~Safety of Two Oral Doses of Prurisol Administered Twice Daily for Twelve Weeks to Subjects with Moderate to Severe Chronic Plaque Psoriasis~~impact viral entry.
☐	Brilacidin and remdesivir exhibit excellent synergistic activity against SARS-CoV-2.

	1.	Brilacidin, and related compounds
	2.	Arylamide and Salicylamide compounds
	3.	Anti-microbial compounds (including ~~anti-Gram~~anti- Gram negative compounds)
	4.	Kevetrin and related compounds
	5.	~~Prurisol and related compounds~~

Patent Title	Status	Description

~~Polycationic~~Arylamide Compounds And ~~Uses Thereof~~	~~United States: issued 07/31/12 and 08/13/13~~ ~~Patents Expire: 2025~~	~~Category 2~~ Arylamide compounds, compositions, methods of inhibiting angiogenesis, and methods of antagonizing heparin; Salicylamide compounds, compositions, methods of antagonizing heparin, and methods of inhibiting anti-Factor Xa

~~Ophthalmic And Otic~~ Compositions ~~Of Facially Amphiphilic Polymers And Oligomers~~ And Uses Thereof	United States: issued 11/24/~~15;~~15 and 01/01/19; Europe: issued 03/04/15; Japan: issued 05/15/15; Australia: issued 11/28/13; China: issued 10/01/14; Canada: issued 8/9/1616; India: issued 10/23/17 Pending: ~~India and~~ United States (Other claims) Patents Expire: 2027	Category 1 Brilacidin compound, compositions, and methods of treating bacterial ophthalmic infections

Synthetic Mimetics Of Host Defense And Uses Thereof	United States: issued 10/02/~~12 and 03/10/15;~~12; Taiwan: issued 04/01/~~15;~~ ~~Mexico: issued 09/28/12;~~ ~~Pending: India~~15 Patents Expire: 2029 and 2030	Category 1 Brilacidin enantiomer, compositions and formulations, and methods of preparation of enantiomer; Methods of preparation of Brilacidin

Host Defense Protein (HDP) Mimetics For Prophylaxis And/Or Treatment Of Inflammatory Diseases of the Gastrointestinal Tract	Pending – United States, Patent Cooperation Treaty (PCT) – National phase entered in Australia. ~~Japan –~~Europe and Japan– Granted Patents Expire: 2036	Category 1 Treatment Of Inflammatory Diseases of the Gastrointestinal Tract


14

~~Compounds And Methods For Treating Candidiasis And Aspergillus Infections~~

Cyclic Compounds And Methods Of Making And Using The Same	United States: issued 10/18/16 Patent Expires: 2032	Category 3 Cyclic compounds, compositions, methods of inhibiting the growth of a bacteria, and method of treating a mammal having a bacterial infection

~~Methods of Preparing Arylamides~~	~~United States: provisional pending~~	~~Category 1~~ ~~Methods of preparing Brilacidin~~
~~Methods Of Preparing Carbocyclic Nucleosides~~	~~United States: pending~~ ~~PCT: pending~~	~~Category 5~~ ~~Methods of preparing Prurisol~~

Facially Amphiphilic Polymers As Anti-infective Agents	United States: issued 02/06/07; 11/18/14 ~~Australia: issued 04/05/07; 04/12/07~~ ~~Canada: issued 07/16/13~~ ~~China: issued 07/01/09; 07/02/14~~ ~~Europe: issued 09/17/08; 05/25/11~~ ~~Japan: issued 08/15/08~~ ~~South Korea: issued 06/03/09; 06/16/09~~ ~~Patents Expire: 2022~~Latest Patent Expires: 2028	Category 1 & 3 - Brilacidin and related compounds; anti-microbial surfactants and related compounds

Facially Amphiphilic Polyaryl And Polyarylalkynyl Polymers And Oligomers And Uses Thereof	United States: issued 07/17/12; 05/06/14 Latest Patent Expires: United States (2028)	Category 1 & 3

	·	Patient has a serious disease or condition, or whose life is immediately threatened by their disease or condition.
18
	·	There is no comparable or satisfactory alternative therapy to diagnose, monitor, or treat the disease or condition.

	·	Patient enrollment in a clinical trial is not possible.

	·	Potential patient benefit justifies the potential risks of treatment.

	·	Providing the investigational medical product will not interfere with investigational trials that could support a medical product’s development or marketing approval for the treatment indication.

	·•	research and development programs;

	·•	preclinical studies and clinical trials;

	·•	material characterization studies;

	·•	regulatory processes; ~~and~~

	·
	•	drug substance and drug product manufacturing; and

	•	establishment of our own laboratory or a search for third party marketing partners to market our products for us.

	·•	enter into leases for new facilities and capital equipment; and

	·•	enter into additional licenses and collaborative agreements.

	·•	successful demonstration in clinical trials that our drug candidates, ~~Kevetrin, Prurisol,~~Brilacidin and ~~Brilacidin~~Kevetrin are safe and effective;

	·•	our ability to seek and obtain regulatory approvals, including with respect to the indications we are seeking;

	·•	the successful commercialization of our product candidates; and

	·•	market acceptance of our products.

	•	partners have significant discretion in determining the efforts and resources that they will apply to collaborations;

	•	partners may not pursue development and commercialization of our compounds or may elect not to continue or renew development or commercialization programs based on clinical study results, changes in their strategic focus due to the acquisition of competitive products, availability of funding, or other external factors, such as a business combination that diverts resources or creates competing priorities;

	•	partners may delay clinical studies, provide insufficient funding for a clinical study program, stop a clinical study, abandon a product candidate, repeat or conduct new clinical studies, or require a new formulation of a product candidate for clinical testing;

	•	partners could independently develop, or develop with third parties, products that compete directly or indirectly with our compounds;

	•	a partner with marketing, manufacturing, and distribution rights to one or more compounds may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities;

	•	we could grant exclusive rights to our partners that would prevent us from collaborating with others;

	•	partners may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;

	•	partners may not aggressively or adequately pursue litigation concerning our compounds or may settle such litigation on unfavorable terms, as they may have different economic interests than ours, and such decisions could negatively impact any royalties we may receive under our license agreements;

	•	disputes may arise between us and a partner that causes the delay or termination of the research, development, or commercialization of our current or future compounds or that results in costly litigation or arbitration that diverts management attention and resources;

	•	agreements may be terminated, possibly at-will, without penalty, and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable compounds;

	•	partners may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases, we would not have the exclusive right to commercialize such intellectual property; and

	•	a partner’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings.

	·•	develop products internally or obtain rights to them from others on favorable terms;

	·•	complete laboratory testing and human clinical studies;

	·•	obtain and maintain necessary intellectual property rights to our products;

	·•	successfully fulfill regulatory requirements to obtain requisite marketing approvals from governmental agencies;

	·•	enter into arrangements with third parties to manufacture our products on our behalf; and

	·•	enter into arrangements with third parties to provide sales and marketing functions.

	·•	failure to achieve clinical trial results that indicate a candidate is effective in treating a specified condition or illness in humans;

	·•	presence of harmful side effects;

	·•	determination by the FDA that the submitted data do not satisfy the criteria for approval;

	·•	lack of commercial viability of the drug;

	·•	failure to acquire, on reasonable terms, intellectual property rights necessary for commercialization; and

	·•	existence of alternative therapeutics that are more effective.

	·•	are found to be unsafe or ineffective in clinical trials;

	·•	do not receive necessary approval from the FDA or foreign regulatory agencies;

	·•	have manufacturing production problems, costs, pricing or reimbursement issues, or other factors that make the product not economical;

	·•	are hampered by the proprietary rights of others and their competing products and technologies;

	·•	fail to conform to a changing standard of care for the diseases they seek to treat; or

	·•	are less effective or more expensive than current or alternative treatment methods.

	·•	provide sufficient safety, efficacy or other data regarding a drug candidate to support the commencement of a Phase 3 or other clinical trial;

	·•	reach agreement on acceptable terms with prospective contract manufacturers, contract research organizations (CROs) and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different third parties;

	·•	select CROs, trial sites and, where necessary, contract manufacturers that do not encounter any regulatory compliance problems;

	·•	manufacture sufficient quantities of a product candidate for use in clinical trials;

	·•	obtain IRB approval to conduct a clinical trial at a prospective site;

	·•	recruit and enroll patients to participate in clinical trials, which can be impacted by many factors outside our or our ~~partners’~~contracted parties’ control, including competition from other clinical trial programs for the same or similar indications; and

	·•	retain patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal issues.

	·•	failure to conduct the clinical trial in accordance with regulatory requirements, including GCP, or our ~~protocols;~~protocol;

	·
	•	inspection of the clinical trial operations, trial sites or manufacturing facility by the FDA or other regulatory authorities resulting in findings of non-compliance and the imposition of a clinical hold;

	·•	unforeseen safety issues or results that do not demonstrate efficacy; and

	·•	lack of adequate funding to continue the clinical trial.

	·•	The FDA or foreign regulators may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them.

	·•	If regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution. In addition, many foreign countries control pricing and coverage under their respective national social security systems.

	·•	The FDA or foreign regulators may not approve our manufacturing processes or manufacturing facilities.

	·•	The FDA or foreign regulators may change their approval policies or adopt new regulations.

	·•	Even if regulatory approval for any of our product is obtained, the corresponding marketing license will be subject to continual review, and newly discovered or developed safety or effectiveness data may result in suspension or revocation of the marketing license.

	·•	If regulatory approval of the product candidate is granted, the marketing of that product would be subject to adverse event reporting requirements and a general prohibition against promoting products for unapproved uses.

	·•	In some foreign countries, we may be subject to official release requirements that require each batch of the product we produce to be officially released by regulatory authorities prior to its distribution by us.

	·•	We will be subject to continual regulatory review and periodic inspection and approval of manufacturing modifications, including compliance with cGMP regulations.

	·•	availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;

	·•	capacity of our facilities or those of our contract manufacturers;

	·•	facility contamination by microorganisms or viruses or cross contamination;

	·•	compliance with regulatory requirements, including Form 483 notices and Warning Letters;

	·•	changes in forecasts of future demand;

	·•	timing and actual number of production runs;

	·•	production success rates and bulk drug yields; and

	·•	timing and outcome of product quality testing.

	·•	the federal anti-kickback law prohibiting bribes, kickbacks or other remuneration for the order, purchase or recommendation of items or services reimbursed by federal health care programs;

	·•	the federal False Claims Act, imposing criminal and civil penalties for knowingly presenting or causing to be presented claims to the federal government that are false or fraudulent; and

	·•	the federal Physician Payment Sunshine Act, requiring pharmaceutical manufacturers to engage in extensive tracking of physician and teaching hospital payments, maintenance of a payments database and public reporting of the payment data.

	·•	lose our rights to develop and market our Polymedix product candidates;

	·•	lose patent and/or trade secret protection for our Polymedix product candidates;

	·•	experience significant delays in the development or commercialization of our Polymedix product candidates;

	·•	not be able to obtain any other licenses on acceptable terms, if at all; and/or

	·•	incur liability for damages.

	·•	significant time and effort from our management team;

	·•	coordination of our marketing and R&D programs with the marketing and R&D priorities of our collaborators; and

	·•	effective allocation of our resources to multiple projects.

	·	Our executive officers or directors or their affiliates may have an economic interest in, or other business relationship with, partner companies that invest in us or are engaged in competing drug development; and

	·	~~Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, leases space from the Company and is engaged in research.~~

	·	~~Our executive officers or directors may have a conflict between our current interests and their personal financial and other interests in another business venture; and~~

	·	~~Our executive officers or directors may have conflicting fiduciary duties to us and the other entity.~~

	·•	obtaining financial and investment information from the investor;

	·•	obtaining a written suitability questionnaire and purchase agreement signed by the investor; and

	·•	providing the investor a written identification of the shares being offered and the quantity of the shares.

	·•	progress of our products through the regulatory process;

	·•	results of preclinical studies and clinical trials;

	·•	announcements of technological innovations or new products by us or our competitors;

	·•	government regulatory action affecting our products or our competitors’ products in both the United States and foreign countries;

	·•	developments or disputes concerning patent or proprietary rights;

	·•	general market conditions for emerging growth and pharmaceutical companies;

	·•	economic conditions in the United States or abroad;

	·•	actual or anticipated fluctuations in our operating results;

	·•	broad market fluctuations; and

	·•	changes in financial estimates by securities analysts.

	Fiscal 2017				Fiscal 2016
	High		Low		High		Low
First Quarter		1.42		1.12		3.65		1.32
Second Quarter		1.50		0.91		1.96		0.94
Third Quarter		1.22		0.86		1.92		0.95
Fourth Quarter		1.08		0.63		1.87		1.30

Periods	Total number of shares purchased			Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
April 1 to April 30, 2017		—			—		—		—
May 1 to May 31, 2017		—			—		—		—
June 1 to June 30, 2017		262,080	(1)	$	0.84		—		—
Total		262,080		$	0.84		—		—

	STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FIVE YEARS ENDED JUNE 30
	2017			2016			2015			2014			2013
Revenues	$	-		$	-		$	-		$	-		$	-
Net loss	$	(15,536,000	)	$	(12,852,000	)	$	(13,145,000	)	$	(8,247,000	)	$	(3,224,000	)
Net loss attributable to common stockholders (a)	$	(15,536,000	)	$	(12,852,000	)	$	(13,145,000	)	$	(10,227,000	)	$	(3,436,000	)
Basic and diluted loss per common share
-Basic	$	(0.12	)	$	(0.11	)	$	(0.11	)	$	(0.10	)	$	(0.04	)
-Diluted	$	(0.12	)	$	(0.11	)	$	(0.11	)	$	(0.10	)	$	(0.04	)
Weighted average common shares outstanding		127,285,861			119,908,145			115,087,368			105,044,985			94,980,552

	BALANCE SHEET DATA AS OF JUNE 30
	2017			2016			2015			2014			2013
Total assets	$	9,112,000		$	11,445,000		$	14,319,000		$	10,852,000		$	2,970,000
Total debt	$	10,576,000		$	8,481,000		$	7,295,000		$	9,646,000		$	8,140,000
Total stockholders’ equity (deficiency)	$	(1,464,000	)	$	2,964,000		$	7,024,000		$	1,206,000		$	(5,170,000	)