UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: December 31, 20172018

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

For the transition period from ____________to _____________

Commission File Number: 001-37357

INNOVATION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

100 CummingsCumming Center, Suite 151-B

Beverly, MA 01915

(Address of principal executive offices, Zip Code)

(978)-921-4125 921-4125

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o¨ No x

The number of shares outstanding of each of the issuer’s classes of common equity, as of January 31, 2018February 5, 2019 is as follows:

INNOVATION PHARMACEUTICALS INC.

FORM 10-Q

For the Quarter Ended December 31,, 2017 2018

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

PART II – OTHER INFORMATION

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FORWARD-LOOKING STATEMENTS

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, statements concerning our future drug development plans and projected timelines for the initiation and completion of preclinical and clinical trials; statements relating to potential licensing, partnering or similar arrangements concerning our drug compounds; 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; any statements relating to potential out-licensing, partnership or joint venture agreements with third parties; 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 continue to fund and successfully progress internal research and development efforts and to create effective, commercially-viable drugs; our ability to effectively and timely conduct clinical trials; and our ability to ultimately distribute our drug candidates; 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 our Annual Report on Form 10-K under “Part I, Item 1A, Risk Factors” and in this report under “Part II, Item 1A, Risk Factors.”

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INNOVATION PHARMACEUTICALS INC.

CONDENSED BALANCE SHEETS

(Unaudited)

(Rounded to nearest thousand except for shares data)

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

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INNOVATION PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 20172018 AND 20162017

(Unaudited)

(Rounded to nearest thousand except for shares and per share data)

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

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INNOVATION PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF CASH FLOWFLOWS

FOR THE SIX MONTHS ENDED DECEMBER 31, 20172018 AND 20162017

(Unaudited)

(Rounded to nearest thousand)

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

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INNOVATION PHARMACEUTICALS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

DECEMBER 31,, 2017 2018

(Unaudited)

Note 1. Basis of Presentation and Nature of Operations

Unaudited Interim Financial Information

The accompanying unaudited condensed financial statements of Innovation Pharmaceuticals Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2017,2018, included in our Annual Report on Form 10-K for the year ended June 30, 2017.2018.

In the opinion of the management of Innovation Pharmaceuticals Inc., all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month and six-month periods have been made. Results for the interim periodsperiod presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms “Company”, “we”,“Company,” “we,” “us” or “our” mean Innovation Pharmaceuticals Inc.

Basis of Presentation and Name Change

Innovation Pharmaceuticals Inc. (the “Company”) 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. 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”.“IPIX.”

Nature of Operations -Overview- Overview

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 Kevetrin and PrurisolKevetrin, 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 discontinued the Prurisol psoriasis program.

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.

Note 2. Going Concern and Liquidity

As of June 30, 2017,These financial statements have been prepared on the assumption that the Company adopted Accounting Standards Codification 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue asis a going concern, which contemplates the realization of its assets and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosurethe settlement of its liabilities 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 resultsnormal course of management’s assessment, plans and conclusion of the Company’s ability to continue as a going concern.

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operations.

We have incurred recurring losses since inception and expect to continue to incur losses as a result of costs and expenses related to our research and continued development of our compounds and our corporate general and administrative expenses. As of December 31, 2017,2018, the Company has an accumulated deficit of $79approximately $92.0 million, representative of recurring losses since inception. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) approval. As a result, the Company expects to continue to incur losses.losses over the next 12 months from the date of this filing. Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $13.5 million for the next twelve months, raise substantial doubt about its ability to continue as a going concern.

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At December 31, 2017,2018, the Company’s cash amounted to $3.2$0.7 million and current liabilities amounted to $10.6$8.0 million, of which $6.5$6.7 million were payables to related parties with no immediate payment terms (See Note 8-8 - Related Party Transactions in the Notes to Condensed Financial Statements section below)Transactions). The Company had expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. The Company’s net cash used in operating activities for the six months ended December 31, 20172018 was approximately $7.2$4.0 million, and current projections indicate that the Company will have continued negative cash flows from operating activities for the foreseeable future. Our net losses incurred for the six months ended December 31, 20172018 and 2016,2017, amounted to $9.1$6.0 million and $6.4$9.1 million, respectively, and we had a working capital deficits wasdeficit of approximately $7.3$7.1 million and $6.1 million, respectively at December 31, 20172018 and June 30, 2017, respectively.2018.

Accordingly,The Company's primary sources of liquidity are cash and cash equivalents as well as issuances of its equity securities. The Company is party to a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) that 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. As of December 31, 2018, the available balance under the Purchase Agreement is approximately $22.3 million. However, as of the date of this report, the conditions for sales under the Purchase Agreement are not satisfied and no sales may occur thereunder. In particular, the Purchase Agreement provides that the Company and Aspire Capital will not affect any sales under the Purchase Agreement when the closing sales price of the Company’s planned operations, including total budgeted expenditures of approximately $12.2 millioncommon stock is less than $0.25 per share. Recently, the Company’s common stock has traded below $0.25 per share, and there is substantial uncertainty regarding the Company’s continued ability to sell shares under the Purchase Agreement in order to meet the Company's projected working capital requirements for the next twelve12 months raise doubt aboutfrom the date of the issuance of the financial statements (or available to be issued).

On October 5, 2018, 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 5% convertible preferred stock for aggregate gross proceeds of approximately $2.0 million. Under this securities purchase agreement, the Company issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock. The Company received the proceeds from exercise of 500 Series 1 warrants of approximately $0.5 million from October to December 2018. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds will be available when needed.

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. The Company will be unable to proceed with its abilityplanned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without additional financing from Aspire Capital, the multi-family office or another source of capital. These financial statements do not include any adjustments related to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern. The Company’s plans to alleviate the doubt of its ability to continue as a going concern primarily include controlling 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 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 shares of common stock, shares of preferred stock and stock purchase contracts through private placement transactions or registered public offerings, pursuant to its registration statement on Form S-3 filed with the SEC on September 11, 2017. 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 twelve months from the issuance of the accompanying financial statements.

On September 6, 2017, the Company entered into a new $30 million common stock purchase agreement with Aspire Capital (the “2017 Agreement”) to replace the prior 2015 $30 million common stock purchase agreement with Aspire Capital (the “2015 Agreement”). During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under the 2015 Agreement from the sale of approximately 2.6 million shares of its common stock. During the period from September 6, 2017 to December 31, 2017, the Company generated proceeds of approximately $4.4 million under the 2017 Agreement from the sale of approximately 6.6 million shares of its common stock. As of December 31, 2017, the available balance under the 2017 Agreement is approximately $25.6 million.

Note 3. Significant Accounting Policies and Recent Accounting Pronouncements

Use of Estimates

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, measurementvaluation of stock-based compensation,equity grants and the periods of performance under collaborative research and development agreements.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.

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NetBasic Loss Perper Share

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, convertible notes payable underlying shares, and unvested restricted stock.stock and Series B Convertible Preferred Stock at a conversion price at approximately $0.09 per share. Common share equivalents of 46.770.1 million shares and 45.146.7 million shares of common stock were excluded from the computation of diluted loss per share for the three and six months ended December 31, 20172018 and 2016, respectively,2017, because we incurred net losses for the six months ended December 31, 20172018 and 2016,2017, and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive and are therefore not included in the calculations.

Treasury Stock

The Company accounts for treasury stock using the cost method. There were 567,184228,218 shares and 262,0800 shares of treasury stock outstanding, purchased at a total cumulative cost of $417,000$91,000 and $220,000$0, at December 31, 20172018 and June 30, 2017, respectively (see Note 10)11 to the notes to the condensed financial statements).

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.

Accounting for Stock Based Compensation

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 an 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”.“tax regulations.” Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.

ASC 505-50-30-11 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:

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 isunits 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 vesting method over the requisite service period of the equity awards.method.

The components of stock-based compensation expense included in the Company’s Condensed StatementsStatement of Operations for the three months and six months ended December 31, 20172018 and 20162017 are as follows (rounded to nearest thousand):

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Recent Adopted Accounting PronouncementsFair Value of Financial Instruments and Fair Value Measurements

FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current liabilities, convertible notes and preferred stock liability (all as defined below) are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of all other financial liabilities at cost approximates fair value.

Stock Compensation -Recently Adopted Accounting Pronouncements

In March 2016,July 2017, the FASB issued ASU 2016-09, Compensation – Stock CompensationAccounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 718)260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Improvements to Employee Share-Based PaymentI. Accounting which will simplifyfor Certain Financial Instruments with Down Round Features; and II. Replacement of the income tax consequences,Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for forfeitures and classificationcertain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the Statementbasis of Cash Flows (i) excess tax benefits be classifiedthe pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as cash inflows provided by operating activities,warrants and (ii) cash paid to taxing authorities arisingconvertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the withholdingexistence of shares from employees be classified as cash outflows usedextensive pending content in financing activities.the FASB Accounting Standards Codification. This standardpending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016,2018, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, 2018, did not have any impact on the financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. This new pronouncement washas been adopted on July 1, 2016in the fourth quarter of fiscal 2018 and did not have a material effect on the Company’s financial position, or results of operations but had an effect of the classification ofor 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 condensed financial statements.

Recently Issued Accounting Guidanceflows.

In May 2014, the FASB issued authoritative guidance thatASU 2014-09, Revenue from Contracts with Customers (Topic 606), which 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 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 thisThis new guidance when it becomes effective andpronouncement has not yet selected a transition method. The Company, due to not having any revenue currently andbeen adopted in the foreseeable future, has concluded that the impactfirst quarter of the adoption of this accounting standard on its financial statements willfiscal 2019 and did 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. The guidance requires the following 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. The guidance requires the following 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 U.S. 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 impactmaterial effect 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.or cash flows.

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Intangibles, Goodwill and Other —In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment” (“ASU No. 2017-04”). To simplify the subsequent measurement of goodwill, ASU No. 2017-04 eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, ASU No. 2017-04 requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU No. 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019. The Company will adopt ASU No. 2017-04 commencing in the first quarter of fiscal 2021. The Company does not believe this standard will have a material impact on its financial statements or the related footnote disclosures.

Statement of Cash Flows — In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the new standard effective July 1, 2018. The application of this standard did not have a material impact on the Company’s unaudited condensed statements of cash flows.

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Recently Issued Accounting Guidance

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The adoption of ASU 2018-07 will not have a material impact on the financial statements.

In February 2016, the FASB issued ASU No. 2016-02,” Lease (Topic 842)" which requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using the modified retrospective approach. The Company will adopt this new pronouncement beginning July 1, 2019. Interpretations are on-going and could have a material impact on the Company's implementation. Currently, the Company expects that the adoption of the ASU No. 2016-15 commencing in the first quarter of fiscal 2019. The Company does not believe this standard2016-02 (Topic 842) Leases will have a material impact on its financial statements orconsolidated balance sheet due to the related footnote disclosures.recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases, and expects it to have a material impact on our results of operations.

Note 4. Patents, net

Patents, net consisted of the following (rounded to nearest thousand):