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: DecemberMarch 31, 20172021

 

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)

 

Nevada

 

30-0565645

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Empl.

Ident. No.)

incorporation or organization)

 

100 Cummings Center,301 Edgewater Place - Suite 151-B100

Beverly,Wakefield, MA 0191501880

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

 

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 pastpreceding 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”,filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

¨

Accelerated Filer

x

Non-Accelerated Filer

¨

Smaller reporting company

¨

(Do not check if a smaller reporting company)

Emerging growth company

¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2018May 10, 2021 is as follows:

 

Class of Securities

 

Shares Outstanding

Common Stock Class A, $0.0001 par value

 

145,688,782 418,157,142

Common Stock Class B, $0.0001 par value

 

None15,641,463

 

 

 

INNOVATION PHARMACEUTICALS INC.

FORM 10-Q

For the Quarter Ended DecemberMarch 31,, 2017 2021

 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

 

4

 

 

Condensed Consolidated Balance Sheets as of DecemberMarch 31, 2017 (unaudited)2021 and June 30, 2017 (audited)2020 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Operations (unaudited) for the three months and sixnine months ended DecemberMarch 31, 20172021 and 20162020 (unaudited)

 

5

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)Stockholders’ Equity for the sixthree months and nine months ended DecemberMarch 31, 20172021 and 20162020 (unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2021 and 2020 (unaudited)

7

Notes to Condensed Consolidated Financial Statements (unaudited)

 

78

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

2030

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

3144

 

Item 4.

Controls and Procedures

 

3244

 

PART II – OTHER INFORMATION

 

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

 

3345

 

Item 1A

Risk Factors

 

3345

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

3345

 

Item 3.

Defaults Upon Senior Securities

 

3345

 

Item 4.

Mine Safety Disclosures

 

3345

 

Item 5.

Other Information

 

3345

 

Item 6.

Exhibits

 

3446

 

 

 

 

SIGNATURES

 

3547

 

 

 
2

Table of Contents

FORWARD-LOOKING STATEMENTS

 

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, 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; any statements relating to potential out-licensing, partnership or joint venture agreements with third parties;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 andefforts; 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 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.”

 

 
3

Table of Contents

  

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2021 AND JUNE 30, 2020

(Unaudited)

(Rounded to nearest thousand except for shares data)

 

 

 

December 31,

 

 

June 30,

 

 

 

2017

 

 

2017

 

 

(Unaudited)

 

 

 

 

ASSETS

Current Assets:

 

 

 

 

 

 

Cash

 

$3,181,000

 

 

$4,141,000

 

Prepaid expenses

 

 

94,000

 

 

 

308,000

 

Security deposits

 

 

78,000

 

 

 

-

 

Subscription receivable

 

 

-

 

 

 

26,000

 

Total Current Assets

 

 

3,353,000

 

 

 

4,475,000

 

Other Assets:

 

 

 

 

 

 

 

 

Patents - net

 

 

4,100,000

 

 

 

4,212,000

 

Equipment - net

 

 

102,000

 

 

 

120,000

 

Deferred offering costs - net

 

 

183,000

 

 

 

227,000

 

Security deposits

 

 

-

 

 

 

78,000

 

Total Other Assets

 

 

4,385,000

 

 

 

4,637,000

 

Total Assets

 

$7,738,000

 

 

$9,112,000

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable - (including related party payables of approximately $1,486,000 and 1,506,000, respectively)

 

$4,850,000

 

 

$4,699,000

 

Accrued expenses - (including related party accruals of approximately $37,000 and $38,000, respectively)

 

 

548,000

 

 

 

711,000

 

Accrued salaries and payroll taxes - (including related party accrued salaries of approximately $2,953,000 and $2,953,000, respectively)

 

 

3,197,000

 

 

 

3,144,000

 

Convertible note payable - related party

 

 

2,022,000

 

 

 

2,022,000

 

Total Current Liabilities

 

 

10,617,000

 

 

 

10,576,000

 

Total Liabilities

 

 

10,617,000

 

 

 

10,576,000

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Deficiency

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 designated shares, no shares issued and outstanding

 

 

-

 

 

 

-

 

Common Stock - Class A, $0.0001 par value, 300,000,000 shares authorized, 145,555,966 and 135,536,501 issued as of December 31, 2017 and June 30, 2017, respectively, 144,988,782 and 135,274,421 outstanding as of December 31, 2017 and June 30, 2017, respectively

 

 

15,000

 

 

 

14,000

 

Common Stock - Class B, (10 votes per share); $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

76,128,000

 

 

 

68,295,000

 

Accumulated deficit

 

 

(78,605,000)

 

 

(69,553,000)

Treasury Stock, at cost (567,184 shares and 262,080 shares as of December 31, 2017 and June 30, 2017, respectively)

 

 

(417,000)

 

 

(220,000)

Total Stockholders’ Deficiency

 

 

(2,879,000)

 

 

(1,464,000)

Total Liabilities and Stockholders’ Deficiency

 

$7,738,000

 

 

$9,112,000

 

 

 

March 31,

 

 

June 30,

 

 

 

2021

 

 

2020

 

ASSETS

Current Assets:

 

 

 

 

 

 

Cash

 

$13,012,000

 

 

$6,018,000

 

Prepaid expenses and other current assets

 

 

46,000

 

 

 

92,000

 

Total Current Assets

 

 

13,058,000

 

 

 

6,110,000

 

Other Assets:

 

 

 

 

 

 

 

 

Patent costs - net

 

 

2,830,000

 

 

 

3,060,000

 

Deferred offering costs

 

 

958,000

 

 

 

 

Security deposit

 

 

78,000

 

 

 

78,000

 

Total Other Assets

 

 

3,866,000

 

 

 

3,138,000

 

Total Assets

 

$16,924,000

 

 

$9,248,000

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable - (including related party payables of approx. $1,511,000 and $1,498,000, respectively)

 

$2,053,000

 

 

$2,043,000

 

Accrued expenses - (including related party accruals of approx. $93,000 and $19,000, respectively)

 

 

633,000

 

 

 

59,000

 

Accrued salaries and payroll taxes - (including related party accrued salaries of approx. $1,977,000 and $2,777,000, respectively)

 

 

2,057,000

 

 

 

3,215,000

 

Operating lease - current liability

 

 

158,000

 

 

 

138,000

 

Note payable - related party

 

 

1,428,000

 

 

 

1,822,000

 

Accrued dividend - Series B 5% convertible preferred stock

 

 

15,000

 

 

 

13,000

 

Loan payable

 

 

79,000

 

 

 

79,000

 

Total Current Liabilities

 

 

6,423,000

 

 

 

7,369,000

 

Other Liabilities:

 

 

 

 

 

 

 

 

Series B 5% convertible preferred stock liability at $1,080 stated value; 0 and 0 shares issued and outstanding at March 31, 2021 and June 30, 2020, respectively

 

 

 

 

 

 

Operating lease - long term liability

 

 

296,000

 

 

 

417,000

 

Total Liabilities

 

 

6,719,000

 

 

 

7,786,000

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 designated shares, no shares issued and outstanding

 

 

 

 

 

 

Common Stock - Class A, $.0001 par value, 600,000,000 shares authorized, 426,673,198 shares and 329,829,992 shares issued as of March 31, 2021 and June 30, 2020, respectively, 418,157,142 shares and 329,170,544 shares outstanding as of March 31, 2021 and June 30, 2020, respectively

 

 

42,000

 

 

 

33,000

 

Common Stock - Class B, (10 votes per share); $.0001 par value, 100,000,000 shares authorized, 18,000,000 shares and 1,818,180 shares issued, and 15,641,463 shares and 1,818,180 shares outstanding as of March 31, 2021 and June 30, 2020, respectively

 

 

2,000

 

 

 

 

Additional paid-in capital

 

 

124,966,000

 

 

 

102,819,000

 

Accumulated deficit

 

 

(112,551,000)

 

 

(101,244,000)

Treasury Stock, at cost (10,874,593 shares and 659,448 shares as of March 31, 2021 and June 30, 2020, respectively)

 

 

(2,254,000)

 

 

(146,000)

Total Stockholders’ Equity

 

 

10,205,000

 

 

 

1,462,000

 

Total Liabilities and Stockholders’ Equity

 

$16,924,000

 

 

$9,248,000

 

 

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

 

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

 
4

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND SIXNINE MONTHS ENDEDDECEMBER

MARCH 31,, 2017 2021 AND 20162020

(Unaudited)

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

 

 

For the Three Months

Ended

 

For the Six Months

Ended

 

 

For the three Months Ended

 

For the Nine Months Ended

 

 

December 31,

 

December 31,

 

 

March 31,

 

March 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$-

 

 

$-

 

 

$-

 

 

$-

 

 

$

 

 

$

 

 

$

 

 

$400,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

3,963,000

 

2,683,000

 

7,768,000

 

4,960,000

 

 

1,423,000

 

276,000

 

4,918,000

 

1,885,000

 

General and administrative expenses

 

297,000

 

344,000

 

594,000

 

706,000

 

 

245,000

 

461,000

 

740,000

 

1,080,000

 

Officers' payroll and payroll tax expenses

 

130,000

 

130,000

 

260,000

 

260,000

 

Officers’ payroll and payroll tax expenses

 

126,000

 

131,000

 

378,000

 

367,000

 

Professional fees

 

 

78,000

 

 

 

152,000

 

 

 

330,000

 

 

 

361,000

 

 

 

124,000

 

 

 

57,000

 

 

 

450,000

 

 

 

279,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

4,468,000

 

 

 

3,309,000

 

 

 

8,952,000

 

 

 

6,287,000

 

 

 

1,918,000

 

 

 

925,000

 

 

 

6,486,000

 

 

 

3,611,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(4,468,000)

 

 

(3,309,000)

 

 

(8,952,000)

 

 

(6,287,000)

Net Loss from operations

 

 

(1,918,000)

 

 

(925,000)

 

 

(6,486,000)

 

 

(3,211,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

Interest income

 

-

 

1,000

 

1,000

 

2,000

 

Interest expense

 

 

(50,000)

 

 

(50,000)

 

 

(101,000)

 

 

(101,000)

Total other income - net

 

 

(50,000)

 

 

(49,000)

 

 

(100,000)

 

 

(99,000)

Other income (expense)

 

 

 

 

 

 

 

 

 

Other income

 

 

 

 

 

Interest expense – debt

 

(37,000)

 

(59,000)

 

(119,000)

 

(155,000)

Interest expense – preferred stock liability

 

(2,005,000)

 

(11,000)

 

(4,702,000)

 

(51,000)

Change in fair value of preferred stock

 

 

 

 

102,000

 

Warrants modification expense

 

 

 

 

(1,212,000)

Impairment expense of operating lease

 

 

 

 

 

 

 

 

 

 

 

(643,000)

Other expense, net

 

 

(2,042,000)

 

 

(70,000)

 

 

(4,821,000)

 

 

(1,959,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

(4,518,000)

 

(3,358,000)

 

(9,052,000)

 

(6,386,000)

 

(3,960,000)

 

(70,000)

 

(11,307,000)

 

(5,170,000)

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(4,518,000)

 

$(3,358,000)

 

$(9,052,000)

 

$(6,386,000)

 

$(3,960,000)

 

$(995,000)

 

$(11,307,000)

 

$(5,170,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$(0.03)

 

$(0.03)

 

$(0.07)

 

$(0.05)

Basic and diluted loss per share attributable to common stockholders

 

$(0.01)

 

$(0.00)

 

$(0.03)

 

$(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

140,749,557

 

 

 

125,275,060

 

 

 

138,960,684

 

 

 

124,782,071

 

Basic and diluted weighted average number of common shares

 

 

396,181,961

 

 

 

238,835,390

 

 

 

362,864,883

 

 

 

219,491,850

 

 

 

 

 

 

 

 

 

 

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

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

 

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

 
5

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSTOCKHOLDERS’ EQUITY

FOR THE SIXTHREE AND NINE MONTHS ENDED DECEMBERMARCH 31, 20172021 AND 20162020

(Unaudited)

(Rounded to nearest thousand)

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$(9,052,000)

 

$(6,386,000)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Common stock and stock options issued as payment for compensation, services rendered and financing costs

 

 

1,400,000

 

 

 

690,000

 

Amortization of patent costs

 

 

192,000

 

 

 

183,000

 

Depreciation of equipment

 

 

18,000

 

 

 

15,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and security deposits

 

 

214,000

 

 

 

73,000

 

Accounts payable

 

 

151,000

 

 

 

(305,000)

Accrued expenses

 

 

(163,000)

 

 

452,000

 

Accrued officers' salaries and payroll taxes

 

 

53,000

 

 

 

28,000

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(7,187,000)

 

 

(5,250,000)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

-

 

 

 

(64,000)

Patent costs

 

 

(80,000)

 

 

(53,000)

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(80,000)

 

 

(117,000)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Sales of common stock, net of offering costs

 

 

6,478,000

 

 

 

2,916,000

 

Purchase of treasury stock

 

 

(171,000)

 

 

-

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

6,307,000

 

 

 

2,916,000

 

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH

 

 

(960,000)

 

 

(2,451,000)

 

 

 

 

 

 

 

 

 

CASH, BEGINNING OF PERIOD

 

 

4,141,000

 

 

 

6,310,000

 

 

 

 

 

 

 

 

 

 

CASH, END OF PERIOD

 

$3,181,000

 

 

$3,859,000

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$96,000

 

 

$29,000

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW

 

 

 

 

 

 

 

 

INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Commitment shares issued as deferred offering costs

 

$215,000

 

 

$-

 

Reversal of subscription receivable to treasury stock

 

$26,000

 

 

$-

 

The accompanying notes are an integral part of these condensed financial statements.thousand, except for shares data)

 

For the Three and Nine Months Ended March 31, 2020

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional

 

 

 

 

Treasury Stock

 

 

 

 

 

Shares

 

 

Par Value

$0.0001

 

 

Shares

 

 

Par Value

$0.0001

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance at June 30, 2019

 

 

202,631,923

 

 

$21,000

 

 

 

909,090

 

 

$

 

 

$90,537,000

 

 

$(94,596,000)

 

 

228,218

 

 

$(91,000)

 

$(4,129,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options issued to officer as equity awards at $0.398 to $0.705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,000

 

 

 

 

 

 

 

 

 

 

 

 

65,000

 

Shares issued to officer as equity awards at $0.398 to $0.705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

124,000

 

 

 

 

 

 

 

 

 

 

 

 

124,000

 

Stock options issued to employee for services at $0.398 - $1.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,000

 

 

 

 

 

 

 

 

 

 

 

 

28,000

 

Shares issued to employee for services at $0.398 - $1.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

Stock options issued to consultant for services at $0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

Shares issued to consultant for services at $0.43 - $0.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,000

 

 

 

 

 

 

 

 

 

 

 

 

3,000

 

Issuance of 12,500 shares to Consultant

 

 

12,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of 1,066,667 shares to Officer & 421,611 shares were withheld for tax purposes as Treasury shares

 

 

1,066,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares for tax purposes as Treasury Shares

 

 

(421,611)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

421,611

 

 

 

(54,000)

 

 

(54,000)

Issuance of 58,394 shares to employee & 9,619 shares were withheld for tax purposes as Treasury shares

 

 

58,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares for tax purposes as Treasury Shares

 

 

(9,619)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,619

 

 

 

(1,000)

 

 

(1,000)

Conversion of 890 preferred stocks to 9,030,870 common stock

 

 

9,030,870

 

 

 

1,000

 

 

 

 

 

 

 

 

 

475,000

 

 

 

 

 

 

 

 

 

 

 

 

476,000

 

Excess of exercise price of 1,045 warrants over fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

478,000

 

 

 

 

 

 

 

 

 

 

 

 

478,000

 

Net loss for the three months ended 9/30/2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,550,000)

 

 

 

 

 

 

 

 

(1,550,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2019

 

 

212,369,124

 

 

$22,000

 

 

 

909,090

 

 

$

 

 

$91,726,000

 

 

$(96,146,000)

 

 

659,448

 

 

$(146,000)

 

$(4,544,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options issued to officer as equity awards at $0.398 to $0.705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37,000

 

 

 

 

 

 

 

 

 

 

 

 

37,000

 

Shares issued to officer as equity awards at $0.398 to $0.705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71,000

 

 

 

 

 

 

 

 

 

 

 

 

71,000

 

Stock options issued to employee for services at $0.398 - $1.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,000

 

 

 

 

 

 

 

 

 

 

 

 

16,000

 

Shares issued to employee for services at $0.398 - $1.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

Stock options issued to consultant for services at $0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

Shares issued to consultant for services at $0.43 - $0.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

Conversion of 291 preferred stocks to 6,182,539 common stock

 

 

6,182,539

 

 

 

 

 

 

 

 

 

 

 

 

156,000

 

 

 

 

 

 

 

 

 

 

 

 

156,000

 

Excess of exercise price of 147 warrants over fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,000

 

 

 

 

 

 

 

 

 

 

 

 

46,000

 

Warrants Modification expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,212,000

 

 

 

 

 

 

 

 

 

 

 

 

1,212,000

 

Net loss for the three months ended 12/31/2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,625,000)

 

 

 

 

 

 

 

 

(2,625,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

218,551,663

 

 

$22,000

 

 

 

909,090

 

 

$

 

 

$93,278,000

 

 

$(98,771,000)

 

 

659,448

 

 

$(146,000)

 

$(5,617,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Options issued to employee for services at $0.398 to $1.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,000

 

 

 

 

 

 

 

 

 

 

 

 

16,000

 

Shares issued to employee for services at $0.132 to $0.705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

Stock Options issued to consultants for services at $0.089 to $0.127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,000

 

 

 

 

 

 

 

 

 

 

 

 

14,000

 

Stock Options issued to directors for services at $0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103,000

 

 

 

 

 

 

 

 

 

 

 

 

103,000

 

Shares issued to directors for services at $0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,000

 

 

 

 

 

 

 

 

 

 

 

 

40,000

 

To reverse the option expense & stock awards granted for officer Art - Q3-2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(86,000)

 

 

 

 

 

 

 

 

 

 

 

(86,000)

To reverse the option expense & stock awards granted for officer- Q3-2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(165,000)

 

 

 

 

 

 

 

 

 

 

 

(165,000)

Conversion of 2,884 preferred stocks to 48,197,729 common stock

 

 

48,197,729

 

 

 

5,000

 

 

 

 

 

 

 

 

 

1,538,000

 

 

 

 

 

 

 

 

 

 

 

 

1,543,000

 

Excess of exercise price of 2,945 warrants over fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

552,000

 

 

 

 

 

 

 

 

 

 

 

 

552,000

 

To adjust the 41 Pref stock from $982.5 to $535.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,000

 

 

 

 

 

 

 

 

 

 

 

 

18,000

 

Cancellation of debt for the purchase of 909,090 shares of Common Stock Class B

 

 

 

 

 

 

 

 

909,090

 

 

 

 

 

 

100,000

 

 

 

 

 

 

 

 

 

 

 

 

100,000

 

Net loss for the three months ended 3/31/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(995,000)

 

 

 

 

 

 

 

 

(995,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2020

 

 

266,749,392

 

 

$27,000

 

 

 

1,818,180

 

 

$

 

 

$95,414,000

 

 

$(99,766,000)

 

 

659,448

 

 

$(146,000)

 

$(4,471,000)

 
6

Table of Contents

For the Three and Nine Months Ended March 31, 2021

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional

 

 

 

 

Treasury Stock

 

 

 

 

 

Shares

 

 

Par Value

$0.0001

 

 

Shares

 

 

Par Value

$0.0001

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance at June 30, 2020

 

 

329,170,544

 

 

$33,000

 

 

 

1,818,180

 

 

$

 

 

$102,819,000

 

 

$(101,244,000)

 

 

659,448

 

 

$(146,000)

 

$1,462,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares sold to Aspire Capital under 2020 Agreement at $0.20 - $0.22 range

 

 

13,500,000

 

 

 

1,000

 

 

 

 

 

 

 

 

 

2,850,000

 

 

 

 

 

 

 

 

 

 

 

 

2,851,000

 

Shares issued as commitment fee of $1,438,000 on 7/31/2020 at $0.23, net of amortization of offering costs of $120,000

 

 

6,250,000

 

 

 

1,000

 

 

 

 

 

 

 

 

 

1,317,000

 

 

 

 

 

 

 

 

 

 

 

 

1,318,000

 

Shares issued to employee for services at $0.132 to $0.398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

Stock options issued to employee for services at $0.132 to $0.398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,000

 

 

 

 

 

 

 

 

 

 

 

 

14,000

 

Stock options issued to consultant for services at $0.14 to $0.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,000

 

 

 

 

 

 

 

 

 

 

 

 

43,000

 

Issuance of 2,200,000 shares of Common Stock Class B to Officer & 412,238 shares were withheld for tax purposes as Treasury shares

 

 

 

 

 

 

 

 

2,200,000

 

 

 

 

 

 

242,000

 

 

 

 

 

 

 

 

 

 

 

 

242,000

 

Issuance of shares for tax purposes as Treasury Shares

 

 

 

 

 

 

 

 

(412,238)

 

 

 

 

 

 

 

 

 

 

 

412,238

 

 

 

(90,000)

 

 

(90,000)

Issuance of 58,394 shares to employee & 21,606 shares were withheld for tax purposes as Treasury shares

 

 

58,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares for tax purposes as Treasury Shares

 

 

(21,606)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,606

 

 

 

(3,000)

 

 

(3,000)

Net loss for the three months ended 9/30/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,173,000)

 

 

 

 

 

 

 

 

(1,173,000)

Balance at September 30, 2020

 

 

348,957,332

 

 

$35,000

 

 

 

3,605,942

 

 

$

 

 

$107,290,000

 

 

$(102,417,000)

 

 

1,093,292

 

 

$(239,000)

 

$4,669,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares sold to Aspire under 2020 Agreement at $0.20 - $0.22 range

 

 

9,000,000

 

 

 

1,000

 

 

 

 

 

 

1,000

 

 

 

1,570,000

 

 

 

 

 

 

 

 

 

 

 

 

1,572,000

 

Shares issued to employee for services at $0.132 to $0.398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

Stock options issued to employee for services at $0.132 to $0.398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

Stock options issued to consultant for services at $0.14 to $0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,000

 

 

 

 

 

 

 

 

 

 

 

 

17,000

 

Cancellation of debt for the purchase of 909,090 shares of Common Stock Class B & 181,096 shares were withheld for tax purposes as Treasury shares

 

 

 

 

 

 

 

 

909,090

 

 

 

 

 

 

100,000

 

 

 

 

 

 

 

 

 

 

 

 

100,000

 

Issuance of shares for tax purposes as Treasury Shares

 

 

 

 

 

 

 

 

(181,096)

 

 

 

 

 

 

 

 

 

 

 

181,096

 

 

 

(37,000)

 

 

(37,000)

To record Series B Discount - Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

870,000

 

 

 

 

 

 

 

 

 

 

 

 

870,000

 

To record issuance costs Series 1 & 2 Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,000)

 

 

 

 

 

 

 

 

 

 

 

(10,000)

To record beneficial conversion feature associated with the issuance of the 3,053 shares of Series B-2 preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,793,000

 

 

 

 

 

 

 

 

 

 

 

 

1,793,000

 

Conversion of 1,183 preferred stocks into 9,346,303 common stocks

 

 

9,346,303

 

 

 

1,000

 

 

 

 

 

 

 

 

 

1,161,000

 

 

 

 

 

 

 

 

 

 

 

 

1,162,000

 

Cancellation of 6,980,583 Class A shares to satisfy the purchase of 13,072,730 shares of Common Stock Class B

 

 

(6,980,583)

 

 

(1,000)

 

 

13,072,730

 

 

 

1,000

 

 

 

1,438,000

 

 

 

 

 

 

6,980,583

 

 

 

(1,438,000)

 

 

 

Shares were withheld for tax purposes as Treasury Shares

 

 

(854,419)

 

 

 

 

 

(1,765,203)

 

 

 

 

 

 

 

 

 

 

 

2,619,622

 

 

 

(540,000)

 

 

(540,000)

Net loss for the three months ended 12/31/2020 - unaudited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,174,000)

 

 

 

 

 

 

 

 

(6,174,000)

Balance at December 31, 2020

 

 

359,468,633

 

 

$36,000

 

 

 

15,641,463

 

 

$2,000

 

 

 

114,243,000

 

 

$(108,591,000)

 

 

10,874,593

 

 

$(2,254,000)

 

$3,436,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(179,000)

 

 

 

 

 

 

 

 

 

 

 

(179,000)

Shares issued to employee for services at $0.132 to $0.398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

Stock options issued to employee for services at $0.132 to $0.398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

Stock options issued to consultant for services at $0.14 to $0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,000

 

 

 

 

 

 

 

 

 

 

 

 

27,000

 

Conversion of 12 preferred stocks into 87,567 common stock

 

 

87,567

 

 

 

 

 

 

 

 

 

 

 

 

13,000

 

 

 

 

 

 

 

 

 

 

 

 

13,000

 

To record Series B Discount - Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

540,000

 

 

 

 

 

 

 

 

 

 

 

 

540,000

 

To record beneficial conversion feature associated with the issuance of the 2,036 shares of Series B-2 preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,460,000

 

 

 

 

 

 

 

 

 

 

 

 

1,460,000

 

Conversion of 9,012 preferred stock into 58,600,942 common stocks

 

 

58,600,942

 

 

 

6,000

 

 

 

 

 

 

 

 

 

8,848,000

 

 

 

 

 

 

 

 

 

 

 

 

8,854,000

 

Net loss for the three months ended 3/31/2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,960,000)

 

 

 

 

 

 

 

 

(3,960,000)

Balance at March 31, 2021

 

 

418,157,142

 

 

$42,000

 

 

 

15,641,463

 

 

$2,000

 

 

$124,966,000

 

 

$(112,551,000)

 

 

10,874,593

 

 

$(2,254,000)

 

$10,205,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

7

Table of Contents

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MARCH 31, 2021 AND 2020

(Unaudited)

(Rounded to nearest thousand, except for shares data)

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$(11,307,000)

 

$(5,170,000)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock based compensation

 

 

134,000

 

 

 

302,000

 

Amortization of patent costs

 

 

283,000

 

 

 

279,000

 

Depreciation of equipment

 

 

 

 

 

1,000

 

Interest expense-preferred stock

 

 

4,672,000

 

 

 

51,000

 

Change in fair value of preferred stock

 

 

 

 

 

(102,000)

Warrants modification expense

 

 

 

 

 

1,212,000

 

Impairment expense of operating lease

 

 

 

 

 

643,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and security deposits

 

 

47,000

 

 

 

10,000

 

Accounts payable

 

 

10,000

 

 

 

193,000

 

Accrued expenses

 

 

574,000

 

 

 

33,000

 

Accrued officers’ salaries and payroll taxes

 

 

(1,157,000)

 

 

272,000

 

Operating lease liability

 

 

(101,000)

 

 

(58,000)

Note payable to officer

 

 

(53,000)

 

 

 

Accrued dividend

 

 

5,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(6,893,000)

 

 

(2,334,000)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Patent costs

 

 

(53,000)

 

 

(57,000)

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(53,000)

 

 

(57,000)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Sale of common stock, net of offering costs

 

 

4,603,000

 

 

 

 

Proceeds from issuance of preferred stocks and warrants, net of financing costs

 

 

4,990,000

 

 

 

 

Proceeds from exercise of warrants

 

 

5,017,000

 

 

 

2,642,000

 

Purchase of treasury stock

 

 

(670,000)

 

 

(55,000)

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

13,940,000

 

 

 

2,587,000

 

 

 

 

 

 

 

 

 

 

NET INCREASE IN CASH

 

 

6,994,000

 

 

 

196,000

 

CASH, BEGINNING OF PERIOD

 

 

6,018,000

 

 

 

579,000

 

CASH, END OF PERIOD

 

$13,012,000

 

 

$775,000

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$44,000

 

 

$111,000

 

Cash paid for tax

 

$

 

 

$

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Initial warrant valuation

 

$

 

 

$1,212,000

 

Beneficial conversion features on preferred stock and warrant discounts recorded as interest expense-preferred stock

 

$4,672,000

 

 

$51,000

 

Shares issued as deferred offering costs

 

$1,438,000

 

 

$

 

Cancellation of 6,980,583 Class A shares for the purchase of 13,072,730 shares of Common Stock Class B

 

$1,438,000

 

 

$

 

Conversion of Series B Convertible Preferred stock to Common stock

 

$10,029,000

 

 

$2,169,000

 

Excess of exercise price of warrants at $850-$950 over fair value of $535

 

$

 

 

$1,094,000

 

Cancellation of shareholder debt for the purchase of 3.1M shares of Common Stock Class B shares

 

$342,000

 

 

$100,000

 

 

 

 

 

 

 

 

 

 

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

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INNOVATION PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBERMARCH 31,, 2017 2021

(Unaudited)

 

Note 1. Basis of Presentation and Nature of Operations

 

Unaudited Interim Financial Information

 

The accompanying unaudited condensed consolidated 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 consolidated financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2017,2020, included in our Annual Report on Form 10-K for the year ended June 30, 2017.2020.

 

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-monthnine-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,” “Innovation,” “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 accordanceOn 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 Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the name change was not required.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 and has no customers, products or revenues to date.company. The Company’s common stock is quoted on OTCQB, symbol “IPIX”.“IPIX.”

 

Basis of Consolidation

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 nine months ended March 31, 2021 and 2020.

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 willaim 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. The trial has already passed 70% of target enrollment.

We currently own all development and marketing rights to our products.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 otheradditional 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.

 

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Note

2. Going Concern and Liquidity

 

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.

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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 DecemberMarch 31, 2017, the Company has an accumulated deficit of $79 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.

At December 31, 2017,2021, the Company’s cash amounted to $3.2$13.0 million and current liabilities amounted to $10.6 million, of which $6.5 million were payables to related parties with no immediate payment terms (See Note 8- Related Party Transactions in the Notes to Condensed Financial Statements section below).$6.4 million. The Company hadhas 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, 2017 was approximately $7.2 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 sixnine months ended DecemberMarch 31, 20172021 and 2016,2020, amounted to $9.1$11.3 million and $6.4$5.2 million, respectively, and we had a working capital deficits wasof approximately $7.3 million and $6.1$6.6 million at DecemberMarch 31, 20172021 and a working capital deficit of approximately $(1.3) million at June 30, 2017, respectively.

Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $12.2 million for the next twelve 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 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.2020.

 

On September 6, 2017,July 31, 2020, the Company entered into a new $30 million common stock purchase agreement (the “2020 Agreement”) with Aspire Capital (the “2017 Agreement”Fund, LLC (“Aspire Capital”) which provides that, upon the terms and subject to replace the prior 2015 $30conditions 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 purchase agreementover 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 March 31, 2021, the available balance was $25.4 million.

We anticipate that future budget expenditures will be approximately $10.6 million for the next 12 months, including approximately $8.3 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 2021 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.

If we are unable to generate enough working capital from our current or future financing agreements with Aspire Capital (the “2015 Agreement”). During the periodwhen 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 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.successfully executing our operating plan.

 

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 isare 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 underlying shares and unvested restricted stock.payable. Common share equivalents of 46.7 million and 45.1 million shares of common stock were excluded from the computation of diluted lossearnings per share for the sixnine months ended DecemberMarch 31, 20172021 and 2016, respectively,2020, because we incurred net losses for the six months ended December 31, 2017 and 2016, and thetheir effect was anti-dilutive.

Weighted average shares of including these potential common sharesstock outstanding used in the net losscalculation of basic and diluted earnings per share calculations would be anti-dilutive and are therefore not included in the calculations.were as follows:

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Weighted average shares outstanding-basic

 

 

396,116,526

 

 

 

238,835,390

 

Dilutive options and restricted stock and warrants

 

 

 

 

 

 

Weighted average shares outstanding-diluted

 

 

396,116,526

 

 

 

238,835,390

 

 

 

 

 

 

 

 

 

 

Antidilutive securities not included:

 

 

 

 

 

 

 

 

Stock options

 

 

6,849,265

 

 

 

20,602,188

 

Stock options arising from convertible note payable and accrued interest – related party

 

 

3,085,242

 

 

 

3,784,444

 

Restricted stock grants

 

 

116,786

 

 

 

116,787

 

Warrants

 

 

 

 

 

8,000,000

 

Convertible preferred stock

 

 

 

 

 

5,537,650

 

Total

 

 

10,051,293

 

 

 

38,041,069

 

Treasury Stock

 

The Company accounts for treasury stock using the cost method. There were 567,184 shares and 262,0808,516,056 shares of treasuryClass A common stock outstanding,and 2,358,537 shares of Class B common stock held in treasury, purchased at a total cumulative cost of $417,000 and $220,000approximately $2.3 million as of March 31, 2021. There were 659,448 shares of Class A common stock held in treasury, purchased at December 31, 2017 anda total cumulative cost of $146,000 as of June 30, 2017, respectively2020 (see Note 10)14. Equity Transactions to the condensed consolidated 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.

 

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Revenue Recognition

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 condensed 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:

(i)

identify the contract(s) with a customer;

(ii)

identify the performance obligations in the contract, including whether they are distinct in the context of the contract;

(iii)

determine the transaction price, including the constraint on variable consideration;

(iv)

allocate the transaction price to the performance obligations in the contract; and

(v)

recognize revenue when (or as) the Company satisfies each performance obligation.

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.

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The terms of the Company’s licensing agreement include the following:

(i)

up-front fees;

(ii)

milestone payments related to the achievement of development, regulatory, or commercial goals; and

(iii)

royalties on net sales of licensed products.

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.

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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”. Ourregulations.”

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 do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.in the same manner as options issued to employees.

 

ASC 505-50-30-11 further provides that an issuer shall measureAwards with service-based vesting conditions only – Expense recognized on a straight-line basis over the fair valuerequisite service period of the equity instruments in these transactions usingaward.

Awards with performance-based vesting conditions – Expense is not recognized until it is determined that it is probable the stock price and other measurement assumptionsperformance-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 earlierderived service period or the explicit service period if one is present. However, if the market condition is satisfied prior to the end of the following dates, referredrequisite service period, the Company will accelerate all remaining expense to as the measurement date: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.

i.

The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and

ii.

The date at which the counterparty’s performance is complete.

 

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 Statements of Operations for the three months and six months ended December 31, 2017 and 2016 are as follows (rounded to nearest thousand):

 

 

Three months ended

December 31

 

 

Six months ended

December 31

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development expenses

 

 

 

 

 

 

 

 

 

 

 

 

Professional fees

 

$-

 

 

$8,000

 

 

$-

 

 

$50,000

 

Employees’ bonus

 

 

42,000

 

 

 

50,000

 

 

 

74,000

 

 

 

62,000

 

Officers’ bonus

 

 

989,000

 

 

 

289,000

 

 

 

1,326,000

 

 

 

578,000

 

Total stock-based compensation expense

 

$1,031,000

 

 

$347,000

 

 

$1,400,000

 

 

$690,000

 

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Recent Adopted Accounting Pronouncements

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 was adopted on July 1, 2016 and did not have a material effect on the Company’s financial position or 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 condensed financial statements.

Recently Issued Accounting Guidance

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 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. 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 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.

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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 will adopt ASU No. 2016-15 commencing in the first quarter of fiscal 2019. The Company does not believe this standard will have a material impact on its financial statements or the related footnote disclosures.

Note 4. Patents, net

 

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

 

 

 

Useful life

(years)

 

 

December 31,

2017

 

 

June 30,

2017

 

Purchased Patent Rights – Brilacidin, and related compounds

 

14

 

 

$4,082,000

 

 

$4,082,000

 

Purchased Patent Rights – Anti-microbial – surfactants and related compounds

 

12

 

 

 

144,000

 

 

 

144,000

 

Patents – Kevetrin and related compounds

 

17

 

 

 

1,388,000

 

 

 

1,308,000

 

 

 

 

 

 

 

5,614,000

 

 

 

5,534,000

 

Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds

 

 

 

 

 

(1,310,000)

 

 

(1,158,000)

Accumulated amortization for Patents –Kevetrin and related compounds

 

 

 

 

 

(204,000)

 

 

(164,000)

 

 

 

 

 

$4,100,000

 

 

$4,212,000

 

 

 

Useful life

(years)

 

 

March 31,

2021

 

 

June 30,

2020

 

 

 

 

 

 

 

 

 

 

 

Purchased Patent Rights- Brilacidin and related compounds

 

 

14

 

 

$4,082,000

 

 

$4,082,000

 

Purchased Patent Rights-Anti-microbial- surfactants and related compounds

 

 

12

 

 

 

144,000

 

 

 

144,000

 

Patents - Kevetrin and related compounds

 

 

17

 

 

 

1,262,000

 

 

 

1,208,000

 

 

 

 

 

 

 

 

5,488,000

 

 

 

5,434,000

 

Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds

 

 

 

 

 

 

(2,297,000)

 

 

(2,069,000)

Accumulated amortization for Patents-Kevetrin and related compounds

 

 

 

 

 

 

(361,000)

 

 

(305,000)

Total

 

 

 

 

 

$2,830,000

 

 

$3,060,000

 

 

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

 

Amortization expense was approximately $96,000 and $92,000, for the three months ended DecemberMarch 31, 20172021 and 2016,2020 was approximately $95,000 and $93,000, respectively and was approximately $192,000,$283,000, and $183,000$279,000 for the sixnine months ended DecemberMarch 31, 20172021 and 2016,2020, respectively.

 

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At DecemberMarch 31, 2017,2021, the future amortization period for all patents was approximately 7.684.43 years to 16.75 years. Future estimated annual amortization expenses are approximately $191,000$94,000 for the year ending June 30, 2018, $382,0002021, $378,000 for each year from 20192022 to 2025, $372,000and a total of $1,224,000 for the year ending June 30, 2026 $370,000 for the year ending June 30, 2027, $132,000 for the year ending June 30, 2028, $78,000 for the years ending June 30, 2029 through the years ended 2032, $37,000 for the year ending June 30, 2033, $11,000 for the year ending June 30, 2034 and $1,000 for the year ending June 30, 2035.thereafter.

 

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Note

5. Accrued Expenses – Related Parties and Other

 

Accrued expenses consisted of the following (rounded to nearest thousand):

 

 

March 31,

2021

 

 

June 30,

2020

 

 

December 31,

2017

 

 

June 30,

2017

 

 

 

 

 

 

Accrued research and development consulting fees

 

$511,000

 

$673,000

 

 

$540,000

 

$40,000

 

Accrued rent (Note 8) – related parties

 

15,000

 

21,000

 

Accrued interest – (Note 9) related parties

 

 

22,000

 

 

 

17,000

 

Accrued rent (Note 10) - related parties

 

8,000

 

8,000

 

Accrued interest (Note 11) - related parties

 

 

85,000

 

 

 

11,000

 

 

 

 

 

 

Total

 

$548,000

 

 

$711,000

 

 

$633,000

 

 

$59,000

 

 

Note 6. Accrued Salaries and Payroll Taxes - Related Parties and Other

 

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

 

 

March 31,

2021

 

 

June 30,

2020

 

 

December 31,

2017

 

 

June 30,

2017

 

 

 

 

 

 

Accrued salaries - related parties

 

$2,823,000

 

$2,823,000

 

 

$1,847,000

 

$2,647,000

 

Accrued payroll taxes - related parties

 

130,000

 

130,000

 

 

130,000

 

130,000

 

Accrued employee bonuses

 

-

 

86,000

 

Accrued salaries – others

 

 

279,000

 

Accrued salaries – employee

 

 

91,000

 

Withholding tax - payroll

 

 

244,000

 

 

 

105,000

 

 

 

80,000

 

 

 

68,000

 

 

 

 

 

 

Total

 

$3,197,000

 

 

$3,144,000

 

 

$2,057,000

 

 

$3,215,000

 

 

Note 7. Commitments and ContingenciesExclusive License Agreement

 

Lease CommitmentsOn 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.

 

Operating Leases – Rental PropertyUnder 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 signed agenerated revenue of $0 million and $0.4 million for the nine months ended March 31, 2021 and 2020, respectively. Revenue during the nine months ended March 31, 2020 represented the initial non-refundable payment of $0.4 million received from Alfasigma.

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8. Operating Leases

Operating lease extension agreement with Cummings Properties which beganright-of-use (“ROU”) assets and liabilities are recognized at commencement date based on October 1, 2013. Thethe 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 for a term of five years ending on September 30, 2018,not readily determinable 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-signedutilizes 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 and subleases 200 square feet of space previously used by the Company and pays the Company $900 per month.

As of December 31, 2017, futurewhen 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 Cummings Properties required underaccount for these lease and non-lease components as a single lease component. We are also electing not to apply the non-cancelablerecognition 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 period are as follows (rounded to nearest thousand):follows:

 

Year ending June 30,

 

 

 

2018

 

$109,000

 

2019

 

 

54,000

 

Total minimum payments

 

$163,000

 

 

 

Nine Months

Ended

March 31,

2021

 

Lease Cost

 

 

 

Operating lease cost (included in general and administrative in the Company’s consolidated statement of operations)

 

$66,000

 

Variable lease cost

 

 

9,000

 

 

 

$75,000

 

Other Information

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities for the nine months ended March 31, 2021

 

$112,000

 

Weighted average remaining lease term – operating leases (in years)

 

 

2.75

 

Average discount rate – operating leases

 

 

18%

 

Rent expense, netThe supplemental balance sheet information related to leases for the period is as follows:

 

 

At March 31,

2021

 

Operating leases

 

 

 

Short-term operating lease liabilities

 

$158,000

 

Long-term operating lease liabilities

 

 

296,000

 

Total operating lease liabilities

 

$454,000

 

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The following table provides maturities of the Company’s lease income, under this operatingliabilities at March 31, 2021 as follows:

 

 

Operating

Leases

 

Fiscal Year Ending June 30,

 

 

 

 

 

 

 

2021

 

$55,000

 

2022

 

 

223,000

 

2023

 

 

223,000

 

2024 (remaining 3 months)

 

 

60,000

 

Total lease payments

 

 

561,000

 

Less: Imputed interest/present value discount

 

 

(107,000)

 

 

 

 

 

Present value of lease liabilities

 

$454,000

 

Operating lease agreement was approximately $52,000 and $51,000cost for the three months and the nine months ended DecemberMarch 31, 2017 and 2016, respectively and2021 was approximately $104,000$24,000 and $102,000$76,000. Operating lease cost for the sixthree months and the nine months ended DecemberMarch 31, 20172020 was approximately $29,000 and 2016,$98,000, respectively. Before September 2013,

9. Commitments and Contingencies

Litigation

On January 22, 2020, the Company paid rent to Kard Scientific for sharefiled a complaint against Cummings Properties, LLC in the Superior Court of office space and details are shown at Note 8 - Related Party Transactions below.

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Operating Leases - Equipment

We lease equipment under a non-cancelable operating leasethe Commonwealth of Massachusetts (C.A. No. 20-77CV00101), seeking, among other things, declaratory relief that expires in April, 2018. The future minimum rental commitment for our operatingthe lease for the next twelve monthsCompany’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 $3,000, ascurrently unable to determine the probability of December 31, 2017 and was disclosed under the caption Prepaid expenses inoutcome or reasonably estimate the accompanying balance sheets.loss or gain, if any.

 

Contractual Commitments

 

The Company has total non-cancellable contractual minimum commitments of approximately $2.7$6.3 million to contract research organizations as of DecemberMarch 31, 2017.2021. Expenses are recognized when services are performed by the contract research organizations.

 

Contingent Liability - Disputed Invoices

As described in Note 8.6. 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,

Office Lease

Dr. Menon, the Company’s principal shareholder, President of Research, and Director, also serves as the Chief Operating Officer and Director ofCompany has a payable to Kard Scientific, Inc. (“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 December 31, 2017 and June 30, 2017, rent payable to KARD of approximately $15,000$1,486,000 for its research and $21,000, respectively, weredevelopment expenses and this amount was 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 leaseaccounts payable. KARD 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 Mr. EhrlichDr. Menon. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon officersresigned 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, 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 total rent of approximately $3,000 and $6,000Company’s intent not to the Company for bothpay them.

All of the three months and six months ended Decemberabove disputed invoices were reflected as current liabilities as of March 31, 2017 and 2016 and the rental payment was offset with the accrued rent owed to KARD.2021.

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10. Related Party Transactions

 

ClinicalPre-clinical Studies

 

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 DecemberMarch 31, 20172021 and June 30, 2017,2020, 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.

Share Issuance

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 9 below.

Note 9.11. Convertible Note Payable - Related Party below.

 

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 Promissory11. Convertible Note A and Ehrlich Promissory Note B be replaced with a new note, Ehrlich Promissory Note C. Payable - Related Party

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. 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,December 29, 2010, the Company amended the Ehrlich Promissory Note C and agreedissued 18,000,000 Equity Incentive Options 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.

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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 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 DecemberOn 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).

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As of March 31, 20172021 and June 30, 2017, approximately $22,000 and $17,000, respectively, is2020, the accrued interest payable on this note.

At December 31, 2017 and June 30, 2017, principal balance of this demandconvertible note payable to Mr. Ehrlich, the Company’s Chairman and CEO was approximately $2,022,000.$1,428,000 and $1,822,000, respectively.

 

As of March 31, 2021 and June 30, 2020, the balance of accrued interest payable was $85,000 and $11,000, respectively (see Note 10.5. Accrued Expenses – Related Parties and Other).

As of March 31, 2021 and June 30, 2020, the total outstanding balances of principal and interest were approximately $1,513,000 and $1,833,000, respectively.

12. Loan payable

On May 10, 2020, the Company received loan proceeds in the amount of approximately $79,000 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 unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. While the Company believes that its use of the loan proceeds satisfied the conditions for forgiveness of the loan, we cannot assure you that we have not or will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.

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

 

Current Equity Incentive PlanStock-based Compensation – Stock Options

 

2016 Equity Incentive Plan (the “2016 Plan”)

 

On June 30, 2016, the Board of Directors adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”).Plan. The 2016 Plan became effective upon adoption by the Board of Directors on 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); provided.

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Stock Options

The fair value of options granted for the nine months ended March 31, 2021 and 2020 was estimated on the date of grant using the Black-Scholes-Merton Model that (1) no Outside Director (as defineduses assumptions noted in the 2016 Plan) may be granted awards covering more than 250,000 sharesfollowing table.

 

 

Nine months ended

March 31,

 

 

 

2021

 

 

2020

 

Expected term (in years)

 

5-10

 

 

3 - 10

 

Expected stock price volatility

 

89.88 to 95.47%

 

 

73.68% to 92.21%

 

Risk-free interest rate

 

0.48 to 0.68%

 

 

0.41% to 1.50%

 

Expected dividend yield

 

 

0

 

 

 

0

 

The components of common stockstock-based compensation expense included in any yearthe Company’s Condensed Statement of Operations for the three months and (2)nine months ended March 31, 2021 and 2020 are as follows (rounded to nearest thousand):

 

 

Three months ended

March 31

 

 

Nine months ended

March 31

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Stock-based compensation – officers

 

$

 

 

$

 

 

$

 

 

$297,000

 

Stock-based compensation – employees

 

 

13,000

 

 

 

22,000

 

 

 

46,000

 

 

 

82,000

 

Stock-based compensation – consultants

 

 

27,000

 

 

 

14,000

 

 

 

88,000

 

 

 

31,000

 

Reversal of forfeited stock-based compensation

 

 

 

 

 

(251,000)

 

 

 

 

 

(251,000)

– included in Research and Development expenses

 

 

41,000

 

 

 

(215,000)

 

 

134,000

 

 

 

159,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation – officers – included in General and Administration expenses

 

 

 

 

 

143,000

 

 

 

 

 

 

143,000

 

Total Stock-based compensation, net

 

$41,000

 

 

$(72,000)

 

$134,000

 

 

$302,000

 

Exercise of options

There was no participant shall be granted, during any one year period,exercise of options to purchase Class A common stock during the nine months ended March 31, 2021 and stock appreciation rights with respect2020.  The details of exercise of options to more than 4,000,000 shares ofpurchase Class B common stock are disclosed 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.Note 14. Equity Transactions.

 

In connection with adoptionForfeiture of the 2016 Plan,options

Dr. Bertolino resigned as President and Chief Medical Officer and as a member of 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 on December 19, 2019. On February 17, 2020, all 2,858,521 options he held were forfeited, representing the options he was granted since June 27, 2016 to grantSeptember 1, 2019. During the nine months ended March 31, 2020, the Company reversed the $251,000 of unvested options and restricted shares underthat were expensed in the 2016 Plan.current year and prior years.

 

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Stock Options Issued and Outstanding

 

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

 

 

 

Number of Options

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Life (Years)

 

 

Aggregate Intrinsic Value

 

Outstanding at June 30, 2017

 

 

40,655,245

 

 

$0.22

 

 

 

3.61

 

 

$31,662,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

795,826

 

 

 

0.71

 

 

 

9.67

 

 

 

 

 

Forfeited/expired

 

 

(172,500)

 

 

3.26

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2017

 

 

41,278,571

 

 

 

0.22

 

 

 

3.24

 

 

$21,696,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31, 2017

 

 

40,356,641

 

 

 

0.21

 

 

 

3.10

 

 

$21,696,800

 

 

 

Number of
Options

 

 

Weighted Average
Exercise Price

 

 

Weighted

Average
Remaining

Contractual Life

(Years)

 

 

Aggregate

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2019

 

 

22,669,883

 

 

$0.24

 

 

 

2.41

 

 

$1,340,000

 

Granted

 

 

3,540,826

 

 

$0.09

 

 

 

7.44

 

 

 

 

Exercised

 

 

(909,090)

 

$0.11

 

 

 

 

 

 

 

Forfeited/expired

 

 

(2,498,521)

 

$0.67

 

 

 

 

 

 

 

Outstanding at June 30, 2020

 

 

22,803,098

 

 

$0.18

 

 

 

1.83

 

 

$5,857,312

 

Granted

 

 

347,987

 

 

$0.28

 

 

 

8.42

 

 

 

 

Exercised

 

 

(2,200,000)

 

$0.11

 

 

 

 

 

 

 

Forfeited/expired

 

 

(14,101,820)

 

$0.11

 

 

 

 

 

 

 

Outstanding at March 31, 2021

 

 

6,849,265

 

 

$0.36

 

 

 

4.61

 

 

$660,561

 

Exercisable at March 31, 2021

 

 

6,081,624

 

 

$0.38

 

 

 

4.27

 

 

$567,797

 

Unvested stock options at March 31, 2021

 

 

762,641

 

 

$0.20

 

 

 

7.32

 

 

$92,763

 

 

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The fair value of options granted for the six months ended December 31, 2017 and 2016 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.

 

Six months ended

December 31,

 

2017

 

2016

 

Expected term (in years)

 

10

 

3 - 10

 

Expected stock price volatility

 

106.01%

 

57.63% to 111.62%

 

Risk-free interest rate

 

2.15%

 

0.71% to 1.73%

 

Expected dividend yield

 

0

 

0

Stock-Based Compensation

The Company recognized approximately $1,400,000 and $690,000 of total stock-based compensation costs related to equity grant awards for the six months ended December 31, 2017 and 2016, respectively. The $1,400,000 of stock- based compensation expense for the six months ended December 31, 2017 included approximately $516,000 of stock options expense and $884,000 of restricted stock awards.

For the six months ended December 31, 2017

On September 1, 2017, the Company agreed to grant to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, 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 $0.705 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) shares of the Company’s common stock close above $3.00 per share (as may be adjusted for any stock splits or similar actions); (3) the commencement of trading of shares of the Company’s common stock on a national securities exchange; or (4) upon a change in control of the Company. The 1,066,667 shares were valued at approximately $752,000 and the 617,839 stock options valued at approximately $399,000. Both shares and options will be amortized over 2 years to September 1, 2019 unless the probability of the other above vesting requirements occurring are met at an earlier date. At December 31, 2017, the Company determined that it was not probable that these accelerated vesting provisions would occur earlier than the scheduled vesting date. During the three months and six months ended December 31, 2017, the Company recorded approximately $144,000 and $192,000 of total stock-based compensation, respectively. The $144,000 of stock-based compensation expense for the three months ended December 31, 2017 included approximately $50,000 of stock option expense and $94,000 of stock awards. The $192,000 of stock-based compensation expense for the six months ended December 31, 2017 included approximately $67,000 of stock option expense and $125,000 of stock awards.

On September 1, 2017, the Company agreed to grant to Ms. Jane Harness, the Vice President, Clinical Sciences and Portfolio Management of the Company 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. Both shares and options shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one third upon the second anniversary of the effective date, and the remaining one third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. 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 will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the three months and six months ended December 31, 2017, the Company recorded approximately $13,000 and $17,000 of total stock-based compensation, respectively. The $13,000 of stock-based compensation expense for the three months ended December 31, 2017 included approximately $10,000 of stock option expense and $3,000 of stock awards. The $17,000 of stock-based compensation expense for the six months ended December 31, 2017 included approximately $13,000 of stock option expense and $4,000 of stock awards.

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On September 1, 2017, the Company agreed to grant to Anne Ponugoti, under the 2016 Plan, ten-year options to purchase 5,000 shares of the Company’s common stock at an exercise price of $0.705 per share, which shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one-third upon the second anniversary of the effective date, and the remaining one-third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 5,000 stock options valued at approximately $3,000 and it will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the three months and six months ended December 31, 2017, the Company recorded approximately $300 and $400 of stock option expense for this option grant.

On January 9, 2017, the Company and Ms. Ponugoti entered into an executive 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 three months and six months ended December 31, 2017, the Company recorded approximately $4,000 and $7,000 of total stock-based compensation, respectively. The $4,000 of stock-based compensation expense for the three months ended December 31, 2017 included approximately $3,000 of stock option expense and $1,000 of stock awards. The $7,000 of stock-based compensation expense for the six months ended December 31, 2017 included approximately $5,000 of stock option expense and $2,000 of stock awards.

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 and issuance of Treasury Stock and the reversal of outstanding stock subscription receivable

On September 1, 2017, 19,465 shares of the Company’s restricted stock vested to Ms. Harness according to Ms. Harness’s employment agreement. The total taxable compensation to Ms. Harness for the 19,465 vested shares was $14,000, which is priced at the closing stock price on September 1, 2017 at $0.705 a share.

The Company issued 12,409 common shares (net share issuance amount), which is approximately 64% of the total vested common share amount of 19,465 common shares due to be issued to Ms. Harness. The remaining 7,056 shares of common stock were withheld from Ms. Harness 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.

On December 22, 2017, 533,334 shares of the Company’s restricted stock vested to Dr. Arthur P. Bertolino according to Dr. Arthur P. Bertolino’s employment agreement. The total taxable compensation to Dr. Arthur P. Bertolino for the 533,334 vested shares was $373,334, which is priced at the closing stock price on December 21, 2017 at $0.7 a share.

The Company issued 295,286 common shares (net share issuance amount), which is approximately 55% of the total vested common share amount of 533,334 common shares due to be issued to Dr. Arthur P. Bertolino. The remaining 238,048 shares of common stock were withheld from Dr. Arthur P. 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.

In addition, the Company reversed an outstanding stock subscription receivable of $26,000 for 60,000 shares of common stock and recorded this amount as the cost of treasury stock.

There were 567,184 shares and 262,080 shares of treasury stock outstanding at December 31, 2017 and June 30, 2017, respectively, purchased at a total cumulative cost of $417,000 and $220,000 at December 31, 2017 and June 30, 2017, respectively.

Restricted Stock Awards Outstanding

 

The following summarizes our restricted stock activity for our restricted stock issuances:activity:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

Grant

 

 

 

Number of

 

 

Date Fair

 

 

 

Shares

 

 

Value

 

 

 

 

 

 

 

 

Total awards outstanding at June 30, 2017

 

 

601,728

 

 

$1.39

 

Total shares granted

 

 

1,125,061

 

 

 

0.71

 

Total shares vested

 

 

(552,799)

 

 

1.40

 

Total shares forfeited

 

 

 

 

 

 

 

 

Total unvested shares outstanding at December 31, 2017

 

 

1,173,990

 

 

$0.75

 

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Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

 

 

 

Shares

 

 

Fair Value

 

Total awards outstanding at June 30, 2019

 

 

1,729,288

 

 

$0.51

 

Total shares granted

 

 

2,625,061

 

 

$0.11

 

Total shares vested

 

 

(2,637,561)

 

$0.29

 

Total shares forfeited

 

 

(1,600,001)

 

$0.22

 

Total unvested shares outstanding at June 30, 2020

 

 

116,787

 

 

$0.32

 

 

 

 

 

 

 

 

 

 

Total shares granted

 

 

58,394

 

 

$0.22

 

Total shares vested

 

 

(58,395)

 

$0.41

 

Total shares forfeited

 

 

 

 

$

 

Total unvested shares outstanding at March 31, 2021

 

 

116,786

 

 

$0.22

 

 

Scheduled vesting for outstanding restricted stock awards at DecemberMarch 31, 20172021 is as follows:

 

 

 

Year Ending June 30,

 

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scheduled vesting

 

 

3,333

 

 

 

575,596

 

 

 

575,597

 

 

 

19,464

 

 

 

1,173,990

 

 

 

Year Ending June 30,

 

 

 

2022

 

 

2023

 

 

2024

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scheduled vesting

 

 

58,394

 

 

 

38,928

 

 

 

19,464

 

 

 

116,786

 

 

As of DecemberMarch 31, 2017,2021, there was approximately $0.7 million$17,000 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 $0.3 million$10,000 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 1.72 years.1.85 years

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Stock Warrants Outstanding

 

ForWarrants to Purchase 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 2,000 shares of the Company’s 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 entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and 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 $2.0 million of 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, endedand 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, 20162021 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:

Average risk-free interest rate

1.64%

Average expected life-years

2

Expected volatility

99.03%

Expected dividends

0%

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.

 

IssuancesDuring 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 March 31, 2021 and June 30, 2020, all Series 1-4 warrants to purchase shares of Series B preferred stock were exercised, and no Series 1-4 warrants were outstanding.

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Warrants to Purchase Common Stock and Stock Options – Pursuant to New Employment Agreements

 

On June 27, 2016,28, 2018, the Company and Dr. Bertolino entered into an executive employment agreement as our President and Chief Medical Officer of the Company, effective on June 27, 2016 anda Securities Purchase Agreement with Aspire Capital Fund, LLC (“Aspire Capital”), pursuant to which the Company agreed to grantsell up to Dr. Bertolino under the Company’s 2016 Equity Incentive Plan (i) 1,066,667 shares$7.0 million of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock atto Aspire Capital, without an exercise priceunderwriter or placement agent. The Company issued to Aspire Capital warrants to purchase 8,000,000 shares 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’sits 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 the employment agreement). 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 valued at approximately $800,000 and will be exercisable for 105 years at an exercise price of $1.39$0.38 per share. DuringThe warrants were recorded within stockholders’ deficiency. The fair value of the three months and six months ended December 31, 2017,warrants issued on June 28, 2018 was estimated on the Company recordeddate of issuance using the Black-Scholes-Merton Model. The value of the warrants issued was approximately $845,000 and $1,134,000 of total stock-based compensation, respectively. The $845,000 of stock-based compensation expense$1.7 million. Assumptions used in the Black Scholes option-pricing model for the three months ended December 31, 2017 included approximately $295,000 of stock option expense and $550,000 of stock awards. The $1,134,000 of stock-based compensation expense for the six months ended December 31, 2017 included approximately $396,000 of stock option expense and $738,000 of stock awards.these warrants were as follows:

 

In December, 2017 and October, 2017, respectively, the Company was able to conclude both the Phase 2b psoriasis study and a Phase 2 oral mucositis study; therefore the remaining 50% of the shares and options vested to Dr. Bertolino, and all remaining shares and options granted on June 27, 2016 were fully amortized and expensed during the three-month period ended December 31, 2017.

Average risk-free interest rate

2.73%

Average expected life-years

5

Expected volatility

52.77%

Expected dividends

0%

 

On July 18, 2016, the Company issued 7,500 stock optionsAll 8,000,000 warrants 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 three months ended September 30, 2016, the Company recorded approximately $4,000 of stock option expense for this option grant.

On September 1, 2016, the Company and Ms. 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 upon the first anniversary of the effective date, one-third upon the second anniversary of the effective date, and the remaining one-third upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company, and (ii) ten-year options to purchase 172,987 shares of the Company’s common stock were also grantedexercised at an exercise price of $1.37$0.38 per share which shall vest upon the earliest to occur of the following: (1) one-third upon the first anniversary of the effective date,on June 18, 2020 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 $1.37 per share. They will be amortized over 3 years to September 1, 2019. During the three months and six months ended December 31, 2017, the Company recorded approximately $25,000 and $50,000 of total stock-based compensation, respectively. The $25,000 of stock-based compensation expense for the three months ended December 31, 2017 included approximately $18,000 of stock option expense and $7,000 of stock awards. The $50,000 of stock-based compensation expense for the six months ended December 31, 2017 included approximately $36,000 of stock option expense and $14,000 of stock awards.June 23, 2020.

 

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14. Equity Transactions

 

On September 15, 2016, the Company and Dr. Lang entered into an executive 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 upon the first anniversary of the effective date, one third upon the second anniversary of the effective date, and the remaining one-third upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company, and (ii) 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 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 three months ended December 31, 2017 and 2016, the Company recorded approximately $0 and $4,000 of stock-based compensation expense for these equity grants, respectively. There was no stock-based compensation expense for Dr. Lang since she resigned on March 17, 2017 and the 63,492 restricted shares and the 188,262 stock options were forfeited. The $4,000 included approximately $3,000 of stock option expense and $1,000 for the stock awards.

Issuance of Common Stock to Consultants for Services

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.

Exercise of options

During the three months and six months ended December 31, 2017 and 2016, there were no stock options exercised.

Note 11. Equity Transactions

For the six months ended December 31, 2017

$30 million Class A Common Stock Purchase Agreement with Aspire Capital

 

On September 6, 2017,July 31, 2020, the Company entered into a common stock purchase agreementthe 2020 Agreement with Aspire Capital which replaced the prior 2015 $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-month24-month term of the Stock Purchase Agreement. TheIn consideration for entering into the 2020 Agreement, the Company issued 300,000to Aspire Capital 6,250,000 shares of its Class A common stock to Aspire CapitalCommon Stock as a commitment fee. The commitment fee of approximately $215,000 is$1.4 million was recorded as deferred financing costs and additional paid-in capital and this asset will be amortized pro-rata asover the funding is received.life of the 2020 Agreement. The amortized amount of $31,000approximately $0.4 million was recorded to additional paid-in capital for the sixnine months ended DecemberMarch 31, 2017.2021. The unamortized portion is carried on the balance sheet as deferred offering costs and was $183,000approximately $1.0 million at DecemberMarch 31, 2017. The Company registered the resale of all shares that Aspire Capital will purchase under this common stock purchase agreement. To the extent Aspire Capital purchases shares under this Purchase Agreement and subsequently sells those shares purchased, the other holders of shares 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 price that we might otherwise wish to effect sales.2021.

 

During the period from September 6, 2017July 31, 2020 to DecemberMarch 31, 2017,2021, the Company generated proceeds of approximately $4.4$4.6 million under the new 2017 agreement with Aspire Capital from the sale of approximately 6.6 million shares of its common stock. As of December 31, 2017, the available balance under the new equity line agreement was approximately $25.6 million.

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On March 30, 2015, the Company entered into its prior common stock purchase 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 Purchase Agreement. In consideration for entering into this stock 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 was amortized as the funding was received. The unamortized portion of deferred offering costs from this stock purchase agreement of $227,000 was recorded to additional paid-in capital during the six months ended December 31, 2017, since the Company entered into a new $30 million common stock purchase agreement with Aspire Capital, to replace this prior $30 million 2015 Aspire Capital agreement, on September 6, 2017. During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under this 2015 agreement with Aspire Capital, from the sale of approximately 2.6 million shares of its common stock.

Note 12. Subsequent Events

Equity Transactions

From January 1, 2018 to February 7, 2018, the Company has generated additional proceeds of approximately $0.6 million under the Common Stock Purchase2020 Agreement with Aspire Capital from the sale of approximately 0.922.5 million shares of its common stock. As of March 31, 2021, the available balance under the 2020 Agreement was approximately $25.4 million.

Class B Common Stock

 

On February 1, 2018, 3,333January 29, 2019, the Company issued 909,090 shares of Class B common stock at the Company’s restrictedoption 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 vestedat the option exercise price of $0.11 per share to Ms. Anne Ponugoti accordingMr. Ehrlich for his partial exercise of his option, paid by the cancellation of debt to Ms. Ponugoti’s employment agreement.Mr. Ehrlich of $100,000 to satisfy the exercise price.

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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 to the consolidated financial statements). 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 Ms. PonugotiMr. Ehrlich for the 3,333 vested13,072,730 shares was $2,433, which is priced atapproximately $540,000, based upon the closing stock price on January 31, 2018 at $0.73December 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 2,64511,307,527 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 March 31, 2021 and June 30, 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.

Class A Common Stock

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.

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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 nine months ended March 31, 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 $20,000 are treated as interest expense – preferred stock during the nine months ended March 31, 2021 and 2020, respectively. The 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 March 31, 2021 and June 30, 2020, respectively.

Terms of the Series B Preferred Stock

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.

Series B Preferred Stock Warrants

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 March 31, 2021 and June 30, 2020.

Conversion of preferred stock to common stock

During the nine months ended March 31, 2021 and 2020, the preferred stockholders converted 0 shares and 890 shares of 2018 Series B 5% convertible preferred stock into 0 million and 9.0 million shares of common stock, respectively. 

As of March 31, 2021 and June 30, 2020, there were no shares of 2018 Series B 5% convertible preferred stock outstanding.

Treasury Stock

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), which is approximately 79% of the total vested common share amount of 3,333 common shares due to be issued to Ms. Ponugoti.Mr. Ehrlich. The remaining 688412,238 shares of Class B common stock were withheld from Ms. PonugotiMr. Ehrlich for the payment of payroll taxes toand were reported by the Federal and State taxing authorities.Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

 

On February 5, 2018, the Board of Directors approved the retirement of 567,872 shares of its common stock in treasury, which shares are issued but are not outstanding. These shares included the 688 shares withheld from Ms. Ponugoti, as a result, all treasury shares of the Company were retired.

 
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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 $2.1 million as of March 31, 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.

Note 15. 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 will also issue 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 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).

 
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The Company 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 time to common stock and given no set term.

 

The Company 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 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 $1.5 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 three and nine months ended March 31, 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 at March 31, 2021 and the total dividends accrued of approximately $5,466 and $14,721 are treated as interest during the three and nine months ended March 31, 2021, respectively.

Terms of the Preferred Stock

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 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.

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Redemption Rights

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 take certain actions without the consent of the holders of the preferred stock.

Warrants

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.

Exercise of warrants

During the nine months ended March 31, 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. 

During the nine months ended March 31, 2020, 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 March 31, 2021, 5,072 Series 1 and 2 warrants to purchase 5,072 shares of Series B-2 preferred stock were outstanding.

Conversion of Preferred Stock to Common Stock

During the nine months ended March 31, 2021, the Series B-2 preferred stockholder converted a total of 10,195 shares of Series B-2 preferred stock into a total of 67,947,245 shares of common stock.

With regard to conversions, the Company reversed Series B-2 preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately $10,017,000 based on the proportion of Series B-2 preferred stock converted relative to the original total issued.

As of March 31, 2021, there are no shares of Series B-2 preferred stock outstanding and the series B-2 preferred stock liability is $0.

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Note 16. 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 an orderly transaction between market participants at the measurement date. The Company calculates the fair value of:

A financial 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 three levels of valuation hierarchy are defined as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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 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, 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 effect on the estimated fair values.

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 nine months ended March 31, 2021:

FY 2021

Balance, beginning of period

$

Issuance of Series B-2 preferred stock at fair value

5,000,000

Exercise of Series 1 and 2 warrants

5,017,000

Conversion of Series B-2 preferred stock to common stock

(10,017,000)

Change in fair value of Series B-2 preferred stock (1)

(—

Balance, end of period

$

______________ 

(1)

Change in fair value of preferred stock is reported in interest expense—preferred stock.

Note 17. Subsequent Events

The Company has evaluated events subsequent to March 31, 2021 through the issuance of these financial statements and determined that there were no additional events requiring disclosure.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and plan of operations should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included in this Form 10-Q. This discussion includes forward-looking statements that involve risk and uncertainties. You should review our important note about forward-looking statements preceding the condensed consolidated financial statements in Item 1 of this Part I. As a result of many factors, such as those set forth under “Risk Factors” in this Form 10-Q and in our Annual Report on Form 10-K, actual results may differ materially from those anticipated in these forward-looking statements.

 

Management’s Plan of Operation

 

Overview

 

Innovation Pharmaceuticals Inc. is a clinical stage biopharmaceuticalpharmaceutical company developing innovative therapies for inflammatory diseases,with anti-infective, oncology, dermatology,anti-inflammatory and anti-infectivesdermatology, 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.

 

Effective June 5, 2017,Recent Developments

Brilacidin is being studied by the Company, changedas well as other independent researchers, as a potential anti-viral therapeutic for the treatment of the novel coronavirus (SARS-CoV-2), which is responsible for COVID-19.

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.

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.

In April 2021, the COVID-19 clinical trial’s independent Data Monitoring Committee (DMC) completed its namescheduled 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 Cellceutix Corporation3 days to Innovation Pharmaceuticals5 days of treatment, as intended per the protocol, which the Company implemented.

Since November 2020, several pharmaceutical companies have received Emergency Use Authorization for their vaccines, which are currently being distributed in the US and abroad. The widespread distribution of vaccines in the US has to date impacted patient recruitment in the US but has not affected  our overseas sites.  The Company believes it can accomplish full recruitment with its overseas sites within the same approximate study timeline. To date, more than 70% of the planned number of patients have been randomized in the study.

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Business Development and Licensing

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 is since added by amendment and due to start imminently. 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.  Accordingly, the Company has placed orders with its vendors to supply Alfasigma the Brilacidin drug substance needed for this study. 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.

Active Clinical Development Programs

Compound

Target/Indication

Clinical Status

Brilacidin

Oral Mucositis (OM)

Phase 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)

COVID-19

Phase 2 Study

Kevetrin

Ovarian Cancer

Phase 2 Study (completed)

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 compoundsBrilacidin, 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.

 

Clinical Development Programs

Compound

Target/Indication

Clinical Status

Prurisol

Psoriasis

Phase 2b (Completed)

Brilacidin

*ABSSSI

Phase 2 (Completed)

Oral Mucositis

Phase 2 (Completed; 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

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Recent Developments

Business Development Activities

A key strategic priority for the Company remains the out-licensing of its mid-stage, first-in-class clinical assets to global and/or specialty pharmaceutical companies who have expressed an interest in our pipeline. Successfully securing partnerships would afford the Company access to immediate and potentially recurring sources of non-dilutive capital, including upfront fees, milestone-based payments and tiered royalties.

Research and development efforts are concentrated on Prurisol, Brilacidin, and Kevetrin:

·

Prurisol - Prurisol, our lead anti-psoriasis drug candidate, is a small molecule compound acting on the principles of immune modulation and PRINS (Psoriasis susceptibility-related RNA Gene Induced by Stress) reduction that has been found to be effective against psoriasis in animal models, both in induced psoriasis as well as a xenograft model with human psoriatic tissue. It is currently in Phase 2 clinical development with the recently completed study below:

Active Clinical Trials: Phase 2b, Multi-center, Randomized, Double Blind, Parallel Group, Placebo-controlled Trial to Study the Efficacy and Safety of Two Oral Doses of Prurisol Administered Twice Daily for Twelve Weeks to Subjects with Moderate to Severe Chronic Plaque Psoriasis

·

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 October 2017, announced it had completed 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 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 the 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 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.

In early 2018, the Company approved steps to focus its efforts on clinical trials for its lead drug candidates. Among other changes, the salary of Dr. Krishna Menon, the Company’s President of Research, was reduced by 50%, and the Company anticipates further reductions to staff unrelated to clinical trials.

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The Company’s common stock traded under the stock symbol “CTIX” 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”.

Set forth below is an overview of our most recent research and development efforts on Prurisol,Brilacidin and Kevetrin and Brilacidin during fiscal 2018 and through the date of this Quarterly Report on Form 10-Q. We have entered into multiple non-disclosure agreements with large and mid-sized pharmaceutical companies that enable us to continue ongoing discussions regarding potential partnering should the below trial results support such a relationship.10-Q:

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Brilacidin

 

PrurisolCOVID-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 demonstrate that Brilacidin exerts potent inhibition of SARS-CoV-2 and thus supports Brilacidin as a promising COVID-19 drug candidate. Also of note, Brilacidin has demonstrated excellent synergistic antiviral activity when combined with Remdesivir.

Research Highlights: 

·

Brilacidin potently inhibits SARS-CoV-2 in an ACE2 positive human lung cell line.

·

Brilacidin achieved a high Selectivity Index of 426 (CC50=241μM/IC50=0.565μM).

·

Brilacidin’s main mechanism appears to disrupt viral integrity and impact viral entry.

·

Brilacidin and remdesivir exhibit excellent synergistic activity against SARS-CoV-2.

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.

A Phase 2 clinical trial of intravenously-administered Brilacidin for COVID-19 is currently underway in the United States and Russia. 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. Target enrollment is 120 patients. In 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 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. The study has already passed 70% of target enrollment.

 

The Company recentlyis collaborating with a Regional Biocontainment Laboratory researcher investigating further research opportunities with Brilacidin as a treatment for the SARS-CoV-2 virus, and other H-CoVs. 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 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 proprietary Alfasigma formulation successfully completed dosing per protocol; an extra treatment cohort is since added by amendment and due to start imminently. In April 2021, the 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.

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See Note 7. Exclusive License Agreement to the consolidated financial statements.

IBD, Ulcerative Colitis (UC) — Brilacidin is also being developed as a treatment in more extensive forms of IBD. Development of an optimized oral formulation is in progress including dosing forms first aimed for the treatment of ulcerative colitis and then Crohn’s disease.

Initial clinical testing, in a Phase 1 single-dose escalation trial, tested a Brilacidin oral formulation prototype in healthy volunteers to assess targeting colon delivery, dispersion, safety, toleration, and systemic exposure/ pharmacokinetics. Data from the Phase 1 trial (NCT03234465) studying the use of delayed-release tablets of Brilacidin showed the trial met its primary endpoints. In the study, the timed-release formulation of Brilacidin was radiolabeled (with complexed technetium-99m) and evaluated for safety and colonic delivery in 9 healthy volunteers (6 with Brilacidin and 3 placebo). Gamma scintigraphic imaging was used to visualize in vivo performance of the enteric coated delayed release tablets designed to target delivery of Brilacidin (50mg, 100mg, and 200mg) to the colon. For Brilacidin treatments, radiolabel release was observed in the ascending colon for four out of the six subjects and in the terminal ileum for the remaining two. Following release, dispersion of the radiolabel was then observed throughout the colon. Serial blood samples were collected through 24 hours post-dose to assess absorption of oral Brilacidin from the colon. Blood level analysis, using a sensitive limit of quantitation in plasma of 1 ng/mL, demonstrated no quantifiable drug concentrations at any timepoint across treatment cohorts, and appears to show containment of Brilacidin within the target location of the colon when delivered by delayed release tablets. Safety outcomes showed that Brilacidin delayed-release tablets were well tolerated by healthy volunteers across all treatment cohorts with no serious adverse events reported. Of the 9 subjects treated, 2 subjects on Brilacidin and 2 subjects on placebo experienced at least one adverse event. The adverse events were of mild intensity and none were deemed to be related to study treatment.

Our oral program development will be supported by a modified release oral capsule formulation now in development. Regulatory approval will be sought to initiate a planned double blinded placebo-controlled Phase 2 clinical trial in UC patients and is anticipated to begin in 2021, pending completion of drug formulation work and securing sufficient drug supply and working capital. Clinical study protocol details have been outlined and sent to vendors pursuant to an RFP (Request for Proposal).

Oral Mucositis (OM) study — In a randomized, double-blind parallel-group, placebo-controlled Phase 2b2 study of Brilacidin for the prevention and control of OM in patients receiving chemoradiation for treatment of Head and 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 Company made available, in a blog published 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 U.S. Food and Drug Administration (FDA) have completed an End-of-Phase 2 meeting concerning the continuing development of Brilacidin 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 preferred chemotherapy regimen in HNC care, is administered in higher concentrations (80-100 mg/m2) every 21 days, and at lower concentrations (30-40 mg/m2) administered weekly as part of the chemoradiation regimen.

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.

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ABSSSI — 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 PrurisolBrilacidin for subjects with moderatethe 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 decided to severe plaque psoriasis. The treatment group arms are Prurisol 300mg, Placebo, Prurisol 400mg (Ratio 3:3:1)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 treatment durationPhase 3 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 used to fund the ABSSSI program. We see ABSSSI as the appropriate gateway indication in infectious diseases, enabling potential further studies of twelve weeks.Brilacidin’s use for implant coating and biofilm infections.

 

We are currently awaiting data fromExpenditures on Brilacidin were approximately $1.0 million and $0.2 million during the trial. Subject recruitment was slower than projected due to competitive trials. In response, we added additional investigator sites. We completed the trial in December 2017. Our expenditures on Prurisol werethree months ended March 31, 2021 and 2020, respectively, and approximately $3.3 million and $1.6$0.6 million during the sixnine months ended DecemberMarch 31, 20172021 and 2016,2020, respectively.

 

Future expenditures on Prurisol willFor 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). The available clinical data also suggest that other inflammatory conditions including various dermatology disorders and conditions may, likewise, be determined by the trial results when available.treated locally and efficaciously with Brilacidin.

 

Kevetrin

 

The Company has commencedcompleted a Phase 2a trial of Kevetrin in treating late-stage ovarian cancer. The main objective of the trial focusesfocused on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. Highly encouraging preliminary positive data from the first patients treated showed direct evidenceThe study was successful in demonstrating modulation of molecular pathways modulationp53 directly in tumors. Modulation of the p53 protein was observedovarian cancer tumor tissue in response to administration of Kevetrin; pathways analyses also pointed to concomitant cell cycle modulation at the level of gene expression. The Company believes that further pathways detail and clinical tumor responses would best be observable with more frequent and potentially higher drug exposure. Thus, the Company has decided to discontinue further enrollment into the current clinical trial and consider a similar trial when ongoing efforts result in the development of an oral formulation of Kevetrin for treating cancer.patients. Pharmacokinetic data collected on Kevetrin during the initial Phase 1 clinical trial demonstratesdemonstrated that the compound has a short half-life of approximately two hours. Kevetrin’sThis 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.

 

Our expendituresExpenditures on Kevetrin were approximately $0.3 million and $0.3 millioninsignificant during the sixboth the quarters and nine months ended DecemberMarch 31, 20172021 and 2016, respectively.

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Brilacidin

Topical Brilacidin Clinical Studies (Trials)

One trial of Brilacidin completed in October 2017 was a double-blind Phase 2 clinical trial of Brilacidin-OM for the treatment of oral mucositis (OM), and another was completed in July 2017, which was 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).

Oral Mucositis (OM): Study - In the completed randomized, double-blind Phase 2 study of Brilacidin for the prevention and control of 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 the use of Brilacidin-OM met its primary endpoint with a clearly reduced incidence of severe OM (SOM) (WHO Grade ≥ 3) compared to placebo. A summary of key secondary endpoints analysis showed that based on Kaplan-Meier curves, Brilacidin-OM oral rinse showed a clear separation from placebo in delaying the onset of SOM—particularly the period from approximately 28-42 days, after the initiation of treatment, during which the incidence of SOM rose strikingly in the placebo group while not in the group being treated with Brilacidin. The delay of onset of SOM data further support the positive primary endpoint findings that showed a clear reduction in the incidence of SOM in patients receiving Brilacidin-OM treatment.

Given that Brilacidin-OM successfully prevented SOM from occurring, as well as delayed its onset, in a substantial number of patients, data comparisons aimed at assessing potential reduction in the duration of SOM were constrained by the fewer number of Brilacidin-OM treated patients that could be included in such analysis. While Brilacidin-OM appeared to decrease the initial duration of SOM (time from the initial WHO Grade ≥ 3 to the first WHO Grade ≤ 2 OM assessment), detailed interpretation of this and other duration data comparisons were limited.

UP/UPS: Study - This 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 or “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.

ABSSSI

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 comments and considerations from the FDA 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 approximate $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.

Our expenditures on Brilacidin were approximately $1.2 million and $0.8 million during the six months ended December 31, 2017 and 2016, respectively.

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Compounds with Activity Against Gram-Negative Bacteria and Fungi2020.

 

We have further reduced costs associated with the licensing of intellectual property for these diseases by returning certain patent portfolios backno product sales to the university licensor. Research at the Company is now focused on supporting our clinical trials. As business conditions warrant,date and we will determine our financial commitmentnot receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to the gram-negative bacteriabegin marketing a pharmaceutical product. Developing pharmaceutical products, however, is a lengthy and fungi programs.very expensive process and there can be no assurance that we will complete such development or commercialize such for several years, if ever.

 

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Critical Accounting Policies and Estimates

 

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. Significant Accounting Policies and Recent Accounting Pronouncements, to the financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q, 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.

 

Please see Note 3 of Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, please see Part II, Item 7, “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended June 30, 2017. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended June 30, 2017.

Recently Issued Accounting Pronouncements

 

Please see Note 3 to the Financial Statements,condensed consolidated financial statements, Significant Accounting Policies and Recent Accounting Pronouncements, in the accompanying notes to Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on our condensed consolidated financial statements.

 

Results of Operations

 

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 expectcurrently anticipate that our generalfuture budget expenditures will be approximately $10.6 million for the next 12 months, including approximately $8.3 million for clinical activities, supportive research, and administrative expenses will also increase indrug product. However, continuing operations for the future as we expand our business development, by adding employees, consultants, additional infrastructure and incurring other additional costs. Basednext 12 months from the date of this filing is very much dependent upon our expected rate of expenditures overability to raise equity from existing or new financing sources. There can be no assurance as to the next twelve monthsavailability or terms upon which such financing and beyond, we will need additional working capital to meet our anticipated clinical trial obligations and other working capital requirements.might be available.

 

For the three months ended December March 31, 20172021 and 20162020

 

Revenue

 

We generated nodid not generate revenue for the three months ended March 31, 2021 and 2020.

We incurred operating expenses of approximately $4.5$1.9 million and $3.3$0.9 million for the three months ended DecemberMarch 31, 20172021 and 2016,2020, respectively.

 

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Research and Development Expenses for Proprietary Programs

 

Below is a summary of our research and development expenses for our proprietary programs by categories of costs for the three months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

For the three months ended

 

Change

 

 

For the three months ended

 

Change

 

 

December 31,

 

2017 Vs. 2016

 

 

March 31,

 

2021 vs. 2020

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

2021

 

 

2020

 

 

 $

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical studies and development research

 

$2,341,000

 

$1,662,000

 

679,000

 

41%

 

$1,210,000

 

$323,000

 

$887,000

 

275%

Officers’ payroll and payroll tax expenses related to R&D Department

 

223,000

 

218,000

 

5,000

 

2%

Employees payroll and payroll tax expenses related to R&D Department

 

262,000

 

354,000

 

(92,000)

 

(26)%

 

77,000

 

77,000

 

 

0%

Stock-based compensation - officers

 

989,000

 

289,000

 

700,000

 

242%

Stock-based compensation - employees

 

42,000

 

50,000

 

(8,000)

 

(16)%

 

14,000

 

22,000

 

(8,000)

 

(36)%

Stock-based compensation - consultants

 

-

 

8,000

 

(8,000)

 

(100)%

 

27,000

 

13,000

 

14,000

 

108%

Reversal of forfeited stock-based compensation

 

 

(251,000)

 

251,000

 

(100)%

Depreciation and amortization expenses

 

 

106,000

 

 

 

102,000

 

 

 

4,000

 

 

 

4%

 

 

95,000

 

 

 

92,000

 

 

 

3,000

 

 

 

3%

Total

 

$3,963,000

 

 

$2,683,000

 

 

 

1,280,000

 

 

 

48%

 

$1,423,000

 

 

$276,000

 

 

$1,147,000

 

 

 

416%

 
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Stock-based compensation - employees decreased during the three months ended March 31, 2021 due to valuation of stock awards vesting being lower to employees during the three months ended March 31, 2021 compared with the same period in 2020.

 

Research and development expenses for proprietary programsStock-based compensation - consultants increased during the three months ended DecemberMarch 31, 2017 primarily2021 due to higher spending on our Brilacidin program and Prurisol program.

Officers’ payroll will decrease in future periods due to the 50% reduction in salary of one officer, which became effective on January 16, 2018. Clinical studies and development expenses may decrease in future reporting periods depending on the Company’s current and future financial liquidity.

Employees payroll and payroll tax expenses decreased during the three months ended December 31, 2017 related to fewer employees engaged in preclinical development in September, 2017, which led to the decrease in employees’ payroll during the quarter ended December 31, 2017.

Stock- based compensation - officers increased during the three months ended December 31, 2017 primarily related to the stock-based compensation given to our new President and Chief Medical Officer on September 1, 2017 and the vesting milestones for the stocks and options granted to our President and Chief Medical Officer on June 27, 2016 became fully vested and expensed for the completed clinical trials in December, 2017.

Stock-based compensation- employee decreased during the three months ended December 31, 2017 due to the decrease in stock awards granted to employees during the quarter ended December 31, 2017 compared with the same period in 2016.

Stock-based compensation- consultant decreased during the three months ended December 31, 2017 due to nomore stock awards were granted to consultants during the quarterthree months ended DecemberMarch 31, 2017.2021 compared with the same period in 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 when 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.

 

General and Administrative 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.

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Below is a summary of our general and administrative expenses for the three months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

For the three months ended

 

Change

 

 

For the three months ended

 

Change

 

 

December 31,

 

2017 vs. 2016

 

 

March 31,

 

2021 vs. 2020

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance and health expense

 

$109,000

 

$121,000

 

(12,000)

 

(10)%

 

$109,000

 

$105,000

 

$4,000

 

4%

Patent expenses

 

-

 

 

 

-

 

-

%

Rent and utility expense

 

65,000

 

69,000

 

(4,000)

 

(6)%

Operating lease and utility expense

 

25,000

 

36,000

 

(11,000)

 

(31)%

Stock-based compensation-Officers

 

 

143,000

 

(143,000)

 

(100)%

Business development expense

 

49,000

 

143,000

 

(94,000)

 

(66)%

Other G&A

 

 

123,000

 

 

 

154,000

 

 

 

(31,000)

 

 

(20)%

 

 

62,000

 

 

 

34,000

 

 

 

28,000

 

 

 

82%

Total

 

$297,000

 

 

$344,000

 

 

 

(47,000)

 

 

(14)%

 

$245,000

 

 

$461,000

 

 

$(216,000)

 

 

(47)%

 

General and administrative expenses decreased during the three months ended DecemberMarch 31, 20172021 primarily related to the decreases in promotion, advertising and office expenses.

 
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Officers’ Payroll and Payroll Tax Expenses

 

Below is a summary of our Officers’ payroll and payroll tax expenses for the three months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

 

Three months ended

 

 

Change

 

 

 

December 31

 

 

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Officers’ payroll and payroll tax expenses

 

$130,000

 

 

$130,000

 

 

 

-

 

 

 

-

 

 

 

Three months ended

 

 

Change

 

 

 

March 31,

 

 

2021 vs. 2020

 

 

 

2021

 

 

2020

 

 

$

 

 

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Officers’ payroll and payroll tax expenses

 

$126,000

 

 

$131,000

 

 

$(5,000)

 

 

(4)%

 

There was no change in Officers’ payroll and payroll tax expenses for the Company slightly decreased during the three months ended DecemberMarch 31, 2017 and 2016. The officers’ payroll and payroll tax expenses represented one officer’s payroll and payroll tax expenses and 10% of payroll and payroll tax expenses paid for Dr. Menon. The Company recorded 90% of payroll paid to Dr. Menon and the related payroll tax expenses under Research and Development Expense.2021.

 

Professional Fees

 

Below is a summary of our Professional fees for the three months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

 

Three months ended

 

 

Change

 

 

 

December 31,

 

 

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit, legal and professional fees

 

$78,000

 

 

 

152,000

 

 

 

(74,000)

 

 

(49)%

 

 

Three months ended

 

 

Change

 

 

 

March 31,

 

 

2021 vs. 2020

 

 

 

2021

 

 

2020

 

 

 $

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit, legal and professional fees

 

$124,000

 

 

$57,000

 

 

$67,000

 

 

 

118%

 

Professional fees decreasedincreased during the three months ended DecemberMarch 31, 20172021 primarily related to decrease in legal fees.the 2020 Securities Purchase Agreement and issuance of Series B-2 preferred stock.

 

Other Income (Expense)

 

Below is a summary of our other income (expense) for the three months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

 

Three months ended

 

 

Change

 

 

 

December 31,

 

 

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$-

 

 

 

1,000

 

 

 

(1,000)

 

 

(100)%

Interest Expenses

 

 

(50,000)

 

 

(50,000)

 

 

-

 

 

 

-

%

Other Income (Expense), net

 

$(50,000)

 

 

(49,000)

 

 

(1,000)

 

 

(2)%

 

 

For the three months ended

 

 

Change

 

 

 

March 31,

 

 

2021 vs. 2020

 

 

 

2021

 

 

2020

 

 

 $

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense – debt

 

$(37,000)

 

$(59,000)

 

$22,000

 

 

 

(37)%

Interest expense – preferred stock liability

 

 

(2,005,000)

 

 

(11,000)

 

 

(1,994,000)

 

 

18,127%

Other Income (Expense), net

 

$(2,042,000)

 

$(70,000)

 

$(1,972,000)

 

 

2,817%

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There was slighta decrease in interest income from bank deposits and there was no change in interest expenses paid on the note payable – related party, because the decrease in the note payable due to the Company’s Chairman and CEO in the three months ended March 31, 2021 compared to the prior three-month-period (see Note 9 to the notes11. Convertible Note Payable - Related Party to the condensed consolidated financial statements).

 

There was an increase in interest expense – preferred stock liability related to the new Series B-2 preferred stock for the three months ended March 31, 2021.

Net Losses

 

We incurred net losses of $4.5$4.0 million and $3.4$1.0 million for the three months ended DecemberMarch 31, 20172021 and 2016,2020, respectively, because of the above-mentioned factors.

 

For the sixnine months ended December March 31, 20172021 and 20162020

 

Revenue

 

We generated no revenue of $0 and $0.4 million for the nine months ended March 31, 2021 and 2020, respectively. Revenue during the nine months ended March 31, 2020 represented the initial non-refundable payment from the exclusive license agreement signed with Alfasigma (see Note 7 Exclusive License Agreement to the condensed consolidated financial statements).

We incurred operating expenses of approximately $9.0$6.5 million and $6.3$3.6 million for the sixnine months ended DecemberMarch 31, 20172021 and 2016,2020, respectively.

 
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Research and Development Expenses for Proprietary Programs

 

Below is a summary of our research and development expenses for our proprietary programs by categories of costs for the six months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

 

For the six months ended

 

 

Change

 

 

 

December 31,

 

 

2017 Vs. 2016

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical studies and development research

 

$5,124,000

 

 

 

3,009,000

 

 

 

2,115,000

 

 

 

70%

Officers’ payroll and payroll tax expenses related to R&D Department

 

 

441,000

 

 

 

453,000

 

 

 

(12,000)

 

 

(3)%

Employees payroll and payroll tax expenses related to R&D Department

 

 

592,000

 

 

 

609,000

 

 

 

(17,000)

 

 

(3)%

Stock-based compensation - officers

 

 

1,326,000

 

 

 

578,000

 

 

 

748,000

 

 

 

129%

Stock-based compensation - employees

 

 

74,000

 

 

 

63,000

 

 

 

11,000

 

 

 

17%

Stock-based compensation - consultants

 

 

-

 

 

 

50,000

 

 

 

(50,000)

 

 

(100)%

Depreciation and amortization expenses

 

 

211,000

 

 

 

198,000

 

 

 

13,000

 

 

 

7%

Total

 

$7,768,000

 

 

 

4,960,000

 

 

 

2,808,000

 

 

 

57%

Research and development expenses for proprietary programs increased during the six months ended December 31, 2017 primarily due to higher spending on our Brilacidin program and Prurisol program.

 

 

For the nine months ended

 

 

Change

 

 

 

March 31,

 

 

2021 vs. 2020

 

 

 

2021

 

 

2020

 

 

 $

 

 

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical studies and development research

 

$4,191,000

 

 

$999,000

 

 

$3,192,000

 

 

 

320%

Officers’ payroll and payroll tax expenses related to R&D Department

 

 

 

 

 

232,000

 

 

 

(232,000)

 

 

(100)%

Employees payroll and payroll tax expenses related to R&D Department

 

 

310,000

 

 

 

217,000

 

 

 

93,000

 

 

 

43%

Stock-based compensation - officers

 

 

 

 

 

298,000

 

 

 

(298,000)

 

 

(100)%

Stock-based compensation - employees

 

 

46,000

 

 

 

82,000

 

 

 

(36,000)

 

 

(44)%

Stock-based compensation - consultants

 

 

88,000

 

 

 

29,000

 

 

 

59,000

 

 

 

203%

Reversal of forfeited stock-based compensation

 

 

 

 

 

(251,000)

 

 

251,000

 

 

 

(100)%

Depreciation and amortization expenses

 

 

283,000

 

 

 

279,000

 

 

 

4,000

 

 

 

1%

Total

 

$4,918,000

 

 

$1,885,000

 

 

$3,033,000

 

 

 

161%

 

Officers’ payroll will decrease in future periods due to the 50% reduction in salary of one officer, which became effective on January 16, 2018. Clinical studies and development expenses may decrease in future reporting periods depending on the Company’s current and future financial liquidity.

Employees payroll and payroll tax expenses decreased during the sixnine months ended March 31, 2021 because the Company’s President and Chief Medical Officer resigned on December 31, 2017 related to the decrease in employees during the six months ended December 31, 2017.19, 2019.

 

Stock-based compensation - officers increaseddecreased during the sixnine months ended DecemberMarch 31, 2017 primarily related to2021 because of the stock-based compensation given toresignation of our President and Chief Medical Officer on September 1, 2017December 19, 2019, resulting in no compensation expense in the current nine-month-period, compared to compensation expense of $298,000 in the prior nine-month-period relating to equity awards granted in 2019 and the stocks and options granted to our new President and Chief Medical Officer on June 27, 2016 that became fully vested and expensed due to the completed clinical trial milestones in December, 2017.2020.

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Stock-based compensation- employee increasedcompensation - employees decreased during the sixnine months ended DecemberMarch 31, 20172021 due to the increase invaluation of stock awards vesting being lower to employees during the sixnine months ended DecemberMarch 31, 20172021 compared with the same period in 2016.2020.

 

Stock-based compensation-compensation - consultants decreasedincreased during the sixnine months ended DecemberMarch 31, 20172021 due to granting fewermore stock awards were granted to consultants during the sixnine months ended DecemberMarch 31, 2017.2021 compared with the same period in 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 when 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.

 

General and Administrative 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.

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Below is a summary of our general and administrative expenses for the six months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

For the six months ended

 

Change

 

 

For the nine months ended

 

Change

 

 

December 31,

 

2017 vs. 2016

 

 

March 31,

 

2021 vs. 2020

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

2021

 

 

2020

 

 

 $

 

 

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance and health expense

 

$236,000

 

258,000

 

(22,000)

 

(9)%

 

$337,000

 

$357,000

 

$(20,000)

 

(6)%

Patent expenses

 

-

 

2,000

 

(2,000)

 

(100)%

Rent and utility expense

 

127,000

 

130,000

 

(3,000)

 

(2)%

Operating lease and utility expense

 

77,000

 

104,000

 

(27,000)

 

(26)%

Stock-based compensation-Officers

 

 

143,000

 

(143,000)

 

(100)%

Business development expense

 

139,000

 

325,000

 

(186,000)

 

(57)%

Other G&A

 

 

231,000

 

 

 

316,000

 

 

 

(85,000)

 

 

(27)%

 

 

187,000

 

 

 

151,000

 

 

 

36,000

 

 

 

24%

Total

 

$594,000

 

 

 

706,000

 

 

 

(112,000)

 

 

(16)%

 

$740,000

 

 

$1,080,000

 

 

$(340,000)

 

 

(31)%

 

General and administrative expenses decreased during the sixnine months ended DecemberMarch 31, 20172021 primarily related to the decreases in promotion, advertising and office expenses.

 

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Officers’ Payroll and Payroll Tax Expenses

 

Below is a summary of our Officers’ payroll and payroll tax expenses for the six months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

 

Six months ended

 

 

Change

 

 

 

December 31

 

 

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Officers’ payroll and payroll tax expenses

 

$260,000

 

 

 

260,000

 

 

 

-

 

 

 

-

%

 

 

Nine months ended

 

 

Change

 

 

 

March 31,

 

 

2021 vs. 2020

 

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Officers’ payroll and payroll tax expenses

 

$

378,000

 

 

$

367,000

 

 

$

11,000

 

 

 

3

%

 

There was no change in Officers’ payroll and payroll tax expenses for the Company slightly increased during the sixnine months ended DecemberMarch 31, 2017 and 2016. The officers’ payroll and payroll tax expenses represented one officer’s payroll and payroll tax expenses and 10% of payroll and payroll tax expenses paid for Dr. Menon. The Company recorded 90% of payroll paid to Dr. Menon and the related payroll tax expenses under Research and Development Expense.2021.

 

Professional Fees

 

Below is a summary of our Professional fees for the six months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

 

Six months ended

 

 

Change

 

 

 

December 31,

 

 

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit, legal and professional fees

 

$330,000

 

 

 

361,000

 

 

 

(31,000)

 

 

(9)%

 

 

Nine months ended

 

 

Change

 

 

 

March 31,

 

 

2021 vs. 2020

 

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit, legal and professional fees

 

$

450,000

 

 

$

279,000

 

 

$

171,000

 

 

 

61

%

 

Professional fees decreasedincreased during the sixnine months ended DecemberMarch 31, 20172021 primarily related to decreasethe 2020 Securities Purchase Agreement and issuance of Series B-2 preferred stock and other increases in legal fees.

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fees and other professional fees in 2021.

 

Other Income (Expense)

 

Below is a summary of our other income (expense) for the six months ended December 31, 2017 and 2016, respectively (rounded to nearest thousand):

 

 

 

Six months ended

 

 

Change

 

 

 

December 31,

 

 

2017 vs. 2016

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$1,000

 

 

 

2,000

 

 

 

(1,000)

 

 

(50)%

Interest Expenses

 

 

(101,000)

 

 

(101,000)

 

 

-

 

 

 

-

%

Other Income (Expense), net

 

$(100,000)

 

 

(99,000)

 

 

(1,000)

 

 

(1)%

 

 

For the Nine months ended

 

 

Change

 

 

 

March 31,

 

 

2021 vs. 2020

 

 

 

2021

 

 

2020

 

 

 $

 

 

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense – debt

 

$(119,000)

 

$(155,000)

 

$36,000

 

 

 

(23)%

Interest expense – preferred stock liability

 

 

(4,702,000)

 

 

(51,000)

 

 

(4,651,000)

 

 

9,120%

Change in fair value – Series B preferred stock

 

 

-

 

 

 

102,000

 

 

 

(102,000)

 

 

(100)%

Warrants modification expense

 

 

-

 

 

 

(1,212,000)

 

 

1,212,000

 

 

 

(100)%

Impairment expense of operating lease

 

 

-

 

 

 

(643,000)

 

 

643,000

 

 

 

(100)%

Other Income (Expense), net

 

$(4,821,000)

 

$(1,959,000)

 

$(2,862,000)

 

 

146%

 

There was slighta decrease in interest income from bank deposits and there was no change in interest expenses paid on the note payable – related party, because of the decrease in the note payable balance due to the Company’s Chairman and CEO in the nine months ended March 31, 2021 compared to the prior nine-month-period (see Note 9 to the notes11. Convertible Note Payable - Related Party to the condensed consolidated financial statements).

 

There was an increase in interest expense – preferred stock liability during the nine months ended March 31, 2021 as compared to the nine months ended March 31, 2020 related to the new Series B-2 preferred stock for the nine months ended March 31, 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 (see Note 8 – Operating Leases to the condensed consolidated financial statements).

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Net Losses

 

We incurred net losses of $9.1$11.3 million and $6.4$5.2 million for the sixnine months ended DecemberMarch 31, 20172021 and 2016,2020, respectively, because of the above-mentioned factors.

 

Liquidity and Capital Resources

 

Projected Future Working Capital Requirements - Next Twelve12 Months

 

As of DecemberMarch 31, 2017,2021, we had approximately $3.2$13.0 million in cash compared to $4.1$6.0 million of cash as of June 30, 2017.2020, and as of the date of this filing, we have approximately $12.1 million in cash. We currently anticipate that future budget expenditures will be approximately $12.2$10.6 million for the next twelve12 months, including approximately $8.2$8.3 million for clinical activities, supportive research, and drug product development. Weproduct. 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 in order2021 to meet our working capital requirements. 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 $30 millionnew common stock purchase agreement (the “2020 Agreement”) with Aspire Capital which replaced 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-month24-month term of the Purchase2020 Agreement. During the period from September 6, 2017 to December 31, 2017, the Company has generated proceeds of approximately $4.4 million under this agreement with Aspire Capital from the sale of approximately 6.6 million shares of its common stock. As of December 31, 2017, the available balance is approximately $25.6 million. Our ability to continue to fund our research and development activities and corporate overhead expenses and continue as a going concern has been and continues to be dependent on this stock purchase agreement.

 

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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 and in this report and in other reports we filed with the SEC on September 11, 2017 and in other reports.SEC.

 

We have been successful at raising capital in the past but there can be no assurance that additional capital will be available on terms acceptable to us or in amounts sufficient to meet our needs. In the event thatIf we are unable to raise sufficientgenerate enough working capital from our current or future financing agreementagreements with Aspire Capital when needed or secure additional sources of funding, from others, weit may be requirednecessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including the more costly Phase 2 clinical trials and potential future Phase 3 clinical trials on our wholly-owned development programs as these clinical trialsprograms progress into a later stage of development or severely curtail our operations or otherwise impede our ongoing business efforts, or we could be forced to cease operations altogether.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 liquidity events could prevent us from successfully executing our current operating plan.

 

$75 Million Shelf Registration Statement - Current Status

 

The Company has an effective shelf registration statement on Form S-3, registering the sale of up to $75$60 million of the Company’s securities. TheHowever, in the future, the Company filedmay not satisfy the conditions for use of Form S-3 withfor primary offerings of securities, in which case the SECCompany may utilize Form S-1 to register the sale of its securities, although Form S-1 offers less flexibility on September 11, 2017, which included registering the shares underlying the 2017 $30 million Aspire Capital stock purchase agreement.timing and types of offerings compared to Form S-3.

 

 
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Cash Flows

 

The following table provides information regarding our cash position, cash flows and capital expenditures for the six months ended December 31, 2017 and 2016 (rounded to nearest thousand):

 

 

 

Six Months Ended

December 31,

 

 

% Change

Increase/

 

 

 

2017

 

 

2016

 

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$(7,177,000)

 

$(5,250,000)

 

 

37%

Net cash used in investing activities

 

 

(90,000)

 

 

(117,000)

 

 

(23)%

Net cash provided by financing activities

 

 

6,307,000

 

 

 

2,916,000

 

 

 

116%

Net decrease in cash

 

$(960,000)

 

$(2,451,000)

 

 

(61)%

Operating activities

 

 

Nine Months Ended

 

 

Change

 

 

 

March 31,

 

 

Increase/

 

 

 

2021

 

 

2020

 

 

(Decrease)

 

 

 

 

 

 

 

%

 

Net cash used in operating activities

 

$(6,893,000)

 

$(2,334,000)

 

 

195%

Net cash used in investing activities

 

 

(53,000)

 

 

(57,000)

 

 

(7)%

Net cash provided by financing activities

 

 

13,940,000

 

 

 

2,587,000

 

 

 

439%

Net increase (decrease) in cash

 

$6,994,000

 

 

$196,000

 

 

 

3,468%

 

The increase in net cash used in operating activities of $1.9$4.6 million versus the prior-year six-monthprior nine-month- period was mainly due to increases in our losses from operations of $2.4$6.1 million, largely attributable to ouran increase in spending for research and development expenses.expenses on Brilacidin and a decrease in initial non-refundable payment from the exclusive license agreement signed with Alfasigma S.p.A., a global pharmaceutical company (see Note 7. Exclusive License Agreement to the consolidated financial statements).

 

Our operating activities used cash of approximately $7.2 million and $5.3 million for the six months ended December 31, 2017 and 2016, respectively. This increase was adjusted for non-cash charges for stock-based compensation, amortization and depreciation, and changes in our working capital accounts.

Investing activities

 

The decrease in net cash used in investing activities versus the prior-year six-month periodprior nine-month-period was due to a decrease in patentspatent costs.

Financing activities

 

During the sixnine months ended DecemberMarch 31, 2017,2021 and 2020, our investingtotal net financing activities usedprovided cash of $0.1 million, consisting of spending on patent costs of $0.1 million. During the six months ended December 31, 2016, our investing activities used cash of $0.1 million, including the purchases of fixed assets of $0.05$13.9 million and the purchases of patents of $0.05 million.

Financing activities

The increase in net cash provided by financing activities of approximately $3.4$2.6 million, versus the prior-year six-month period was due to an increase in sales of shares of our common stock to Aspire Capital.respectively.

 

During the sixnine months ended DecemberMarch 31, 2017,2021, we raised approximately $6.5$4.6 million in net cash proceeds from the sale of 9.2 million shares of our common stock to Aspire Capital, offset by cash paid to taxing authorities arising from the withholding of shares from employees of $172,000. During the six months ended December 31, 2016, we raised approximately $2.9$5.0 million in net cash proceeds from the saleissuance of 2.4Series B-2 preferred stock and $5.0 million sharesin net cash from exercise of our commonwarrants, offset by purchase of treasury stock to Aspire Capital.of $0.7 million.

 

During the nine months ended March 31, 2020, we raised approximately $2.6 million in net cash proceeds, from issuance of Series B preferred stock.

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Requirement for Additional Working Capital

 

The Company, contingent on future sales of its securities, plans to incur total expenses of approximately $12.2$10.6 million for the next twelve12 months, including approximately $8.2$8.3 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 $25.6$30 million, of which approximately $25.4 million remains as of December 31, 2017. Management has put in placethe date of this new 2017 equity purchase agreement with Aspire Capital to fund its future clinical trial expenses and overhead expenses over the next twelve 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.filing. Management believes, as of the date of this filing that the funding amount from Aspire Capital will be available as needed by the Company. AdverseCompany and that adverse market conditions in the Company’s per share price of its common stock price and its trading volume, maywill not prevent the Company from funding its working capital requirements as needed.

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for the next 12 months from the date of this filing.

 

In the event that we are unable to generate sufficient cash from our 2020 Agreement with Aspire Capital purchase agreement or raise additional funds from others, we willmay 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.

 

Contractual ObligationsCommitments and Contingencies

 

Below is a table that presents our contractual obligations and commercial commitments as of December 31, 2017 (roundedPlease see Note 9 to the nearest million):

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than One Year

 

 

2 Year

 

 

3-5 Years

 

 

More than 5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CRO obligations (1)

 

$2.7

 

 

$2.7

 

 

$-

 

 

$-

 

 

$-

 

Lease obligations (2)

 

$0.2

 

 

$0.1

 

 

$0.1

 

 

$-

 

 

$-

 

Total

 

$2.9

 

 

$2.8

 

 

$0.1

 

 

$-

 

 

$-

 

___________________ 

(1)

The Company has contractual minimum commitments to Contract Research Organizations as of December 31, 2017.

(2)

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 approximately $18,000. The Company will receive $900 per month from the sublease of 200 square feet of space to Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of our Company, which is not included in the table above.

Equity Transactionsconsolidated financial statements, Commitments and Contingencies, for a discussion of recent contractual commitments and contingent liability - disputed invoices.

 

From January 1, 2018Equity Transactions

During the period from July 31, 2020 to February 7, 2018,March 31, 2021, the Company has generated additional proceeds of approximately $0.6$4.6 million under the Common Stock Purchasethis 2020 Agreement with Aspire Capital from the sale of approximately 0.922.5 million shares of its common stock. As of March 31, 2021, the available balance under the 2020 Agreement was approximately $25.4 million.

 

On December 9, 2020, the Company entered into 2020 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 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 the second closing for the sale of up to 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 2020 Securities Purchase Agreement, the Company will also issue to the investor warrants to purchase up to an additional 10,178 shares of preferred stock.

Off-Balance Sheet Arrangements

 

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

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company maintains an investment portfolio in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The Company holds investments that are subject to credit risk, but not interest rate risks. The Company does not own derivative financial instruments in our investment portfolio. Accordingly, the Company does not believe there is any material market risk exposure that would require disclosure under this item.

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Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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 DecemberMarch 31, 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 DecemberMarch 31, 2017,2021, the principal executive officer and principal financial officer of the Company havehas concluded that the Company’s disclosure controls and procedures are effective.

 

Changes in Internal Controls

 

There have been no changes in our internal control over financial reporting during the quarter ended DecemberMarch 31, 2017,2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 
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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

NoneSee Note 9 in the accompanying unaudited condensed consolidated financial statements.

 

ITEM 1A. RISK FACTORS

 

Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2017,2020, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended June 30, 2017.2020, other than as set forth below.

 

We may not be able to recruit patients for Brilacidin as a treatment for COVID-19 which would materially affect our business, financial condition and stock price.

Since November 2020, several pharmaceutical companies have received Emergency Use Authorization for their vaccines, which are currently being distributed in the US and abroad. The widespread distribution of vaccines in the U.S. has impacted recruitment at our US clinical trial sites but has not affected  our overseas sites.  The Company believes it can accomplish full recruitment of its Phase 2 study with its overseas sites.

If worldwide, a vaccine is successfully distributed, administered to the population, and effective against COVID-19, the recruitment for moderate to severe COVID-19 patients may decline over time, which could materially affect our ability to complete Phase 3 clinical trials and the business of therapies for this disease.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

ITEM 5. OTHER INFORMATION

 

None

 

 
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ITEM 6. EXHIBITS

 

(a) Exhibit index

 

(1)

(1)

The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.

 

EXHIBIT INDEX

 

Exhibit No.

 

Title

 

Method of Filing

 

3131.1

President of Research Certifications required under Section 302 of the Sarbanes Oxley Act of 2002

Filed herewith

31.2.1

 

Chief Executive Officer and Chief Financial Officer Certifications required under Section 302 of the Sarbanes Oxley Act of 2002

 

Filed herewith

 

32.1

President of Research Certifications required under Section 906 of the Sarbanes Oxley Act of 2002

Furnished herewith

32.2

 

Chief Executive Officer and Chief Financial Officer Certifications required under Section 906 of the Sarbanes Oxley Act of 2002

 

Furnished herewith

 

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the sixnine months ended DecemberMarch 31, 20172021 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes

 

Filed herewith

  

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

INNOVATION PHARMACEUTICALS INC.

 

Dated: February 7, 2018May 13, 2021

By:

/s/ Leo Ehrlich

Name:

Leo Ehrlich

Title:

Chief Executive Officer and Chief Financial Officer

(Principal Executive, Accounting and Financial Officer)

 

By:

/s/ Krishna Menon

Krishna Menon

President of Research

47

 

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