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: March 31, 20182019
¨ 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 |
| (I.R.S. Empl. Ident. No.) |
incorporation or organization) |
|
100 Cummings Center, Suite 151-B
Beverly, MA 01915
(Address of principal executive offices, Zip Code)
(978)-921-4125 921-4125
(Registrant’s telephone number, including area code)
(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 ¨
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 |
|
|
| 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 ¨ No x
Securities registered under Section 12(b) of the Exchange Act: none
The number of shares outstanding of each of the issuer’s classes of common equity, as of May 6, 2018April 30, 2019 is as follows:
Class of Securities |
| Shares Outstanding |
Common Stock Class A, $0.0001 par value |
|
|
Common Stock Class B, $0.0001 par value |
|
|
INNOVATION PHARMACEUTICALS INC.
FORM 10-Q
For the Quarter Ended March 31 2018, 2019
PART I – FINANCIAL INFORMATION
| 37 | |||
| 37 | |||
| 37 | |||
| 37 | |||
| 37 | |||
| 37 | |||
| 38 | |||
| ||||
| 39 | |||
| 2 |
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “intends,” “estimates,” “predicts,” “potential,” “continues,” “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will” or the negative of these terms or other comparable terminology, we are identifying forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning our future drug development plans and projected timelines for the initiation and completion of preclinical and clinical trials; statements relating to potential licensing, partnering or similar arrangements concerning our drug compounds; the potential for the results of ongoing preclinical or clinical trials; other statements regarding our future product development and regulatory strategies, including with respect to specific indications; any statements regarding our future financial performance, results of operations expenditures or sufficiency of capital resources to fund our operating requirements; and any other statements which are other than statements of historical fact. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, but are not limited to, our ability to continue as a going concern and our capital needs; our ability to continue to fund and successfully progress internal research and development efforts and to create effective, commercially-viable drugs; our ability to effectively and timely conduct clinical trials; and our ability to ultimately distribute our drug candidates; compliance with regulatory requirements; and our capital needs,requirements, as well as other factors described elsewhere in this report and our other reports filed with the Securities and Exchange Commission (the “SEC”). Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Forward-looking statements speak only as of the date on which they are made. Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business. Readers are cautioned not to put undue reliance on forward-looking statements.
For further information about these and other risks, uncertainties and factors, please review the disclosure included in our Annual Report on Form 10-K under “Part I, Item 1A, Risk Factors” and in this report under “Part II, Item 1A, Risk Factors.”
| 3 |
| Table of Contents |
INNOVATION PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED BALANCE SHEETS(Unaudited)
(Rounded to nearest thousand except for shares data)
|
| March 31, |
| June 30, |
| |||||||||||
|
| 2018 |
|
| 2017 |
|
| March 31, |
| June 30, |
| |||||
(Unaudited) |
|
|
|
| 2019 |
|
| 2018 |
| |||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||
Current Assets: |
|
|
|
|
|
|
|
|
|
| ||||||
Cash |
| $ | 1,336,000 |
| $ | 4,141,000 |
|
| $ | 468,000 |
| $ | 2,424,000 |
| ||
Prepaid expenses |
| 40,000 |
| 308,000 |
| |||||||||||
Prepaid expenses and other current assets |
| 55,000 |
| 98,000 |
| |||||||||||
Security deposits |
| 78,000 |
| - |
|
|
| - |
|
|
| 78,000 |
| |||
Subscription receivable |
|
| - |
|
|
| 26,000 |
| ||||||||
Total Current Assets |
|
| 1,454,000 |
|
|
| 4,475,000 |
|
|
| 523,000 |
|
|
| 2,600,000 |
|
Other Assets: |
|
|
|
|
|
|
|
|
|
| ||||||
Patents - net |
| 4,032,000 |
| 4,212,000 |
| |||||||||||
Equipment - net |
| 93,000 |
| 120,000 |
| |||||||||||
Patents – net |
| 3,406,000 |
| 3,780,000 |
| |||||||||||
Equipment – net |
| 1,000 |
| 2,000 |
| |||||||||||
Deferred offering costs - net |
| 173,000 |
| 227,000 |
|
| - |
| 159,000 |
| ||||||
Security deposits |
|
| - |
|
|
| 78,000 |
|
|
| 78,000 |
|
|
| - |
|
Total Other Assets |
|
| 4,298,000 |
|
|
| 4,637,000 |
|
|
| 3,485,000 |
|
|
| 3,941,000 |
|
Total Assets |
| $ | 5,752,000 |
|
| $ | 9,112,000 |
|
| $ | 4,008,000 |
|
| $ | 6,541,000 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | LIABILITIES AND STOCKHOLDERS' DEFICIENCY | LIABILITIES AND STOCKHOLDERS' DEFICIENCY | ||||||||||||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
| ||||||
Accounts payable - (including related party payables of approximately $1,486,000 and 1,506,000, respectively) |
| $ | 4,122,000 |
| $ | 4,699,000 |
| |||||||||
Accrued expenses - (including related party accruals of approximately $25,000 and $38,000, respectively) |
| 306,000 |
| 711,000 |
| |||||||||||
Accrued salaries and payroll taxes - (including related party accrued salaries of approximately $2,953,000 and $2,953,000, respectively) |
| 3,017,000 |
| 3,144,000 |
| |||||||||||
Accounts payable - (including related party payables of approximately $1,498,000 and 1,504,000, respectively) |
| $ | 2,255,000 |
| $ | 3,185,000 |
| |||||||||
Accrued expenses - (including related party accruals of approximately $74,000 and $58,000, respectively) |
| 241,000 |
| 266,000 |
| |||||||||||
Accrued salaries and payroll taxes - (including related party accrued salaries of approximately $3,129,000 and $2,953,000, respectively) |
| 3,174,000 |
| 3,219,000 |
| |||||||||||
Convertible note payable - related party |
|
| 2,022,000 |
|
|
| 2,022,000 |
|
|
| 1,922,000 |
|
|
| 2,022,000 |
|
Total Current Liabilities |
|
| 9,467,000 |
|
|
| 10,576,000 |
|
|
| 7,592,000 |
|
|
| 8,692,000 |
|
Other Liabilities: |
|
|
|
|
| |||||||||||
Series B convertible preferred stock liability at $1,080 stated value; 1,027 and 0 shares issued and outstanding at March 31, 2019 and June 30, 2018, respectively |
|
| 701,000 |
|
|
| - |
| ||||||||
Total Liabilities |
|
| 9,467,000 |
|
|
| 10,576,000 |
|
|
| 8,293,000 |
|
|
| 8,692,000 |
|
|
|
|
|
|
| |||||||||||
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, 147,091,427 and 135,536,501 issued as of March 31, 2018 and June 30, 2017, respectively, 147,091,427 and 135,274,421 outstanding as of March 31, 2018 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 March 31, 2018 and June 30, 2017, respectively |
| - |
| - |
| |||||||||||
Common Stock - Class A, $0.0001 par value, 300,000,000 shares authorized, 187,803,536 shares and 163,103,927 shares issued as of March 31, 2019 and June 30, 2018, respectively, 187,575,318 shares and 163,103,927 shares outstanding as of March 31, 2019 and June 30, 2018, respectively |
| 19,000 |
| 17,000 |
| |||||||||||
Common Stock - Class B, (10 votes per share); $0.0001 par value, 100,000,000 shares authorized, 909,090 shares and 0 shares issued and outstanding as of March 31, 2019 and June 30, 2018 |
| - |
| - |
| |||||||||||
Additional paid-in capital |
| 77,324,000 |
| 68,295,000 |
|
| 88,868,000 |
| 83,747,000 |
| ||||||
Accumulated deficit |
| (81,054,000 | ) |
| (69,553,000 | ) |
| (93,081,000 | ) |
| (85,915,000 | ) | ||||
Treasury Stock, at cost (0 shares and 262,080 shares as of March 31, 2018 and June 30, 2017, respectively) |
|
| - |
|
|
| (220,000 | ) | ||||||||
Treasury Stock, at cost (228,218 shares and 0 shares as of March 31, 2019 and June 30, 2018, respectively) |
|
| (91,000 | ) |
|
| - |
| ||||||||
Total Stockholders’ Deficiency |
|
| (3,715,000 | ) |
|
| (1,464,000 | ) |
|
| (4,285,000 | ) |
|
| (2,151,000 | ) |
Total Liabilities and Stockholders’ Deficiency |
| $ | 5,752,000 |
|
| $ | 9,112,000 |
|
| $ | 4,008,000 |
|
| $ | 6,541,000 |
|
|
| |||||||||||||||
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
| 4 |
| Table of Contents |
INNOVATION PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 20182019 AND 20172018
(Unaudited)
(Rounded to nearest thousand except for shares and per share data)
|
| For the Three Months Ended |
| For the Nine Months Ended |
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||||||||||||||||
|
| March 31, |
| March 31, |
|
| March 31, |
| March 31, |
| ||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Revenues |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Research and development expenses |
| 1,776,000 |
| 3,182,000 |
| 9,544,000 |
| 8,142,000 |
|
| 707,000 |
| 1,776,000 |
| 3,463,000 |
| 9,544,000 |
| ||||||||||||||
General and administrative expenses |
| 295,000 |
| 331,000 |
| 889,000 |
| 1,037,000 |
|
| 250,000 |
| 295,000 |
| 942,000 |
| 889,000 |
| ||||||||||||||
Officers' payroll and payroll tax expenses |
| 132,000 |
| 138,000 |
| 392,000 |
| 398,000 |
|
| 126,000 |
| 132,000 |
| 367,000 |
| 392,000 |
| ||||||||||||||
Professional fees |
|
| 195,000 |
|
|
| 201,000 |
|
|
| 525,000 |
|
|
| 562,000 |
|
|
| 45,000 |
|
|
| 195,000 |
|
|
| 349,000 |
|
|
| 525,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Total operating expenses |
|
| 2,398,000 |
|
|
| 3,852,000 |
|
|
| 11,350,000 |
|
|
| 10,139,000 |
|
|
| 1,128,000 |
|
|
| 2,398,000 |
|
|
| 5,121,000 |
|
|
| 11,350,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Loss from operations |
|
| (2,398,000 | ) |
|
| (3,852,000 | ) |
|
| (11,350,000 | ) |
|
| (10,139,000 | ) |
|
| (1,128,000 | ) |
|
| (2,398,000 | ) |
|
| (5,121,000 | ) |
|
| (11,350,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Other income (expenses) |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Other income (expense) |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Interest income |
| - |
| - |
| 1,000 |
| 2,000 |
|
| - |
| - |
| - |
| 1,000 |
| ||||||||||||||
Other income |
| - |
| - |
| 40,000 |
| - |
| |||||||||||||||||||||||
Interest expense |
|
| (51,000 | ) |
|
| (51,000 | ) |
|
| (152,000 | ) |
|
| (152,000 | ) |
|
|
|
|
|
|
|
|
| |||||||
Total other income - net |
|
| (51,000 | ) |
|
| (51,000 | ) |
|
| (151,000 | ) |
|
| (150,000 | ) | ||||||||||||||||
Interest expense – debt |
| (44,000 | ) |
| (51,000 | ) |
| (145,000 | ) |
| (152,000 | ) | ||||||||||||||||||||
Interest expense – preferred stock liability |
| (15,000 | ) |
| - |
| (1,990,000 | ) |
| - |
| |||||||||||||||||||||
Change in fair value of preferred stock |
|
| 50,000 |
|
|
| - |
|
|
| 50,000 |
|
|
| - |
| ||||||||||||||||
Other expense, net |
|
| (9,000 | ) |
|
| (51,000 | ) |
|
| (2,045,000 | ) |
|
| (151,000 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Loss before provision for income taxes |
| (2,449,000 | ) |
| (3,903,000 | ) |
| (11,501,000 | ) |
| (10,289,000 | ) |
| (1,137,000 | ) |
| (2,449,000 | ) |
| (7,166,000 | ) |
| (11,501,000 | ) | ||||||||
Provision for income taxes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net loss |
| $ | (2,449,000 | ) |
| $ | (3,903,000 | ) |
| $ | (11,501,000 | ) |
| $ | (10,289,000 | ) |
| $ | (1,137,000 | ) |
| $ | (2,449,000 | ) |
| $ | (7,166,000 | ) |
| $ | (11,501,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Basic and diluted loss per share |
| $ | (0.02 | ) |
| $ | (0.03 | ) |
| $ | (0.08 | ) |
| $ | (0.08 | ) |
|
|
|
|
|
|
|
|
| |||||||
attributable to common stockholders |
| $ | (0.01 | ) |
| $ | (0.02 | ) |
| $ | (0.04 | ) |
| $ | (0.08 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Weighted average number of common shares outstanding |
|
| 146,071,627 |
|
|
| 127,270,598 |
|
|
| 141,296,395 |
|
|
| 125,599,470 |
| ||||||||||||||||
Weighted average number of common shares |
|
| 182,556,203 |
|
|
| 146,071,627 |
|
|
| 172,051,124 |
|
|
| 141,296,395 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
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 (DEFICIENCY)
FOR THE NINE MONTHS ENDED MARCH 31, 2018 AND 20172019
(Unaudited)
(Rounded to nearest thousand)thousand, except for shares data)
|
| 2018 |
|
| 2017 |
| ||
|
|
|
|
|
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
| ||
Net loss |
| $ | (11,501,000 | ) |
| $ | (10,289,000 | ) |
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 |
|
| 1,665,000 |
|
|
| 1,026,000 |
|
Amortization of patent costs |
|
| 289,000 |
|
|
| 277,000 |
|
Depreciation of equipment |
|
| 28,000 |
|
|
| 24,000 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Prepaid expenses and security deposits |
|
| 268,000 |
|
|
| 165,000 |
|
Accounts payable |
|
| (578,000 | ) |
|
| 664,000 |
|
Accrued expenses |
|
| (406,000 | ) |
|
| 130,000 |
|
Accrued officers' salaries and payroll taxes |
|
| (127,000 | ) |
|
| 54,000 |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
| (10,362,000 | ) |
|
| (7,949,000 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| - |
|
|
| (63,000 | ) |
Patent costs |
|
| (108,000 | ) |
|
| (256,000 | ) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
| (108,000 | ) |
|
| (319,000 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Sales of common stock, net of offering costs |
|
| 7,837,000 |
|
|
| 7,571,000 |
|
Purchase of treasury stock |
|
| (172,000 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
| 7,665,000 |
|
|
| 7,571,000 |
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH |
|
| (2,805,000 | ) |
|
| (697,000 | ) |
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF PERIOD |
|
| 4,141,000 |
|
|
| 6,310,000 |
|
|
|
|
|
|
|
|
|
|
CASH, END OF PERIOD |
| $ | 1,336,000 |
|
| $ | 5,613,000 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 156,000 |
|
| $ | 44,000 |
|
|
|
|
|
|
|
|
|
|
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 |
|
| $ | - |
|
For the Nine Months Ended March 31, 2018 Common Stock A Common Stock B Additional Treasury Stock Par Value Par Value Paid-in Accumulated Shares $0.0001 Shares $0.0001 Capital Deficit Shares Amount Total Balance at June 30, 2017 - - Shares sold to Aspire under 2015 Agreement at $0.74 - $0.94 range Shares sold to Aspire under 2017 Agreement at $0.25 - $0.76 range Shares issued as commitment fee, 9/6/2017 at $0.715 Offering cost Shares issued to officer as equity awards at $0.705 - 1.40 Shares issued to employee for services at $0.705 - $1.37 Stock options issued to officer as equity awards at $1.39 Stock options issued to employee for services at $0.705-$1.37 Issuance of vested shares to Officer and employees Withholding and Purchase of 67,056 treasury shares from vested shares issued – at cost Net loss for the three months ended September 30, 2017 Balance at September 30, 2017 - - Shares sold to Aspire under 2017 Agreement at $0.25 - $0.76 range Offering cost Shares issued to officer as equity awards at $0.705 - 1.40 Shares issued to employee for services at $0.705 - $1.37 Stock options issued to officer as equity awards at $1.39 Stock options issued to employee for services at $0.705-$1.37 Issuance of vested shares to Officer and employees Withholding and Purchase of 238,048 treasury shares from vested shares issued – at cost Net loss for the three months ended December 31, 2017 Balance at December 31, 2017 Shares sold to Aspire under 2017 Agreement at $0.25 - $0.76 range - Offering cost - Shares issued to officer as equity awards at $0.705 - 1.40 - Shares issued to employee for services at $0.705 - $1.37 Stock options issued to officer as equity awards at $1.39 Stock options issued to employee for services at $0.705-$1.37 Stock options issued to consultant for services at $0.15 - 0.73 Issuance of vested shares to Officer and employees Purchase of 305,792 Treasury shares Withholding and Purchase of 305,792 treasury shares from vested shares issued – at cost Net loss for the three months ended March 31, 2018 Balance at March 31, 2018 The accompanying notes are an integral part of these condensed financial statements.135,274,421 $ 14,000 $ 68,295,000 $ (69,553,000 ) 262,080 $ (220,000 ) $ (1,464,000 ) 2,600,000 - - - 2,089,000 - - - 2,089,000 600,000 - - - 419,000 - - - 419,000 300,000 - - - 215,000 - - - 215,000 -- - - - (230,000 ) - - - (230,000 ) - - - - 219,000 - - - 219,000 - - - - 9,000 - - - 9,000 - - - - 118,000 - - - 118,000 - - - - 23,000 - - - 23,000 19,465 - - - - - - - - (67,056 ) - - - - - 67,056 (31,000 ) (31,000 ) - - - - - (4,534,000 ) - - (4,534,000 ) 138,726,830 $ 14,000 $ 71,157,000 $ (74,087,000 ) 329,136 $ (251,000 ) $ (3,167,000 ) 5,966,666 1,000 - - 3,969,000 - - - 3,970,000 -- - - - (28,000 ) - - - (28,000 ) - - - - 644,000 - - - 644,000 - - - - 11,000 - - - 11,000 - - - - 345,000 - - - 345,000 - - - - 30,000 - - - 30,000 533,334 - - - - - - - - (238,048 ) - - - - - 238,048 (166,000 ) (166,000 ) - - - - - (4,518,000 ) - - (4,518,000 ) 144,988,782 $ 15,000 - - $ 76,128,000 $ (78,605,000 ) 567,184 $ (417,000 ) $ (2,879,000 ) - - 2,100,000 - - 1,359,000 - - - 1,359,000 - - - (10,000 ) - - - (10,000 ) - - - 94,000 - - - 94,000 - - - - 12,000 - - - 12,000 - - - - 49,000 - - - 49,000 - - - - 29,000 - - - 29,000 - - - - 80,000 - - - 80,000 3,333 - - - - - - - - (688 ) - - - - - 688 - - - - - - (417,000 ) - (567,872 ) 417,000 - - - - - - (2,449,000 ) - - (2,449,000 ) 147,091,427 $ 15,000 - - $ 77,324,000 $ (81,054,000 ) - $ - $ (3,715,000 )
| 6 |
| Table of Contents |
For the Nine Months Ended March 31, 2019 Common Stock A Common Stock B Additional Treasury Stock Par Value Par Value Paid-in Accumulated Shares $0.0001 Shares $0.0001 Capital Deficit Shares Amount Total Balance at June 30, 2018 Shares issued to consultant for services at $0.84 - $1.38 Shares issued to officer as equity awards at $0.398 to $0.705 Stock options issued to consultant for services at $0.43 - $0.73 Stock options issued to officer as equity awards at $0.398 to $0.705 Issuance of 572,264 shares to Officer and employee Shares issued to employee for services at $0.398 - $1.37 Stock options issued to employee for services at $0.398 - $1.37 Net loss for the three months ended 9/30/2018 Balance at September 30, 2018 Shares issued to consultant for services at $0.84 - $1.38 Shares issued to officer as equity awards at $0.398 to $0.705 Stock options issued to consultant for services at $0.43 - $0.73 Stock options issued to officer as equity awards at $0.398 to $0.705 Issuance of 533,334 shares to Officer & 218,946 shares were withheld for tax purposes as Treasury shares, so net issuance was 314,387 shares Issuance of 38,930 shares to employee, 9,272 shares were withheld for tax purposes as Treasury shares, so net issuance was 29,658 shares Issuance of 12,500 shares to Consultant Conversion of 1,310 preferred stocks to 12,808,388 common stock Offering cost for Q2-2019 To record underlying Series 1, Series 2 and Series 3 Warrants attached to 2000 shares Series B Preferred Stock To record beneficial conversion feature of Series B preferred stock & warrants discounts Transfer of the related preferred stock liability to APIC Allocating warrants (proportion of value exercised) to Pref Stock Liability Shares issued to employee for services at $0.398 - $1.37 Stock options issued to employee for services at $0.398 - $1.37 Net loss for the three months ended 12/31/2018 Balance at December 31, 2018 Shares issued to consultant for services at $0.84 - $1.38 Shares issued to officer as equity awards at $0.398 to $0.705 Stock options issued to consultant for services at $0.43 - $0.73 Stock options issued to officer as equity awards at $0.398 to $0.705 Shares issued to employee for services at $0.398 - $1.37 Stock options issued to employee for services at $0.398 - $1.37 Cancellation of debt for the purchase of 909,090 shares of Common Stock Class B 5% dividend paid by issuance of preferred stock Conversion of 954 preferred stocks to 11,306,457 common stock Transfer of the related preferred stock liability to APIC Allocating warrants (proportion of value exercised) to Pref Stock Liability Reversal of the stock based compensation related to unvested options and shares Net loss for the three months ended 3/31/2019 Balance at March 31, 2019 The accompanying notes are an integral part of these condensed consolidated financial statements.163,103,927 $ 17,000 - $ - $ 83,747,000 $ (85,915,000 ) - $ - $ (2,151,000 ) - - - - 3,000 - - - 3,000 - - - - 112,000 - - - 112,000 - - - - 10,000 - - - 10,000 - - - - 60,000 - - - 60,000 572,264 - - - - - - - - - - - - 12,000 - - - 12,000 - - - - 32,000 - - - 32,000 - - - - (2,050,000 ) - - (2,050,000 ) 163,676,191 $ 17,000 - $ - $ 83,976,000 $ (87,965,000 ) - $ - $ (3,972,000 ) - - - - 2,000 - - - 2,000 - - - - 148,000 - - - 148,000 - - - - 10,000 - - - 10,000 - - - - 78,000 - - - 78,000 (218,946 ) - - - - - 218,946 (87,000 ) (87,000 ) (9,272 ) - - - - - 9,272 (4,000 ) (4,000 ) 12,500 - - - - - - - - 12,808,388 1,000 - - (1,000 ) - - - - (159,000 ) (159,000 ) - - - - 817,000 - - - 817,000 - - - - 1,917,000 - - - 1,917,000 - - - - 963,000 - - - 963,000 - - - - (20,000 ) - - - (20,000 ) - - - - 15,000 - - - 15,000 - - - - 34,000 - - - 34,000 - - - - (3,979,000 ) - - (3,979,000 ) 176,268,861 $ 18,000 - $ - $ 87,780,000 $ (91,944,000 ) 228,218 $ (91,000 ) $ (4,237,000 ) - - - - 2,000 - - - 2,000 - - - - 145,000 - - - 145,000 - - - - 17,000 - - - 17,000 - - - - 77,000 - - - 77,000 - - - - 12,000 - - - 12,000 - - - - 33,000 - - - 33,000 - - 909,090 100,000 - - - 100,000 - - - - 17,000 - - - 17,000 11,306,457 1,000 - - (1,000 ) - - - - - - - - 735,000 - - - 735,000 - - - - (45,000 ) - - - (45,000 ) - - - - (4,000 ) - - - (4,000 ) - - - - - (1,137,000 ) - - (1,137,000 ) 187,575,318 $ 19,000 909,090 $ - $ 88,868,000 $ (93,081,000 ) 228,218 $ (91,000 ) $ (4,285,000 )
| 7 |
| Table of Contents |
INNOVATION PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2019 AND 2018
(Unaudited)
(Rounded to nearest thousand)
|
| For the Nine Months |
| |||||
|
| Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
| ||
Net loss |
| $ | (7,166,000 | ) |
| $ | (11,501,000 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Common stock and stock options issued as employee compensation |
|
|
|
|
|
|
|
|
and payment for services rendered and financing costs |
|
| 798,000 |
|
|
| 1,665,000 |
|
Amortization of patent costs |
|
| 277,000 |
|
|
| 289,000 |
|
Patent write off |
|
| 155,000 |
|
|
| - |
|
Depreciation of equipment |
|
| 1,000 |
|
|
| 28,000 |
|
(Gain) Loss on disposal of equipment |
|
| (40,000 | ) |
|
| - |
|
Interest expense-preferred stock liability |
|
| 1,990,000 |
|
|
| - |
|
Change in fair value of preferred stock |
|
| (50,000 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Prepaid expenses and security deposits |
|
| 43,000 |
|
|
| 268,000 |
|
Accounts payable |
|
| (930,000 | ) |
|
| (578,000 | ) |
Accrued expenses |
|
| (25,000 | ) |
|
| (406,000 | ) |
Accrued officers' salaries and payroll taxes |
|
| (45,000 | ) |
|
| (127,000 | ) |
Net cash used in operating activities |
|
| (4,992,000 | ) |
|
| (10,362,000 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Sales proceeds of property, plant and equipment |
|
| 40,000 |
|
|
| - |
|
Patent costs |
|
| (58,000 | ) |
|
| (108,000 | ) |
Net cash used in investing activities |
|
| (18,000 | ) |
|
| (108,000 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Sales of common stock, net of offering costs |
|
| - |
|
|
| 7,837,000 |
|
Purchase of treasury stock |
|
| (91,000 | ) |
|
| (172,000 | ) |
Proceeds from issuance of preferred stock, net of offering costs |
|
| 1,892,000 |
|
|
| - |
|
Proceeds from exercise of warrants |
|
| 1,253,000 |
|
|
| - |
|
Net cash provided by financing activities |
|
| 3,054,000 |
|
|
| 7,665,000 |
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH |
|
| (1,956,000 | ) |
|
| (2,805,000 | ) |
CASH, BEGINNING OF PERIOD |
|
| 2,424,000 |
|
|
| 4,141,000 |
|
CASH, END OF PERIOD |
| $ | 468,000 |
|
| $ | 1,336,000 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid of income taxes |
| $ | - |
|
|
| - |
|
Cash paid for interest |
| $ | 128,000 |
|
| $ | 156,000 |
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Commitment shares issued as deferred offering costs |
| $ | - |
|
| $ | 215,000 |
|
Reversal of subscription receivable to treasury stock |
| $ | - |
|
| $ | 26,000 |
|
Amortization of offering costs to additional paid in capital |
| $ | (159,000 | ) |
| $ | (268,000 | ) |
Recording beneficial conversion feature of Series B preferred stock & warrants discounts |
| $ | 1,917,000 |
|
| $ | - |
|
Recording 5% dividend of preferred stock paid by issuance of preferred stock |
| $ | 17,000 |
|
| $ | - |
|
Transfer of preferred stock liability to additional paid in capital regarding conversion of Series B Convertible Preferred stock to Common stock |
| $ | 1,698,000 |
|
| $ | - |
|
Cancellation of debt for the purchase of 909,090 shares of Common Stock Class B |
| $ | 100,000 |
|
| $ | - |
|
| ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||
| 8 |
| Table of Contents |
INNOVATION PHARMACEUTICALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,, 2018 2019
(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, 2017,2018, included in our Annual Report on Form 10-K for the year ended June 30, 2017.2018.
In the opinion of the management of Innovation Pharmaceuticals Inc., all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month and nine-month periods have been made. Results for the interim periodsperiod presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms “Company”, “we”,“Company,” “we,” “us” or “our” mean Innovation Pharmaceuticals Inc.
Basis of Presentation and Name Change
Innovation Pharmaceuticals Inc. (the “Company”(“Innovation”) 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 will 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. The Company’s common stock is quoted on OTCQB, symbol “IPIX”.“IPIX.”
Basis of Consolidation
These condensed consolidated financial statements include the accounts of Innovation, a Nevada corporation, and our wholly-owned subsidiaries, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. Translation gains and losses for the nine months ended March 31, 2019 and 2018 were not significant.
Nature of Operations - 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. We discontinued the Prurisol psoriasis program.
We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.
Note 2. Going Concern and Liquidity
As of June 30, 2017, 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.
| Table of Contents |
Note 2. Going Concern and Liquidity
These financial statements have been prepared on the assumption that the Company is a going concern, which contemplates the realization of its assets and the settlement of its liabilities in the normal course of operations.
We have incurred recurring losses since inception and expect to continue to incur losses as a result of costs and expenses related to our research and continued development of our compounds and our corporate general and administrative expenses. As of March 31, 2018,2019, the Company has an accumulated deficit of approximately $81.1$93.0 million, representative of recurring losses since inception. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) and/ or other health authorities approval. As a result, the Company expects to continue to incur losses over the next 12 months from the date of this filing. Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $12.5 million for the next twelve months, raise substantial doubt about its ability to continue as a going concern.
At March 31, 2018,2019, the Company’s cash amounted to $1.3$0.5 million and current liabilities amounted to $9.5$7.6 million, of which $6.5$6.7 million were payables to related parties with no immediate payment terms (See Note 8-8 - Related Party Transactions in the Notes to Condensed Financial Statements section below)Transactions). The Company had expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. The Company’s net cash used in operating activities for the nine months ended March 31, 20182019 was approximately $10.4$5.0 million, and current projections indicate that the Company will have continued negative cash flows from operating activities for the foreseeable future. Our net losses incurred for the nine months ended March 31, 20182019 and 2017,2018, amounted to $11.5$7.2 million and $10.3$11.5 million, respectively, and we had a working capital deficit of approximately $8.0$7.1 million and $6.1 million, respectively at March 31, 20182019 and June 30, 2017.2018.
Accordingly,The Company's primary sources of liquidity are cash and cash equivalents as well as issuances of its equity securities. The Company is party to a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) that provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company's common stock over the 36-month term of the Purchase Agreement. As of March 31, 2019, the available balance under the Purchase Agreement is approximately $22.3 million. However, as of the date of this report, the conditions for sales under the Purchase Agreement are not satisfied and no sales may occur thereunder. In particular, the Purchase Agreement provides that the Company and Aspire Capital will not affect any sales under the Purchase Agreement when the closing sales price of the Company’s planned operations, including total budgeted expenditures of approximately $12.2 millioncommon stock is less than $0.25 per share. Recently, the Company’s common stock has traded below $0.25 per share, and there is substantial uncertainty regarding the Company’s continued ability to sell shares under the Purchase Agreement in order to meet the Company's projected working capital requirements for the next twelve12 months raise doubt aboutfrom the date of the issuance of the financial statements (or available to be issued).
On October 5, 2018, the Company entered into a securities purchase agreement with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock for aggregate gross proceeds of approximately $2.0 million. Under this securities purchase agreement, the Company issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock. The Company received the proceeds from exercise of 1,275 Series 1-2 warrants of approximately $1.3 million from October 2018 to March 31, 2019. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds will be available when needed.
The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships) and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available. The Company will be unable to proceed with its abilityplanned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without additional financing from Aspire Capital, the multi-family office or another source of capital. These financial statements do not include any adjustments related to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern. The Company’s plans to alleviate the doubt of its ability to continue as a going concern primarily include controlling the timing and spending on its research and development programs, thereby being able to decrease its current budgeted expenditures mentioned above for the next 12 months, as needed and to continue 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 and declared effective on September 21, 2017. Pursuant to the instructions to Form S-3, if the Company’s non-affiliate market capitalization as of an applicable measurement time, such as upon the filing of the Company’s Annual Report on Form 10-K, does not equal or exceed $75 million, the Company will be unable to offer and sell securities from its effective shelf registration statement on Form S-3.
The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of its product candidates and key development and regulatory events and its decisions in the future.
The Company believes that the actions discussed above are probable of occurring and alleviating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs twelve months from the issuance of the accompanying financial statements.
On September 6, 2017, the Company entered into a new $30 million common stock purchase agreement with Aspire Capital (the “2017 Agreement”) to replace the prior 2015 $30 million common stock purchase agreement with Aspire Capital (the “2015 Agreement”). During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under the 2015 Agreement from the sale of approximately 2.6 million shares of its common stock. During the period from September 6, 2017 to March 31, 2018, the Company generated proceeds of approximately $5.7 million under the 2017 Agreement from the sale of approximately 8.7 million shares of its common stock. As of March 31, 2018, the available balance under the 2017 Agreement is approximately $24.3 million.
| Table of Contents |
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.
NetBasic Loss Perper Share
Basic and diluted loss per share is computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of warrants, stock options, convertible notes payable underlying shares, and unvested restricted stock.stock and Series B Convertible Preferred Stock at a conversion price at approximately $0.10 per share. Common share equivalents of 4766 million shares and 4647 million shares of common stock were excluded from the computation of diluted loss per share for the three and nine months ended March 31, 20182019 and 2017, respectively,2018, because we incurred net losses for the nine months ended March 31, 20182019 and 2017,2018, and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive and are therefore not included in the calculations.
Treasury Stock
The Company accounts for treasury stock using the cost method. There were 0228,218 shares and 262,0800 shares of treasury stock outstanding, purchased at a total cumulative cost of $0$91,000 and $220,000$0, at March 31, 20182019 and June 30, 2017,2018, respectively (see Note 10)11 to the notes 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.
Accounting for Stock Based Compensation
The stock-based compensation expense incurred by the Company for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 an employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. tax regulations”.“tax regulations.” Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.
ASC 505-50-30-11 further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:
| 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.
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The components of stock-based compensation expense included in the Company’s Condensed StatementsStatement of Operations for the three months and nine months ended March 31, 20182019 and 20172018 are as follows (rounded to nearest thousand):
|
| Three months ended March 31 |
| Nine months ended March 31 |
|
| Three months ended March 31 |
| Nine months ended March 31 |
| ||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Professional fees |
| $ | 80,000 |
| $ | 5,000 |
| $ | 80,000 |
| $ | 55,000 |
|
| $ | 19,000 |
| $ | 80,000 |
| $ | 44,000 |
| $ | 80,000 |
| ||||||
Employees’ bonus |
| 41,000 |
| 48,000 |
| 115,000 |
| 110,000 |
|
| 41,000 |
| 41,000 |
| 134,000 |
| 115,000 |
| ||||||||||||||
Officers’ bonus |
|
| 144,000 |
|
|
| 283,000 |
|
|
| 1,470,000 |
|
|
| 861,000 |
|
|
| 222,000 |
|
|
| 144,000 |
|
|
| 620,000 |
|
|
| 1,470,000 |
|
Total stock-based compensation expense |
| $ | 265,000 |
|
| $ | 336,000 |
|
| $ | 1,665,000 |
|
| $ | 1,026,000 |
|
| $ | 282,000 |
|
| $ | 265,000 |
|
| $ | 798,000 |
|
| $ | 1,665,000 |
|
RecentFair Value of Financial Instruments and Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current liabilities, convertible notes and preferred stock liability (all as defined below) are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of all other financial liabilities at cost approximates fair value.
Recently Adopted Accounting Pronouncements
Stock Compensation -In March 2016,July 2017, the FASB issued ASU 2016-09, Compensation – Stock CompensationAccounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 718)260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Improvements to Employee Share-Based PaymentI. Accounting which simplifiedfor Certain Financial Instruments with Down Round Features; and II. Replacement of the income tax consequences,Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for forfeitures and classificationcertain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the Statementbasis of Cash Flowsthe pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with (i) excess tax benefits being classified as cash inflows provided by operating activities,down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and (ii) cash paid to taxing authorities arising from the withholdingcertain mandatorily redeemable non-controlling interests. The amendments in Part II of shares from employees being classified as cash outflows used in financing activities.this update do not have an accounting effect. This standardASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016,2018, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, 2018, did not have any impact on the financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. This new pronouncement washas been adopted on July 1, 2016in the fourth quarter of fiscal 2018 and did not have a material effect on the Company’s financial position, or results of operations but had an effect of the classification ofor cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.
In June 2014, the FASB issued ASU 2014-12, “Compensation—Stock Compensation.” The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This ASU is the final version of Proposed ASU EITF-13D, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The implementation of this standard did not have a material impact on the Company’s accompanying condensed financial statements.
Recently Issued Accounting Guidanceflows.
In May 2014, the FASB issued authoritative guidance thatASU 2014-09, Revenue from Contracts with Customers (Topic 606), which defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a five-step, principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until 2019. In addition, the FASB is allowing companies to early adopt this guidance for non-public entities beginning in fiscal year 2017. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply thisThis new guidance when it becomes effective andpronouncement has not yet selected a transition method. The Company, due to not having any revenue currently andbeen adopted in the foreseeable future, has concluded thatfirst quarter of fiscal 2019 and did not have a material effect on the impactCompany’s financial position, results of the adoption of this accounting standard on its financial statements will not be material.operations or cash flows.
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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.
Intangibles, Goodwill and Other —In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment” (“ASU No. 2017-04”). To simplify the subsequent measurement of goodwill, ASU No. 2017-04 eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, ASU No. 2017-04 requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU No. 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019. The Company will adopt ASU No. 2017-04 commencing in the first quarter of fiscal 2021. The Company does not believe this standard will have a material impact on its financial statements or the related footnote disclosures.
Statement of Cash Flows — In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the new standard effective July 1, 2018. The application of this standard did not have a material impact on the Company’s unaudited condensed statements of cash flows.
Recently Issued Accounting Guidance
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The adoption of ASU 2018-07 will not have a material impact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using the modified retrospective approach. The Company will adopt this new pronouncement beginning July 1, 2019. Interpretations are on-going and could have a material impact on the Company's implementation. Currently, the Company expects that the adoption of the ASU No. 2016-15 commencing in the first quarter of fiscal 2019. The Company does not believe this standard2016-02 (Topic 842) Leases will have a material impact on its financial statements orconsolidated balance sheet due to the related footnote disclosures.recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases, and expects it to have a material impact on our results of operations.
Note 4. Patents, net
Patents, net consisted of the following (rounded to nearest thousand):
|
| Useful life |
|
| March 31, |
|
| June 30, |
| ||
|
| (years) |
|
| 2018 |
|
| 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 |
|
|
| 1,417,000 |
|
|
| 1,308,000 |
|
|
|
|
|
|
| 5,643,000 |
|
|
| 5,534,000 |
|
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds |
|
|
|
|
| (1,386,000 | ) |
|
| (1,158,000 | ) |
Accumulated amortization for Patents –Kevetrin and related compounds |
|
|
|
|
| (225,000 | ) |
|
| (164,000 | ) |
|
|
|
|
| $ | 4,032,000 |
|
| $ | 4,212,000 |
|
|
| Useful life |
|
| March 31, 2019 |
|
| June 30, 2018 |
| ||
|
|
|
|
|
|
|
|
|
| ||
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 |
|
|
| 1,090,000 |
|
|
| 1,219,000 |
|
|
|
|
|
|
| 5,316,000 |
|
|
| 5,445,000 |
|
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds |
|
|
|
|
| (1,690,000 | ) |
|
| (1,462,000 | ) |
Accumulated amortization for Patents-Kevetrin and related compounds |
|
|
|
|
| (220,000 | ) |
|
| (203,000 | ) |
Total |
|
|
|
| $ | 3,406,000 |
|
| $ | 3,780,000 |
|
The patents are amortized on a straight-line basis over the useful lives of the assets, determined to be 12-17 years from the date of acquisition.
Amortization expense was approximately $96,000 and $95,000, for the three months ended March 31, 2019 and 2018 was approximately $92,000 and 2017,$96,000, respectively and was approximately $289,000,$277,000, and $277,000$289,000 for the nine months ended March 31, 2019 and 2018, respectively.
During the nine months ended March 31, 2019 and 2017, respectively.2018, the Company has written off the Prurisol patent and other patents of approximately $155,000 and $0, respectively, and included in general and administrative expenses.
At March 31, 2018,2019, the future amortization period for all patents was approximately 7.436.43 years to 16.7515.87 years. Future estimated annual amortization expenses are approximately $96,000$92,000 for the year ending June 30, 2018, $383,0002019, $366,000 for each year from 20192020 to 2025, $374,0002022, and total of $2,216,000 for the year ending June 30, 2026, $371,000 for the year ending June 30, 2027, $134,000 for the year ending June 30, 2028, $80,000 for the years ending June 30, 2029 through the years ended 2032, $41,000 for the year ending June 30, 2033, $10,000 for the year ending June 30, 20342023 and $2,000 for the year ending June 30, 2035.thereafter.
| 13 |
| Table of Contents |
Compounds with Activity Against Gram-Negative Bacteria and Fungi
As research at the Company is now focused on supporting its clinical trials, we have reduced costs associated with the licensing of intellectual property for gram-negative bacteria and anti-fungal compounds by returning our patent portfolio titled “Compounds and Methods for Treating Candidiasis and Aspergillus Infections” back to the university co-licensor. The Company at this time does not have any active gram-negative or anti-fungal programs and therefore has decided not to pay for the maintenance of these Patent Rights. The net book value of the impaired patent as of March 31, 2018 is not material.
Note 5. Accrued Expenses – Related Parties and Other
Accrued expenses consisted of the following (rounded to nearest thousand):
|
| March 31, |
| June 30, |
|
| March 31, 2019 |
|
| June 30, 2018 |
| |||||
|
| 2018 |
|
| 2017 |
|
|
|
|
|
| |||||
Accrued research and development consulting fees |
| $ | 281,000 |
| $ | 673,000 |
|
| $ | 167,000 |
| $ | 208,000 |
| ||
Accrued rent (Note 8) – related parties |
| 13,000 |
| 21,000 |
| |||||||||||
Accrued interest – (Note 9) related parties |
|
| 12,000 |
|
|
| 17,000 |
| ||||||||
Accrued rent (Note 8) - related parties |
| 8,000 |
| 10,000 |
| |||||||||||
Accrued interest (Note 9) - related parties |
|
| 66,000 |
|
|
| 48,000 |
| ||||||||
|
|
|
|
|
| |||||||||||
Total |
| $ | 306,000 |
|
| $ | 711,000 |
|
| $ | 241,000 |
|
| $ | 266,000 |
|
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, |
| June 30, |
|
| March 31, 2019 |
|
| June 30, 2018 |
| |||||
|
| 2018 |
|
| 2017 |
|
|
|
|
|
| |||||
Accrued salaries - related parties |
| $ | 2,823,000 |
|
| $ | 2,823,000 |
|
| $ | 2,999,000 |
| $ | 2,823,000 |
| |
Accrued payroll taxes - related parties |
| 130,000 |
| 130,000 |
|
| 130,000 |
| 130,000 |
| ||||||
Accrued employee bonuses |
| - |
| 86,000 |
|
| - |
| 214,000 |
| ||||||
Withholding tax - payroll |
|
| 64,000 |
|
|
| 105,000 |
|
|
| 45,000 |
|
|
| 52,000 |
|
|
|
|
|
|
| |||||||||||
Total |
| $ | 3,017,000 |
|
| $ | 3,144,000 |
|
| $ | 3,174,000 |
|
| $ | 3,219,000 |
|
Note 7. Commitments and Contingencies
Lease Commitments
Operating Leases – Rental Property
The Company signed aOn October 1, 2018, the Company’s lease extension agreement with Cummings Properties which began on October 1, 2013.automatically renewed. The lease is for a term of five years ending on September 30, 2018,2023, and requires monthly payments of $18,000. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease and subleases 200 square feet of space previously used by the Company and pays the Company $900 per month.approximately $19,000.
As of March 31, 2018,2019, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):
Year ending June 30, |
|
|
|
|
|
| ||
2018 |
| $ | 54,000 |
| ||||
2019 |
| 54,000 |
|
| $ | 57,000 |
| |
Total minimum payments |
| $ | 108,000 |
| ||||
2020 |
| 228,000 |
| |||||
2021 |
| 228,000 |
| |||||
2022 |
| 228,000 |
| |||||
2023 |
| 228,000 |
| |||||
Thereafter |
| 57,000 |
| |||||
Total |
| $ | 1,026,000 |
| ||||
Rent expense, net of lease income, under this operating lease agreement was approximately $53,000$58,000 and $52,000$53,000 for the three months ended March 31, 20182019 and 2017,2018, respectively and was approximately $157,000$168,000 and $153,000$157,000 for the nine months ended March 31, 2019 and 2018, and 2017, respectively. BeforeAs of September 2013,1, 2018, Kard Scientific no longer leases space from the Company paid rent to Kard Scientific for office space and details are shown at(See Note 8 - Related Party Transactions below.to the notes to the condensed consolidated financial statements).
Operating Leases - Equipment
We leased equipment under a non-cancelable operating lease that expired in April, 2018. As of March 31, 2018, there was no future minimum rental commitment for our operating lease for the next twelve months.
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| Table of Contents |
Contractual Commitments
The Company has total non-cancelable contractual minimum commitments of approximately $1.0$1.8 million to contract research organizations as of March 31, 2018.2019. Expenses are recognized when services are performed by the contract research organizations.
Note 8. Related Party Transactions
Office Lease
The Company charged Kard Scientific (“KARD”) $1,800 for space for the two months of July and August, 2018. Dr. Menon, the Company’s principal shareholder, and former President of Research, and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007,Scientific. Dr. Menon’s employment was terminated with the Company began renting office spaceon September 18, 2018, and Dr. Menon resigned from KARD, and sincethe Company’s Board of Directors on December 11, 2018. As of September 1, 2013, the Company2018, KARD no longer leases space from KARD. At March 31, 2018 and June 30, 2017, rent payable to KARD of approximately $13,000 and $21,000, respectively, were included in accrued expenses.the Company.
In September 2013, the Company signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $18,000. The Company had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., (“Innovative Medical”) a company owned by Mr. Ehrlich and Dr. Menon, officers of the Company, has co-signed the lease and rents approximately 200 square feet of office space, the space previously used by the Company and pays the Company $900 per month, the same amount the Company previously paid KARD. Innovative Medical paid total rent of approximately $3,000 and $9,000 to the Company for both of the three months and nine months ended March 31, 2018 and 2017 and the rental payment was offset with the accrued rent owed to KARD.
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 March 31, 20182019 and June 30, 2017,2018, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable.
Other related party transactions are disclosed in Note 9 to the notes to the condensed consolidated financial statements below.
Note 9. Convertible Note Payable - Related Party
During the year ended June 30, 2010, Mr. Ehrlich, the Company’s Chairman and CEO, loaned the Company a total of approximately $973,000. A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note, Ehrlich Promissory Note C. The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s Class A common stock at $0.50 per share. The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the Ehrlich Promissory Note C and agreed to retroactively convert accrued interest of approximately $97,000 through December 31, 2010 into additional principal. During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional (approximate)approximately $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of this demand note to approximately $2,022,000.
On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principal and interest of approximately $2,248,000, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten (10) years from the date of issuance.
AtAs of March 31, 20182019 and June 30, 2017, approximately $12,000 and $17,000, respectively, is2018, the balance of accrued interest payable on this note.were $66,000 and $12,000, respectively (see Note 5 to the notes to the condensed consolidated financial statements).
AtOn January 29, 2019, Mr. Ehrlich cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 shares of Class B common stock at the option exercise price of $0.11 per share. As of March 31, 20182019 and June 30, 2017,2018, principal balance of this demand note was approximately $2,022,000.$1,922,000 and $2,022,000, respectively. As of March 31, 2019 and June 30, 2018, the total outstanding balance of principal and interest were approximately $1,988,000 and $2,034,000, respectively.
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| Table of Contents |
Note 10. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding
Current Equity Incentive PlanPlans
2016 Equity Incentive Plan
On June 30, 2016, the Board of Directors adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan became effective upon adoption by the Board of Directors on June 30, 2016.
Up to 20,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that (1) no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and (2) no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of ISOs, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.
In connection with adoption of the 2016 Plan, the Board of Directors also approved forms of Incentive Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Non-Employee Directors, Restricted Stock Award Agreement for Employees and Restricted Stock Award Agreement for Non-Employee Directors that will be utilized by the Company to grant options and restricted shares under the 2016 Plan.
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 |
|
| 1,070,826 |
|
|
| 0.75 |
|
|
| 8.14 |
|
|
|
|
|
Forfeited/expired |
|
| (277,924 | ) |
|
| 2.44 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018 |
|
| 41,448,147 |
|
|
| 0.22 |
|
|
| 3.01 |
|
| $ | 14,819,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018 |
|
| 40,452,299 |
|
|
| 0.21 |
|
|
| 2.87 |
|
| $ | 14,819,300 |
|
|
| Number of Options |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Life (Years) |
|
| Aggregate Intrinsic Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Outstanding at June 30, 2018 |
|
| 41,643,571 |
|
|
| 0.22 |
|
|
| 2.76 |
|
| $ | 17,523,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
| 1,195,826 |
|
|
| 0.31 |
|
|
| 7.89 |
|
|
|
|
|
Exercised |
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
Forfeited/expired |
|
| (1,235,424 | ) |
|
| 1.65 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019 |
|
| 41,603,973 |
|
|
| 0.18 |
|
|
| 2.24 |
|
| $ | - |
|
Exercisable at March 31, 2019 |
|
| 40,068,405 |
|
| $ | 0.17 |
|
|
| 2.01 |
|
| $ | - |
|
The fair value of options granted for the nine months ended March 31, 20182019 and 20172018 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.
| Nine months ended | |||||||||||
| March 31, |
| Nine months ended March 31, | |||||||||
| 2018 |
| 2017 |
|
| 2019 |
|
| 2018 |
| ||
Expected term (in years) |
| 5 - 10 |
| 3 - 10 |
|
| 5 - 10 |
| 5 - 10 |
| ||
Expected stock price volatility |
| 52.80% to 106.01% |
| 57.63% to 111.62% |
|
| 67.34% to 104.11% |
| 52.80% to 106.01% |
| ||
Risk-free interest rate |
| 2.15% to 2.56% |
| 0.71% to 2.49% |
|
| 2.51% to 2.86% |
| 2.15% to 2.56% |
| ||
Expected dividend yield |
| 0 |
| 0 |
| 0 |
| 0 |
| |||
Stock-Based Compensation
The Company recognized approximately $265,000$798,000 and $336,000$1,665,000 of total stock-based compensation costs related to stock and stock options awards for the three months ended March 31, 2018 and 2017, respectively. The Company recognized approximately $1,665,000 and $1,026,000 of total stock-based compensation costs related to stock and stock optionsequity grant awards for the nine months ended March 31, 2019 and 2018, respectively.
The $798,000 of stock-based compensation expense for the nine months ended March 31, 2019 included approximately $349,000 of stock options expense and 2017, respectively.$449,000 of restricted stock awards.
| 16 |
| Table of Contents |
The $1,665,000 of total stock-based compensation expense for the nine months ended March 31, 2018 included approximately $677,000 of stock options expense and $988,000 of restricted stock awards.awards (see Note 11 to the notes to the condensed consolidated financial statements).
ForDuring the nine months ended March 31, 20182019
On February 1, 2018,2019, the Company agreed to issue 400,000 stock options to purchase 75,000 shares of the Company’s common stock to each of two consultants for specified services to be provided from February 1, 20182019 to January 31, 20192020 in accordance with agreements with the two consultants. These options were issued with an exercise price of $0.13 per share and vest 33 1/3% on February 1, 2019, 33 1/3% on August 1, 2019, and 33 1/3% on January 31, 2020. The value of the total 800,000 options for two consultants was approximately $60,000. During the nine months ended March 31, 2018,2019, the Company recorded approximately $8,000$13,000 of related stock-based compensation.
On February 10, 2017, the Company entered into verbal agreements with two consultants to issue options to purchase 50,000 shares of common stock and 75,000 shares of common stock, respectively, to the two consultants for services to be performed from February 13, 2017 to January 31, 2018 in accordance with their consulting agreements. The Company formally signed the agreements with the two consultants on March 13, 2018. During the nine months ended March 31,September 1, 2018, the Company recorded approximately $72,000 of related stock-based compensation.
On September 1, 2017, the Company agreed to grantissued to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, under the 2016 Plan (i)for his services rendered 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)vesting 50% upon the first anniversary of the effectivegrant date and the remaining 50% upon the second anniversary of the effective date; (2)grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock 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 wereoptions are valued at approximately $752,000$225,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.40 per share. These options were issued with an exercise price of $0.40 per share and vest 50% upon 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 probabilityfirst anniversary of the other above vesting requirements occurring are met at an earlier date. At March 31, 2018,grant date and 50% upon the Company determined that it was not probable that these accelerated vesting provisions would occur earlier thansecond anniversary of the scheduled vesting date. grant date, with acceleration as defined in award agreement, with a ten year option term. These options have piggyback registration rights.
During the three months and nine months ended March 31, 2018,2019, the Company recorded approximately $144,000$80,000 and $336,000$188,000 of total stock-based compensation, respectively. The $144,000$80,000 of stock-based compensation expense for the three months ended March 31, 20182019 included approximately $50,000$28,000 of stock option expense and $94,000$52,000 of stock awards. The $336,000$188,000 of stock-based compensation expense for the nine months ended March 31, 20182019 included approximately $117,000$65,000 of stock option expense and $219,000$123,000 of stock awards.
On September 1, 2017,2018, the Company agreed to grantalso issued to Ms. Jane Harness, the Senior 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 third33 1/3% vesting upon the first anniversary of the effectivegrant date, one third33 1/3% upon the second anniversary of the effectivegrant date and the remaining one third33 1/3% upon the third anniversary of the effective date; or (2) upon a changegrant date, with acceleration in control ofcertain circumstances as provided in the Company.award agreement. The 58,394 shares wereCompany also issued 172,987 options to purchase common stock. These stock options are valued at approximately $41,000$63,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.40 per share. These options were issued with an exercise price of $0.40 per share and vest 33 1/3% upon the 172,987 stock options valued at approximately $112,000. Both sharesfirst anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and options will be amortized over 3 years to September 1, 2020 unless33 1/3% upon the otherthird anniversary of the grant date, with acceleration of vesting requirements are met sooner. upon certain events.
During the three months and nine months ended March 31, 2018,2019, the Company recorded approximately $13,000$7,000 and $30,000$17,000 of total stock-based compensation, respectively. The $13,000$7,000 of stock-based compensation expense for the three months ended March 31, 20182019 included approximately $9,000$5,000 of stock option expense and $4,000$2,000 of stock awards. The $30,000$17,000 of stock-based compensation expense for the nine months ended March 31, 20182019 included approximately $22,000$12,000 of stock option expense and $8,000$5,000 of stock awards.
On September 1, 2017,2018, the Company agreedalso issued to grant toMs. Anne Ponugoti, underAssociate Director, Clinical Sciences of the 2016 Plan, ten-year options to purchaseCompany, 5,000 shares of the Company’s common stock at an exercise price of $0.705 per share, which shall vest uponand 5,000 options to purchase common stock with same vesting periods as the earliestcommon stock and options issued to occurMs. Ponugoti. The total value of the following: (1) one third upon the first anniversary of the effective date, one-third upon the second anniversary of the effective date,5,000 shares 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 were valuedapproximately $2,000 each, based on the closing bid price as quoted on the OTC on August 31, 2018 at approximately $3,000 and will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner.$0.40 per share. During the three months and nine months ended March 31, 2018,2019, the Company recorded approximately $300 and $700 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 nine months ended March 31, 2018, the Company recorded approximately $3,000 and $9,000 of total stock-based compensation, respectively. The $3,000 of stock-based compensation expense for the three months ended March 31, 2018 included approximately $2,000 of stock option expense and $1,000 of stock awards. The $10,000 of stock-based compensation expense for the nine months ended March 31, 2018 included approximately $7,000 of stock option expense and $3,000 of stock awards.
Purchase of Treasury Stock - cash paid to Federal and State Taxing Authorities arising from the withholding of common shares from officers’ 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 bynot significant. She left the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.January 15, 2019.
On December 22, 2017, 533,334 shares of the Company’s restricted stock vested to Dr. Bertolino according to Dr. Bertolino’s employment agreement. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was $373,334, which is priced at the closing stock price on December 21, 2017 at $0.7 a share.
| Table of Contents |
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. Bertolino. The remaining 238,048 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
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.
On February 1, 2018, 3,333 shares of the Company’s restricted stock vested to Ms. Anne Ponugoti according to Ms. Ponugoti’s employment agreement. The total taxable compensation to Ms. Ponugoti for the 3,333 vested shares was $2,433, which is priced at the closing stock price on January 31, 2018 at $0.73 a share. The Company issued 2,645 common shares (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. The remaining 688 shares of common stock were withheld from Ms. Ponugoti for the payment of payroll taxes to the Federal and State taxing authorities.
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.
There were 0 shares and 262,080 shares of treasury stock outstanding at March 31, 2018 and June 30, 2017, respectively, purchased at a total cumulative cost of $0 and $220,000 at March 31, 2018 and June 30, 2017, respectively.
Restricted Stock Awards Outstanding
The following summarizes our restricted stock activity for our restricted stock issuances:
|
|
|
| Weighted |
|
|
|
| Weighted |
| ||||||
|
|
|
| Average |
|
|
|
| Average |
| ||||||
|
|
|
| Grant |
|
| Number of |
| Grant Date |
| ||||||
|
| Number of |
| Date Fair |
|
| Shares |
|
| Fair Value |
| |||||
|
| Shares |
|
| Value |
| ||||||||||
|
|
|
|
|
| |||||||||||
Total awards outstanding at June 30, 2017 |
| 601,728 |
| $ | 1.39 |
| ||||||||||
Total awards outstanding at June 30, 2018 |
| 1,208,157 |
| $ | 0.72 |
| ||||||||||
Total shares granted |
| 1,125,061 |
| 0.71 |
|
| 1,130,061 |
| $ | 0.40 |
| |||||
Total shares vested |
| (556,132 | ) |
| 1.40 |
|
| (584,763 | ) |
| $ | 0.72 |
| |||
Total shares forfeited |
|
|
|
|
|
|
|
|
|
| (11,667 | ) |
| $ | 0.76 |
|
Total unvested shares outstanding at March 31, 2018 |
|
| 1,170,657 |
|
| $ | 0.73 |
| ||||||||
Total unvested shares outstanding at March 31, 2019 |
|
| 1,741,788 |
|
| $ | 0.51 |
| ||||||||
Scheduled vesting for outstanding restricted stock awards at March 31, 20182019 is as follows:
|
| Year Ending June 30, |
| |||||||||||||||||
|
| 2018 |
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Scheduled vesting |
|
| 0 |
|
|
| 575,596 |
|
|
| 575,597 |
|
|
| 19,464 |
|
|
| 1,170,657 |
|
|
| Year Ending June 30, |
| |||||||||||||||||
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Scheduled vesting |
|
| 12,500 |
|
|
| 1,137,562 |
|
|
| 572,262 |
|
|
| 19,464 |
|
|
| 1,741,788 |
|
As of March 31, 2018,2019, there was approximately $0.6$0.5 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately $0.4 million of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 1.481.12 years.
For the nine months ended March 31, 2017
Issuances of Common Stock and Stock Options – Pursuant to New Employment Agreements
On June 27, 2016, 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 and the Company agreed to grant to Dr. Bertolino under the Company’s 2016 Equity Incentive Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $1.39 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) 50% upon the first anniversary of the effective date, and the remaining 50% upon the second anniversary of the effective date (2) completion of both a Phase 2b psoriasis study and a Phase 2 oral mucositis study; (3) the Company’s common stock closes above $3.00 per share (as may be adjusted for any stock splits or similar actions); (4) the commencement of trading of the Company’s common stock on a national securities exchange (e.g. Nasdaq or the NYSE); or (5) upon a Change in Control 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 10 years at an exercise price of $1.39 per share. During the three months and nine months ended March 31, 2018, the Company recorded approximately $0 and $1,134,000 of total stock-based compensation, respectively. There was no stock-based compensation expense for the three months ended March 31, 2018 for it was fully expensed. The $1,134,000 of stock-based compensation expense for the nine months ended March 31, 2018 included approximately $396,000 of stock option expense and $738,000 of stock awards.
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 in December, 2017.
On July 18, 2016, the Company issued 7,500 stock options to purchase shares of the Company’s common stock to a consultant for services rendered, exercisable for 3 years at $1.38 per share of common stock. The value of these 7,500 options was approximately $4,000. During the 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 granted at an exercise price of $1.37 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 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 nine months ended March 31, 2018, the Company recorded approximately $25,000 and $75,000 of total stock-based compensation, respectively. The $25,000 of stock-based compensation expense for the three months ended March 31, 2018 included approximately $18,000 of stock option expense and $7,000 of stock awards. The $75,000 of stock-based compensation expense for the nine months ended March 31, 2018 included approximately $54,000 of stock option expense and $21,000 of stock awards.
Exercise of options
During the three months and nine months ended March 31, 20182019 and 2017,2018, there were no stock options exercised.exercised under the Company’s equity incentive plans.
Stock Warrants Outstanding
Warrants to Purchase Preferred Stock
On October 5, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock (the “Series B preferred stock”), for aggregate gross proceeds of approximately $2.0 million. Each share of preferred stock was 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, (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.
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. There were 1,275 Series 1-2 warrants exercised during the nine months ended March 31, 2019. As of March 31, 2019, 6,725 Series 1-3 warrants to purchase 6,725 preferred stock were outstanding (see Note 12 to the notes to the condensed consolidated financial statements).
| 18 |
| Table of Contents |
The following table summarizes the outstanding preferred stock warrants: | ||||||||||||||||
|
| Warrants |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Life (Years) |
|
| Aggregate Intrinsic Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Outstanding at June 30, 2018 |
|
| - |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
| 8,000 |
|
|
| 982.50 |
|
|
| 1.37 |
|
|
|
|
|
Exercised |
|
| (1,275 | ) |
|
| 982.50 |
|
|
| 1.00 |
|
|
|
|
|
Expired |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019 |
|
| 6,725 |
|
| $ | 985.50 |
|
|
| 1.00 |
|
| $ | - |
|
Warrants to Purchase Common Stock
During the nine months ended March 31, 2019 and 2018, there were no warrants issued to purchase common stock.
On June 28, 2018, the Company entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company has agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent. The Company issued to Aspire Capital warrants to purchase 8,000,000 shares of its common stock exercisable for 5 years at an exercise price of $0.38 per share (see Note 11 to the notes to the condensed consolidated financial statements). The warrants were recorded within stockholders’ deficiency. The fair value of the warrants issued on June 28, 2018 was estimated on the date of issuance using the Black Scholes Model that uses assumptions noted in the following table. The value of the warrants issued was approximately $1.7 million.
Expected term (in years) | 3 | |||
Expected stock price volatility | 82.36 | % | ||
Risk-free interest rate | 2.73 | % | ||
Expected dividend yield | 0 |
The following table summarizes the outstanding common stock warrants: | ||||||||||||||||
|
| Warrants |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Life (Years) |
|
| Aggregate Intrinsic Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Outstanding at June 30, 2018 |
|
| 8,000,000 |
|
| $ | 0.38 |
|
|
| 5.0 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
Exercised |
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
Expired |
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
Outstanding at March 31, 2019 |
| 8.000.000 |
|
| $ | 0.38 |
|
|
| 4.25 |
|
| $ | - |
| |
11. Equity Transactions
On January 29, 2019, Leo Ehrlich, the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 shares of Common Stock Class B, $0.0001 par value at the option exercise price of $0.11. As of March 31, 2019, 909,090 shares of Common Stock Class B were outstanding.
Purchase of Treasury Stock
On September 1, 2018, 38,930 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 38,930 vested shares was approximately $3,690, which is priced at the closing stock price on September 1, 2018 at $0.40 a share.
The Company issued 29,658 common shares (net share issuance amount), which was approximately 76% of the total vested common share amount of 38,930 common shares due to be issued to Ms. Harness. The remaining 9,272 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.
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On September 1, 2018, 533,334 shares of the Company’s restricted stock vested to Dr. Bertolino according to Dr. Bertolino’s employment agreement. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was approximately $87,140, which is priced at the closing stock price on September 1, 2018 at $0.40 a share.
The Company issued 314,387 common shares (net share issuance amount), which was approximately 59% of the total vested common share amount of 533,334 common shares due to be issued to Dr. Bertolino. The remaining 218,946 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
There were 228,218 shares and 0 shares of treasury stock outstanding at March 31, 2019 and June 30, 2018, respectively, purchased at a total cumulative cost of $90,830 and $0 at March 31, 2019 and June 30, 2018, respectively.
Securities Purchase Agreement Dated June 28, 2018
On June 28, 2018, we entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company has agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent.
Pursuant to the Securities Purchase Agreement, and in connection with Aspire Capital’s commitment to purchase additional securities from the Company, on June 28, 2018, the Company agreed to (i) sell to Aspire Capital 5,263,158 shares for a purchase price of $2.0 million and (ii) issue to Aspire Capital 2,736,842 shares of common stock and warrants to purchase 8,000,000 shares of common stock, with such warrants having an exercise price equal to $0.38 per share (the “Commitment Fee”). The Securities Purchase Agreement provides for the sale of up to an additional $5.0 million of the Company’s common stock to Aspire Capital upon the achievement of certain milestones by September 30, 2018, which were not achieved by the Company.
The total commitment fee of $2.7 million was allocated to the $2 million offering first based on historical price discounts that Aspire Capital has received and the balance of the commitment fee was allocated to the $5 million of potential future milestone funding from Aspire Capital. The portion of the commitment fee allocated to the $2 million of initial proceeds was approximately $0.5 million and was effectively netted against the $2 million of initial proceeds, resulting in a discounted purchase price of $0.29 per share. The remaining $2.2 million of the commitment fee was allocated to the future milestone funding and was fully expensed under Other Expenses as of June, 30, 2018. As of March 31, 2019, the $5 million of milestone funding was not received and expired.
$30 million Class A Common Stock Purchase Agreement with Aspire Capital
On September 6, 2017, the Company entered into a common stock purchase agreementthe Purchase 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-month term of the Stock Purchase Agreement. The Company issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The commitment fee of approximately $215,000 is amortized pro-rata as the funding is received. The amortized amount of $41,000the commitment fee of $55,000 was recorded to additional paid-in capital for the nine monthsyear ended March 31,June 30, 2018. The remaining $159,000 of the unamortized portion isof the commitment fee was carried on the balance sheet as deferred offering costs and was $173,000 at March 31,fully expensed in December, 2018. The Company registered the sale 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.
During the period from September 6, 2017 to March 31,June 30, 2018, the Company generated proceeds of approximately $5.7$7.7 million under the new 2017 agreement with Aspire Capital from the sale of approximately 8.716.7 million shares of its common stock. As ofDuring the nine months ended March 31, 2018,2019, we did not have any financing from the 2017 agreement with Aspire Capital, the available balance under the new equity line agreement was approximately $24.3$22.3 million. However, as of date of this report, the conditions for sales under the Purchase Agreement are not satisfied and no sales may occur thereunder. See Note 2 to the notes to the condensed consolidated financial statements- Going Concern and Liquidity.
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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.2015 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 in September 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 EventsSeries B 5% convertible preferred stock
Equity TransactionsOn October 5, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock (the “Series B preferred stock”), for aggregate gross proceeds of approximately $2.0 million. An initial closing for the sale of 1,250 shares of the Series B preferred stock closed on October 9, 2018, and a second closing for the sale of 750 shares of the Series B preferred stock closed on October 12, 2018. Under the Securities Purchase Agreement, the Company also issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock.
The Series B 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 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 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. Given that the Series B 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 preferred stock liability after the issuance).
The Company recorded the October 9, 2018 issuance of 1,250 shares Series B Preferred Stock at approximately $0.7 million and the underlying Series 1, Series 2 and Series 3 warrants at approximately $0.5 million in total by allocating the gross proceeds to Series B preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.2 million associated with the issuance of the 1,250 shares of Series B preferred stock to additional paid-in capital. The Company then recorded interest of approximately $1.2 million for the BCF and warrant discounts as a first day interest given that the Series B preferred shares can be converted at any time to common stock and given no set term.
The Company recorded the October 12, 2018 issuance of 750 shares Series B Preferred Stock at approximately $0.4 million and the underlying Series 1, Series 2 and Series 3 warrants at approximately $0.3 million in total by allocating the gross proceeds to Series B preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $0.7 million associated with the issuance of the 750 shares of Series B preferred stock to additional paid-in capital. The Company then recorded interest of approximately $0.7 million for the BCF and warrant discounts as a first day interest given that Series B preferred shares can be converted at any time to common stock and given no set term.
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 issuances costs associated with the Series B preferred stock liability of $41,000 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 preferred stock was $50,000 during the quarter ended March 31, 2019, which is reflected in interest expense—preferred stock liability.
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 at March 31, 2019 and the total dividends of approximately $32,000 are treated as interest during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019.
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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 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.
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.
Redemption Rights
Following 30 days after the initial closing, 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 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, (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.
Subject to the satisfaction of certain circumstances, the Company had the option to compel the holders to exercise up to $250,000 of the Series 1 warrants 30 days after the initial closing of the sale of the preferred stock. On November 2, 2018, the Company notified the holders of the warrants of the Company’s election to compel the exercise of $245,625 of warrants, which exercise closed on or about November 12, 2018. In addition, 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 30 days following the Company’s payment of the call fee, provided that the warrant holders have not exercised the warrants prior to cancellation.
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Exercise of warrants
During the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019, the Company issued 1,275 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $1,252,688, upon exercise of 1,275 warrants issued by the Company in October 2018.
As of March 31, 2019, 6,725 Series 1-3 warrants to purchase 6,725 shares of Series B preferred stock were outstanding.
Conversion of preferred stock to common stock
In December, 2018, one preferred stockholder converted all of its 1,300 shares of Series B preferred stock into 12,734,258 shares of common stock; another preferred stockholder converted 10 shares of Series B preferred stock into 74,130 shares of common stock, with a total of 12,808,388 shares of common stock being issued upon conversion of the Series B preferred stock.
With regard to conversions, the Company reversed Series B preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately $963,000 based on the proportion of Series B preferred stock converted relative to the original total issued.
During the three months ended March 31, 2019, one preferred stockholder converted all of its 450 shares of Series B preferred stock into 5,730,883 shares of common stock; another preferred stockholder converted 504 shares of Series B preferred stock into 5,575,574 shares of common stock, with a total of 11,306,457 shares of common stock being issued upon conversion of the Series B preferred stock.
With regard to conversions, the Company reversed Series B preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately $761,000 based on the proportion of Series B preferred stock converted relative to the original total issued.
As of March 31, 2019, 1,027 shares of preferred stock were outstanding.
13. 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 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.
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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 preferred stock liability balance for the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019.
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| 2019 |
| |
Balance, beginning of period |
| $ | — |
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Issuance of preferred stock at fair value |
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| 1,116,000 |
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Issuance of preferred stock by exercise of 1,275 warrants |
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| 1,253,000 |
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Conversion of preferred stock to common stock |
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| (1,698,000 | ) |
Value of the warrants exercise |
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| 65,000 |
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Change in fair value of preferred stock (1) |
|
| (50,000 | ) |
5% dividend |
|
| 15,000 |
|
Balance, end of period |
| $ | 701,000 |
|
(1) | Change in fair value of preferred stock is reported in interest expense—preferred stock. |
14. Subsequent Events
From April 1, 20182019 to May 9, 2018,10, 2019, the Company has generated additionalissued 550 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of approximately $2.0 million under$540,000, upon exercise of 550 warrants issued by the Common Stock PurchaseCompany in October 2018, including 500 warrants exercised pursuant to the Issuance Agreement with Aspire Capital from the sale of approximately 8.0 million(as defined below). In addition, there were 375 preferred stock shares of itsconverted to 4,557,103 common stock.
On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (the “Issuance Agreement”) with the holders of its Series B preferred stock and warrants to purchase Series B preferred stock (collectively, the “Series B holders”), pursuant to which the Series B holders agreed to exercise warrants to purchase up to $2.5 million of Series B preferred stock through November 2019, subject to the conditions described therein. Pursuant to the Issuance Agreement, the Company also issued the Series B holders 100 shares of additional Series B preferred stock following the execution of the Issuance Agreement and agreed to issue up to an additional 400 shares of additional Series B preferred stock upon exercise of warrants to purchase Series B preferred stock. The Company also issued Series 4 warrants to purchase up to 2,500 shares of Series B preferred stock to the Series B holders following execution of the Issuance Agreement.
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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 dermatology, oncology, dermatology,anti-inflammatory and anti-infectivesantibiotic applications. The Company owns the rights to numerous drug compounds, including Brilacidin, our lead drug in a new class of compounds called defensin-mimetics;defensin-mimetics, and Kevetrin (thioureidobutyronitrile), our lead anti-cancer compound; and Prurisol (KM-133), which is in development for psoriasis.compound.
Effective June 5, 2017,Recent Developments
On January 7, 2019, Dr. Bertolino, the Company’s President and Chief Medical Officer, joined the Board of Directors. The Company is currently exploring options for further Board additions in preparation for late-stage clinical trials and ongoing portfolio development.
On January 29, 2019, Mr. Ehrlich, the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by the Company changedto satisfy the exercise price for the purchase of 909,090 Class B shares at the option exercise price of $0.11.
On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (the “Issuance Agreement”) with the holders of its nameSeries B preferred stock and warrants to purchase Series B preferred stock (collectively, the “Series B holders”), pursuant to which the Series B holders agreed to exercise warrants to purchase up to $2.5 million of Series B preferred stock through November 2019, subject to the conditions described therein. Pursuant to the Issuance Agreement, the Company also issued the Series B holders 100 shares of additional Series B preferred stock following the execution of the Issuance Agreement and agreed to issue up to an additional 400 shares of additional Series B preferred upon exercise of warrants to purchase Series B preferred stock. The Company also issued Series 4 warrants to purchase up to 2,500 shares of Series B preferred stock to the Series B holders following execution of the Issuance Agreement.
Business Development and Licensing
The Company is actively engaged in business development and licensing initiatives with multiple specialty and global pharmaceutical companies across its entire pipeline of drugs. 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.
Active Clinical Development Programs
Compound | Target/Indication | Clinical Status |
Brilacidin | Oral Mucositis | Phase 2 Study (completed)/Phase 3 in preparation |
Inflammatory Bowel Disease | Phase 2 Proof of Concept Study (completed) | |
ABSSSI (Acute Bacterial Skin and Skin Structure Infection) | Phase 2 (completed) | |
Kevetrin | Ovarian Cancer | Phase 2 Study (completed) |
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We have no product sales to date and we will not receive any product revenue until we receive approval from Cellceutix Corporationthe FDA or equivalent foreign regulatory agencies to Innovation Pharmaceuticals Inc.begin marketing a pharmaceutical product. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety or efficacy issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate for several years, if ever.
The Company devotes most of its efforts and resources on business developmentits compounds Brilacidin and theKevetrin, which are in clinical trials of its compounds.
Business Development Activities
The Company is engaged in discussions and negotiations regarding 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 one or more assets 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.
Recently, we released results from our completed Phase 2 Brilacidin study on Oral Mucositis. The results have attracted inquiries, additional confidential disclosure agreements, and discussions with pharmaceutical companies.
Clinical Development Programs
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.
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*ABSSSI- Acute Bacterial Skin and Skin Structure Infection **Qualified Infectious Disease Product
Recent Developments
In early 2018, the Company approved steps to focus its efforts on clinical trials for its lead drug candidates. The Company’s office and laboratory needs have shifted from compound discovery to clinical development programs. The Company is now in the process of searching sites for its future headquarters.
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”.
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.
Set forth below is an overview of our most recent research and development efforts on Brilacidin Kevetrin, and Prurisol during fiscal 2018 andKevetrin 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:
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”Two trials of defense in the immune system, it is a small, non-peptidic, synthetic molecule that kills pathogens swiftly and thoroughly. Just as importantly,topical Brilacidin also functions in a robust immunomodulatory capacity, lessening inflammation and promoting healing.
Topical Brilacidin Clinical Studies (Trials)
In October 2017, the Company completed,have been completed: a double-blind Phase 2 clinical trial of Brilacidin-OM for the treatment of oral mucositisOral Mucositis (OM). In July 2017, the Company completed; and an open-label Phase 2 Proof-of-Concept (PoC)(P-o-C) trial of Brilacidin for the treatment of ulcerative proctitis /proctosigmoiditisUlcerative Proctitis/Proctosigmoiditis (UP/UPS), two types of Inflammatory Bowel Diseases (IBD). Appropriate regulatory and other activities aimed at moving the programs forward into further clinical testing are currently underway.
Topical Administration (Oral Mucositis/IBD)
Oral Mucositis (OM) study: This completed study was a— In this randomized, double-blind placebo-controlled, Phase 2 clinical trialstudy of Brilacidin for the prevention and control of Oral Mucositis (OM)OM in patients receiving chemoradiation for treatment of Head and Neck Cancer. AnalysisCancer (HNC), 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.that Brilacidin oral rinse also appeared to be safe and well-tolerated.
Overall results were:
Relative risk reduction in severe Oral Mucositis (WHO Grade ≥ 3) in the Brilacidin-OM treatment group from that seen in the control group ([incidence control- incidence active]/incidence control) was: 28.5% (mITT population) and 38.7% (PP population).
Brilacidin appeared to be more effective with a cisplatin chemotherapy regimen administered approximately every 21 days vs. weekly administration. Brilacidinmarkedly reduced the incidencerate of severe OM (WHO Grade ≥3)≥ 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 subgroupU.S. Food and Drug Administration (FDA) have completed an End-of-Phase 2 meeting concerning the continuing development of patients receiving cisplatin administered as a high-dose regimen (80-100 mg/m2) approximately every 21 days comparedBrilacidin oral rinse to placebo. For the mITT population,decrease the incidence of severe OM in the placebo subgroup was 71.4%, whereas the incidence for theHNC patients receiving chemoradiation. Both parties agreed to an acceptable Brilacidin subgroup was reduced to 25.0% (p=0.048). For the PP population, the incidence ofPhase 3 development pathway, including studying Brilacidin oral rinse effects on severe OM when cisplatin, the preferred chemotherapy regimen in the placebo subgroup was 72.7%, whereas the incidence for the Brilacidin subgroup was reduced to 14.3% (p=0.025). In addition, time to onset of severe OM was delayed with Brilacidin treatment compared to placebo, even more markedlyHNC care, is administered in the 21-day cisplatin regimen subset.
The relative risk reduction in the incidence of severe OM, Brilacidin compared to placebo, for the approximatelyhigher concentrations (80-100 mg/m2) every 21 days, cisplatin regimen subset is 65.0% (mITT population) and 80.3% (PP population).
The Company believes that Brilacidin-OM, with its granted Fast Track FDA designation, occupies a lead position among OM drug candidates currently advancing in competitive clinical pipelines.at lower concentrations (30-40 mg/m2) administered weekly as part of the chemoradiation regimen.
Ulcerative proctitis /proctosigmoiditisIBD (UP/UPS) study: The completed — This Phase 2a trial comprised ofcomprises three sequential cohorts, with progressive dose escalation by cohort—Cohortcohort A (6 patients) -50- 50 mg, Cohortcohort B (6 patients) - 100 mg, and Cohortcohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The Primary Efficacy Endpointprimary efficacy endpoint of Clinical Remissionclinical remission (accounting for Stool Frequency, Rectal Bleedingstool frequency, rectal bleeding and Endoscopy Findingsendoscopy findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient Qualityquality of Lifelife (as assessed by the Short Inflammatory Bowel Disease Questionnaireshort inflammatory bowel disease questionnaire, or “SIBDQ”)SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. To obtain maximum value of the Brilacidin-IBD asset, the Company plans to develop the drug candidate as an oral dose (pill or tablet). The Company has completed early testing evaluating the stability of Brilacidin in simulated gastric fluid—a synthetic form of the fluid found in the stomach. Results showed very minimal degradation of Brilacidin across 4 hours, suggesting a simple formulation of Brilacidin likely would not be subject to rapid breakdown once in the stomach. This finding should enable initial clinical testing with a simple formulation of the drug candidate delivered to the gut while a more elegant, tailored oral dosage form of Brilacidin is developed and refined, in parallel. Planned next steps in the development of Brilacidin for oral delivery include clinical testing of Brilacidin in healthy volunteers to assess safety and toleration, the pharmacokinetic profile and effects on the gut’s microbiome. Clinical trials in IBD including Ulcerative Colitis and Crohn’s Disease, would then follow.
From these results,As stated above, we see significant opportunities in more broadly treating Inflammatory Bowel Disease (IBD)Oral Mucositis and IBD with Brilacidin. Our development programs depending on available financial resources include new formulations (oralThese data also suggest that other inflammatory conditions including various dermatology disorders and foam type)conditions may, likewise, be treated locally and efficaciously with potential associated toxicology studies and clinical studies to be defined.Brilacidin.
| 26 |
| Table of Contents |
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-positivegram-positive bacteria, including methicillin-resistant Staphylococcus aureus (MRSA). We received from the FDA 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 approximateapproximately $30 million costs required for this study, the financing of which would likely result in significant dilution to our shareholders. Our strategy, for now, is to achieve success with other trials and attract partnering opportunities withthat may provide significant down-paymentsupfront payments and milestone payments, which can then be used to fund these trials.the ABSSSI program. Although we recognize significant generic competition for treating ABSSSI, pharmaceutical industry and governmental interest is re-emerging to develop novel anti-infectives given growing bacterial resistance to current antibiotics, thereby supporting the potential value of Brilacidin in treating infectious disease. We also see ABSSSI as the appropriate gateway indication in infectious diseases, enabling potential further studies of Brilacidin’s use for implant coating and biofilm infections.
Our expendituresExpenditures on Brilacidin were approximately $1.5$1.2 million and $1.3$1.5 million during the nine months ended March 31, 20182019 and 2017,2018, respectively.
Kevetrin
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.
The main objective of the Company’sCompany has completed a Phase 2a trial of Kevetrin in treating late-stage ovarian cancer was to confirmOvarian Cancer. The main objective of the trial focused on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. This goalThe study was met with positive data from the first patients treated, showing direct evidencesuccessful in demonstrating modulation of molecular pathways modulationp53 directly in tumors. Modulationovarian cancer tumor tissue in patients. We are currently focused on development of the p53 protein was observed in response to administrationan oral formulation of Kevetrin; pathways analyses also pointed to concomitant cell cycle modulation at the level of gene expression. The Company believes that further pathways details and clinical tumor responses would best be explored with more frequent and potentially higher systemic drug exposure.Kevetrin for treating cancer. Pharmacokinetic data collected on Kevetrin during the initial Phase 1 clinical trial demonstrates that the compound has a short half-life of approximately two hours. Kevetrin’s short half-life makes it a compelling candidate 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. The Company has completedToxicology studies for the oral formulation of Kevetrin are approximately half the Toxicology studies to support progression to oral dosing in humans, butcompleted, with the remainder of this work is on hold untilnow prioritized as the Company secures additional financial resources. Next steps in the development of Kevetrin include: completing toxicology work for an oral formulation; developing the oral formulation (pill or tablet); requesting an FDA meeting to discuss trial results to date and the design of future trials; and performing a dosing safety study in healthy volunteers once the oral formulation has been developed. Once completed, these steps would likely lead directly to Phase 2 testing of oral Kevetrin in both solid tumors and leukemias, with ovarian cancer likely continuing to be the lead indication.
Our expendituresExpenditures on Kevetrin were approximately $0.3$0.1 million and $0.7$0.3 million during the nine months ended March 31, 20182019 and 2017,2018, respectively.
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.
The Company recently completed a randomized, double-blind, parallel-group, placebo-controlled Phase 2b trial of Prurisol for patients with moderate to severe plaque psoriasis. The treatment group arms are Prurisol 300mg, Placebo, Prurisol 400mg (Ratio 3:3:1) with a treatment duration of twelve weeks.Going Concern
We are currently awaiting data fromhave identified conditions and events that raise substantial doubt about our ability to continue as a going concern. At March 31, 2019, the trial. Our expenditures on Prurisol were approximately $3.8Company’s cash amounted to $0.5 million and $2.7current liabilities amounted to $7.7 million, during the nine months ended March 31, 2018 and 2017, respectively.
Future expenditures on Prurisol will be determined by the trial results, when available.
Compoundsof which $6.7 million were payables to related parties with Activity Against Gram-Negative Bacteria and Fungi
As research at theno immediate payment terms. The Company is now focused on supporting its clinical trials, we have reduced costs associated with the licensing of intellectual property for gram-negative bacteria and anti-fungal compounds by returning our patent portfolio titled “Compounds and Methods for Treating Candidiasis and Aspergillus Infections” back to the university co-licensor. The Company at this timea development stage pharmaceutical company that has no sales as it does not have any active gram-negativeproducts in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary FDA and/ or anti-fungal programs and therefore has decided notother health authorities approval. As a result, the Company expects to paycontinue to incur losses over the next 12 months from the date of this filing. Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $12.5 million for the maintenancenext twelve months, raise doubt about its ability to continue as a going concern. If we are not able to continue as a going concern, it is likely that holders of these Patent Rights.our common stock will lose all of their investment. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
To continue as a going concern, we must secure additional funding to support our current operating plan in the fiscal quarter ended June 30, 2019. The net book value ofCompany 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 impaired patent as of March 31, 2018 is not material.availability or terms upon which such financing and capital might be available.
| 27 |
| Table of Contents |
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our accompanying condensed consolidated financial statements, which have been prepared in conformity with 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. 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 the condensed consolidated financial statements included in 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, 2017.2018. 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, 2017.2018.
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 expect that our general and administrative expenses will also increase in the future as we expand our business development, by adding employees, consultants, additional infrastructure and incurring other additional costs. Based upon our expected rate of expenditures over the next twelve months and beyond, we will need additional working capital to meet our anticipated clinical trial obligations and other working capital requirements.
For the three months ended March 31, 2018 2019 and 20172018
Revenue
We generated no revenue and incurred operating expenses of approximately $2.4$1.1 million and $3.9$2.4 million for the three months ended March 31, 20182019 and 2017,2018, respectively.
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 March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| For the three months ended |
| Change |
|
| For the three months ended |
| Change |
| ||||||||||||||||||||||
|
| March 31 |
| 2018 vs. 2017 |
|
| March 31, |
| 2019 vs. 2018 |
| ||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Clinical studies and development research |
| $ | 1,040,000 |
| $ | 2,119,000 |
| (1,079,000 | ) |
| -51 | % |
| $ | 128,000 |
| $ | 1,040,000 |
| $ | (912,000 | ) |
| -88 | % | |||||||
Officers’ payroll and payroll tax expenses related to R&D Department |
| 174,000 |
| 232,000 |
| (58,000 | ) |
| -25 | % |
| 120,000 |
| 174,000 |
| (54,000 | ) |
| -31 | % | ||||||||||||
Employees payroll and payroll tax expenses related to R&D Department |
| 192,000 |
| 392,000 |
| (200,000 | ) |
| -51 | % |
| 84,000 |
| 192,000 |
| (108,000 | ) |
| -56 | % | ||||||||||||
Stock-based compensation - officers |
| 144,000 |
| 283,000 |
| (139,000 | ) |
| -49 | % | ||||||||||||||||||||||
Stock-based compensation - employees |
| 41,000 |
| 48,000 |
| (7,000 | ) |
| -15 | % | ||||||||||||||||||||||
Stock-based compensation - consultants |
| 80,000 |
| 5,000 |
| 75,000 |
| 1,500 | % | |||||||||||||||||||||||
Stock-based compensation – officers |
| 222,000 |
| 144,000 |
| 78,000 |
| 54 | % | |||||||||||||||||||||||
Stock-based compensation – employees |
| 41,000 |
| 41,000 |
| - |
| 0 | % | |||||||||||||||||||||||
Stock-based compensation – consultants |
| 19,000 |
| 80,000 |
| (61,000 | ) |
| -76 | % | ||||||||||||||||||||||
Depreciation and amortization expenses |
|
| 105,000 |
|
|
| 103,000 |
|
|
| 2,000 |
|
|
| 2 | % |
|
| 93,000 |
|
|
| 105,000 |
|
|
| (12,000 | ) |
|
| -11 | % |
Total |
| $ | 1,776,000 |
|
| $ | 3,182,000 |
|
|
| (1,406,000 | ) |
|
| -44 | % |
| $ | 707,000 |
|
| $ | 1,776,000 |
|
| $ | (1,069,000 | ) |
|
| -60 | % |
| 28 |
| Table of Contents |
Research and development expenses for proprietary programs decreased during the three months ended March 31, 20182019 primarily due to lowerless spending on our Brilacidin program and Prurisol program.
Officers’ payroll decreased due to the reduction in salary of one officer, which became effective on January 16, 2018.programs. Clinical studies and development expenses may decrease in future reporting periods depending on the Company’s current and future financial liquidity.
Officers’ payroll decreased during the three months ended March 31, 2019 because the Company’s President of Research resigned in September 2018, which led to the decrease in officers’ payroll during the quarter ended March 31, 2019.
Employees payroll and payroll tax expenses decreased during the three months ended March 31, 20182019 related to fewer employees engaged in preclinical development in September, 2017,after March 31, 2018, which led to the decrease in employees’ payroll during the quarter ended March 31, 2018.2019.
Stock- basedStock-based compensation - officers decreasedincreased during the three months ended March 31, 20182019 primarily related to thebecause of 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.September 1, 2018.
Stock-based compensation- employee decreasedcompensation - employees was not changes during the three months ended March 31, 20182019 due to the decreasesame vesting in the number of stock awards granted to employees during the quarter ended March 31, 20182019 compared with the same period in 2017.2018.
Stock-based compensation- consultant increasedcompensation - consultants decreased during the three months ended March 31, 20182019 due to moreonly two stock awards werebeing granted to two consultants during the quarter ended March 31, 2018.2019.
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. 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 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, facilities, depreciation and other office expenses.
Below is a summary of our general and administrative expenses for the three months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| For the three months ended |
| Change |
|
| For the three months ended |
| Change |
| ||||||||||||||||||||||
|
| March 31 |
| 2018 vs. 2017 |
|
| March 31, |
| 2019 vs. 2018 |
| ||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Insurance and health expense |
| $ | 112,000 |
| $ | 127,000 |
| (15,000 | ) |
| -12 | % |
| $ | 121,000 |
| $ | 112,000 |
| $ | 9,000 |
| 8 | % | ||||||||
Rent and utility expense |
| 64,000 |
| 70,000 |
| (6,000 | ) |
| -9 | % |
| 59,000 |
| 64,000 |
| (5,000 | ) |
| -8 | % | ||||||||||||
Other G&A |
|
| 119,000 |
|
|
| 134,000 |
|
|
| (15,000 | ) |
|
| -11 | % |
|
| 70,000 |
|
|
| 119,000 |
|
|
| (49,000 | ) |
|
| -41 | % |
Total |
| $ | 295,000 |
|
| $ | 331,000 |
|
|
| (36,000 | ) |
|
| -11 | % |
| $ | 250,000 |
|
| $ | 295,000 |
|
| $ | (45,000 | ) |
|
| -15 | % |
| 29 |
| Table of Contents |
General and administrative expenses decreased during the three months ended March 31, 20182019 primarily related to the decreases in promotion, advertising and office expenses.expenses offset by increases in insurance expense.
Officers’ Payroll and Payroll Tax Expenses
Below is a summary of our Officers’ payroll and payroll tax expenses for the three months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| Three months ended |
|
| Change |
| ||||||||||
|
| March 31 |
|
| 2018 vs. 2017 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Officers’ payroll and payroll tax expenses |
| $ | 132,000 |
|
| $ | 138,000 |
|
|
| (6,000 | ) |
|
| -4 | % |
|
| Three months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2019 vs. 2018 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Officers’ payroll and payroll tax expenses |
| $ | 126,000 |
|
| $ | 132,000 |
|
| $ | (6,000 | ) |
|
| (5 | )% |
Officers’ payroll and payroll tax expenses for the Company was decreased during the three months ended March 31, 20182019. The Company previously recorded 10% of payroll and 2017.payroll tax expenses paid for Dr. Menon under Officers’ Payroll and Payroll Tax Expenses and recorded 90% of payroll paid to Dr. Menon under Research and Development Expense. The decrease in officers’ payroll and payroll tax expenses represented one officer’s payroll and payroll tax expenses andfor the Company during the three ended March 31, 2019 was mainly because of the decrease in the 10% of payroll and payroll tax expenses paid for Dr. Menon. TheDr. Menon’s employment was terminated with the Company recorded 90% of payroll paid toon September 18, 2018, and Dr. Menon andresigned from the related payroll tax expenses under Research and Development Expense.
Professional Fees
Below is a summary of our Professional fees for the three months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| Three months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2018 vs. 2017 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Audit, legal and professional fees |
| $ | 195,000 |
|
|
| 201,000 |
|
|
| (6,000 | ) |
|
| -3 | % |
|
| Three months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2019 vs. 2018 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Audit, legal and professional fees |
| $ | 45,000 |
|
| $ | 195,000 |
|
| $ | (150,000 | ) |
|
| (77 | )% |
Professional fees decreased during the three months ended March 31, 20182019 primarily related to decrease in legal fees.fees and other professional fees for less legal review of various contracts in 2019.
Other Income (Expense)
Below is a summary of our other income (expense) for the three months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| Three months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2018 vs. 2017 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest Income |
| $ | - |
|
|
| - |
|
|
| - |
|
|
| - | % |
Interest Expenses |
|
| (51,000 | ) |
|
| (51,000 | ) |
|
| - |
|
|
| - | % |
Other Income (Expense), net |
| $ | (51,000 | ) |
|
| (51,000 | ) |
|
| - |
|
|
| - | % |
|
| Three months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2019 vs. 2018 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense – debt |
| $ | (44,000 | ) |
| $ | (51,000 | ) |
| $ | (7,000 | ) |
|
| (14 | )% |
Interest expense – preferred stock liability |
|
| (15,000 | ) |
|
| - |
|
|
| 15,000 |
|
|
| 100 | % |
Change in fair value – Series B preferred stock |
|
| 50,000 |
|
|
| - |
|
|
| (50,000 | ) |
|
| 100 | % |
Other Income (Expense), net |
| $ | (9,000 | ) |
| $ | (51,000 | ) |
| $ | (42,000 | ) |
|
| (84 | )% |
There was no change in interest income from bank deposits and there was no changea decrease in interest expenses paid on the note payable – related party, because the Company’s Chairman and CEO cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 Class B shares at the option exercise price of $0.11 on January 29, 2019 (see Note 9 to the notes to the condensed consolidated financial statements).
There was an increase in interest expense – preferred stock liability of approximately $15,000 relating to the accrued dividend payable to the Series B preferred stock that has been recorded as a liability on the accompanying balance sheets. There was an increase in change in value related to Series B preferred stock (see Note 12 to the notes to the condensed consolidated financial statements).
| 30 |
| Table of Contents |
Net Losses
We incurred net losses of $2.4$1.1 million and $3.9$2.4 million for the three months ended March 31, 20182019 and 2017,2018, respectively because of the above-mentioned factors.
For the nine months ended March 31, 20182019 and 20172018
Revenue
We generated no revenue and incurred operating expenses of approximately $11.4$5.1 million and $10.1$11.3 million for the nine months ended March 31, 2019 and 2018, and 2017, respectively.
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 nine months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| For the nine months ended |
| Change |
|
| For the nine months ended |
| Change |
| ||||||||||||||||||||||
|
| March 31, |
| 2018 vs. 2017 |
|
| March 31, |
| 2019 vs. 2018 |
| ||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Clinical studies and development research |
| $ | 6,164,000 |
| $ | 5,129,000 |
| $ | 1,035,000 |
| 20 | % |
| $ | 1,542,000 |
| $ | 6,164,000 |
| $ | (4,622,000 | ) |
| -75 | % | |||||||
Officers’ payroll and payroll tax expenses related to R&D Department |
| 615,000 |
| 685,000 |
| (70,000 | ) |
| -10 | % |
| 466,000 |
| 615,000 |
| (149,000 | ) |
| -24 | % | ||||||||||||
Employees payroll and payroll tax expenses related to R&D Department |
| 784,000 |
| 1,001,000 |
| (217,000 | ) |
| -22 | % |
| 379,000 |
| 784,000 |
| (405,000 | ) |
| -52 | % | ||||||||||||
Stock-based compensation - officers |
| 1,470,000 |
| 861,000 |
| 609,000 |
| 71 | % | |||||||||||||||||||||||
Stock-based compensation - employees |
| 115,000 |
| 110,000 |
| 5,000 |
| 5 | % | |||||||||||||||||||||||
Stock-based compensation - consultants |
| 80,000 |
| 55,000 |
| 25,000 |
| 45 | % | |||||||||||||||||||||||
Stock-based compensation – officers |
| 620,000 |
| 1,470,000 |
| (850,000 | ) |
| -58 | % | ||||||||||||||||||||||
Stock-based compensation – employees |
| 134,000 |
| 115,000 |
| 19,000 |
| 17 | % | |||||||||||||||||||||||
Stock-based compensation – consultants |
| 44,000 |
| 80,000 |
| (36,000 | ) |
| -45 | % | ||||||||||||||||||||||
Depreciation and amortization expenses |
|
| 316,000 |
|
|
| 301,000 |
|
|
| 15,000 |
|
|
| 5 | % |
|
| 278,000 |
|
|
| 316,000 |
|
|
| (38,000 | ) |
|
| -12 | % |
Total |
| $ | 9,544,000 |
|
| $ | 8,142,000 |
|
| $ | 1,402,000 |
|
|
| 17 | % |
| $ | 3,463,000 |
|
| $ | 9,544,000 |
|
| $ | (6,081,000 | ) |
|
| -64 | % |
Research and development expenses for proprietary programs increaseddecreased during the nine months ended March 31, 20182019 primarily due to higherless spending on our Brilacidin programprograms due to our current lack of working capital. Clinical studies and Prurisol program.development expenses will continue to decrease in future reporting periods if there is no increase in the Company’s financial liquidity.
Officers’ payroll decreased dueduring the nine months ended March 31, 2019 because the Company’s President of Research resigned in September 2018, which led 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 onofficers’ payroll during the Company’s current and future financial liquidity.nine months ended March 31, 2019.
Employees payroll and payroll tax expenses decreased during the nine months ended March 31, 2019 related to fewer employees engaged in preclinical development after March 31, 2018, relatedwhich led to the decrease in employeesemployees’ payroll during the nine months ended March 31, 2018.2019.
Stock-based compensation - officers increaseddecreased during the nine months ended March 31, 2019 because stock-based compensation - officers expenses in 2018 primarily related to the stock-based compensation given to our President and Chief Medical Officer on September 1, 2017 and the stockstocks and options granted to our new President and Chief Medical Officer on June 27, 20162017 that became fully vested and expensed due to the completed clinical trial milestones in December 2017.
Stock-based compensation- employeecompensation - employees increased during the nine months ended March 31, 20182019 due to the increase vesting in the number of stock awards granted to employees during the nine months ended March 31, 20182019 compared with the same period in 2017.2018.
Stock-based compensation-compensation - consultants increaseddecreased during the nine months ended March 31, 20182019 due to granting moreless stock awards being granted to consultants during the nine months ended March 31, 2018.2019.
| 31 |
| Table of Contents |
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. 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 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, facilities, depreciation and other office expenses.
Below is a summary of our general and administrative expenses for the nine months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| For the nine months ended |
| Change |
|
| For the nine months ended |
| Change |
| ||||||||||||||||||||||
|
| March 31, |
| 2018 vs. 2017 |
|
| March 31, |
| 2019 vs. 2018 |
| ||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Insurance and health expense |
| $ | 348,000 |
| $ | 385,000 |
| (37,000 | ) |
| -10 | % |
| $ | 376,000 |
| $ | 348,000 |
| $ | 28,000 |
| 8 | % | ||||||||
Rent and utility expense |
| 191,000 |
| 200,000 |
| (9,000 | ) |
| -5 | % |
| 181,000 |
| 191,000 |
| (10,000 | ) |
| (5 | )% | ||||||||||||
Patent write off expense |
| 155,000 |
| - |
| 155,000 |
| 100 | % | |||||||||||||||||||||||
Other G&A |
|
| 350,000 |
|
|
| 452,000 |
|
|
| (102,000 | ) |
|
| -23 | % |
|
| 230,000 |
|
|
| 350,000 |
|
|
| (120,000 | ) |
|
| (34 | )% |
Total |
| $ | 889,000 |
|
|
| 1,037,000 |
|
|
| (148,000 | ) |
|
| -14 | % |
| $ | 942,000 |
|
| $ | 889,000 |
|
| $ | 53,000 |
|
|
| 6 | % |
General and administrative expenses decreasedincreased during the nine months ended March 31, 20182019 primarily related to increases in insurance expense and patent write off expenses offset by the decreases in promotion, advertising and office expenses.
Officers’ Payroll and Payroll Tax Expenses
Below is a summary of our Officers’ payroll and payroll tax expenses for the nine months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| Nine months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2018 vs. 2017 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Officers’ payroll and payroll tax expenses |
| $ | 392,000 |
|
| $ | 398,000 |
|
| $ | (6,000 | ) |
|
| -2 | % |
|
| For the nine months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2019 vs. 2018 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Officers’ payroll and payroll tax expenses |
| $ | 367,000 |
|
| $ | 392,000 |
|
| $ | (25,000 | ) |
|
| (6 | )% |
Officers’ payroll and payroll tax expenses for the Company was decreased during the nine months ended March 31, 20182019 and 2017.2018. The Company previously recorded 10% of payroll and payroll tax expenses paid for Dr. Menon under Officers’ Payroll and Payroll Tax Expenses and recorded 90% of payroll paid to Dr. Menon under Research and Development Expense. The decrease in officers’ payroll and payroll tax expenses represented one officer’s payrollfor the Company during the nine ended March 31, 2019 and payroll tax expenses and2018 mainly because of the decrease in the 10% of payroll and payroll tax expenses paid for Dr. Menon. TheDr. Menon’s employment was terminated with the Company recorded 90% of payroll paid toon September 18, 2018, and Dr. Menon andresigned from the related payroll tax expenses under Research and Development Expense.Company’s Board of Directors on December 11, 2018.
| 32 |
| Table of Contents |
Professional Fees
Below is a summary of our Professional fees for the nine months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| Nine months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2018 vs. 2017 |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Audit, legal and professional fees |
| $ | 525,000 |
|
| $ | 562,000 |
|
| $ | (37,000 | ) |
|
| -7 | % |
|
| For the nine months ended |
|
| Change |
| ||||||||||
|
| March 31, |
|
| 2019 vs. 2018 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Audit, legal and professional fees |
| $ | 349,000 |
|
| $ | 525,000 |
|
| $ | (176,000 | ) |
|
| (34 | )% |
Professional fees decreased during the nine months ended March 31, 20182019 primarily related to decrease in legal fees.fees for less legal review of various contracts in 2018.
Other Income (Expense)
Below is a summary of our other income (expense) for the nine months ended March 31, 20182019 and 2017,2018, respectively (rounded to nearest thousand):
|
| Nine months ended |
| Change |
|
| For the nine months ended |
| Change |
| ||||||||||||||||||||||
|
| March 31, |
| 2018 vs. 2017 |
|
| March 31, |
| 2019 vs. 2018 |
| ||||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| $ |
|
| % |
|
| 2019 |
|
| 2018 |
|
| $ |
|
| % |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Interest Income |
| $ | 1,000 |
| $ | 2,000 |
| $ | (1,000 | ) |
| -50 | % |
| $ | - |
| $ | 1,000 |
| $ | 1,000 |
| (100 | )% | |||||||
Interest Expenses |
|
| (152,000 | ) |
|
| (152,000 | ) |
|
| - |
|
|
| - | % | ||||||||||||||||
Other Income |
| 40,000 |
| - |
| (40,000 | ) |
| 100 | % | ||||||||||||||||||||||
Interest expense – debt |
| (145,000 | ) |
| (152,000 | ) |
| (7,000 | ) |
| (5 | )% | ||||||||||||||||||||
Interest expense – preferred stock liability |
| (1,990,000 | ) |
| - |
| 1,990,000 |
| 100 | % | ||||||||||||||||||||||
Change in fair value – Series B preferred stock |
|
| 50,000 |
|
|
| - |
|
|
| (50,000 | ) |
|
| 100 | % | ||||||||||||||||
Other Income (Expense), net |
| $ | (151,000 | ) |
| $ | (150,000 | ) |
| $ | (1,000 | ) |
|
| 1 | % |
| $ | (2,045,000 | ) |
| $ | (151,000 | ) |
| $ | 1,894,000 |
|
|
| 1254 | % |
There was slighta decrease in interest income fromof approximately $1,000 relating to the decrease in bank deposits and theredeposits. There was no changean increase in other income of approximately $40,000 which represented the gain on disposal of lab equipment.
There was a decrease in interest expenses paid on the note payable – related party, because the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 Class B shares at the option exercise price of $0.11 on January 29, 2019 (see Note 9 to the notes to the condensed consolidated financial statements).
There was an increase in interest expense – preferred stock liability of approximately $1,990,000 relating to the issuance of Series B preferred stock that has been recorded as a liability on the accompanying balance sheets. There was an increase in change in value related to Series B preferred stock (see Note 12 to the notes to the condensed consolidated financial statements).
Net Losses
We incurred net losses of $11.5$7.2 million and $10.3$11.5 million for the nine months ended March 31, 20182019 and 2017,2018, respectively because of the above-mentioned factors.
Liquidity and Capital Resources
Projected Future Working Capital Requirements - Next 12 Months
As of March 31, 2019, we had approximately $0.5 million in cash compared to $2.4 million of cash as of June 30, 2018. On October 5, 2018, the Company entered into a securities purchase agreement with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock for aggregate gross proceeds of approximately $2.0 million. Under the securities purchase agreement, the Company also issued to the investors Series 1-2 warrants to purchase up to an additional 8,000 shares of preferred stock for an aggregate purchase price of approximately $7.9 million. The Company received the proceeds from exercise of 1,275 Series 1-2 warrants of approximately $1.3 million during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019. As of March 31, 2019, 1,227 shares of preferred stock were outstanding and 6,725 Series 1-3 warrants to purchase 6,725 shares of Series B preferred stock were outstanding. 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 has agreed to issue up to an additional 500 shares of Series B preferred stock and 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 $2.5 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds or other funds will be available when needed.
| Table of Contents |
Liquidity and Capital Resources
Projected Future Working Capital Requirements - Next Twelve Months
As of March 31, 2018, we had approximately $1.3 million in cash compared to $4.1 million of cash as of June 30, 2017. We have raised approximately $2.0 million from our stock purchase agreement with Aspire Capital from April 1, 2018 to the date of this filing. We have raised approximately $7.8 million from the sale of our common stock for the nine months ended March 31, 2018.
We anticipate that future budget expenditures maywill be approximately $12.2$12.5 million for the next twelve months, including approximately $8.2$7.5 million for clinical activities, supportive research, and drug product development. We will require additional sources of capital during fiscal years 2018 and 2019 in order to meet these budgeted working capital requirements.product. 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. We
Our ability to successfully raise sufficient funds through the sale of equity securities, to meet our current and future operating expenditures is uncertain and subject to market conditions generally, the market for our common stock, and our ability to sell our common stock and other risks. These factors, among others, raise substantial doubt about our ability to continue as a going concern for the next 12 months. If we are unable to raise funds to meet our current and future obligations, we will presently needbe forced to significantly reduce our spending on our clinical development programs as wecease all operations, in which event investors may lose their entire investment in the Company. Our financial statements do not haveinclude any adjustments that might result from the adequate financial resources, as of the dateoutcome of this filing,uncertainty. See Note 2 to fully executethe condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our clinical programs.liquidity and the conditions and events which raise substantial doubt regarding our ability to continue as a going concern.
We are actively engagedOne future potential source of cash available to us in licensing discussions with global pharmaceutical companies. Successfully securing partnerships would afford the Company access to immediate and potentially recurring sourcesfuture is from the issuances of non-dilutive capital,our equity securities, including upfront fees, milestone-based payments and tiered royalties. There can be no assurance that the Company will be successful in these business development activities.
On September 6, 2017, the Company entered into a $30 millionthrough our common stock purchase agreement with Aspire Capital which replacedFund, LLC (“Aspire Capital”) dated September 6, 2017, and the prior $30 millionexercise of warrants issued under the October 2018 securities purchase agreement and May 2019 Issuance Agreement. As of date of this report, the conditions for sales under the Aspire Capital purchase agreement are not satisfied and no sales may occur thereunder. In particular, the common stock purchase agreement and provides that upon the termsCompany and Aspire Capital will not effect any sales under the agreement when the closing sales price of our common stock is less than $0.25 per share. In recent months, our common stock has traded below this threshold, and there is substantial uncertainty regarding our continued ability to sell shares under the common stock purchase agreement. In addition, the October 2018 securities purchase agreement prohibits sales under the Aspire Capital purchase agreement through January 10, 2019, with sales thereafter subject to the conditions and limitations set forth therein, Aspire Capitalsatisfaction of certain conditions.
Our current projected average monthly cash flow shortfall is committedanticipated to purchase up to an aggregate of $30.0 millionaverage approximately $700,000 per month for the next 12 months from the date of the Company’s common stock over the 36-month termfiling of the Purchase Agreement. During the period from September 6, 2017this report. We are working to March 31, 2018, the Company has generated proceedsreduce our projected monthly cash flow shortfall and we are currently seeking new sources of approximately $5.7 million under this agreement with Aspire Capital from the sale of approximately 8.7 million shares of its common stock. As of March 31, 2018 the available balance is approximately $24.3 million. Our ability to continuefinancing to fund our additional research and development activities and corporate overheadwork over the next 12 months from the date of this filing. We have the ability to delay incurring certain operating expenses and continue as a going concern has been and continues to be dependent on this stock purchase agreement or similar agreements with Aspire Capital.in the next 12 months, which could reduce our cash flow shortfall, if needed.
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”"Risk Factors" in Part I, Item 1A and elsewhere inof our Annual Report on Form 10-K and in this report under “Part II, Item 1A, Risk Factors.” 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 agreement with Aspire Capitalagreements when needed or secure additional sources of funding, from others, we may be required towill 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
The Company has an effective shelf registration statement on Form S-3, registering the sale of up to $75 million of the Company’s securities. The Company filed the Form S-3 with the SEC on September 11, 2017, which included registering the shares underlying the 2017 $30 million Aspire Capital stock purchase agreement. Pursuant to the instructions to Form S-3, if the Company’s non-affiliate market capitalization as of an applicable measurement time, such as upon the filing of the Company’s Annual Report on Form 10-K, does not equal or exceed $75 million, the Company will be unable to offer and sell securities from its effective shelf registration statement on Form S-3, and the Company will have to use a registration statement for which it is eligible, such as Form S-1, to offer and sell securities.
Cash Flows
The following table provides information regarding our cash position, cash flows and capital expenditures for the nine months ended March 31, 2018 and 2017 (rounded to nearest thousand):
|
| Nine Months Ended |
|
| % Change |
| ||||||
|
| March 31 |
|
| Increase/ |
| ||||||
|
| 2018 |
|
| 2017 |
|
| (Decrease) |
| |||
|
|
|
|
|
|
|
|
|
| |||
Net cash used in operating activities |
| $ | (10,362,000 | ) |
| $ | (7,949,000 | ) |
|
| 30 | % |
Net cash used in investing activities |
|
| (108,000 | ) |
|
| (319,000 | ) |
|
| (66 | )% |
Net cash provided by financing activities |
|
| 7,665,000 |
|
|
| 7,571,000 |
|
|
| 1 | % |
Net decrease in cash |
| $ | (2,805,000 | ) |
| $ | (697,000 | ) |
|
| (302 | )% |
Operating activities
The increase in net cash used in operating activities of $2.4 million versus the prior-year nine-month period was mainly due to increase in our losses from operations of $1.2 million as adjusted for the changes in our working capital accounts.
Investing activities
The decrease in net cash used in investing activities of $0.2 million versus the prior-year nine-month period was mainly due to decrease in purchases of patents of $0.2 million.
During the nine months ended March 31, 2018, our investing activities used cash of $0.1 million, mainly including the purchases of patents of $0.1 million.
During the nine months ended March 31, 2017, our investing activities used cash of $0.3 million, mainly including the purchases of patents of $0.3 million.
Financing activities
The increase in net cash provided by financing activities of approximately $0.1 million versus the prior-year nine-month period was due to an increase in sales of shares of our common stock to Aspire Capital.
During the nine months ended March 31, 2018, we raised approximately $7.8 million in net cash proceeds from the sale of 11.3 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 nine months ended March 31, 2017, we raised approximately $7.6 million in net cash proceeds, including $5.4 million in net proceeds from the sale of 5.3 million shares of our common stock to Aspire and $2.2 million in net proceeds from the sale of 2.5 million shares of our common stock at $0.89 per share in a registered direct offering, without an underwriter or placement agent on March 28, 2017.
Requirement for Additional Working Capital
The Company plans to incur total expenses of approximately $12.2 million for the next twelve months, including approximately $8.2 million for clinical activities, supportive research, and drug product development. The Company has limited experience with pharmaceutical drug development. As such, 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 if it is not successful with its business development efforts or without accessing its financing available with Aspire Capital of approximately $24.3 million as of March 31, 2018. Management has put in place this new 2017 stock 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. Management believes, as of the date of this filing that the funding amount from Aspire Capital will be available as needed by the Company. Adverse market conditions in the Company’s per share price of its common stock and its trading volume may prevent the Company from funding its working capital requirements as needed.
In the event that we are unable to generate sufficient cash from our Aspire Capital purchase agreementPurchase 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 availableavailable. The accompanying condensed consolidated financial statements do not include any adjustments related to us.the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern.
| 34 |
| Table of Contents |
Contractual Obligations$75 Million Shelf Registration Statement
Below isThe Company has an effective shelf registration statement on Form S-3, registering the sale of up to $75 million of the Company’s securities. The Company filed with the Securities and Exchange Commission (i) a prospectus supplement, dated November 13, 2017, registering up to $30 million of our common stock that have been or may be offered and sold to Aspire Capital from time to time, (ii) a prospectus supplement, dated June 28, 2018, registering $7.0 million of our common stock and warrants to purchase 8.0 million shares of our common stock in a registered direct offering, (iii) a prospectus supplement, dated October 5, 2018, registering $10.0 million of our preferred stock, warrants to purchase preferred stock, and underlying shares of our common stock in a registered direct offering, and (iv) a prospectus supplement, dated May 9, 2019, registering $2.5 million of our preferred stock, warrants to purchase preferred stock, and underlying shares of our common stock in a registered direct offering, leaving approximately $20.5 million available under the Company’s effective shelf registration statement. Depending on the Company’s public float, the Company may not be eligible to utilize Form S-3 for future primary offerings of its securities following the filing of its Annual Reports on Form 10-K in 2019 and 2020. The Company anticipates that in the future, if it were to no longer eligible to use Form S-3, that it may utilize Form S-1 to register the sale of its securities, including through future financing agreements with Aspire Capital.
Cash Flows
The following table that presentsprovides information regarding our contractual obligationscash position, cash flows and commercial commitmentscapital expenditures for the nine months ended March 31, 2019 and 2018 (rounded to nearest thousand):
|
| Nine Months Ended |
|
| Change |
| ||||||
|
| March 31, |
|
| Increase/ |
| ||||||
|
| 2019 |
|
| 2018 |
|
| (Decrease) |
| |||
|
|
|
|
|
|
|
| % |
| |||
Net cash used in operating activities |
| $ | (4,992,000 | ) |
| $ | (10,362,000 | ) |
|
| (52 | )% |
Net cash used in investing activities |
|
| (18,000 | ) |
|
| (108,000 | ) |
|
| (83 | )% |
Net cash provided by financing activities |
|
| 3,054,000 |
|
|
| 7,665,000 |
|
|
| (60 | )% |
Net decrease in cash |
| $ | (1,956,000 | ) |
| $ | (2,805,000 | ) |
|
| (30 | )% |
The decrease in net cash used in operating activities of $5.4 million versus the prior-year nine-month period was mainly due to decreases in our losses from operations of $4.3 million, largely attributable to our less spending for research and development expenses.
Our operating activities used cash of $5.0 million and $10.4 million for the nine months ended March 31, 2019 and 2018, respectively. The use of cash in these periods principally resulted from our losses from operations, as 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 nine-month period was due to a decrease in patents costs.
Financing activities
During the nine months ended March 31, 2019, we raised approximately $3.2 million in net cash proceeds, from issuance of preferred stock and warrants, offset by purchase of treasury stock of $0.1 million.
During the nine months ended March 31, 2018, (rounded 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) |
| $ | 1.0 |
|
| $ | 1.0 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
Lease obligations (2) |
| $ | 0.2 |
|
| $ | 0.1 |
|
| $ | 0.1 |
|
| $ | - |
|
| $ | - |
|
Total |
| $ | 1.2 |
|
| $ | 1.1 |
|
| $ | 0.1 |
|
| $ | - |
|
| $ | - |
|
___________
|
|
|
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Equity Transactions
From April 1, 2018 to May 6, 2018, the Company has generated additionalwe raised approximately $7.8 million in net cash proceeds of approximately $2.0 million under the Common Stock Purchase Agreement with Aspire Capital from the sale of approximately 8.011.3 million shares of itsour common stock.stock to Aspire Capital offset by cash paid to taxing authorities arising from the withholding of shares from employees of $172,000.
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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.
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.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 March 31, 2018,2019, 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 March 31, 2018,2019, the principal executive officer and principal financial officer of the Company have 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 March 31, 2018,2019, 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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None
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K, foras revised or supplemented by our most recent Quarterly Reports on Form 10-Q, each of which are on file with the year ended June 30, 2017, which could adversely affectSEC and are incorporated herein by reference, as well as any risks described in our other filings with the SEC. Our business, financial condition or results of operations cash flows, andcould be materially adversely affected by any of these risks.
Our Series B preferred stock converts into shares of common stock at a discount to the tradingmarket price of our common stock. As a result, our common stockholders will experience substantial additional dilution if shares of our Series B preferred stock are converted into common stock.
Our Series B preferred stock may be converted at any time at the holder’s option into shares of our common stock at a conversion price equal of the lower of (i) $0.31625 per share and capital(ii) 85% of the lowest volume weighted average sale prices of our Class A common stock as reported on Bloomberg L.P. on a trading day during the ten trading days prior to and ending on, and including, the conversion date. In addition, the conversion price may be decreased following certain triggering events. As a result, the number of shares of common stock that the holders of our Series B preferred stock will receive upon conversion will increase as our common stock price decreases, and there is no floor to the conversion price, and our common stockholders will experience substantial dilution as shares of our Series B Preferred Stock offered hereby are converted into our common stock. ThereAny dilution or potential dilution may cause our stockholders to sell their shares, which may contribute to a downward movement in the stock price of our common stock.
Management will have been nobroad discretion as to the use of the proceeds from the Series B preferred stock offering, and we may not use the proceeds effectively.
Our management will have broad discretion in the application of the proceeds from sales of our securities in the preferred stock offering, and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material changesadverse effect on our business and cause the price of our common stock to decline.
In addition to potential dilution associated with future fundraising transactions, we currently have significant numbers of securities outstanding that are exercisable for our common stock, which could result in significant additional dilution and downward pressure on our stock price.
As of April 30, 2019, there were 192,132,420 shares of our common stock outstanding. In addition, as of March 31, 2019 there were outstanding stock options, warrants and a convertible note representing the potential issuance of approximately an additional 66.0 million shares of our common stock. The issuance of these shares in the future would result in significant dilution to our risk factors sincecurrent stockholders and could adversely affect the price of our Annual Reportcommon stock and the terms on Form 10-Kwhich we could raise additional capital. In addition, the issuance and subsequent trading of shares could cause the supply of our common stock available for purchase in the year ended June 30, 2017.market to exceed the purchase demand for our common stock. Such supply in excess of demand could cause the market price of our common stock to decline.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
None
None
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(a) Exhibit index
(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 |
Filed herewith | ||||
Filed herewith | ||||
Filed herewith | ||||
Filed herewith | ||||
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| Filed herewith | ||
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| Filed herewith | ||
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| Furnished herewith | ||
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| Furnished herewith | ||
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| The following materials from the Company’s Quarterly Report on Form 10-Q for the nine months ended March 31, |
| Filed herewith |
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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. | ||
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Dated: May 10, | By: | /s/ Leo Ehrlich | |
Name: | Leo Ehrlich | ||
Title: | Chief Executive Officer and Chief Financial Officer (Principal Executive, Accounting and Financial Officer) | ||
Dated: May 10, 2019 | By: | /s/ | |
Name: | Arthur P. Bertolino | ||
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Title: | President |
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