The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2019 AND 2018
1. Basis of Presentation and Nature of Operations
Innovation Pharmaceuticals Inc. (“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. On February 15, 2019, the Company formed IPIX Pharma Limited (“IPIX Pharma”), a wholly-owned subsidiary incorporated under the Companies Act 2014 of Ireland. IPIX Pharma is a Private Company Limited by Shares. The subsidiary will serve as a key hub for strategic collaboration with European companies and medical communities in addition to providing cost-saving efficiencies and flexibility with respect to developing Brilacidin under European Medicines Agency standards.
The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. The Company’s common stock is quoted on OTCQB, symbol “IPIX.”
Basis of Consolidation
The consolidated financial statements for 2019 include the accounts of Innovation, a Nevada corporation, and our wholly-owned subsidiary, IPIX Pharma, an Ireland limited Company which was incorporated in 2019. No consolidated accounts were prepared in 2018. All significant intercompany transactions and balances have been eliminated in consolidation. Translation gains and losses for the year ended June 30, 2019 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 and Kevetrin, and advancing them as quickly as possible along the regulatory pathway. We aim to develop the highest quality data and broadest intellectual property to support our compounds. We discontinued the Prurisol psoriasis program.
We currently own all development and marketing rights to our investigational products, other than the rights granted to Alfasigma S.p.A. in July 2019, as disclosed in Note 17, Subsequent Events, for the development, manufacturing and commercialization of locally-administered Brilacidin for UP/UPS. In order to successfully develop and market our products, we may have to partner with additional companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.
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 June 30, 2019, the Company has an accumulated deficit of approximately $95.0 million, representative of recurring losses since inception. The Company 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 $11.5 million for the next twelve months, raise substantial doubt about its ability to continue as a going concern.
At June 30, 2019, the Company’s cash amounted to $0.6 million and current liabilities amounted to $7.3 million, of which $3.7 million were payables to related parties with no immediate payment terms and $2.9 million was payable to one shareholder who is our former director and officer of the Company (see Note 9. Related Party Transactions and Note 10. Convertible Note Payable - Related Party). 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 years ended June 30, 2019 was approximately $6.3 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 fiscal years ended June 30, 2019 and 2018, amounted to $8.7 million and $16.4 million, respectively, and we had a working capital deficit of approximately $6.7 million and $6.1 million, respectively, at June 30, 2019 and June 30, 2018.
The Company’s primary sources of liquidity are cash and cash equivalents as well as issuances of its equity securities. On October 5, 2018, the Company entered into a Securities Purchase Agreement with one multi-family office for the sale of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock for aggregate gross proceeds of approximately $2.0 million. Under the Securities Purchase Agreement, the Company also initially issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock for an aggregate purchase price of approximately $7.9 million. On May 9, 2019, the Company entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and warrants pursuant to which the Company issued an additional 100 shares of Series B preferred stock and warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to $2.0 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. In addition, the Company agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock.
The Company received the proceeds from the exercise of 2,780 warrants of approximately $2.7 million during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019. As of June 30, 2019, 1,196 shares of preferred stock were outstanding and warrants to purchase 7,720 shares of Series B preferred stock were outstanding. 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. See Note 14 - Series B 5% convertible preferred stock.
The amount of cash and cash equivalents on the balance sheet as of the date of this filing is approximately $0.8 million. 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 planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without raising additional capital in the future. 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.
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, valuation of equity grants and income tax valuation. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Cash
Cash consist of bank deposits. There were no cash equivalents at June 30, 2019 and 2018.
Equipment
Equipment is stated at cost, net of accumulated depreciation. Expenditures that extend the life, increase the capacity, or improve the efficiency of property and equipment are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation is recognized using the straight-line method over the following approximate useful lives:
Intangible Assets - Patents
Costs incurred to file patent applications and acquired intangibles are capitalized when the Company believes that there is a high likelihood that the patent will be issued and there will be future economic benefit associated with the patent. These costs will be amortized on a straight-line basis over a 12 - 17 years life from the date of patent filing. All costs associated with abandoned patent applications are expensed. In addition, the Company will review the carrying value of patents for indicators of impairment on a periodic basis and if it determines that the carrying value is impaired, it values the patent at fair value. As of June 30, 2019 and 2018, carrying value of patent was approximately $3,342,000 and $3,780,000, respectively. Amortization expense for the fiscal years ended June 30, 2019 and 2018, was approximately $370,000 and $385,000, respectively.
As of June 30, 2019, the Company expensed the costs associated with obtaining patents that have not yet resulted in products or gained market acceptance and the Company has or will let these patents go abandoned. For the fiscal years ended June 30, 2019 and 2018, the Company has charged to operations approximately $4,000 and $2,000, respectively as patent expenses included in general and administrative expenses.
In accordance with the provisions of the applicable authoritative guidance, the Company’s long-lived assets and amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company assesses the recoverability of such assets by determining whether their carrying value can be recovered through undiscounted future operating cash flows, including its estimates of revenue driven by assumed market segment share and estimated costs. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. During the fiscal years ended June 30, 2019 and 2018, the Company has recorded patents write off of approximately $154,000 and $163,000, respectively and included in general and administrative expenses.
Financial Instruments
The Company’s financial instruments include cash, accounts payable, accrued liabilities and the preferred stock liability. The carrying amounts of these financial instruments approximate their fair value, due to the short-term nature of these items. The fair value hierarchy has the following three levels:
Level 1 - quoted prices in active markets for identical assets and liabilities.
Level 2 - observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3 - unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
Certain Risks and Uncertainties
Product Development
We devote significant resources to research and development programs in an effort to discover and develop potential future product candidates. The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes three phases of clinical trials in which we collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease. There are many difficulties and uncertainties inherent in research and development of new products, resulting in a high rate of failure. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and significant cost. Failure can occur at any point in the process, including after the product is approved, based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs of manufacture, alternative therapies or infringement of the patents or intellectual property rights of others. Uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval and which will be commercially viable and generate profits. Successful results in preclinical or clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.
Expenditures for research, development, and engineering of products are expensed as incurred. For the fiscal years ended June 30, 2019 and 2018, the Company incurred approximately $4,343,000 and $11,368,000 of research and development costs, respectively.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit and checking accounts that at times exceed federally insured limits. Approximately $0.3 million is subject to credit risk at June 30, 2019. However, these cash balances are maintained at creditworthy financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
Accrued Outsourcing Costs
Substantial portions of our preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors, or collectively “CROs.” These CROs generally bill monthly or quarterly for services performed, or bill based upon milestone achievement. For preclinical studies, we accrue expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. We monitor patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to us by the CROs, correspondence with the CROs and clinical site visits. Our estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. We periodically evaluate the estimates to determine if adjustments are necessary or appropriate based on information we receive.
Valuation of Equity Grants
The Company accounts for all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to measure the cost of employee services received in exchange for stock options and similar awards based on the grant-date fair value of the award and recognize this cost in the income statement over the period during which an employee is required to provide service in exchange for the award. The Company uses the Black-Scholes-Merton valuation model and has elected to use the ratable method to amortize compensation expense over the vesting period of the grant. The Company accounts for equity instruments issued to nonemployees by valuing them using the Black-Scholes-Merton valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest.
Income Taxes
Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has generated net losses since inception and accordingly has not recorded a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset the deferred tax assets. Additionally, the future utilization of the NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company follows the provisions of FASB ASC 740-10 “Uncertainty in Income Taxes” (ASC 740-10). The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
The Company has identified its U.S. Federal income tax return and its State return in Massachusetts as its major tax jurisdictions. The fiscal 2015 and forward years are still open for examination.
Basic Loss per Share
Basic and diluted loss per share are computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, restricted stock, warrants and convertible related party notes payable. Common share equivalents were excluded from the computation of diluted earnings per share for the fiscal years ended June 30, 2019 and 2018, because their effect was anti-dilutive (see Note 11 - Weighted Average Shares Outstanding).
Treasury Stock
The Company accounts for treasury stock using the cost method. There were 228,218 shares and 0 shares of treasury stock outstanding, purchased at a total cumulative cost of $91,000 and $0 at June 30, 2019 and June 30, 2018, respectively (see Note 12. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding).
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 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.” 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 units are measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line method.
The components of stock-based compensation related to stock options and restricted stock grants in the Company’s Statement of Operations for the fiscal years ended June 30, 2019 and 2018 are as follows (rounded to nearest thousand):
|
|
Year ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development expenses
|
|
|
|
|
|
|
Professional fees
|
|
$
|
53,000
|
|
|
$
|
120,000
|
|
Employees’ bonus
|
|
|
179,000
|
|
|
|
156,000
|
|
Officers’ bonus
|
|
|
844,000
|
|
|
|
1,610,000
|
|
Total stock-based compensation expense
|
|
$
|
1,076,000
|
|
|
$
|
1,886,000
|
|
Recent Adopted Accounting Pronouncements
In July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; and II. Replacement of the 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 certain 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 basis of the 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 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 certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, 2019, 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 has been adopted in the fourth quarter of fiscal 2019 and did not have a material effect on the Company’s financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 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. 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. This new pronouncement has been adopted in the first quarter of fiscal 2019 and did not have a material effect on the Company’s financial position, results of operations or 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 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 2016-02 (Topic 842) Leases will have a material impact on its consolidated balance sheet due to the 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. We are finalizing our analysis of certain key assumptions that will be utilized at the above transition date, including the potential recording of the future impairment of the right-of-use asset regarding the leasehold for the Company’s headquarters.
4. Patents, net
Patents, net consisted of the following (rounded to nearest thousand):
|
|
|
Useful life
|
|
|
June 30,
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
|
|
|
|
1,118,000
|
|
|
|
1,219,000
|
|
|
|
|
|
|
|
|
5,344,000
|
|
|
|
5,445,000
|
|
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds
|
|
|
|
|
|
|
(1,765,000
|
)
|
|
|
(1,462,000
|
)
|
Accumulated amortization for Patents-Kevetrin and related compounds
|
|
|
|
|
|
|
(237,000
|
)
|
|
|
(203,000
|
)
|
Total
|
|
|
|
|
|
$
|
3,342,000
|
|
|
$
|
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 $370,000 and $385,000 for the fiscal years ended June 30, 2019 and 2018, respectively.
During the fiscal years ended June 30, 2019 and 2018, the Company has written off the Prurisol patent and other patents of approximately $154,000 and $163,000, respectively, and included in general and administrative expenses.
At June 30, 2019, the future amortization period for all patents was approximately 6.18 years to 16.75 years. Future estimated annual amortization expenses are approximately $369,000 for each year from 2020 to 2025, and total of $1,128,000 for the year ending June 30, 2026 and thereafter.
5. Property, plant and equipment, net
Property, plant and equipment, net consisted of the following (rounded to nearest thousand):
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
Testing equipment
|
|
$
|
4,000
|
|
|
$
|
4,000
|
|
Less: Accumulated depreciation
|
|
|
(3,000
|
)
|
|
|
(2,000
|
)
|
|
|
$
|
1,000
|
|
|
$
|
2,000
|
|
Depreciation expense for the fiscal years ended June 30, 2019 and 2018 was approximately $1,000 and $28,000, respectively.
6. Accrued Expenses – Related Parties and Other
Accrued expenses consisted of the following (rounded to nearest thousand):
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
Accrued research and development consulting fees
|
|
$
|
40,000
|
|
|
$
|
208,000
|
|
Accrued rent (Note 9) - related parties
|
|
|
8,000
|
|
|
|
10,000
|
|
Accrued interest (Note 10) - related parties
|
|
|
37,000
|
|
|
|
48,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,000
|
|
|
$
|
266,000
|
|
7. Accrued Salaries and Payroll Taxes - Related Parties And Other
Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
Accrued salaries - related parties
|
|
$
|
2,999,000
|
|
|
$
|
2,823,000
|
|
Accrued payroll taxes - related parties
|
|
|
130,000
|
|
|
|
130,000
|
|
Accrued employee bonuses
|
|
|
-
|
|
|
|
214,000
|
|
Withholding tax - payroll
|
|
|
33,000
|
|
|
|
52,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,162,000
|
|
|
$
|
3,219,000
|
|
8. Commitments and Contingencies
Lease Commitments
Operating Leases – Rental Property
Corporate Headquarters
On October 1, 2018, the Company’s lease agreement with Cummings Properties automatically renewed. The lease is for a term of five years ending on September 30, 2023, and requires monthly payments of approximately $19,000. The Company currently uses this leased premise as its Corporate headquarters space. The Company is actively looking for a subtenant for this entire office space. As of June 30, 2019, management determined that there was no cease use write-off required for this office space, pursuant to ASC Topic 420, Exit or Disposal Cost Obligation (“ASC 420”).
As of June 30, 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,
|
|
|
|
2020
|
|
$
|
228,000
|
|
2021
|
|
|
228,000
|
|
2022
|
|
|
228,000
|
|
2023
|
|
|
228,000
|
|
Thereafter
|
|
|
57,000
|
|
Total
|
|
$
|
969,000
|
|
Rent expense, net of lease income, under this operating lease agreement was approximately $244,000 and $210,000 for the fiscal years ended June 30, 2019 and 2018, respectively. As of September 1, 2018, Kard Scientific no longer leases space from the Company (see Note 9. Related Party Transactions).
Contractual Commitments
The Company has total non-cancelable contractual minimum commitments of approximately $2 million to contract research organizations as of June 30, 2019. Expenses are recognized when services are performed by the contract research organizations.
9. 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, a significant shareholder of the Company and the former President of Research and former director of the Company, also serves as the Chief Operating Officer and Director of Kard Scientific. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon resigned from the Company’s Board of Directors on December 11, 2018. As of September 1, 2018, KARD no longer leases space from the Company.
Pre-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 no longer uses KARD. At June 30, 2019 and June 30, 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 10 below.
10. 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 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 years from the date of issuance.
On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s Chairman and CEO, for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).
As of June 30, 2019 and June 30, 2018, principal balance of this demand convertible note payable was approximately $1,922,000 and $2,022,000, respectively.
As of June 30, 2019 and June 30, 2018, the balance of accrued interest payable were $37,000 and $48,000, respectively (see Note 6. Accrued Expenses – Related Parties and Other).
As of June 30, 2019 and June 30, 2018, the total outstanding balances of principal and interest were approximately $1,959,000 and $2,070,000, respectively.
11. Weighted Average Shares Outstanding
Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted average shares outstanding-basic
|
|
|
178,227,405
|
|
|
|
144,510,021
|
|
Dilutive options and restricted stock and warrants
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares outstanding-diluted
|
|
|
178,227,405
|
|
|
|
144,510,021
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities not included:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
22,669,883
|
|
|
|
41,643,571
|
|
Stock options arising from convertible note payable and interests
|
|
|
3,917,860
|
|
|
|
4,141,176
|
|
Restricted stock grants
|
|
|
1,729,288
|
|
|
|
1,208,157
|
|
Warrants
|
|
|
8,000,000
|
|
|
|
8,000,000
|
|
Convertible preferred stock
|
|
|
8,254,074
|
|
|
|
-
|
|
Total
|
|
|
44,571,105
|
|
|
|
54,992,904
|
|
12. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding
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.
On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s Chairman and CEO, see Note 10.
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
|
|
|
1,175,826
|
|
|
|
0.72
|
|
|
|
7.44
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(187,500
|
)
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
41,643,571
|
|
|
|
0.22
|
|
|
|
2.76
|
|
|
$
|
17,523,113
|
|
Granted
|
|
|
1,195,826
|
|
|
|
0.31
|
|
|
|
7.64
|
|
|
|
|
|
Exercised
|
|
|
(909,090
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(19,260,424
|
)
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
22,669,883
|
|
|
|
0.24
|
|
|
|
2.41
|
|
|
$
|
1,340,000
|
|
Exercisable at June 30, 2019
|
|
|
21,166,036
|
|
|
$
|
0.23
|
|
|
|
2.01
|
|
|
$
|
1,324,000
|
|
Unvested stock options at June 30, 2019
|
|
|
1,503,847
|
|
|
$
|
0.44
|
|
|
|
8.01
|
|
|
$
|
16,000
|
|
The fair value of options granted for the fiscal years ended June 30, 2019 and 2018 was estimated on the date of grant using the Black-Scholes-Merton Model that uses assumptions noted in the following table.
|
|
Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Expected term (in years)
|
|
5 - 10
|
|
|
3 - 10
|
|
Expected stock price volatility
|
|
67.34% - 104.11%
|
|
|
48.26% - 106.01%
|
|
Risk-free interest rate
|
|
2.51% - 2.86%
|
|
|
2.15% - 2.56%
|
|
Expected dividend yield
|
|
0
|
|
|
0
|
|
Stock-Based Compensation
The Company recognized approximately $1,076,000 and $1,886,000 of total stock-based compensation costs related to equity grant awards for the fiscal years ended June 30, 2019 and 2018, respectively.
The $1,076,000 of stock-based compensation expense for the year ended June 30, 2019 included approximately $465,000 of stock options expense and $611,000 of restricted stock awards.
For the fiscal year ended June 30, 2019
During the year ended June 30, 2019, there were 19,260,424 options granted to employees, consultants and officer expired, of which, 18,000,000 options held by Dr. Krishna Menon were expired in March 2019, i.e. three months after his departure from the board of directors and Company on December 11, 2018.
On February 1, 2019, the Company agreed to issue 400,000 stock options to purchase shares of the Company’s common stock to two consultants for specified services to be provided from February 1, 2019 to January 31, 2020 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 400,000 options for two consultants was approximately $30,000. During the year ended June 30, 2019, the Company recorded approximately $18,000 of related stock-based compensation.
On September 1, 2018, the Company issued to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, for his services rendered 1,066,667 shares of common stock, vesting 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $225,000, based on the closing bid price as quoted on the OTCQB 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 first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration as defined in award agreement, with a ten year option term. These options have piggyback registration rights. During the year ended June 30, 2019, the Company recorded approximately $269,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $93,000 of stock option expense and $176,000 of stock awards.
On September 1, 2018, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 58,394 shares of the Company’s common stock, 33 1/3% vesting upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date and 33 1/3% upon the third anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $63,000, based on the closing bid price as quoted on the OTCQB 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 first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and 33 1/3% upon the third anniversary of the grant date, with acceleration of vesting upon certain events. During the year ended June 30, 2019, the Company recorded approximately $24,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $17,000 of stock option expense and $7,000 of stock awards.
On September 1, 2018, the Company also issued to Ms. Anne Ponugoti, Associate Director, Clinical Sciences of the Company, 5,000 shares of the Company’s common stock and 5,000 options to purchase common stock with the same vesting periods as the common stock and options issued to Ms. Harness. The total value of the 5,000 shares and 5,000 options were approximately $2,000 each, based on the closing bid price as quoted on the OTCQB on August 31, 2018 at $0.40 per share. During the years ended June 30, 2019, the stock-based compensation expense was not significant. Ms. Ponugoti left the Company on January 15, 2019.
Purchase of Treasury Stock
On September 1, 2018, 38,930 restricted shares issued to Ms. Harness vested. The total taxable compensation to Ms. Harness for the 38,930 vested shares was approximately $3,690, based upon the closing stock price on August 31, 2018 of $0.40 a share.
The Company issued 29,658 common shares (net share issuance amount), which was approximately 76% of the 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.
On September 1, 2018, 533,334 restricted shares issued to Dr. Bertolino vested. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was approximately $87,140, based upon the closing stock price on August 31, 2018 of $0.40 a share.
The Company issued 314,387 common shares (net share issuance amount), which was approximately 59% of the 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 June 30, 2019 and June 30, 2018, respectively, purchased at a total cumulative cost of $90,830 and $0 at June 30, 2019 and June 30, 2018, respectively.
Restricted Stock Awards Outstanding
The following summarizes our restricted stock activity:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Total awards outstanding at June 30, 2018
|
|
|
1,208,157
|
|
|
$
|
0.72
|
|
Total shares granted
|
|
|
1,130,061
|
|
|
$
|
0.40
|
|
Total shares vested
|
|
|
(597,263
|
)
|
|
$
|
0.72
|
|
Total shares forfeited
|
|
|
(11,667
|
)
|
|
$
|
0.76
|
|
Total unvested shares outstanding at June 30, 2019
|
|
|
1,729,288
|
|
|
$
|
0.51
|
|
Scheduled vesting for outstanding restricted stock awards at June 30, 2019 is as follows:
|
|
Year Ending June 30,
|
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled vesting
|
|
|
1,137,562
|
|
|
|
572,262
|
|
|
|
19,464
|
|
|
|
1,729,288
|
|
As of June 30, 2019, there was approximately $0.4 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 $0.3 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 1.02 years.
For the fiscal year ended June 30, 2018
On May 29, 2018, the Company issued (1) 55,000 stock options to purchase shares of the Company’s common stock which was vested immediately; (2) 50,000 stock shares, (3) additional 3-year 50,000 stock options, and (4) Bonus 3-year 50,000 stock options to a consultant for services rendered, exercisable for 3 years at $0.43 per share of common stock. The Company expensed these equity awards as below:
|
·
|
The 55,000 options vested on June 1, 2018. The value of these 55,000 options was approximately $8,000. During the year ended June 30, 2019 and 2018, the Company recorded approximately $0 and $8,000 of stock option expense for this grant, respectively.
|
|
|
|
|
·
|
The 50,000 restricted shares vest in four equal installments on June 1, 2018, December 1, 2018, June 1, 2019 and December 1, 2019. The value of these shares was approximately $22,000. During the year ended June 30, 2019 and 2018, the Company recorded approximately $11,000 and $6,000 of shares award expense for this 50,000 stock shares, respectively.
|
|
|
|
|
·
|
The additional 3-year 50,000 stock options will vest in four equal installments on June 1, 2018, December 1, 2018, June 1, 2019 and December 1, 2019 at an exercise price equal to the closing stock price on the day before vesting The value of the stock options was approximately $8,000. During the year ended June 30, 2019 and 2018, the Company recorded approximately $4,000 and $2,000 of stock option expense for this grant, respectively.
|
On February 1, 2018, the Company agreed to issue options to purchase 75,000 shares of common stock to each of two consultants for specified services to be provided from February 1, 2018 to January 31, 2019 in accordance with agreements with the consultants. During the year ended June 30, 2019 and 2018, the Company recorded approximately $30,000 and $31,000 of related stock-based compensation, respectively.
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 year ended June 30, 2018, the Company recorded approximately $72,000 of related stock-based compensation.
On September 1, 2017, the Company agreed to grant to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, under the 2016 Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) 50% upon the first anniversary of the effective date and the remaining 50% upon the second anniversary of the effective date; (2) shares of the Company’s common stock close above $3.00 per share (as may be adjusted for any stock splits or similar actions); (3) the commencement of trading of shares of the Company’s common stock on a national securities exchange; or (4) upon a change in control of the Company. The 1,066,667 shares were valued at approximately $752,000 and the 617,839 stock options valued at approximately $399,000. Both shares and options will be amortized over 2 years to September 1, 2019 unless the probability of the other above vesting requirements occurring are met at an earlier date. At June 30, 2018, the Company determined that it was not probable that these accelerated vesting provisions would occur earlier than the scheduled vesting date. During the year ended June 30, 2018, the Company recorded approximately $477,000 of total stock-based compensation. The $477,000 of stock-based compensation expense for the year ended June 30, 2018 included approximately $166,000 of stock option expense and $311,000 of stock awards. During the year ended June 30, 2019, the Company recorded approximately $477,000 of total stock-based compensation. The $477,000 of stock-based compensation expense for the year ended June 30, 2018 included approximately $166,000 of stock option expense and $311,000 of stock awards.
On September 1, 2017, the Company agreed to grant 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 third upon the first anniversary of the effective date, one third upon the second anniversary of the effective date, and the remaining one third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 58,394 shares were valued at approximately $41,000 and the 172,987 stock options valued at approximately $112,000. Both shares and options will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the year ended June 30, 2019 and 2018, the Company recorded approximately $51,000 and $43,000 of total stock-based compensation, respectively. The $51,000 of stock-based compensation expense for the year ended June 30, 2019 included approximately $37,000 of stock option expense and $14,000 of stock awards. The $43,000 of stock-based compensation expense for the year ended June 30, 2018 included approximately $31,000 of stock option expense and $12,000 of stock awards.
On September 1, 2017, the Company agreed to grant to Anne Ponugoti, under the 2016 Plan, ten-year options to purchase 5,000 shares of the Company’s common stock at an exercise price of $0.705 per share, which shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one-third upon the second anniversary of the effective date, and the remaining one-third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 5,000 stock options were valued at approximately $3,000 and will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the years ended June 30, 2019 and 2018, the stock-based compensation expense was not significant.
Exercise of options
See Note 10 for stock options exercised for the year ended June 30, 2019.
During the year ended June 30, 2018, there were no stock options exercised.
Stock Warrants Outstanding
Warrants to Purchase 5% convertible preferred stock (“Series B preferred stock”)
On October 5, 2018, the Company entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) with one multi-family office for the sale of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock (“Series B preferred stock”), for aggregate gross proceeds of approximately $2.0 million. Each share of preferred stock was initially sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance (later extended to 15 months following issuance), (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance. On May 9, 2019, the Company entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and warrants pursuant to which the Company issued an additional 100 shares of Series B preferred stock and Series 4 warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to $2.0 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. The Series 4 warrant entitles the holder thereof to purchase 2,500 shares of preferred stock at $982.50 per share for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance. In addition, the Company extended the termination date for the Series 1 warrants by six months, and agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock.
The Company received the proceeds from the exercise of 2,780 warrants of approximately $2.7 million during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019. As of June 30, 2019, 1,196 shares of preferred stock were outstanding and warrants to purchase 7,720 shares of Series B preferred stock were outstanding. 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 (see Note 14. Series B 5% convertible preferred stock to the financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K).
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 2,780 Series 1-2 warrants exercised during the year ended June 30, 2019. As of June 30, 2019, 7,720 Series 1-4 warrants to purchase 7,720 preferred stock were outstanding (see Note 14. Series B 5% convertible preferred stock).
The following table summarizes the outstanding Series B preferred stock warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
10,500
|
|
|
|
982.50
|
|
|
|
2.00
|
|
|
|
|
|
Exercised
|
|
|
(2,780
|
)
|
|
|
982.50
|
|
|
|
2.00
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
7,720
|
|
|
$
|
985.50
|
|
|
|
1.21
|
|
|
$
|
752,700
|
|
Warrants 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 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. The warrants were recorded within stockholders’ deficiency. The fair value of the warrants issued on June 28, 2018 was estimated on the date of issuance using the Black-Scholes-Merton Model that uses assumptions noted in the following table. The value of the warrants issued was approximately $1.7 million.
|
|
Year Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Expected term (in years)
|
|
5 - 10
|
|
|
|
3
|
|
Expected stock price volatility
|
|
67.34% - 104.11%
|
|
|
|
82.36
|
%
|
Risk-free interest rate
|
|
2.51% - 2.86%
|
|
|
|
2.73
|
%
|
Expected dividend yield
|
|
0
|
|
|
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, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Extended
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
8,000,000
|
|
|
|
0.38
|
|
|
|
5.0
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
8,000,000
|
|
|
$
|
0.38
|
|
|
|
5.0
|
|
|
$
|
-
|
|
Extended
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
|
8,000,000
|
|
|
$
|
0.38
|
|
|
|
4.0
|
|
|
$
|
-
|
|
As of June 30, 2019 and 2018, 8,000,000 warrants to purchase shares of the Company’s common stock exercisable for 5 years at an exercise price of $0.38 per share were outstanding.
13. Equity Transactions
On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s Chairman and CEO (See Note 10). As of June 30, 2019, 909,090 shares of Class B common stock were outstanding.
Securities Purchase Agreement Dated June 28, 2018
On June 28, 2018, the Company entered into a securities purchase agreement with Aspire Capital Fund, LLC, pursuant to which the Company sold to Aspire Capital 5,263,158 shares of Class A common stock for a purchase price of $2.0 million, without an underwriter or placement agent. The Company also issued to Aspire Capital 2,736,842 shares of Class A common stock and warrants to purchase 8,000,000 shares of Class A common stock, with such warrants having an exercise price equal to $0.38 per share, as a commitment fee. The securities purchase agreement provided for the sale of up to an additional $5.0 million of the Company’s common stock upon the satisfaction of certain milestones by September 30, 2018, which milestones were not achieved by the Company.
The 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.
$30 million Class A Common Stock Purchase Agreement with Aspire Capital
On September 6, 2017, the Company entered into a purchase agreement with Aspire Capital, which replaced the prior 2015 $30 million Aspire Capital 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 a 36-month term ending in September 2020. 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 was amortized pro-rata as the funding is received. The amortized amount of the commitment fee of $55,000 was recorded to additional paid-in capital for the year ended June 30, 2018. The remaining $159,000 of the commitment fee was carried on the balance sheet as deferred offering costs and was fully expensed in December 2018. The Company initially registered the sale of shares that Aspire Capital may purchase under the purchase agreement, but the registration of these shares will lapse September 2019 and the Company does not currently intend to effect another registration of the shares issuable under the purchase agreement. In addition, the trading price for the Company’s common stock has not satisfied the minimum $0.25 price condition under the purchase agreement and no sales may occur thereunder (See Note 2. Going Concern and Liquidity).
During the period from September 6, 2017 to June 30, 2019, the Company generated proceeds of approximately $7.7 million under the 2017 purchase agreement with Aspire Capital from the sale of approximately 16.7 million shares of its common stock. During the year ended June 30, 2019, the Company did not sell any shares to Aspire Capital under the purchase agreement.
On March 30, 2015, the Company entered into its prior 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 2015 purchase agreement. In consideration for entering into the 2015 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 of $227,000 was recorded to additional paid-in capital in September 2017 when the Company entered into the 2017 purchase agreement described above. During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under the 2015 purchase agreement with Aspire Capital from the sale of approximately 2.6 million shares of its common stock.
14. Series B 5% convertible preferred stock
Series B 5% convertible preferred stock purchase agreement
On October 5, 2018, as modified on May 9, 2019 (see Warrant Restructuring and Additional Issuance Agreement as described below), the Company entered into a Securities Purchase Agreement (“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 ( “Series B preferred stock” or “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 beneficial conversion feature (“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, in accordance with 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 Company recognized change in fair value of preferred stock liabilities of $357,000 under Other (income) expense in the accompanying consolidated Statements of Operations.
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 June 30, 2019 and the total dividends of approximately $42,000 are treated as interest during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019. The approximately $17,000 dividends was paid by issuance of Series B preferred stocks, so the remaining accrued dividends of $25,000 was recorded under Preferred stock liability as of June 30, 2019 and was paid by issuance of Series B preferred stocks subsequent to the balance sheet date.
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 initially sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up nine months following issuance (later extended to 15 months following issuance), (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance. On May 9, 2019, the Company entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and warrants pursuant to which the Company issued an additional 100 shares of Series B preferred stock and Series 4 warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to $2.0 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. The Series 4 warrant entitles the holder thereof to purchase 2,500 shares of preferred stock at $982.50 per share for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance. In addition, the Company extended the termination date for the Series 1 warrants by six months, and agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock.
The Series B Preferred shareholders’ warrants held were modified on May 9, 2019 (see Warrant Restructuring and Additional Issuance Agreement described below in this Note). Pursuant to this warrant restructuring agreement, the Company had the option to compel these shareholders to exercise each month up to $250,000 of their Series 1 warrants. These warrant holders exercised a total of $250,000 of their warrants, starting from May 2019 through September 2019. 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.
Exercise of warrants
During the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019, the Company issued 2,780 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $2.73 million, upon exercise of 2,780 warrants issued by the Company in October 2018.
As of June 30, 2019, Series 1-4 warrants to purchase 7,720 shares of Series B preferred stock were outstanding.
Conversion of preferred stock to common stock
During the years ended June 30, 2019, the two preferred stockholders converted 3,891 shares of Series B preferred stock into 39.2 million shares of common 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 $3,068,000 based on the proportion of Series B preferred stock converted relative to the original total issued.
As of June 30, 2019, 1,096 shares of Series B 5% convertible preferred stock were outstanding.
Warrant Restructuring and Additional Issuance Agreement
On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (“Issuance Agreement”) with the Series B investors of its Series B preferred stock and warrants to purchase Series B preferred stock. Pursuant to the Issuance Agreement, the Series B investors have agreed, subject to the conditions set forth therein, to exercise existing warrants to purchase 500 shares of preferred stock and to amend the existing warrants to permit the Company to compel the exercise of up to $400,000 of existing warrants each calendar month commencing June 3, 2019 and ending November 1, 2019, or, if earlier, until the aggregate amount of the forced exercises is $2,000,000. As consideration for the Series B investors entering into the Issuance Agreement, the Company has issued 100 shares of preferred stock and warrants to purchase 2,500 shares of preferred stock (“Series 4 warrants”) to the Series B investors. In addition, the Company extended the termination date for the Series 1 warrants issued in October 2018 by six months, and has agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock.
The warrants were modified in accordance with ASC 470-50 and, as a result, immediately prior to the modification, the Company recognized a loss of approximately $63,000 to change in fair value of preferred stock liabilities under Other (income) expense in the accompanying consolidated Statements of Operations.
Subsequent to the modification, the Company recognized an expense of approximately $294,000 due to the above modification of Series B preferred stock terms in the accompanying consolidated statements of operations
The fair value of the Series B convertible preferred stock is measured in accordance with ASC 820 “Fair Value Measurement,” using “Monte Carlo simulation” modeling, incorporating the following inputs:
|
|
June 30, 2019
|
|
|
May 9, 2019
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
54.5
|
%
|
|
|
51.9
|
%
|
Risk-free interest rate
|
|
|
2.18
|
%
|
|
|
2.43
|
%
|
Expected term of warrants (years)
|
|
|
0.1
|
|
|
|
0.25
|
|
Stock price
|
|
$
|
535.12
|
|
|
$
|
535.12
|
|
Exercise price
|
|
$
|
982.50
|
|
|
$
|
982.50
|
|
15. 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 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.
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 June 30, 2019.
Series B 5% convertible preferred stock liability
|
|
2019
|
|
Balance, beginning of year
|
|
$
|
—
|
|
Issuance of preferred stock at fair value
|
|
|
1,116,000
|
|
Issuance of preferred stock by exercise of 1,275 warrants
|
|
|
2,895,000
|
|
Conversion of preferred stock to common stock
|
|
|
(3,068,000
|
)
|
Change in fair value of preferred stock due to modification of terms
|
|
|
(357,000
|
)
|
Issuance of 100 shares valued at $535.12 per share Series B Preferred Stock per May 2019 Modification
|
|
|
54,000
|
|
Contingent consideration
|
|
|
214,000
|
|
5% accrued dividend (1)
|
|
|
25,000
|
|
Balance, end of year
|
|
$
|
879,000
|
|
(1)
|
The 5% accrued dividend is reported in interest expense—preferred stock.
|
|
|
|
The total dividends of approximately $42,000 are treated as interest expense – preferred stock during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019. The approximately $17,000 of the Series B preferred stock dividends was paid by issuance of Series B preferred stocks, so the remaining accrued dividends of $25,000 was recorded under Preferred stock liability as of June 30, 2019 and was paid by issuance of Series B preferred stocks subsequent to the balance sheet date.
|
16. Income Taxes
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company has incurred operating losses since its inception and therefore no tax liabilities have been incurred for the periods presented. The amount of unused tax losses (“NOL”) available for carryforward and to be applied against taxable income in future years totaled approximately $78.39 million at June 30, 2019. The Tax Cuts and Jobs Act changes the rules on NOL carryforwards. The 20-year limitation was eliminated for losses incurred for the 2018 tax year, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January 1, 2018, will now be limited to 80% of taxable income. Internal Revenue Code Sec. 382 places limitations on the utilization of net operating losses.
The income tax provision benefit differs from the amount of tax determined by applying the Federal and States statutory rates as follows:
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Book income at federal statutory rate
|
|
|
21.00
|
%
|
|
|
28.19
|
%
|
State income tax, net of federal tax benefit
|
|
|
6.64
|
%
|
|
|
6.02
|
%
|
Change in valuation allowance
|
|
|
(43.68
|
)%
|
|
|
13.50
|
%
|
Research and development credit
|
|
|
5.00
|
%
|
|
|
6.95
|
%
|
Permanent difference
|
|
|
1.05
|
%
|
|
|
-
|
%
|
Change in Federal Statutory Rate
|
|
|
-
|
%
|
|
|
(54.66
|
)%
|
Others - net
|
|
|
9.99
|
%
|
|
|
-
|
%
|
Total
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
There was no current or deferred provision or benefit for income taxes for the fiscal years ended June 30, 2019 and 2018. The components of deferred tax assets as of June 30, 2019 and 2018 are as follows (rounded to nearest thousand):
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
21,416,000
|
|
|
$
|
18,010,000
|
|
Accrued payroll
|
|
|
807,000
|
|
|
|
807,000
|
|
Stock compensation
|
|
|
2,943,000
|
|
|
|
2,649,000
|
|
Research and development credit
|
|
|
5,193,000
|
|
|
|
5,088,000
|
|
Other
|
|
|
100,000
|
|
|
|
114,000
|
|
|
|
$
|
30,459,000
|
|
|
$
|
26,668,000
|
|
Valuation allowance
|
|
|
(30,459,000
|
)
|
|
|
(26,668,000
|
)
|
Total deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
17. Subsequent Events
Exclusive License Agreement
On July 18, 2019, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Alfasigma S.p.A., a global pharmaceutical company (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for the treatment of ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS).
Under the terms of the License Agreement, Alfasigma will make an initial payment to the Company and will make additional payments of up to $24.0 million to the Company based upon the achievement of certain milestones, including a $1.0 million payment due following commencement of the first phase III clinical trial of Brilacidin for UP/UPS and an additional $1.0 million payment upon the filing of a marketing approval application with the U.S. Food and Drug Administration or the European Medicines Agency. In addition, Alfasigma will pay a royalty to the Company equal to six percent of net sales of Brilacidin for UP/UPS, subject to adjustment as provided in the License Agreement.
Equity Transactions
From July 1, 2019 to September 30, 2019, the Company issued 1,045 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of approximately $1.0 million, upon exercise of 1,045 warrants. In addition, there were 890 preferred stock shares converted to approximately 0.9 million shares of common stock.
On September 1, 2019, the Company issued to Dr. Bertolino for his services rendered 1,066,667 shares of common stock, vesting 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $71,000, based on the closing bid price as quoted on the OTC on August 30, 2019 at $0.132 per share. These options were issued with an exercise price of $0.132 and vest 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration as defined in award agreement, with a three year option term. These options have piggyback registration rights.
On September 1, 2019, the Company also issued to Ms. Harness 58,394 shares of the Company’s common stock, 33 1/3% vesting upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date and 33 1/3% upon the third anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $20,000, based on the closing bid price as quoted on the OTC on August 30, 2019 at $0.132 per share. These options were issued with an exercise price of $0.132 and vest 33 1/3% upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and 33 1/3% upon the third anniversary of the grant date, with acceleration of vesting upon certain events.
Increased Capitalization Charter Amendment
On September 20, 2019, the Company amended its Articles of Incorporation to increase the number of authorized shares of Class A common stock from 300 million to 600 million, following stockholder approval.