UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒  QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2020

 

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

 

For the transition period from ____________to _____________

 

Commission File Number: 001-37357

 

INNOVATION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

30-0565645

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Empl.

Ident. No.)

 

301 Edgewater Place - Suite 100

Wakefield, MA 01880

(Address of principal executive offices, Zip Code)

 

(978) 921-4125

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒  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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

Accelerated Filer

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. ☐

 

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

 

The number of shares outstanding of each of the issuer’s classes of common equity, as of November 12, 2020 is as follows:

 

Class of Securities

 

Shares Outstanding

Common Stock Class A, $0.0001 par value

 

355,957,332

Common Stock Class B, $0.0001 par value

 

4,333,936

 

 

 

 

INNOVATION PHARMACEUTICALS INC.

FORM 10-Q

For the Quarter Ended September 30, 2020

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

4

 

 

Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Operations for the three months ended September 30, 2020 and 2019 (unaudited)

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2020 and 2019 (unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2020 and 2019 (unaudited)

 

8

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

9

 

Item 2.

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

 

26

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

Item 4.

Controls and Procedures

 

36

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

37

 

Item 1A

Risk Factors

 

37

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

Item 3.

Defaults Upon Senior Securities

 

37

 

Item 4.

Mine Safety Disclosures

 

37

 

Item 5.

Other Information

 

37

 

Item 6.

Exhibits

 

38

 

 

 

 

 

 

SIGNATURES

 

39

 

 

 
2

Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

For further information about these and other risks, uncertainties and factors, please review the disclosure included in our Annual Report on Form 10-K under “Part I, Item 1A, Risk Factors” and in this report under “Part II, Item 1A, Risk Factors.”

 

 
3

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020 AND JUNE 30, 2020

(Unaudited)

(Rounded to nearest thousand except for shares data)

 

 

 

September 30,

 

 

June 30,

 

 

 

2020

 

 

2020

 

ASSETS

 

Current Assets:

 

 

 

 

 

 

Cash

 

$ 7,252,000

 

 

$ 6,018,000

 

Prepaid expenses and other current assets

 

 

74,000

 

 

 

92,000

 

Total Current Assets

 

 

7,326,000

 

 

 

6,110,000

 

Other Assets:

 

 

 

 

 

 

 

 

Patent costs - net

 

 

2,969,000

 

 

 

3,060,000

 

Deferred offering costs

 

 

1,318,000

 

 

 

 

Security deposit

 

 

78,000

 

 

 

78,000

 

Total Other Assets

 

 

4,365,000

 

 

 

3,138,000

 

Total Assets

 

$ 11,691,000

 

 

$ 9,248,000

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable - (including related party payables of approx. $1,486,000 and $1,498,000, respectively)

 

$ 2,165,000

 

 

$ 2,043,000

 

Accrued expenses - (including related party accruals of approx. $49,000 and $19,000, respectively)

 

 

89,000

 

 

 

59,000

 

Accrued salaries and payroll taxes - (including related party accrued salaries of approx. $2,377,000 and $2,777,000, respectively)

 

 

2,573,000

 

 

 

3,215,000

 

Operating lease - current liability

 

 

144,000

 

 

 

138,000

 

Note payable - related party

 

 

1,580,000

 

 

 

1,822,000

 

Accrued dividend - Series B 5% convertible preferred stock

 

 

13,000

 

 

 

13,000

 

Loan payable

 

 

79,000

 

 

 

79,000

 

Total Current Liabilities

 

 

6,643,000

 

 

 

7,369,000

 

Other Liabilities:

 

 

 

 

 

 

 

 

Operating lease - long term liability

 

 

379,000

 

 

 

417,000

 

Total Liabilities

 

 

7,022,000

 

 

 

7,786,000

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common Stock - Class A, $.0001 par value, 600,000,000 shares authorized, 349,638,386 shares and 329,829,992 shares issued as of September 30, 2020 and June 30, 2020, respectively, 348,957,332 shares and 329,170,544 shares outstanding as of September 30, 2020 and June 30, 2020, respectively.

 

 

35,000

 

 

 

33,000

 

Common Stock - Class B, (10 votes per share); $.0001 par value, 100,000,000 shares authorized, 4,018,180 shares and 1,818,180 shares issued, and 3,605,942 shares and 1,818,180 shares outstanding as of September 30, 2020 and June 30, 2020, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

107,290,000

 

 

 

102,819,000

 

Accumulated deficit

 

 

(102,417,000 )

 

 

(101,244,000 )

Treasury Stock, at cost (1,093,292 shares and 659,448 shares as of September 30, 2020 and June 30, 2020, respectively)

 

 

(239,000 )

 

 

(146,000 )

Total Stockholders’ Equity

 

 

4,669,000

 

 

 

1,462,000

 

Total Liabilities and Stockholders’ Equity

 

$ 11,691,000

 

 

$ 9,248,000

 

 

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

 

 
4

Table of Contents

  

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

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

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Revenues

 

$ -

 

 

$ 400,000

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development expenses

 

 

524,000

 

 

 

803,000

 

General and administrative expenses

 

 

264,000

 

 

 

265,000

 

Officers’ payroll and payroll tax expenses

 

 

127,000

 

 

 

118,000

 

Professional fees

 

 

214,000

 

 

 

155,000

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

1,129,000

 

 

 

1,341,000

 

 

 

 

 

 

 

 

 

 

Net loss from operations

 

 

(1,129,000 )

 

 

(941,000 )

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

Other income

 

 

 

 

 

 

Change in fair value of preferred stock

 

 

 

 

 

102,000

 

Interest expense – debt

 

 

(44,000 )

 

 

(48,000 )

Interest expense – preferred stock liability

 

 

 

 

 

(20,000 )

Warrants modification expense

 

 

 

 

 

 

Impairment expense of operating lease

 

 

 

 

 

(643,000 )

Total other income (expense)

 

 

(44,000 )

 

 

(609,000 )

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(1,173,000 )

 

 

(1,550,000 )

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ (1,173,000 )

 

$ (1,550,000 )

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share attributable to common stockholders

 

$ (0.00 )

 

$ (0.01 )

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number of common shares

 

 

337,494,640

 

 

 

205,666,583

 

 

 

 

 

 

 

 

 

 

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

 

 
5

Table of Contents

  

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020AND 2019

(Unaudited)

(Rounded to nearest thousand, except for shares data)

 

For the Three Months Ended September 30, 2019

 

 

 

Common Stock A

 

 

Common Stock B

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

Shares

 

 

Par Value

$0.0001

 

 

Shares

 

 

Par Value

$0.0001

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance at June 30, 2019

 

 

202,631,923

 

 

$ 21,000

 

 

 

909,090

 

 

$

 

 

$ 90,537,000

 

 

$ (94,596,000 )

 

 

228,218

 

 

$ (91,000 )

 

$ (4,129,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65,000

 

 

 

 

 

 

 

 

 

 

 

 

65,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

124,000

 

 

 

 

 

 

 

 

 

 

 

 

124,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,000

 

 

 

 

 

 

 

 

 

 

 

 

28,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

10,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,000

 

 

 

 

 

 

 

 

 

 

 

 

3,000

 

Stock options issued to consultant for services at $0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

 

 

 

 

 

 

 

 

 

 

 

6,000

 

Issuance of 12,500 shares to Consultant

 

 

12,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,066,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares for tax purposes as Treasury Shares

 

 

(421,611 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

421,611

 

 

 

(54,000 )

 

 

(54,000 )

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

 

 

58,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares for tax purposes as Treasury Shares

 

 

(9,619 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,619

 

 

 

(1,000 )

 

 

(1,000 )

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

 

 

9,030,870

 

 

 

1,000

 

 

 

 

 

 

 

 

 

475,000

 

 

 

 

 

 

 

 

 

 

 

 

476,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

478,000

 

 

 

 

 

 

 

 

 

 

 

 

478,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,550,000 )

 

 

 

 

 

 

 

 

(1,550,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2019

 

 

212,369,124

 

 

$ 22,000

 

 

 

909,090

 

 

$

 

 

$ 91,726,000

 

 

$ (96,146,000 )

 

 

659,448

 

 

$ (146,000 )

 

$ (4,544,000 )

 

 
6

Table of Contents

  

For the Three Months Ended September 30, 2020

 

 

 

Common Stock A

 

 

Common Stock B

 

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

Shares

 

 

Par Value

$0.0001

 

 

Shares

 

 

Par Value

$0.0001

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance at June 30, 2019

 

 

329,170,544

 

 

$ 33,000

 

 

 

1,818,180

 

 

$ -

 

 

$ 102,819,000

 

 

$ (101,244,000 )

 

 

659,448

 

 

$ (146,000 )

 

$ 1,462,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

13,500,000

 

 

 

1,000

 

 

 

 

 

 

 

 

 

2,850,000

 

 

 

 

 

 

 

 

 

 

 

 

2,851,000

 

Shares issued as commitment fee, 7/31/2020 at $0.23, net

 

 

6,250,000

 

 

 

1,000

 

 

 

 

 

 

 

 

 

1,317,000

 

 

 

 

 

 

 

 

 

 

 

 

1,318,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,000

 

 

 

 

 

 

 

 

 

 

 

 

14,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,000

 

 

 

 

 

 

 

 

 

 

 

 

43,000

 

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

 

 

 

 

 

 

 

 

2,200,000

 

 

 

 

 

 

242,000

 

 

 

 

 

 

 

 

 

 

 

 

242,000

 

Issuance of shares for tax purposes as Treasury Shares

 

 

 

 

 

 

 

 

(412,238 )

 

 

 

 

 

 

 

 

 

 

 

412,238

 

 

 

(90,000 )

 

 

(90,000 )

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

 

 

58,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares for tax purposes as Treasury Shares

 

 

(21,606 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,606

 

 

 

(3,000 )

 

 

(3,000 )

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,173,000 )

 

 

 

 

 

 

 

 

(1,173,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2020

 

 

348,957,332

 

 

$ 35,000

 

 

 

3,605,942

 

 

$

 

 

$ 107,290,000

 

 

$ (102,417,000 )

 

 

1,093,292

 

 

$ (239,000 )

 

$ 4,669,000

 

 

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

 

 
7

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

(Rounded to nearest thousand, except for shares data)

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$ (1,173,000 )

 

$ (1,550,000 )

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

 

 

 

 

 

 

 

 

Stock based compensation

 

 

62,000

 

 

 

236,000

 

Amortization of patent costs

 

 

94,000

 

 

 

93,000

 

Interest expense-preferred stock

 

 

 

 

 

20,000

 

Change in fair value of preferred stock

 

 

 

 

 

(102,000 )

Impairment of operating lease

 

 

 

 

 

643,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and security deposits

 

 

18,000

 

 

 

(11,000 )

Accounts payable

 

 

122,000

 

 

 

16,000

 

Accrued expenses

 

 

30,000

 

 

 

(3,000 )

Accrued officers’ salaries and payroll taxes

 

 

(642,000 )

 

 

38,000

 

Operating lease liability

 

 

(32,000 )

 

 

 

Net cash used in operating activities

 

 

(1,521,000 )

 

 

(620,000 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Patent costs

 

 

(3,000 )

 

 

(21,000 )

Net cash used in investing activities

 

 

(3,000 )

 

 

(21,000 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Sale of common stock, net of offering costs

 

 

2,851,000

 

 

 

 

Proceeds from exercise of warrants

 

 

 

 

 

1,027,000

 

Purchase of treasury stock

 

 

(93,000 )

 

 

(55,000 )

Net cash provided by financing activities

 

 

2,758,000

 

 

 

972,000

 

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH

 

 

1,234,000

 

 

 

331,000

 

 

 

 

 

 

 

 

 

 

CASH, BEGINNING OF PERIOD

 

 

6,018,000

 

 

 

579,000

 

 

 

 

 

 

 

 

 

 

CASH, END OF PERIOD

 

$ 7,252,000

 

 

$ 910,000

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ 15,000

 

 

$ 51,000

 

Cash paid for tax

 

$

 

 

$

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Shares issued as deferred offering costs

 

$ 1,438,000

 

 

 

 

Cancellation of shareholder debt for the purchase of 2.2M shares of Common Stock Class B shares

 

 

242,000

 

 

 

 

Conversion of Series B Convertible Preferred stock to Common stock

 

$

 

 

$ 476,000

 

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

 

$

 

 

$ 478,000

 

 

 

 

 

 

 

 

 

 

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

  

 
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INNOVATION PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(Unaudited)

 

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, 2020, included in our Annual Report on Form 10-K for the year ended June 30, 2020.

 

In the opinion of the management of Innovation Pharmaceuticals Inc., all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month periods have been made. Results for the interim period 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,” “Innovation,” “we,” “us” or “our” mean Innovation Pharmaceuticals Inc.

 

Basis of Presentation

 

Innovation Pharmaceuticals Inc. was incorporated on August 1, 2005 in the State of Nevada. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. On February 15, 2019, the Company formed IPIX Pharma Limited (“IPIX Pharma”), a wholly-owned subsidiary incorporated under the Companies Act 2014 of Ireland. IPIX Pharma is a Private Company Limited by Shares. The subsidiary 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. The Company’s common stock is quoted on OTCQB, symbol “IPIX.”

 

Basis of Consolidation

 

These consolidated financial statements include the accounts of Innovation, a Nevada corporation, and our wholly-owned subsidiary, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. There was no translation gain and loss for the three months ended September 30, 2020 and 2019.

 

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.

 

 
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We currently own all development and marketing rights to our products, other than the license rights granted to Alfasigma S.p.A. in July 2019 for the development, manufacturing and commercialization of locally-administered Brilacidin for 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.

 

2. Liquidity

 

As of September 30, 2020, the Company’s cash amounted to $7.3 million and current liabilities amounted to $6.6 million. The Company had expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. Our net losses incurred for the three months ended September 30, 2020 and 2019, amounted to $1.2 million and $1.6 million, respectively, and we had a working capital of approximately $0.7 million at September 30, 2020 and a working capital deficit of approximately $(1.2) million at June 30, 2020.

 

On July 31, 2020, the Company entered into a new common stock purchase agreement (the “2020 Agreement”) with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 24-month term of the Agreement. In consideration for entering into the 2020 Agreement, the Company issued to Aspire Capital 6,250,000 shares of its Class A Common Stock as a commitment fee. The commitment fee of approximately $1.4 million was recorded as deferred financing costs and additional paid-in capital and this asset will be amortized over the life of the 2020 Agreement. As of September 30, 2020, the available balance is $27.1 million.

 

We anticipate that future budget expenditures will be approximately $10.3 million for the fiscal year ending June 30, 2021, including approximately $8.3 million for clinical activities, supportive research, and drug product. Alternatively, if we decide to pursue a more aggressive plan with our clinical trials, we will require additional sources of capital during the fiscal year 2021 to meet our working capital requirements for our planned clinical trials. Potential sources for capital include grant funding for COVID-19 research and equity financings. There can be no assurances that we will be successful in receiving any grant funding for our programs.

 

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

 

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

 

 
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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.

 

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 three months ended September 30, 2020 and 2019, because their effect was anti-dilutive.

 

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

 

 

 

September 30,

 

 

 

2020

 

 

2019

 

Weighted average shares outstanding-basic

 

 

337,494,640

 

 

 

205,666,583

 

Dilutive options and restricted stock and warrants

 

 

 

 

 

 

Weighted average shares outstanding-diluted

 

 

337,494,640

 

 

 

205,666,583

 

 

 

 

 

 

 

 

 

 

Antidilutive securities not included:

 

 

 

 

 

 

 

 

Stock options

 

 

20,876,085

 

 

 

22,662,383

 

Stock options arising from convertible note payable and accrued interest

 

 

1,620,842

 

 

 

3,911,188

 

Restricted stock grants

 

 

116,786

 

 

 

1,729,288

 

Warrants

 

 

 

 

 

8,000,000

 

Convertible preferred stock

 

 

 

 

 

16,154,108

 

Total

 

 

22,613,713

 

 

 

52,456,967

 

 

Treasury Stock

 

The Company accounts for treasury stock using the cost method. There were 681,054 shares of Class A common stock and 412,238 shares of Class B common stock held in treasury, purchased at a total cumulative cost of $239,000 as of September 30, 2020. There were 659,448 shares of Class A common stock held in treasury, purchased at a total cumulative cost of $146,000 as of June 30, 2020 (see Note 14. Equity Transactions 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.

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

 

(i)

identify the contract(s) with a customer;

 

 

 

 

(ii)

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

 

 

 

 

(iii)

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

 

 

 

 

(iv)

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

 

 

 

 

(v)

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

 

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

 

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

 

 

(i)

up-front fees;

 

 

 

 

(ii)

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

 

 

 

 

(iii)

royalties on net sales of licensed products.

 

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

 

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

 

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

 

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.”

 

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

 

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

 

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

 

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

 

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

 

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

 

4. Patents, net

 

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

 

 

 

Useful life

 

 

September 30,

2020

 

 

June 30,

2020

 

 

 

 

 

 

 

 

 

 

 

Purchased Patent Rights- Brilacidin, and related compounds

 

 

14

 

 

$ 4,082,000

 

 

$ 4,082,000

 

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

 

 

12

 

 

 

144,000

 

 

 

144,000

 

Patents - Kevetrin and related compounds

 

 

17

 

 

 

1,211,000

 

 

 

1,208,000

 

 

 

 

 

 

 

 

5,437,000

 

 

 

5,434,000

 

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

 

 

 

 

 

 

(2,145,000 )

 

 

(2,069,000 )

Accumulated amortization for Patents-Kevetrin and related compounds

 

 

 

 

 

 

(323,000 )

 

 

(305,000 )

Total

 

 

 

 

 

$ 2,969,000

 

 

$ 3,060,000

 

  

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 for the three months ended September 30, 2020 and 2019 was approximately $94,000 and $93,000, respectively.

 

At September 30, 2020, the future amortization period for all patents was approximately 5.0 years to 16.75 years. Future estimated amortization expenses are approximately $281,000 for the year ending June 30, 2021, $375,000 for each year from 2022 to 2025, and a total of $1,189,000 for the year ending June 30, 2026 and thereafter.

 

 
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5. Accrued Expenses – Related Parties and Other

 

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

 

 

 

September 30,

2020

 

 

June 30,

2020

 

 

 

 

 

 

 

 

Accrued research and development consulting fees

 

$ 40,000

 

 

$ 40,000

 

Accrued rent (Note 10) - related parties

 

 

8,000

 

 

 

8,000

 

Accrued interest (Note 11) - related parties

 

 

41,000

 

 

 

11,000

 

 

 

 

 

 

 

 

 

 

Total

 

$ 89,000

 

 

$ 59,000

 

 

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

 

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

 

 

 

September 30,

2020

 

 

June 30,

2020

 

 

 

 

 

 

 

 

Accrued salaries - related parties

 

$ 2,247,000

 

 

$ 2,647,000

 

Accrued payroll taxes - related parties

 

 

130,000

 

 

 

130,000

 

Accrued salaries – others

 

 

154,000

 

 

 

279,000

 

Accrued salaries – employee

 

 

 

 

 

91,000

 

Withholding tax - payroll

 

 

42,000

 

 

 

68,000

 

 

 

 

 

 

 

 

 

 

Total

 

$ 2,573,000

 

 

$ 3,215,000

 

 

7. 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 made an initial upfront non-refundable payment of $0.4 million 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. At this time Alfasigma has not commenced a Phase 1 clinical trial with Brilacidin. In addition to the milestones, Alfasigma will pay a royalty to the Company equal to six percent of net sales of Brilacidin for UP/UPS, subject to adjustment as provided in the License Agreement.

 

The Company generated revenue of $0 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively. Revenue during the three months ended September 30, 2019 represented the initial non-refundable payment of $0.4 million received from Alfasigma.

 

8. Operating Leases

 

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

 

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

 

The Company determined that the operating lease right-of-use asset is fully impaired on September 30, 2019. As such, the Company recognized an impairment loss of approximately $643,000, after recording amortization of the right-of-use asset for July, August, and September 2019 totaling approximately $27,000, resulting in a carrying value of $0 since September 30, 2019. The Company vacated the leased office space in December 2019, and in January 2020 the Company initiated a lawsuit against the lessor relating to an automatic extension of the lease for the office space and related matters (See Note 9. Commitments and Contingencies).

 

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

 

 

 

Three Months

Ended

September 30,

2020

 

Lease Cost

 

 

 

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

 

$ 24,000

 

Variable lease cost

 

 

3,000

 

 

 

$ 27,000

 

Other Information

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities for the three months ended September 30, 2020

 

$ 56,000

 

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

 

 

3.00

 

Average discount rate – operating leases

 

 

18 %

 

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

 

 

 

At

September 30,

2020

 

Operating leases

 

 

 

Short-term operating lease liabilities

 

$ 144,000

 

Long-term operating lease liabilities

 

 

379,000

 

 

 

 

 

 

Total operating lease liabilities

 

$ 523,000

 

 

 
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The following table provides maturities of the Company’s lease liabilities at September 30, 2020 as follows:

 

 

 

Operating

Leases

 

Fiscal Year Ending June 30,

 

 

 

 

 

 

 

2021

 

$ 167,000

 

2022

 

 

223,000

 

2023

 

 

223,000

 

2024 (remaining 3 months)

 

 

60,000

 

Total lease payments

 

 

673,000

 

Less: Imputed interest/present value discount

 

 

(150,000 )

 

 

 

 

 

Present value of lease liabilities

 

$ 523,000

 

 

Operating lease cost for the three months ended September 30, 2020 was approximately $27,000. Rent expense under this operating lease agreement for the three months ended September 30, 2019 was approximately $37,000.

 

9. Commitments and Contingencies

 

Litigation

 

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

 

Contractual Commitments

 

The Company has total non-cancellable contractual minimum commitments of approximately $4.2 million to contract research organizations as of September 30, 2020. Expenses are recognized when services are performed by the contract research organizations.

 

Contingent Liability - Disputed Invoices

 

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

 

All of the above disputed invoices were reflected as current liabilities as of September 30, 2020.

 

 
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10. Related Party Transactions

 

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 September 30, 2020 and June 30, 2020, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable. Dr. Menon, on behalf of himself and KARD, demanded payment of these amounts in October 2019; however, the Company disputes the underlying basis for these amounts and notified Dr. Menon in November 2019 of the Company’s intent not to pay them.

 

Share Issuance

 

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

 

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

 

11. Convertible Note Payable - Related Party

 

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

 

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

 

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

 

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

 

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

 

 
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As of September 30, 2020 and June 30, 2020, the principal balance of this convertible note payable to Mr. Ehrlich, the Company’s Chairman and CEO was approximately $1,580,000 and $1,822,000, respectively.

 

As of September 30, 2020 and June 30, 2020, the balance of accrued interest payable was $41,000 and $11,000, respectively (see Note 5. Accrued Expenses – Related Parties and Other).

 

As of September 30, 2020 and June 30, 2020, the total outstanding balances of principal and interest were approximately $1,621,000 and $1,833,000, respectively.

 

12. Loan payable

 

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

 

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

 

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

 

Stock-based Compensation – Stock Options

 

2016 Equity Incentive Plan (the “2016 Plan”)

 

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

 

On June 30, 2016, the Board of Directors adopted the Company’s 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).

 

 
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Stock Options

 

The fair value of options granted for the three months ended September 30, 2020 and 2019 was estimated on the date of grant using the Black-Scholes-Merton Model that uses assumptions noted in the following table.

 

 

 

Three months ended

September 30,

 

 

 

2020

 

 

2019

 

Expected term (in years)

 

 

10

 

 

 

10

 

Expected stock price volatility

 

93.95 to 95.47%

 

 

 

92.21 %

Risk-free interest rate

 

0.59 to 0.68%

 

 

 

1.50 %

Expected dividend yield

 

 

0

 

 

 

0

 

 

The components of stock-based compensation expense included in the Company’s Statement of Operations for the three months ended September 30, 2020 and 2019 are as follows (rounded to nearest thousand):

 

 

 

Three months ended

September 30,

 

Stock-based compensation

 

2020

 

 

2019

 

Stock-based compensation – officers

 

 

 

 

 

189,000

 

Stock-based compensation – employees

 

 

19,000

 

 

 

38,000

 

Stock-based compensation – consultants

 

 

43,000

 

 

 

9,000

 

– included in Research and Development expenses

 

 

62,000

 

 

 

236,000

 

 

Exercise of options

 

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 909,090 options, 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; see Note 11).

 

On March 30, 2020, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich for his partial exercise of his 909,090 options, 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; see Note 11).

 

On September 8, 2020, Mr. Ehrlich partially exercised an option to purchase 2.2 million shares of Class B common stockat the option exercise price of $0.11 per share, paid by the cancellation of debt to Mr. Ehrlich of $242,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement; see Note 11). The total taxable compensation to Mr. Ehrlich for the 2.2 million shares was approximately $90,223, based upon the closing stock price on September 4, 2020 of $0.21 a share. The Company issued 1,787,762 shares of Class B common shares (net share issuance amount) to Mr. Ehrlich. The remaining 412,238 shares of Class B common shares were withheld from Mr. Ehrlich 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.

 

Forfeiture of options

 

Dr. Bertolino resigned as President and Chief Medical Officer and as a member of the Board of Directors of the Company on December 19, 2019. On February 17, 2020, all his 2,858,521 options he held were forfeited, representing the options he was granted since June 27, 2016 to September 1, 2019. The Company reversed the $251,000 of unvested options and shares that were expensed in the current year and prior years.

 

 
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Stock Options Issued and Outstanding

 

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

 

 

 

Number of
Options

 

 

Weighted Average
Exercise Price

 

 

Weighted

Average
Remaining

Contractual Life

(Years)

 

 

Aggregate

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2019

 

 

22,669,883

 

 

$ 0.24

 

 

 

2.41

 

 

$ 1,340,000

 

Granted

 

 

3,540,826

 

 

$ 0.09

 

 

 

7.44

 

 

 

 

Exercised

 

 

(909,090 )

 

$ 0.11

 

 

 

 

 

 

 

Forfeited/expired

 

 

(2,498,521 )

 

$ 0.67

 

 

 

 

 

 

 

Outstanding at June 30, 2020

 

 

22,803,098

 

 

$ 0.18

 

 

 

1.83

 

 

$ 5,857,312

 

Granted

 

 

272,987

 

 

$ 0.26

 

 

 

9.90

 

 

 

 

Exercised

 

 

(2,200,000 )

 

$ 0.11

 

 

 

 

 

 

 

Forfeited/expired

 

 

 

 

$

 

 

 

 

 

 

 

Outstanding at September 30, 2020

 

 

20,876,085

 

 

$ 0.19

 

 

 

1.82

 

 

$ 1,711,775

 

Exercisable at September 30, 2020

 

 

19,796,777

 

 

$ 0.19

 

 

 

1.51

 

 

$ 1,656,113

 

Unvested stock options at September 30, 2020

 

 

1,079,308

 

 

$ 0.18

 

 

 

7.58

 

 

$ 55,662

 

 

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, 2019

 

 

1,729,288

 

 

$ 0.51

 

Total shares granted

 

 

2,625,061

 

 

$ 0.11

 

Total shares vested

 

 

(2,637,561 )

 

$ 0.29

 

Total shares forfeited

 

 

(1,600,001 )

 

$ 0.22

 

Total unvested shares outstanding at June 30, 2020

 

 

116,787

 

 

$ 0.32

 

 

 

 

 

 

 

 

 

 

Total shares granted

 

 

58,394

 

 

$ 0.22

 

Total shares vested

 

 

(58,395 )

 

$ 0.41

 

Total shares forfeited

 

 

-

 

 

$ -

 

Total unvested shares outstanding atSeptember 30, 2020

 

 

116,786

 

 

$ 0.22

 

 

Scheduled vesting for outstanding restricted stock awards at September 30, 2020 is as follows:

 

 

 

Year Ending June 30,

 

 

 

2022

 

 

2023

 

 

2024

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Scheduled vesting

 

 

58,394

 

 

 

38,928

 

 

 

19,464

 

 

 

116,786

 

 

As of September 30, 2020, there was approximately $25,000 of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately $14,000 of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 2.16 years

 

 
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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. All 400 shares of preferred stock were issued from May 2029 to September, 2019.

 

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

 

Average risk-free interest rate

 

 

1.64 %

Average expected life-years

 

 

2

 

Expected volatility

 

 

99.03 %

Expected dividends

 

 

0 %

 

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

 

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

 

 
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Warrants to Purchase Common Stock

 

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. The value of the warrants issued was approximately $1.7 million. Assumptions used in the Black Scholes option-pricing model for these warrants were as follows:

 

Average risk-free interest rate

 

 

2.73 %

Average expected life-years

 

 

5

 

Expected volatility

 

 

52.77 %

Expected dividends

 

 

0 %

 

All 8,000,000 warrants to purchase shares of the Company’s common stock were exercised at an exercise price of $0.38 per share on June 18, 2020 and June 23, 2020.

 

14. Equity Transactions

 

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

 

On July 31, 2020, the Company entered into a new common stock purchase agreement (the “2020 Agreement”) with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 24-month term of the Agreement. In consideration for entering into the 2020 Agreement, the Company issued to Aspire Capital 6,250,000 shares of its Class A Common Stock as a commitment fee. The commitment fee of approximately $1.4 million was recorded as deferred financing costs and additional paid-in capital and this asset will be amortized over the life of the 2020 Agreement. The amortized amount of approximately $0.1 million was recorded to additional paid-in capital for the quarter ended September 30, 2020. The unamortized portion is carried on the balance sheet as deferred offering costs and was approximately $1.3 million at September 30, 2020.

 

During the period from July 31, 2020 to September 30, 2020, the Company generated proceeds of approximately $2.9 million under this 2020 Agreement with Aspire Capital from the sale of approximately 13.5 million shares of its common stock. As of September 30, 2020, the available balance under the new equity line agreement was approximately $27.2 million.

 

Class B Common Stock

 

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).

 

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

 

On September 8, 2020, the Company issued 2.2 million shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $242,000 to satisfy the exercise price (See Note 11. Convertible Note Payable to the consolidated financial statements).

 

As of September 30, 2020 and June 30, 2020, the total issued number of Class B common stock were 4,018,180 shares and 1,818,180 shares, respectively, and the total outstanding number of Class B common stock were 3,605,942 shares and 1,818,180 shares, respectively.

 

As of September 30, 2020 and June 30, 2020, the total number of treasury shares of Class B common stockwere 412,238 shares and 0 shares, respectively.

 

Class A Common Stock

 

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

 

Series B 5% convertible preferred stock purchase agreement

 

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 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 $0 and $102,000 under Other (income) expense in the accompanying consolidated Statements of Operations for the three months ended September 30, 2020 and 2019, respectively.

 

Underlying Series B preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B preferred stock) on a daily basis given fixed dividend terms under the Series B preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B preferred stock up to June 30, 2020. The total dividends of approximately $0 and $20,000 are treated as interest expense – preferred stock during the three months ended September 30, 2020 and 2019, respectively. The balance of unpaid dividends of $13,000 was included at accrued dividend under current liabilities as of September 30, 2020 and June 30, 2020.

 

 
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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.

 

Warrants

 

See Note 13 for a description of the Series 1-4 warrants issued in connection with the preferred stock. No Series 1-4 warrants were outstanding as of September 30, 2020 and June 30, 2020.

 

Conversion of preferred stock to common stock

 

During the three months ended September 30, 2020 and 2019, the two preferred stockholders converted 0 shares and 890 shares of Series B preferred stock into 9.0 million shares of common stock, respectively.

 

As of September 30, 2020 and June 30, 2020, there was no Series B 5% convertible preferred stock was outstanding.

 

Treasury Stock

 

During the three months ended September 30, 2020 and 2019, the Company withheld 21,606 and 431,230 shares of Class A common stock upon the vesting of restricted shares for the payment of payroll taxes to federal and state taxing authorities. In addition, during the three months ended September 30, 2020, the Company withheld 412,238 shares of Class B common stock following the exercise of an option for the payment of payroll taxes to the Federal and State taxing authorities. No shares of Class B common stock were withheld during the three months ended September 30, 2019.All of the foregoing shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

 

There were 681,054 shares of Class A common stock and 412,238 shares of Class B common stock held in treasury, purchased at a total cumulative cost of $239,000 as of September 30, 2020.

 

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

 

15. Subsequent Events

 

Equity Transactions

 

From October 1, 2020 to November 16, 2020, the Company has generated additional proceeds of approximately $1.4 million under the 2020 Agreement with Aspire Capital from the sale of 7 million shares of its common stock.

 

On October 2, 2020, Mr. Ehrlich exercised 909,090 options to purchase 909,090 shares of Class B common stock at the option exercise price of $0.11 per share. Mr. Ehrlich paid for this exercise of his option by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price. The total taxable compensation to Mr. Ehrlich for these 909,090 shares was approximately $86,000 based upon the closing stock price on October 2, 2020 of $0.21 a share. The Company issued 727,994 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 181,096 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

 

The Company has evaluated events subsequent to September 30, 2020 through the issuance of these financial statements and determined that there were no additional events requiring disclosure.

 

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

 

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

 

Management’s Plan of Operation

 

Overview

 

Innovation Pharmaceuticals Inc. is a clinical stage pharmaceutical company developing innovative therapies with anti-infective, oncology, anti-inflammatory and dermatology, applications. The Company owns the rights to Brilacidin, our lead drug in a new class of compounds called defensin-mimetics, and Kevetrin (thioureidobutyronitrile), our anti-cancer compound.

 

Recent Developments

 

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

 

On August 26, 2020, Dr William F. DeGrado, a discoverer of Brilacidin, joined the Company as a Scientific Advisor.

 

On October 2, 2020, the Company relayed that the FDA had granted a pre-IND meeting for the study of Brilacidin for the treatment of COVID-19.

 

On October 30, 2020, the Company released details regarding research conducted at the U.S. Regional Biocontainment Laboratory located at George Mason University demonstrating Brilacidin’s COVID-19 treatment potential. Public release of the information was disclosed via a preprint, prior to formal peer review submission.

 

On November 2, 2020, the Company confirmed receipt of pre-IND responses from FDA on the study of Brilacidin for the treatment of COVID-19. The feedback will be incorporated into the clinical trial protocol ahead of IND submission. The clinical trial is anticipated to commence during the fourth quarter of calendar 2020.

 

Business Development and Licensing

 

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

 

 
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In July 2019, the Company entered into a license agreement with Alfasigma, granting Alfasigma the worldwide right to develop, manufacture and commercialize rectally administered Brilacidin for UP/UPS. The license agreement also provides Alfasigma with a right of first refusal for Brilacidin for the treatment of more extensive forms of inflammatory bowel disease (IBD), such as Ulcerative Colitis and Crohn’s disease, and a right of first negotiation for Brilacidin in other gastrointestinal indications.

 

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

 

Active Clinical Development Programs

 

Compound

Target/Indication

Clinical Status

Brilacidin

Oral Mucositis (OM)

Phase 2 Study (completed)

Phase 3 in preparation

 

Inflammatory Bowel Disease (IBD)

Phase 2 UP/UPS Proof of Concept Study (completed)

Phase 1 Safety/toleration/PK of oral dosage form (completed)

Phase 2 UC Safety/toleration/PK and Proof of Concept in preparation

 

ABSSSI (Acute Bacterial Skin and Skin Structure Infection)

Phase 2 (completed)

 

COVID-19

Phase 2 in preparation

Kevetrin

Ovarian Cancer

Phase 2 Study (completed)

 

We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Milestone payments from our licensee are also dependent on clinical/regulatory milestones. 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 made an initial upfront non-refundable payment of $0.4 million to the Company during the year ended June 30, 2020. We are actively engaged in business development for partnering our drugs. Developing pharmaceutical products, however, is a lengthy and very expensive process and there can be no assurance that we will complete such development or commercialize such for several years, if ever.

 

The Company devotes most of its efforts and resources on Brilacidin, which is in clinical 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.

 

Set forth below is an overview of our most recent research and development efforts on Brilacidin and Kevetrin through the date of this Quarterly Report on Form 10-Q:

 

 
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Brilacidin

 

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

 

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

 

Research Highlights:

 

·

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

·

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

·

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

·

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

 

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

 

Given the safety and efficacy data already known about Brilacidin from pre-clinical and clinical studies utilizing multiple routes of administration, a Phase 2 clinical trial of intravenously-administered Brilacidin for COVID-19 is being planned, with a trial initiation targeted for the fourth quarter of calendar year 2020. The Company filed a pre-IND meeting request with the US FDA for the study of Brilacidin for the treatment of COVID-19. FDA feedback has been received and the Company is now finalizing the Phase 2 clinical protocol, and anticipates submitting a US IND application in November 2020 for its planned Phase 2, randomized, double-blind, placebo-controlled, multi-center study to evaluate the efficacy and safety of Brilacidin in COVID-19 hospitalized patients. Target enrollment is 120 patients. Contract Research Organizations have been secured to expedite trial enrollment, with many clinical sites expressing interest in participating in the study.

 

Partnering opportunities with industry and academic partners are ongoing regarding the COVID-19 program. The Company through discussions with industry, academic consultants, and potential partners will also explore investigation of treatment with Brilacidin by inhaled administration for the prevention of COVID-19 infection.

 

The Company is collaborating with a Regional Biocontainment Laboratory (RBL) for federal grants to fund continued research on Brilacidin as a treatment for SARS-CoV2. An earlier grant application was unsuccessful. At the time of that grant filing deadline, the only research data available was limited to non-human Vero cells. Subsequent to the filing, human cell line experiments were completed and the data is now available. Additional grant applications incorporating the new data are planned for submission before the end of 2020.

 

IBD, Ulcerative Proctitis/Proctosigmoiditis (UP/UPS) study —A Phase 2a trial comprised three sequential cohorts, with progressive dose escalation by cohort—cohort A (6 patients) - 50 mg, cohort B (6 patients) - 100 mg, and cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The primary efficacy endpoint of clinical remission (accounting for stool frequency, rectal bleeding and endoscopy findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient quality of life (as assessed by the short inflammatory bowel disease questionnaire, or SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. Future development work with locally-administered Brilacidin for UP/UPS is being conducted by Alfasigma, our licensee. See Note 7. Exclusive License Agreement to the consolidated financial statements.

 

 
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IBD, Ulcerative Colitis (UC) — Brilacidin is also being developed as a treatment in more extensive forms of IBD, with formulation development plans including oral tablets (or capsules) first aimed for the treatment of ulcerative colitis and then Crohn’s disease.

 

Initial clinical testing in a Phase 1 single-dose escalation trial was conducted in January 2020, which tested a Brilacidin oral formulation in healthy volunteers to assess targeting colon delivery, dispersion, safety, toleration, and systemic exposure/ pharmacokinetics. Data from the Phase 1 trial (NCT03234465) studying the use of delayed-release tablets of Brilacidin showed the trial met its primary endpoints. In the study, the timed-release formulation of Brilacidin was radiolabeled (with complexed technetium-99m) and evaluated for safety and colonic delivery in 9 healthy volunteers (6 with Brilacidin and 3 placebo). Gamma scintigraphic imaging was used to visualize in vivo performance of the enteric coated delayed release tablets designed to target delivery of Brilacidin (50mg, 100mg, and 200mg) to the colon. For Brilacidin treatments, radiolabel release was observed in the ascending colon for four out of the six subjects and in the terminal ileum for the remaining two. Following release, dispersion of the radiolabel was then observed throughout the colon. Serial blood samples were collected through 24 hours post-dose to assess absorption of oral Brilacidin from the colon. Blood level analysis, using a sensitive limit of quantitation in plasma of 1 ng/mL, demonstrated no quantifiable drug concentrations at any timepoint across treatment cohorts, and appears to show containment of Brilacidin within the target location of the colon when delivered by delayed release tablets. Safety outcomes showed that Brilacidin delayed-release tablets were well tolerated by healthy volunteers across all treatment cohorts with no serious adverse events reported. Of the 9 subjects treated, 2 subjects on Brilacidin and 2 subjects on placebo experienced at least one adverse event. The adverse events were of mild intensity and none were deemed to be related to study treatment.

 

Our oral program development will be supported by a modified release oral capsule formulation now in development. Regulatory approval will be sought to initiate a proposed placebo-controlled Phase 2 clinical trial in UC patients, targeted to begin in the first half of calendar year 2021 once drug supply is available.

 

ABSSSI — In February 2016, the Company submitted a Special Protocol Assessment (SPA) request, along with a final protocol, to the FDA, for a Phase 3 clinical trial of Brilacidin for the treatment of Acute Bacterial Skin and Skin Structure Infection (ABSSSI) caused by gram-positive bacteria, including methicillin-resistant Staphylococcus aureus (MRSA). We received from the FDA comments and considerations for incorporation into our study design. Management decided to delay its response to FDA due to the low price per share of our common stock and the many multiple million dollar costs associated with a Phase 3 program. Our strategy, for now, is to achieve success with other trials and attract partnering opportunities that may provide significant upfront payments and milestone payments, which can then be used to fund the ABSSSI program. We see ABSSSI as the appropriate gateway indication in infectious diseases, enabling potential further studies of Brilacidin’s use for implant coating and biofilm infections.

 

Expenditures on Brilacidin were $0.3 million and $0.2 million during the quarters ended September 30, 2020 and 2019, respectively.

 

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

 

 
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Kevetrin

 

The Company has completed a Phase 2a trial of Kevetrin in treating late-stage Ovarian 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. The study was successful in demonstrating modulation of p53 directly in ovarian cancer tumor tissue in patients. Pharmacokinetic data collected on Kevetrin during the Phase 1 clinical trial demonstrated that the compound has a short half-life of approximately two hours. This short half-life makes it a compelling candidate for an oral drug delivery treatment for the main purpose of allowing simple daily, or multiple-times daily administrations within or outside the hospital setting. Compared to injectable or intravenous treatments, oral therapy is the preferred drug delivery method of patients. Preliminary laboratory studies are encouraging and support the potential of developing an oral formulation, but there are no assurances made or implied that the Company will be successful in completing development of an oral formulation. Toxicology studies for the oral formulation of Kevetrin are approximately half completed, with the remainder of this work to be completed when the Company secures additional financial resources. Next steps in the development of Kevetrin include: completing bridging toxicology work for an oral formulation; developing the oral formulation (capsule 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 quickly lead to Phase 2 testing of oral Kevetrin in both solid tumors and leukemias, with ovarian cancer likely continuing to be the lead indication.

 

Expenditures on Kevetrin were insignificant during the both quarters ended September 30, 2020 and 2019.

 

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 and there can be no assurance that we will complete such development or commercialize such for several years, if ever.

 

Critical Accounting Policies and Estimates

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

 
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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. Based upon our expected rate of expenditures over the next 12 months, we expect to raise additional capital through, among other things, the sale of equity or debt securities to meet all of our anticipated obligations for our current operations through our fiscal year end of June 30, 2021. However, continuing operations for the next 12 months from the date of this filing is very much dependent upon our ability to raise equity from existing or new financing sources. There can be no assurance as to the availability or terms upon which such financing and capital might be available.

 

For the three months ended September 30, 2020 and 2019

 

Revenue

 

We generated revenue of $0 and $0.4 million for the three months ended September 30, 2020 and 2019, respectively. Revenue during the three months ended September 30, 2019 represented the initial non-refundable payment from the exclusive license agreement signed with Alfasigma S.p.A., a global pharmaceutical company (see Note 7. Exclusive License Agreement to the condensed consolidated financial statements).

 

We incurred operating expenses of approximately $1.1 million and $1.3 million for the three months ended September 30, 2020 and 2019, 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 (rounded to nearest thousand):

 

 

 

For the three months ended

 

 

Change

 

 

 

September 30,

 

 

2020 vs. 2019

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical studies and development research

 

$ 298,000

 

 

$ 290,000

 

 

 

8,000

 

 

 

3 %

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

 

 

-

 

 

 

114,000

 

 

 

(114,000 )

 

 

-100 %

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

 

 

70,000

 

 

 

70,000

 

 

 

-

 

 

 

0 %

Stock-based compensation - officers

 

 

-

 

 

 

189,000

 

 

 

(189,000 )

 

 

-100 %

Stock-based compensation - employees

 

 

19,000

 

 

 

38,000

 

 

 

(19,000 )

 

 

-50 %

Stock-based compensation - consultants

 

 

43,000

 

 

 

9,000

 

 

 

34,000

 

 

 

378 %

Depreciation and amortization expenses

 

 

94,000

 

 

 

93,000

 

 

 

1,000

 

 

 

1 %

Total

 

$ 524,000

 

 

$ 803,000

 

 

 

(279,000 )

 

 

-35 %

 

Officers’ payroll decreased during the three months ended September 30, 2020 because the Company’s President and Chief Medical Officer resigned on December 19, 2019, which led to the decrease in officers’ payroll during the quarter ended September 30, 2020.

 

Stock-based compensation - officers decreased during the three months ended September 30, 2020because of the resignation of our President and Chief Medical Officeron December 19, 2019, resulting in no compensation expense in the current year period, compared to compensation expense of $189,000 in the prior year period relating to equity awards granted in 2018 and 2019.

 

 
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Stock-based compensation - employees decreased during the three months ended September 30, 2020 due to valuation of stock awards vesting being lower to employees during the quarter ended September 30, 2020 compared with the same period in 2019.

 

Stock-based compensation - consultants increased during the three months ended September 30, 2020 due to more stock awards were granted to consultants during the quarter ended September 30, 2020 compared with the same period in 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. Clinical studies and development expenses may increase in future reporting periods depending on the Company’s current and future financial liquidity.We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects when possible; however, many activities occurring simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on an individual program basis.

 

General and Administrative Expenses

 

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

 

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

 

 

 

For the three months ended

 

 

Change

 

 

 

September 30,

 

 

2020 vs. 2019

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance and health expense

 

$ 118,000

 

 

$ 128,000

 

 

 

(10,000 )

 

 

(8 )%

Rent and utility expense

 

 

27,000

 

 

 

59,000

 

 

 

(32,000 )

 

 

(54 )%

Other G&A

 

 

119,000

 

 

 

78,000

 

 

 

41,000

 

 

 

53 %

Total

 

$ 264,000

 

 

$ 265,000

 

 

 

(1,000 )

 

-

%

 

General and administrative expenses slightly decreased during the three months ended September 30, 2020 primarily related to 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 (rounded to nearest thousand):

 

 

 

Three months ended

 

 

Change

 

 

 

September 30,

 

 

2020 vs. 2019

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Officers’ payroll and payroll tax expenses

 

$ 127,000

 

 

$ 118,000

 

 

 

9,000

 

 

 

8 %

 

Officers’ payroll and payroll tax expenses for the Company slightly increased during the three months ended September 30, 2020.

 

 
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Professional Fees

 

Below is a summary of our Professional fees (rounded to nearest thousand):

 

 

 

Three months ended

 

 

Change

 

 

 

September 30,

 

 

2020 vs. 2019

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit, legal and professional fees

 

$ 214,000

 

 

 

155,000

 

 

 

59,000

 

 

 

38 %

 

Professional fees increased during the three months ended September 30, 2020 primarily related to increase in legal fees and other professional fees in 2020.

 

Other Income (Expense)

 

Below is a summary of our other income (expense) (rounded to nearest thousand):

 

 

 

For the Three months ended

 

 

Change

 

 

 

September 30,

 

 

2020 vs. 2019

 

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense – debt

 

 

(44,000 )

 

 

(48,000 )

 

 

(4,000 )

 

-

%

Interest expense – preferred stock liability

 

 

-

 

 

 

(20,000 )

 

 

(20,000 )

 

-

%

Change in fair value – Series B preferred stock

 

 

-

 

 

 

102,000

 

 

 

102,000

 

 

-

%

Impairment expense of operating lease

 

 

-

 

 

 

(643,000 )

 

 

(643,000 )

 

-

%

Other Income (Expense), net

 

$ (44,000 )

 

$ (609,000 )

 

$ (565,000 )

 

1177

%

 

There was a decrease in interest expenses paid on the note payable – related party, because the decrease in the note payable due to the Company’s Chairman and CEO in the quarter ended September 30, 2020 compared to the prior year period (see Note 11. Convertible Note Payable - Related Party to the condensed consolidated financial statements).

 

There was a decrease in interest expense – preferred stock liability and change in fair value – Series B preferred stock because no shares of Series B preferred stock were outstanding in the three months ended September 30, 2020.

 

There was a decrease in impairment expense of operating lease of approximately $643,000, related to the operating lease right-of-use asset associated with the office space vacated by the Company in December 2019 (see Note 8 – Operating Leases to the condensed consolidated financial statements).

 

Net Losses

 

We incurred net losses of $1.2 million and $1.6 million for the three months ended September 30, 2020 and 2019, respectively, because of the above-mentioned factors.

 

Liquidity and Capital Resources

 

Projected Future Working Capital Requirements - Next 12 Months

 

As of September 30, 2020, we had approximately $7.3 million in cash compared to $6.0 million of cash as of June 30, 2020, and as of the date of this filing, we have approximately $7.2 million in cash. We currently anticipate that future budget expenditures will be approximately $10.3 million for the fiscal year ending June 30, 2021, including approximately $8.3 million for clinical activities, supportive research, and drug product. Alternatively, if we decide to pursue a more aggressive plan with our clinical trials, we will require additional sources of capital during the fiscal year 2021 to meet our working capital requirements for our planned clinical trials. Potential sources for capital include grant funding for COVID-19 research and equity financings (see below). There can be no assurances that we will be successful in receiving any grant funding for our programs.

 

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

 

On July 31, 2020, the Company entered into a new common stock purchase agreement (the “2020 Agreement”) with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 24-month term of the 2020 Agreement.

 

Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading “Risk Factors” in Part I, Item 1A and elsewhere in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 and in this report and in other reports we filed with the SEC.

 

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

 

Shelf Registration Statement - Current Status

 

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

 

Cash Flows

 

The following table provides information regarding our cash position, cash flows and capital expenditures (rounded to nearest thousand):

 

 

 

Three Months Ended

 

 

Change

 

 

 

September 30,

 

 

Increase/

 

 

 

2020

 

 

2019

 

 

(Decrease)

 

 

 

 

 

 

 

%

 

Net cash used in operating activities

 

$ (1,521,000 )

 

$ (620,000 )

 

 

145 %

Net cash used in investing activities

 

 

(3,000 )

 

 

(21,000 )

 

 

(86 )%

Net cash provided by financing activities

 

 

2,758,000

 

 

 

972,000

 

 

 

184 %

Net increase in cash

 

$ 1,234,000

 

 

$ 331,000

 

 

 

273 %

 

The increase in net cash used in operating activities of $0.9 million versus the prior-year three-month period was mainly due to revenue of $0.4 million in 2019representing an initial non-refundable payment from the exclusive license agreement signed with Alfasigma (see Note 7. Exclusive License Agreement to the condensed consolidated financial statements) compared to no revenue in the current year period, and high payroll taxes in the current year period, partially offset by less spending for research and development expenses in the current year period.

 

 
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Investing activities

 

The decrease in net cash used in investing activities versus the prior-year three-month period was due to adecrease in patent costs.

 

Financing activities

 

During the three months ended September 30, 2020 and 2019, our total net financing activities provided cash of $2.8 million and $1.0 million, respectively.

 

During the three months ended September 30, 2020, we raised approximately $2.9 million in net cash proceeds, from sale of common stock to Aspire, offset by purchase of treasury stock of $0.1 million.

 

During the three months ended September 30, 2019, we raised approximately $1.0 million in net cash proceeds, from issuance of Series B preferred stock and exercise of warrants, offset by purchase of treasury stock of $0.1 million.

 

Requirement for Additional Working Capital

 

The Company, contingent on its future sale of its securities, plans to incur total expenses of approximately $10.3 million for the next 12 months, including approximately $8.3 million for clinical activities, supportive research, and drug product development. The Company has limited experience with pharmaceutical drug development. As such, the budget estimate may not be accurate. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or a change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget and on our projected timeline of drug development.

 

The Company will be unable to proceed with its planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without accessing its financing available with Aspire Capital of approximately $30 million, of which approximately $25.7 million remains as of the date of this filing. Management believes, as of the date of this filing that the funding amount from Aspire Capital will be available as needed by the Company and that adverse market conditions in the Company’s common stock price and trading volume, will not prevent the Company from funding its working capital requirements for the next 12 months from the date of this filing.

 

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

 

 
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Commitments and Contingencies

 

Please see Note 9 to the consolidated financial statements, Commitments and Contingencies, for a discussion of recent contractual commitments and contingent liability - disputed invoices.

 

Equity Transactions

 

From October 1, 2020 to November 16, 2020, the Company has generated additional proceeds of approximately $1.4 million under the 2020 Agreement with Aspire Capital from the sale of 7 million shares of its common stock.

 

Off-Balance Sheet Arrangements

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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 September 30, 2020, 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 September 30, 2020, the principal executive officer and principal financial officer of the Company has 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 September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

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

 

 
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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

See Note 9 in the accompanying consolidated financial statements.

 

ITEM 1A. RISK FACTORS

 

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

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

 

The table below provides information about shares delivered to the Company from restricted stock held by Company employees upon vesting for purpose of funding the recipient’s tax withholding obligations:

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs

 

July 1, 2020 through July 31, 2020

 

 

 

 

$

 

 

 

 

 

 

N/A

 

August 1, 2020 through August 31, 2020

 

 

 

 

$

 

 

 

 

 

 

N/A

 

September 1, 2020 through September 20, 2020

 

 

21,606

 

 

$ 0.21

 

 

 

 

 

 

N/A

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

ITEM 5. OTHER INFORMATION

 

None

 

 
37

Table of Contents

 

ITEM 6. EXHIBITS

 

(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

 

 

 

 

 

4.1

 

Registration Rights Agreement, dated as of July 31, 2020, between the Company and Aspire Capital Fund, LLC

 

Exhibit 4.1 to the Current Report on Form 8-K of the Company filed on August 4, 2020

 

 

 

 

 

10.1

 

Common Stock Purchase Agreement, dated as of July 31, 2020, between the Company and Aspire Capital Fund, LLC

 

Exhibit 10.1 to the Current Report on Form 8-K of the Company filed on August 4, 2020

 

 

 

 

 

31.1

 

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

 

Filed herewith

 

 

 

 

 

32.1

 

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

 

Furnished herewith

 

 

 

 

 

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2020 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes

 

Filed herewith

 

 
38

Table of Contents

 

SIGNATURES

 

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

 

 

INNOVATION PHARMACEUTICALS INC.

 

 

 

 

 

Dated: November 16, 2020

By:

/s/ Leo Ehrlich

 

 

Name:

Leo Ehrlich

 

 

Title:

Chief Executive Officer and Chief Financial Officer

(Principal Executive, Accounting and Financial Officer)

 

 

 
39

 

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