NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2018 AND 2017
1. Basis of Presentation and Nature of Operations
Innovation Pharmaceuticals Inc. (the “Company”) was incorporated on August 1, 2005 in the State of Nevada. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the name change was not required.
The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. The Company’s common stock is quoted on OTCQB, symbol “IPIX”.
Nature of Operations - Overview
We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of inflammatory diseases, cancer, dermatology and anti-infectives. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Brilacidin, Kevetrin and Prurisol and advancing them as quickly as possible along the regulatory pathway. We will develop the highest quality data and broadest intellectual property to support our compounds.
We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.
Note 2. Going Concern and Liquidity
These financial statements have been prepared on the assumption that the Company is a going concern, which contemplates the realization of its assets and the settlement of its liabilities in the normal course of operations.
We have incurred recurring losses since inception and expect to continue to incur losses as a result of costs and expenses related to our research and continued development of our compounds and our corporate general and administrative expenses. As of June 30, 2018, the Company has an accumulated deficit of approximately $85.9 million, representative of recurring losses since inception. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) approval. As a result, the Company expects to continue to incur losses over the next 12 months from the date of this filing. Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $14 million for the next twelve months, raise substantial doubt about its ability to continue as a going concern.
At June 30, 2018, the Company’s cash amounted to $2.4 million and current liabilities amounted to $8.7 million, of which $6.5 million were payables to related parties with no immediate payment terms (See Note 10- Related Party Transactions). The Company had expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. The Company’s net cash used in operating activities for the years ended June 30, 2018 was approximately $13.3 million, and current projections indicate that the Company will have continued negative cash flows from operating activities for the foreseeable future. Our net losses incurred for the years ended June 30, 2018 and 2017, amounted to $16.4 million and $15.5 million, respectively, and we had a working capital deficit of approximately $6.1 million and $6.1 million, respectively at June 30, 2018 and June 30, 2017.
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.
The Company's primary sources of liquidity are cash and cash equivalents as well as availability, under a common stock purchase agreement (“Purchase Agreement”) with Aspire Capital. Management has put in place the Purchase Agreement (see Note 13 to the accompanying financial statements) with Aspire Capital to fund its future clinical trial expenses and overhead expenses over the next 12 months. The Purchase Agreement provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company's common stock over the 36-month term of the Purchase Agreement. As of June 30, 2018, the available balance under the 2017 purchase agreement is approximately $22.3 million.
As of date of this report, management noted a decline in the market conditions of the Company’s common stock price and volume trading. Based on these considerations, management believes that the funding amount available from Aspire Capital may not be available as needed by the Company which may prevent management from funding the Company's projected working capital requirements for the next 12 months from the date of the issuance of the financial statements (or available to be issued). In particular, the Purchase Agreement provides that the Company and Aspire Capital will not effect any sales under the agreement when the closing sales price of our common stock is less than $0.25 per share. In recent months, our common stock has closed as low as $0.34 per share, and there is substantial uncertainty regarding our continued ability to sell shares under the common stock purchase agreement.
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. These financial statements do not include any adjustments related to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern.
3. Significant Accounting Policies and Recent Accounting Pronouncements
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include contract research accruals, recoverability of long-lived assets, valuation of equity grants and income tax valuation. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Cash
Cash consist of bank deposits. There were no cash equivalents at June 30, 2018 and 2017.
Equipment
Equipment is stated at cost, net of accumulated depreciation. Expenditures that extend the life, increase the capacity, or improve the efficiency of property and equipment are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation is recognized using the straight-line method over the following approximate useful lives:
Intangible Assets - Patents
Costs incurred to file patent applications and acquired intangibles are capitalized when the Company believes that there is a high likelihood that the patent will be issued and there will be future economic benefit associated with the patent. These costs will be amortized on a straight-line basis over a 12 - 17 years life from the date of patent filing. All costs associated with abandoned patent applications are expensed. In addition, the Company will review the carrying value of patents for indicators of impairment on a periodic basis and if it determines that the carrying value is impaired, it values the patent at fair value. As of June 30, 2018 and 2017, carrying value of patent was approximately $3,780,000 and $4,212,000, respectively. Amortization expense for the fiscal years ended June 30, 2018 and 2017, was approximately $385,000 and $372,000, respectively.
As of June 30, 2018, the Company expensed the costs associated with obtaining patents that have not yet developed products nor which have gained market acceptance and the Company has or will let these patents go abandoned. For the fiscal years ended June 30, 2018 and 2017, the Company has charged to operations approximately $2,000 and $4,000, respectively as patent expenses included in general and administrative expenses.
In accordance with the provisions of the applicable authoritative guidance, the Company’s long-lived assets and amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company assesses the recoverability of such assets by determining whether their carrying value can be recovered through undiscounted future operating cash flows, including its estimates of revenue driven by assumed market segment share and estimated costs. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. During the fiscal years ended June 30, 2018 and 2017, the Company has recorded patents write off of approximately $163,000 and $0, respectively and included in general and administrative expenses.
Financial Instruments
The Company’s financial instruments include cash, accounts payable and accrued liabilities. The carrying amounts of these financial instruments approximate their fair value, due to the short-term nature of these items. The fair value hierarchy has the following three levels:
Level 1 - quoted prices in active markets for identical assets and liabilities.
Level 2 - observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3 - unobservable inputs that reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability.
Certain Risks and Uncertainties
Product Development
We devote significant resources to research and development programs in an effort to discover and develop potential future product candidates. The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes three phases of clinical trials in which we collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease. There are many difficulties and uncertainties inherent in research and development of new products, resulting in a high rate of failure. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and significant cost. Failure can occur at any point in the process, including after the product is approved, based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs of manufacture, alternative therapies or infringement of the patents or intellectual property rights of others. Uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval and which will be commercially viable and generate profits. Successful results in preclinical or clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.
Expenditures for research, development, and engineering of products are expensed as incurred. For the fiscal years ended June 30, 2018 and 2017, the Company incurred approximately $11,368,000 and $12,783,000 of research and development costs, respectively.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit and checking accounts that at times exceed federally insured limits. Approximately $2 million is subject to credit risk at June 30, 2018. However, these cash balances are maintained at creditworthy financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
Accrued Outsourcing Costs
Substantial portions of our preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors, or collectively "CROs". These CROs generally bill monthly or quarterly for services performed, or bill based upon milestone achievement. For preclinical studies, we accrue expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. We monitor patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to us by the CROs, correspondence with the CROs and clinical site visits. Our estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. We periodically evaluate the estimates to determine if adjustments are necessary or appropriate based on information we receive.
Valuation of Equity Grants
The Company accounts for all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to measure the cost of employee services received in exchange for stock options and similar awards based on the grant-date fair value of the award and recognize this cost in the income statement over the period during which an employee is required to provide service in exchange for the award. The Company uses the Black-Scholes valuation model and has elected to use the ratable method to amortize compensation expense over the vesting period of the grant. The Company accounts for equity instruments issued to nonemployees by valuing them using the Black-Scholes valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest.
Income Taxes
Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has generated net losses since inception and accordingly has not recorded a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset the deferred tax assets. Additionally, the future utilization of the NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company follows the provisions of FASB ASC 740-10 “Uncertainty in Income Taxes” (ASC 740-10). The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
The Company has identified its U.S. Federal income tax return and its State return in Massachusetts as its major tax jurisdictions. The fiscal 2015 and forward years are still open for examination.
Basic Loss per Share
Basic and diluted loss per share are computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, restricted stock, warrants and convertible related party notes payable. Common share equivalents were excluded from the computation of diluted earnings per share for the years ended June 30, 2018 and 2017, because their effect was anti-dilutive (See Note 11 - Weighted Average Shares Outstanding).
Treasury Stock
The Company accounts for treasury stock using the cost method. There were 0 shares and 262,080 shares of treasury stock outstanding, purchased at a total cumulative cost of $0 and $220,000 at June 30, 2018 and June 30, 2017, respectively (see Note 12).
Treasury stock, representing shares of the Company’s common stock that have been acquired for payroll tax withholding on vested stock grants, is recorded at its acquisition cost and these shares are not considered outstanding.
Accounting for Stock Based Compensation
The stock-based compensation expense incurred by the Company for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. “tax regulations”. Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.
ASC 505-50-30-11 further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:
|
i.
|
The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and
|
|
|
|
|
ii.
|
The date at which the counterparty’s performance is complete.
|
We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line method.
The components of stock-based compensation related to stock options and restricted stock grants in the Company’s Statement of Operations for the fiscal years ended June 30, 2018 and 2017 are as follows (rounded to nearest thousand):
|
|
Year ended
June 30
|
|
|
|
2018
|
|
|
2017
|
|
Research and development expenses
|
|
|
|
|
|
|
Professional fees
|
|
$
|
120,000
|
|
|
$
|
75,000
|
|
Employees’ bonus
|
|
|
156,000
|
|
|
|
139,000
|
|
Officers’ bonus
|
|
|
1,610,000
|
|
|
|
1,147,000
|
|
Total stock-based compensation expense
|
|
$
|
1,886,000
|
|
|
$
|
1,361,000
|
|
Recent Adopted Accounting Pronouncements
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, 2018, did not have any impact on the financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. This new pronouncement has been adopted in the fourth quarter of fiscal 2018 and did not have a material effect on the Company’s financial position, results of operations or cash flows.
Recently Issued Accounting Guidance
In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a five-step, principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until 2019. In addition, the FASB is allowing companies to early adopt this guidance for non-public entities beginning in fiscal year 2017. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply this new guidance when it becomes effective and has not yet selected a transition method. The Company, due to not having any revenue currently and in the foreseeable future, has concluded that the impact of the adoption of this accounting standard on its financial statements will not be material.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The adoption of ASU 2018-07 will not have a material impact on the financial statements.
In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. The guidance requires the following for finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. The guidance requires the following for operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. The amendments in Topic 842 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management has determined that based on current accounting and lease contract information the adoption of ASU No. 2016-02 is not expected to have a significant impact on the Company’s financial position, results of operations and disclosures. However, management is continually evaluating the future impact of ASU No. 2016-02 based on changes in the Company’s financial statements through the period of adoption.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company will adopt ASU No. 2016-15 commencing in the first quarter of fiscal 2019. The Company does not believe this standard will have a material impact on its financial statements or the related footnote disclosures.
4. Patents, net
Patents, net consisted of the following (rounded to nearest thousand):
|
|
Useful life
|
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Patent Rights- Brilacidin, and related compounds
|
|
|
14
|
|
|
$
|
4,082,000
|
|
|
$
|
4,082,000
|
|
Purchased Patent Rights-Anti-microbial- surfactants and related compounds
|
|
|
12
|
|
|
|
144,000
|
|
|
|
144,000
|
|
Patents - Kevetrin and related compounds
|
|
|
17
|
|
|
|
1,219,000
|
|
|
|
1,308,000
|
|
|
|
|
|
|
|
|
5,445,000
|
|
|
|
5,534,000
|
|
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds
|
|
|
|
|
|
|
(1,462,000
|
)
|
|
|
(1,158,000
|
)
|
Accumulated amortization for Patents-Kevetrin and related compounds
|
|
|
|
|
|
|
(203,000
|
)
|
|
|
(164,000
|
)
|
Total
|
|
|
|
|
|
$
|
3,780,000
|
|
|
$
|
4,212,000
|
|
The patents are amortized on a straight-line basis over the useful lives of the assets, determined to be 12-17 years from the date of acquisition.
Amortization expense was approximately $385,000 and $372,000 for the years ended June 30, 2018 and 2017, respectively.
At June 30, 2018, the future amortization period for all patents was approximately 7.18 years to 16.75 years. Future estimated annual amortization expenses are approximately $375,000 for the year ending June 30, 2019, $375,000 for each year from 2019 to 2025, $365,000 for the year ending June 30, 2026, $363,000 for the year ending June 30, 2027, $125,000 for the year ending June 30, 2028, $72,000 for the years ending June 30, 2029 through the years ended 2031, $52,000 for the year ending June 30, 2032, $23,000 for the year ending June 30, 2033, $7,000 for the year ending June 30, 2034 and $2,000 for the year ending June 30, 2035.
Compounds with Activity Against Gram-Negative Bacteria and Fungi
As research at the Company is now focused on supporting its clinical trials, we have reduced costs associated with the licensing of intellectual property for gram-negative bacteria and anti-fungal compounds by returning our patent portfolio titled “Compounds and Methods for Treating Candidiasis and Aspergillus Infections” back to the university co-licensor. The Company at this time does not have any active gram-negative or anti-fungal programs and therefore has decided not to pay for the maintenance of these patent rights. The carrying value of these abandoned patent as of June 30, 2018 was approximately $163,000. During the fiscal years ended June 30, 2018 and 2017, the Company has recorded patents write off of approximately $163,000 and $0, respectively and included in general and administrative expenses.
5. Property, plant and equipment, net
Property, plant and equipment, net consisted of the following (rounded to nearest thousand):
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Testing equipment
|
|
$
|
4,000
|
|
|
$
|
183,000
|
|
Less: Accumulated depreciation
|
|
|
(2,000
|
)
|
|
|
(63,000
|
)
|
|
|
$
|
2,000
|
|
|
$
|
120,000
|
|
During the year ended June 30, 2018, the Company recorded the loss on disposal of equipment of $49,000 for the sales of its plant and equipment with net book value of $91,000 for the sales proceeds of $42,000. The sales proceeds receivable of $29,000 was recorded under Prepaid and Other Current Assets.
Depreciation expense for the fiscal years ended June 30, 2018 and 2017 was approximately $28,000 and $33,000, respectively.
6. Accrued Expenses – Related Parties and Other
Accrued expenses consisted of the following (rounded to nearest thousand):
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Accrued research and development consulting fees
|
|
$
|
208,000
|
|
|
$
|
673,000
|
|
Accrued rent (Note 9) - related parties
|
|
|
10,000
|
|
|
|
21,000
|
|
Accrued interest (Note 10) - related parties
|
|
|
48,000
|
|
|
|
17,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
266,000
|
|
|
$
|
711,000
|
|
7. Accrued Salaries and Payroll Taxes - Related Parties And Other
Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Accrued salaries - related parties
|
|
$
|
2,823,000
|
|
|
$
|
2,823,000
|
|
Accrued payroll taxes - related parties
|
|
|
130,000
|
|
|
|
130,000
|
|
Accrued employee bonuses
|
|
|
214,000
|
|
|
|
86,000
|
|
Withholding tax - payroll
|
|
|
52,000
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,219,000
|
|
|
$
|
3,144,000
|
|
8. Commitments and Contingencies
Lease Commitments
Operating Leases – Rental Property
The Company signed a lease extension agreement with Cummings Properties which began on October 1, 2013. The lease is for a term of five years ending on September 30, 2018, and requires monthly payments of $18,000. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease.
As of June 30, 2018, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):
Year ending June 30,
|
|
|
|
2019
|
|
$
|
54,000
|
|
Total minimum payments
|
|
$
|
54,000
|
|
Rent expense, net of lease income, under this operating lease agreement was approximately $210,000 and $205,000 for the years ended June 30, 2018 and 2017, respectively. Before September, 2013, the Company paid rent to KARD for share of office space and details are shown at Note 9. Related Party Transactions.
Operating Leases - Equipment
We leased equipment under a non-cancelable operating lease that expired in April, 2018. As of June 30, 2018, there was no future minimum rental commitment for our operating lease for the next twelve months.
Contractual Commitments
The Company has total non-cancelable contractual minimum commitments of approximately $4 million to contract research organizations as of June 30, 2018. Expenses are recognized when services are performed by the contract research organizations.
9. Related Party Transactions
Office Lease
Dr. Menon, the Company’s principal shareholder, President of Research, and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007, the Company began renting office space from KARD, and since September 1, 2013, the Company no longer leases space from KARD. At June 30, 2018 and June 30, 2017, rent payable to KARD of approximately $10,000 and $21,000, respectively, were included in accrued expenses.
In September 2013, the Company signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $18,000. The Company had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., a company owned by Mr. Ehrlich and Dr. Menon, officers of the Company, has co-signed the lease.
Clinical Studies
The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company now has its own research study capabilities and no longer uses KARD. At June 30, 2018 and June 30, 2017, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable.
Other related party transactions are disclosed in Note 10 below.
10. Convertible Note Payable - Related Party
During the year ended June 30, 2010, Mr. Ehrlich loaned the Company a total of approximately $973,000. A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note, Ehrlich Promissory Note C. The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s Class A common stock at $0.50 per share. The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the Ehrlich Promissory Note C and agreed to retroactively convert accrued interest of approximately $97,000 through December 31, 2010 into additional principal. During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional (approximate) $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of this demand note to approximately $2,022,000.
On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principal and interest of approximately $2,248,000, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten (10) years from the date of issuance.
As of June 30, 2018 and June 30, 2017, approximately $48,000 and $17,000, respectively, is the accrued interest payable on this note.
As of June 30, 2018 and June 30, 2017, principal balance of this demand note was approximately $2,022,000.
11. Weighted Average Shares Outstanding
Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:
|
|
June 30
|
|
|
|
2018
|
|
|
2017
|
|
Weighted average shares outstanding-basic
|
|
|
144,510,021
|
|
|
|
127,285,861
|
|
Dilutive options and restricted stock and warrants
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares outstanding-diluted
|
|
|
144,510,021
|
|
|
|
127,285,861
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities not included:
|
|
|
|
|
|
|
|
|
Stock options and convertible note shares
|
|
|
45,784,747
|
|
|
|
44,733,477
|
|
Restricted stock grants
|
|
|
1,208,157
|
|
|
|
601,728
|
|
Warrants
|
|
|
8,000,000
|
|
|
|
-
|
|
Total
|
|
|
54,992,904
|
|
|
|
45,335,205
|
|
12.
Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding
Equity Incentive Plans
2009 Stock Option Plan
On April 5, 2009 the Board of Directors of the Company adopted the 2009 Stock Option Plan (“the 2009 Plan”). The 2009 Plan permits the grant of 2,000,000 shares of both Incentive Stock Options (“ISOs”), intended to qualify under section 422 of the Code, and Non-Qualified Stock Options.
2010 Equity Incentive Plan
Under the 2010 Equity Incentive Plan (the "2010 Plan") adopted by the Board of Directors in December 2010, the total number of shares of Class A or Class B common stock reserved and available for issuance under the 2010 Plan is 45,000,000 shares. Shares of common stock under the 2010 Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. The term of each stock option shall be fixed as provided, however, an ISO may be granted only within the ten-year period commencing from the effective date of the 2010 Plan and may only be exercised within ten years of the date of grant (or five years in the case of an ISO granted to an optionee who, at the time of grant, owns common stock possessing more than 10% of the total combined voting power of all classes of voting stock of the Company).
2016 Equity Incentive Plan
On June 30, 2016, the Board of Directors adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan became effective upon adoption by the Board of Directors on June 30, 2016.
Up to 20,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that (1) no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and (2) no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of ISOs, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.
In connection with adoption of the 2016 Plan, the Board of Directors also approved forms of Incentive Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Non-Employee Directors, Restricted Stock Award Agreement for Employees and Restricted Stock Award Agreement for Non-Employee Directors that will be utilized by the Company to grant options and restricted shares under the 2016 Plan.
Stock Options Issued and Outstanding
The following table summarizes all stock option activity under the Company’s equity incentive plans:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
40,444,758
|
|
|
|
0.22
|
|
|
|
4.58
|
|
|
$
|
48,185,911
|
|
Granted
|
|
|
398,749
|
|
|
|
1.29
|
|
|
|
9.09
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(188,262
|
)
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
40,655,245
|
|
|
|
0.22
|
|
|
|
3.61
|
|
|
$
|
31,662,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,175,826
|
|
|
|
0.72
|
|
|
|
7.44
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(187,500
|
)
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
41,643,571
|
|
|
|
0.22
|
|
|
|
2.76
|
|
|
$
|
17,523,113
|
|
Exercisable at June 30, 2018
|
|
|
40,629,222
|
|
|
$
|
0.21
|
|
|
|
2.63
|
|
|
$
|
17,507,706
|
|
The fair value of options granted for the years ended June 30, 2018 and 2017 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.
|
|
Year Ended June 30
|
|
|
|
2018
|
|
|
2017
|
|
Expected term (in years)
|
|
3-10
|
|
|
3 - 10
|
|
Expected stock price volatility
|
|
48.26%-106.01%
|
|
|
57.63% to 111.62%
|
|
Risk-free interest rate
|
|
2.15%-2.56%
|
|
|
0.71% to 2.49%
|
|
Expected dividend yield
|
|
|
0
|
|
|
|
0
|
|
Stock-Based Compensation
The Company recognized approximately $1,886,000 and $1,361,000 of total stock-based compensation expense for the years ended June 30, 2018 and 2017 respectively. The $1,886,000 of stock- based compensation expense for the year ended June 30, 2018 included approximately $786,000 of stock options expense and $1,100,000 of stock awards (see Note 13).
For the fiscal year ended June 30, 2018
On June 28, 2018, the Company issued (1) 55,000 stock options to purchase shares of the Company’s common stock which was vested immediately; (2) 50,000 stock shares, (3) additional 3-year 50,000 stock options, and (4) Bonus 3-year 50,000 stock options to a consultant for services rendered, exercisable for 3 years at $0.43 per share of common stock. The Company expensed these stock –based compensation as below:
|
·
|
The 55,000 options vested on June 1, 2018. The value of these 55,000 options was approximately $8,000. During the year ended June 30, 2018, the Company recorded approximately $8,000 of stock option expense for this 55,000 stock options grant.
|
|
|
|
|
·
|
The 50,000 stock shares will be vested in 4 equal installments of 12,500 Stock Shares on June 1, 2018, December 1, 2018, June 1, 2019 and December 1, 2019. The value of these 50,000 stock shares was approximately $21,500. During the year ended June 30, 2018, the Company recorded approximately $6,000 of shares award expense for this 50,000 stock shares.
|
|
|
|
|
·
|
The additional 3-year 50,000 stock options will be vested in 4 equal installments of 12,500 Stock Shares on June 1, 2018, December 1, 2018, June 1, 2019 and December 1, 2019 at exercise price equal to the closing stock price on the day before vesting The value of the additional 3-year 50,000 stock options was approximately $8,000. During the year ended June 30, 2018, the Company recorded approximately $2,000 of stock option expense for this additional 3-year 50,000 stock options grant.
|
On February 1, 2018, the Company agreed to issue options to purchase 75,000 shares of common stock to each of two consultants for specified services to be provided from February 1, 2018 to January 31, 2019 in accordance with agreements with the consultants. During the year ended June 30, 2018, the Company recorded approximately $31,000 of related stock-based compensation.
On February 10, 2017, the Company entered into verbal agreements with two consultants to issue options to purchase 50,000 shares of common stock and 75,000 shares of common stock, respectively, to the two consultants for services to be performed from February 13, 2017 to January 31, 2018 in accordance with their consulting agreements. The Company formally signed the agreements with the two consultants on March 13, 2018. During the year ended June 30, 2018, the Company recorded approximately $72,000 of related stock-based compensation.
On September 1, 2017, the Company agreed to grant to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, under the 2016 Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) 50% upon the first anniversary of the effective date and the remaining 50% upon the second anniversary of the effective date; (2) shares of the Company’s common stock close above $3.00 per share (as may be adjusted for any stock splits or similar actions); (3) the commencement of trading of shares of the Company’s common stock on a national securities exchange; or (4) upon a change in control of the Company. The 1,066,667 shares were valued at approximately $752,000 and the 617,839 stock options valued at approximately $399,000. Both shares and options will be amortized over 2 years to September 1, 2019 unless the probability of the other above vesting requirements occurring are met at an earlier date. At June 30, 2018, the Company determined that it was not probable that these accelerated vesting provisions would occur earlier than the scheduled vesting date. During the year ended June 30, 2018, the Company recorded approximately $477,000 of total stock-based compensation. The $477,000 of stock-based compensation expense for the year ended June 30, 2018 included approximately $166,000 of stock option expense and $311,000 of stock awards.
On September 1, 2017, the Company agreed to grant to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company under the 2016 Plan (i) 58,394 shares of restricted stock and (ii) a ten-year option to purchase 172,987 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one third upon the second anniversary of the effective date, and the remaining one third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 58,394 shares were valued at approximately $41,000 and the 172,987 stock options valued at approximately $112,000. Both shares and options will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the year ended June 30, 2018, the Company recorded approximately $43,000 of total stock-based compensation. The $43,000 of stock-based compensation expense for the year ended June 30, 2018 included approximately $31,000 of stock option expense and $12,000 of stock awards.
On September 1, 2017, the Company agreed to grant to Anne Ponugoti, under the 2016 Plan, ten-year options to purchase 5,000 shares of the Company’s common stock at an exercise price of $0.705 per share, which shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one-third upon the second anniversary of the effective date, and the remaining one-third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 5,000 stock options were valued at approximately $3,000 and will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the year ended June 30, 2018, the Company recorded approximately $900 of stock option expense for this option grant.
Purchase of Treasury Stock
On September 1, 2017, 19,465 shares of the Company’s restricted stock vested to Ms. Harness according to Ms. Harness’s employment agreement. The total taxable compensation to Ms. Harness for the 19,465 vested shares was $14,000, which is priced at the closing stock price on September 1, 2017 at $0.705 a share.
The Company issued 12,409 common shares (net share issuance amount), which is approximately 64% of the total vested common share amount of 19,465 common shares due to be issued to Ms. Harness. The remaining 7,056 shares of common stock were withheld from Ms. Harness for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
On December 22, 2017, 533,334 shares of the Company’s restricted stock vested to Dr. Bertolino according to Dr. Bertolino’s employment agreement. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was $373,334, which is priced at the closing stock price on December 21, 2017 at $0.7 a share.
The Company issued 295,286 common shares (net share issuance amount), which is approximately 55% of the total vested common share amount of 533,334 common shares due to be issued to Dr. Bertolino. The remaining 238,048 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
Our employee previously exercised an option to acquire 60,000 shares of the Company’s Common Stock, and the Company booked a $26,000 subscription receivable in connection with this exercise of such option; and on August 31, 2017, the Board has determined that it is in the best interests of the Company and its stockholders to repurchase the 60,000 shares of Common Stock from the employee in satisfaction of the subscription receivable.
On February 1, 2018, 3,333 shares of the Company’s restricted stock vested to Ms. Anne Ponugoti according to Ms. Ponugoti’s employment agreement. The total taxable compensation to Ms. Ponugoti for the 3,333 vested shares was $2,433, which is priced at the closing stock price on January 31, 2018 at $0.73 a share. The Company issued 2,645 common shares (net share issuance amount), which is approximately 79% of the total vested common share amount of 3,333 common shares due to be issued to Ms. Ponugoti. The remaining 688 shares of common stock were withheld from Ms. Ponugoti for the payment of payroll taxes to the Federal and State taxing authorities.
On February 5, 2018, the Board of Directors approved the retirement of 567,872 shares of its common stock in treasury, which shares are issued but are not outstanding. These shares included the 688 shares withheld from Ms. Ponugoti, as a result, all treasury shares of the Company were retired.
There were 0 shares and 262,080 shares of treasury stock outstanding at June 30, 2018 and June 30, 2017, respectively, purchased at a total cumulative cost of $0 and $220,000 at June 30, 2018 and June 30, 2017, respectively.
Restricted Stock Awards Outstanding
The following summarizes our restricted stock activity for our restricted stock issuances:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
|
|
|
|
Total awards outstanding at June 30, 2017
|
|
|
601,728
|
|
|
$
|
1.39
|
|
Total shares granted
|
|
|
1,175,061
|
|
|
|
0.69
|
|
Total shares vested
|
|
|
(568,632
|
)
|
|
|
1.38
|
|
Total shares forfeited
|
|
|
-
|
|
|
|
-
|
|
Total unvested shares outstanding at June 30, 2018
|
|
|
1,208,157
|
|
|
$
|
0.72
|
|
Scheduled vesting for outstanding restricted stock awards at June 30, 2018 is as follows:
|
|
Year Ending June 30,
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled vesting
|
|
|
600,596
|
|
|
|
588,097
|
|
|
|
19,464
|
|
|
|
1,208,157
|
|
As of June 30, 2018, there was approximately $0.5 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately $0.4 million of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 1.23 years.
For the fiscal year ended June 30, 2017
On July 18, 2016, the Company issued 7,500 stock options to purchase shares of the Company’s common stock to a consultant for services rendered, exercisable for 3 years at $1.38 per share of common stock. The value of these 7,500 options was approximately $4,000. During the year ended June 30, 2017, the Company recorded approximately $4,000 of stock option expense for this option grant.
On September 1, 2016, the Company and Jane Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Portfolio Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness, under the 2016 Plan (i) 58,394 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 172,987 shares of the Company’s common stock were also granted at an exercise price of $1.37 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 58,394 shares were valued at approximately $80,000, which will be amortized over three years to September 1, 2019. The 172,987 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 1, 2019. During the year ended June 30, 2018 and 2017, the Company recorded approximately $100,000 and $83,000 of total stock-based compensation, respectively. The $100,000 of stock-based compensation expense for the year ended June 30, 2018 included approximately $72,000 of stock option expense and $28,000 of stock awards. The $83,000 of stock-based compensation expense for the year ended June 30, 2017 included approximately $61,000 of stock option expense and $22,000 of stock awards.
On September 15, 2016, the Company and LaVonne Lang entered into an executive employment agreement as the Company’s VP, Regulatory Affairs, effective on September 15, 2016. Commencing on September 15, 2016, the Company agreed to pay Dr. Lang an annual salary of $250,000. In addition, the Company agreed to grant to Dr. Lang under the 2016 Plan (i) 63,492 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 188,262 shares of the Company’s common stock were also granted at an exercise price of $1.26 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 63,492 shares were valued at approximately $80,000, which will be amortized over three years to September 15, 2019. The 188,262 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 15, 2019. During the year ended June 30, 2017, the Company recorded approximately $50,000 of stock-based compensation expense for these equity grants, including approximately $37,000 of stock option expense and $13,000 for the stock awards. Dr. Lang resigned on March 17, 2017 and the 63,492 restricted shares and the 188,262 stock options were forfeited.
On January 9, 2017, the Company and Anne Ponugoti entered into an executive employment agreement as the Company’s Associate Director, Clinical Sciences, effective on February 1, 2017. Pursuant to the employment agreement, the Company issued 10,000 shares of restricted stock and options to purchase 30,000 shares of common stock under the 2016 Plan. During the year ended June 30, 2018 and 2017, the Company recorded approximately $13,000 and $6,000 of total stock-based compensation, respectively. The $13,000 of stock-based compensation expense for the year ended June 30, 2018 included approximately $9,000 of stock option expense and $4,000 of stock awards. The $6,000 of stock-based compensation expense for the year ended June 30, 2017 included approximately $4,000 of stock option expense and $2,000 of stock awards.
On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement as our President and Chief Medical Officer, effective on June 27, 2016. Commencing on June 27, 2016, the Company agreed to pay Dr. Bertolino an annual salary of $440,000. In addition, the Company agreed to grant to Dr. Bertolino under the 2016 Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company's Class A common stock at an exercise price of $1.39 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) 50% upon the first anniversary of the effective date, and the remaining 50% upon the second anniversary of the effective date (2) completion of both a Phase 2b psoriasis study and a Phase 2 oral mucositis study; (3) the Company’s common stock closes above $3.00 per share (as may be adjusted for any stock splits or similar actions); (4) the commencement of trading of the Company’s common stock on a national securities exchange (e.g. Nasdaq or the NYSE); or (5) upon a Change in Control (as defined in the employment agreement) of the Company. The Company could not conclude that it was probable that these awards will fully vest until the second anniversary of the effective date, because such events listed above are outside the Company’s control. The Company will evaluate the probability of these events occurring for each reporting period. The 1,066,667 shares were valued at approximately $1.5 million, which will be amortized over two years to June 27, 2018. The 617,839 stock options were valued at approximately $800,000 and will be exercisable for 10 years at an exercise price of $1.39 per share. They will be amortized over 2 years to June 27, 2018 or sooner if the Company determines that it is probable that one of the events listed above will occur. During the year ended June 30, 2018 and 2017, the Company recorded approximately $1,134,000 and $1,147,000 of stock-based compensation expense – Officer, for these equity grants, respectively. The $1,134,000 of stock-based compensation – Officer in 2018 included approximately $395,000 of stock option expense and $739,000 of stock awards. The $1,147,000 of stock-based compensation – Officer in 2017 included approximately $400,000 of stock option expense and $747,000 of stock awards.
Exercise of options
During the year ended June 30, 2018 and 2017, there were no stock options exercised.
Stock Warrants Outstanding
The warrants were recorded within stockholders’ deficiency. The fair value of the warrants issued for the years ended June 30, 2018 and 2017 was estimated on the date of issuance using the Black Scholes Model that uses assumptions noted in the following table.
|
|
Year Ended June 30
|
|
|
|
2018
|
|
|
2017
|
|
Expected term (in years)
|
|
|
3
|
|
|
|
-
|
|
Expected stock price volatility
|
|
|
82.36
|
%
|
|
|
-
|
|
Risk-free interest rate
|
|
|
2.73
|
%
|
|
|
-
|
|
Expected dividend yield
|
|
|
0
|
|
|
|
-
|
|
The following table summarizes the outstanding stock warrants:
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
25,000
|
|
|
$
|
1.79
|
|
|
|
0.56
|
|
|
$
|
-
|
|
Extended
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
(25,000
|
)
|
|
|
1.79
|
|
|
|
-
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
8,000,000
|
|
|
|
0.38
|
|
|
|
5.0
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
8.000.000
|
|
|
$
|
0.38
|
|
|
|
5.0
|
|
|
$
|
-
|
|
For the fiscal year ended June 30, 2018
On June 28, 2018, the Company issued 8,000,000 Class A common shares par value $.0001 to a warrant holder upon exercise of Common Stock Purchase Warrants exercisable for 5 years at an exercise price of $0.38 per share.
For the fiscal year ended June 30, 2017
During the year ended June 30, 2017, there were no warrants issued and 25,000 expired.
13. Equity Transactions
On June 28, 2018, we entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company has agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent.
Pursuant to the Securities Purchase Agreement, and in connection with Aspire Capital’s commitment to purchase additional securities from the Company, on June 28, 2018, the Company agreed to (i) sell to Aspire Capital 5,263,158 shares for a purchase price of $2.0 million and (ii) issue to Aspire Capital 2,736,842 shares of common stock and warrants to purchase 8,000,000 shares of common stock, with such warrants having an exercise price equal to $0.38 per share (the “Commitment Fee”). The Securities Purchase Agreement provides for the sale of up to an additional $5.0 million of the Company’s common stock to Aspire Capital upon the achievement of certain milestones, as follows:
|
·
|
on or before September 30, 2018, $1.0 million of the Company’s common stock upon the Company’s announcement of the FDA’s granting of the Company’s request for Breakthrough Therapy Designation for the Company’s Brilacidin compound in the indication of Oral Mucositis;
|
|
|
|
|
·
|
on or before September 30, 2018, $2.0 million of the Company’s common stock upon the Company’s announcement that the Company’s Phase 2b trial of Prurisol on psoriasis has met its primary end point; and
|
|
|
|
|
·
|
on or before September 30, 2018, $2.0 million of the Company’s common stock upon the Company’s announcement that the Company has entered into a licensing arrangement with a pharmaceutical company for any of the Company’s clinical assets that will include an initial payment to the Company of an amount in the double-digits millions of dollars.
|
The total commitment fee of $2.7 million was allocated to the $2 million offering first based on historical price discounts that Aspire Capital has received and the balance of the commitment fee was allocated to the $5 million of potential future milestone funding from Aspire Capital. The portion of the commitment fee allocated to the $2 million of initial proceeds was approximately $0.5 million and was effectively netted against the $2 million of initial proceeds, resulting in a discounted purchase price of $0.29 per share. The remaining $2.2 million of the commitment fee was allocated to the future milestone funding and was fully expensed under Other Expenses, because it is unlikely that the Company will achieve any of the above 3 milestones by September 30, 2018.
Each of the subsequent closings is subject to customary conditions, including the satisfaction of Aspire Capital with achievement of the milestones and the closing price of the Company’s common stock being equal to or greater than $0.50 on the date of announcement. The purchase price per share for the subsequent closings will be based upon the market price of the common stock at the time of such closings. Aspire Capital may elect to receive pre-funded warrants in lieu of common stock for all or a portion of the subsequent closings. The Company intends to use the net proceeds from the offerings for general corporate purposes, including research and development.
$30 million Class A Common Stock Purchase Agreement with Aspire Capital
On September 6, 2017, the Company entered into a common stock purchase agreement with Aspire Capital, which replaced the prior 2015 $30 million Aspire Capital stock purchase agreement and provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Stock Purchase Agreement. The Company issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The commitment fee of approximately $215,000 is amortized pro-rata as the funding is received. The amortized amount of $55,000 was recorded to additional paid-in capital for the year ended June 30, 2018. The unamortized portion is carried on the balance sheet as deferred offering costs and was $159,000 at June 30, 2018. The Company registered the sale of all shares that Aspire Capital will purchase under this common stock purchase agreement. To the extent Aspire Capital purchases shares under this Purchase Agreement and subsequently sells those shares purchased, the other holders of shares of our Class A common stock may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A common stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we might otherwise wish to effect sales.
During the period from September 6, 2017 to June 30, 2018, the Company generated proceeds of approximately $7.7 million under the new 2017 agreement with Aspire Capital from the sale of approximately 9.5 million shares of its common stock. As of June 30, 2018, the available balance under the new equity line agreement was approximately $22.3 million.
On March 30, 2015, the Company entered into its prior common stock purchase agreement with Aspire Capital, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Purchase Agreement. In consideration for entering into this stock purchase agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 was amortized as the funding was received. The unamortized portion of deferred offering costs from this stock purchase agreement of $227,000 was recorded to additional paid-in capital in September, 2017, since the Company entered into a new $30 million common stock purchase agreement with Aspire Capital, to replace this prior $30 million 2015 Aspire Capital agreement, on September 6, 2017. During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under this 2015 agreement with Aspire Capital, from the sale of approximately 2.6 million shares of its common stock.
14. Income Taxes
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company has incurred operating losses since its inception and therefore no tax liabilities have been incurred for the periods presented. The amount of unused tax losses available for carryforward and to be applied against taxable income in future years totaled approximately $65,921,000 at June 30, 2018. The tax loss carryforwards expire beginning in 2028. Internal Revenue Code Sec. 382 places limitations on the utilization of net operating losses.
Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future. On December 22, 2017 the U.S. President signed into law the Tax Cuts and Jobs Act (the “Act”), which enacted significant tax law changes largely effective for tax years beginning after June 30, 2018. The Act reduces the corporate tax rate to 21 percent, effective January 1, 2018, for all corporations. Because GAAP requires the effect of a change in tax laws or rates to be recognized as of the date of enactment, we have revalued our deferred tax assets and liabilities as of December 22, 2017. As a result of the re-valuation of the deferred tax assets, we have accounted for $8,944,000 of tax expense as a discrete item in our provision for income taxes for the year ended June 30, 2018. The impact was entirely offset by a reduction of the Company’s valuation allowance.
We are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of our income tax provision, which may cause us to revise our estimate in future periods in accordance with SAB 118. These impacts may be material due to, among other things, further refinement of our calculations, changes in interpretations of the Act, or issuance of additional guidance by the relevant tax authorities.
The income tax provision benefit differs from the amount of tax determined by applying the Federal and States statutory rates as follows:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Book income at federal statutory rate
|
|
|
28.19
|
%
|
|
|
34.00
|
%
|
State income tax, net of federal tax benefit
|
|
|
6.02
|
%
|
|
|
5.30
|
%
|
Change in valuation allowance
|
|
|
13.50
|
%
|
|
|
(45.35
|
)%
|
Research and development credit
|
|
|
6.95
|
%
|
|
|
8.20
|
%
|
Permanent difference
|
|
|
-
|
%
|
|
|
(2.78
|
)%
|
Change in Federal Statutory Rate
|
|
|
(54.66
|
)%
|
|
|
-
|
%
|
Others - net
|
|
|
-
|
%
|
|
|
0.63
|
%
|
Total
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
There was no current or deferred provision or benefit for income taxes for the years ended June 30, 2018 and 2017. The components of deferred tax assets as of June 30, 2018 and 2017 are as follows
(
rounded to nearest thousand
)
:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
18,010,000
|
|
|
$
|
21,510,000
|
|
Accrued payroll
|
|
|
807,000
|
|
|
|
1,174,000
|
|
Stock compensation
|
|
|
2,649,000
|
|
|
|
2,104,000
|
|
Research and development credit
|
|
|
5,088,000
|
|
|
|
3,951,000
|
|
Other
|
|
|
114,000
|
|
|
|
171,000
|
|
|
|
$
|
26,668,000
|
|
|
$
|
28,910,000
|
|
Valuation allowance
|
|
|
(26,668,000
|
)
|
|
|
(28,910,000
|
)
|
Total deferred taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
15. Subsequent Events
On September 1, 2018, the Company issued to Dr. Bertolino for his services rendered 1,066,667 shares of common stock, vesting 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $225,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.398 per share. These options were issued with an exercise price of $0.398 and vest 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration as defined in award agreement, with a ten year option term. These options have piggyback registration rights.
On September 1, 2018, the Company also issued to Ms. Harness 58,394 shares of the Company’s common stock, 33 1/3% vesting upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date and 33 1/3% upon the third anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $63,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.398 per share. These options were issued with an exercise price of $0.398 and vest 33 1/3% upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and 33 1/3% upon the third anniversary of the grant date, with acceleration of vesting upon certain events.