UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended: March 31, 2022

 

☐     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 May 10, 2022 is as follows:

 

Class of Securities

 

Shares Outstanding

Common Stock Class A, $0.0001 par value

 

456,580,514

Common Stock Class B, $0.0001 par value

 

15,641,463

 
 

  

INNOVATION PHARMACEUTICALS INC.

FORM 10-Q

For the Quarter Ended March 31, 2022

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

4

 

 

Condensed Consolidated Balance Sheets as of March 31, 2022 and June 30, 2021 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Operations for the three months and nine months ended March 31, 2022 and 2021 (unaudited)

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended March 31, 2022 and 2021 (unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2022 and 2021 (unaudited)

 

8

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

9

 

Item 2.

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

 

31

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

Item 4.

Controls and Procedures

 

46

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

47

 

Item 1A

Risk Factors

 

47

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

Item 3.

Defaults Upon Senior Securities

 

47

 

Item 4.

Mine Safety Disclosures

 

47

 

Item 5.

Other Information

 

47

 

Item 6.

Exhibits

 

48

 

 

 

 

 

 

SIGNATURES

 

49

 

 

 
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 MARCH 31, 2022 AND JUNE 30, 2021

(Unaudited)

(Rounded to nearest thousand except for shares data) 

 

 

 

March 31,

 

 

June 30,

 

 

 

2022

 

 

2021

 

ASSETS

 

Current Assets:

 

 

 

 

 

 

Cash

 

 $ 8,795,000

 

 

 $ 10,194,000

 

Prepaid expenses and other current assets

 

 

 27,000

 

 

 

 495,000

 

Total Current Assets

 

 

 8,822,000

 

 

 

 10,689,000

 

Other Assets:

 

 

 

 

 

 

 

 

Patent costs - net

 

 

 2,518,000

 

 

 

 2,754,000

 

Deferred offering costs

 

 

 240,000

 

 

 

 778,000

 

Security deposit

 

 

 78,000

 

 

 

 78,000

 

Total Other Assets

 

 

 2,836,000

 

 

 

 3,610,000

 

Total Assets

 

 $ 11,658,000

 

 

 $ 14,299,000

 

Current Liabilities:

 

 

 

 

 

 

 

 

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

 

 $ 2,400,000

 

 

 $ 2,563,000

 

Accrued expenses - (including related party accruals of approx. $21,000 and $8,000, respectively)

 

 

 71,000

 

 

 

 348,000

 

Accrued salaries and payroll taxes - (including related party accrued salaries of approx. $1,551,000 and $1,915,000, respectively)

 

 

 1,635,000

 

 

 

 1,992,000

 

Operating lease - current liability

 

 

 189,000

 

 

 

 165,000

 

Convertible note payable - related party

 

 

 250,000

 

 

 

 1,283,000

 

Accrued dividend - Series B 5% convertible preferred stock

 

 

 46,000

 

 

 

 15,000

 

Loan payable

 

 

 —

 

 

 

 172,000

 

Total Current Liabilities

 

 

 4,591,000

 

 

 

 6,538,000

 

Other Liabilities:

 

 

 

 

 

 

 

 

Series B 5% convertible preferred stock liability at $1,080 stated value; 1,165 and 0 shares issued and outstanding at March 31, 2022 and June 30, 2021, respectively

 

 

 1,145,000

 

 

 

 —

 

Operating lease - long term liability

 

 

 107,000

 

 

 

 252,000

 

Total Liabilities

 

 

 5,843,000

 

 

 

 6,790,000

 

 

 

 

 

 

 

 

 

 

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, $0.0001 par value, 600,000,000 shares authorized, 465,096,570 shares and 426,673,198 shares issued as of March 31, 2022 and June 30, 2021, respectively, 456,580,514 shares and 418,157,142 shares outstanding as of March 31, 2022 and June 30, 2021, respectively.

 

 

 46,000

 

 

 

 42,000

 

Common Stock - Class B, (10 votes per share); $0.0001 par value, 100,000,000 shares authorized, 18,000,000 shares issued as of March 31, 2022 and June 30, 2021, and 15,641,463 shares outstanding as of March 31, 2022 and June 30, 2021

 

 

 2,000

 

 

 

 2,000

 

Additional paid-in capital

 

 

 128,552,000

 

 

 

 124,835,000

 

Accumulated deficit

 

 

 (120,531,000 )

 

 

 (115,116,000 )

Treasury Stock, at cost (10,874,593 shares as of March 31, 2022 and June 30, 2021)

 

 

 (2,254,000 )

 

 

 (2,254,000 )

Total Stockholders’ Equity

 

 

 5,815,000

 

 

 

 7,509,000

 

Total Liabilities and Stockholders’ Equity

 

 $ 11,658,000

 

 

 $ 14,299,000

 

 

 

 

 

 

 

 

 

 

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 AND NINE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

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

 

 

 

For the three Months

Ended

 

 

For the Nine months

Ended

 

 

 

March 31,

 

 

March 31

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 $ —

 

 

 $ —

 

 

 $ —

 

 

 $ —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

 931,000

 

 

 

 1,423,000

 

 

 

 4,115,000

 

 

 

 4,918,000

 

General and administrative expenses

 

 

 320,000

 

 

 

 245,000

 

 

 

 771,000

 

 

 

 740,000

 

Officers’ payroll and payroll tax expenses

 

 

 126,000

 

 

 

 126,000

 

 

 

 308,000

 

 

 

 378,000

 

Professional fees

 

 

 81,000

 

 

 

 124,000

 

 

 

 301,000

 

 

 

 450,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

 1,458,000

 

 

 

 1,918,000

 

 

 

 5,495,000

 

 

 

 6,486,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from operations

 

 

 (1,458,000 )

 

 

 (1,918,000 )

 

 

 (5,495,000 )

 

 

 (6,486,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

 —

 

 

 

 —

 

 

 

 172,000

 

 

 

 —

 

Interest expense - debt

 

 

 (11,000 )

 

 

 (37,000 )

 

 

 (61,000 )

 

 

 (119,000 )

Interest expense - preferred stock liability

 

 

 (17,000 )

 

 

 (2,005,000 )

 

 

 (31,000 )

 

 

 (4,702,000 )

Other expense, net

 

 

 (28,000 )

 

 

 (2,042,000 )

 

 

 80,000

 

 

 

 (4,821,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

 (1,486,000 )

 

 

 (3,960,000 )

 

 

 (5,415,000 )

 

 

 (11,307,000 )

Provision for income taxes

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

Net loss

 

 $ (1,486,000 )

 

 $ (3,960,000 )

 

 $ (5,415,000 )

 

 $ (11,307,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share attributable to common stockholders

 

 $ (0.00 )

 

 $ (0.01 )

 

 $ (0.01 )

 

 $ (0.03 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average number of common shares

 

 

 468,040,150

 

 

 

 411,823,424

 

 

 

 457,195,112

 

 

 

 370,330,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

3,053

 
5

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

(Rounded to nearest thousand, except for shares data)

 

For the Nine Months Ended March 31, 2021

 

 

 

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, 2020

 

 

 329,170,544

 

 

 $ 33,000

 

 

 

 1,818,180

 

 

 $ —

 

 

 $ 102,819,000

 

 

 $ (101,244,000 )

 

 

 659,448

 

 

 $ (146,000 )

 

 $ 1,462,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 13,500,000

 

 

 

 1,000

 

 

 

 —

 

 

 

 —

 

 

 

 2,850,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 2,851,000

 

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

 

 

 6,250,000

 

 

 

 1,000

 

 

 

 —

 

 

 

 —

 

 

 

 1,317,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 1,318,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 5,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 5,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 14,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 14,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 43,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 43,000

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 9,000,000

 

 

 

 1,000

 

 

 

 —

 

 

 

 1,000

 

 

 

 1,570,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 1,572,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 4,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 4,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 10,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 10,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 17,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 17,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 909,090

 

 

 

 —

 

 

 

 100,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 100,000

 

Issuance of shares for tax purposes as Treasury Shares

 

 

 —

 

 

 

 —

 

 

 

 (181,096 )

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 181,096

 

 

 

 (37,000 )

 

 

 (37,000 )

To record Series B Discount - Warrants

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 870,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 870,000

 

To record issuance costs Series 1 & 2 Warrants

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (10,000 )

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (10,000 )

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 1,793,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 1,793,000

 

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

 

 

 9,346,303

 

 

 

 1,000

 

 

 

 —

 

 

 

 —

 

 

 

 1,161,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 1,162,000

 

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

 

 

 (6,980,583 )

 

 

 (1,000 )

 

 

 13,072,730

 

 

 

 1,000

 

 

 

 1,438,000

 

 

 

 —

 

 

 

 6,980,583

 

 

 

 (1,438,000 )

 

 

 —

 

Shares were withheld for tax purposes as Treasury Shares

 

 

 (854,419 )

 

 

 —

 

 

 

 (1,765,203 )

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 2,619,622

 

 

 

 (540,000 )

 

 

 (540,000 )

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (6,174,000 )

 

 

 —

 

 

 

 —

 

 

 

 (6,174,000 )

Balance at December 31, 2020

 

 

 359,468,633

 

 

 $ 36,000

 

 

 

 15,641,463

 

 

 $ 2,000

 

 

 $ 114,243,000

 

 

 $ (108,591,000 )

 

 

 10,874,593

 

 

 $ (2,254,000 )

 

 $ 3,436,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering cost

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (179,000 )

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (179,000 )

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 4,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 4,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 10,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 10,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 27,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 27,000

 

Conversion of 12 preferred stocks into 87,567 common stock

 

 

 87,567

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 13,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 13,000

 

To record Series B Discount - Warrants

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 540,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 540,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 1,460,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 1,460,000

 

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

 

 

 58,600,942

 

 

 

 6,000

 

 

 

 —

 

 

 

 —

 

 

 

 8,848,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 8,854,000

 

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

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (3,960,000 )

 

 

 —

 

 

 

 —

 

 

 

 (3,960,000 )

Balance at March 31, 2021

 

 

 418,157,142

 

 

 $ 42,000

 

 

 

 15,641,463

 

 

 $ 2,000

 

 

 $ 124,966,000

 

 

 $ (112,551,000 )

 

 

 10,874,593

 

 

 $ (2,254,000 )

 

 $ 10,205,000

 

 

 
6

Table of Contents

 

For the Nine Months Ended March 31, 2022

 

 

 

 

 

 

 

 

 

 Additional

 

 

 

 

 

 

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Paid-in

 

 

Accumulated

 

 

Treasury Stock

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

 Amount

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance at June 30, 2021

 

 

 418,157,142

 

 

 $ 42,000

 

 

 

 15,641,463

 

 

 $ 2,000

 

 

 $ 124,835,000

 

 

 $ (115,116,000 )

 

 

 10,874,593

 

 

 $ (2,254,000 )

 

 $ 7,509,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering cost

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (179,000 )

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (179,000 )

Restricted stock awards of common stock issued to employee for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 3,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 3,000

 

Stock options issued to employee for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 8,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 8,000

 

Stock options issued to consultants for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 29,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 29,000

 

Conversion of 3,036 shares of preferred stock into 18,939,080 shares of common stock

 

 

 18,939,080

 

 

 

 2,000

 

 

 

 —

 

 

 

 —

 

 

 

 2,981,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 2,983,000

 

Net loss for the three months ended 9/30/2021

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (2,056,000 )

 

 

 —

 

 

 

 —

 

 

 

 (2,056,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2021

 

 

 437,096,222

 

 

 $ 44,000

 

 

 

 15,641,463

 

 

 $ 2,000

 

 

 $ 127,677,000

 

 

 $ (117,172,000 )

 

 

 10,874,593

 

 

 $ (2,254,000 )

 

 $ 8,297,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (180,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (180,000 )

Restricted stock awards of common stock issued to employee for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 2,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 2,000

 

Stock options issued to employee for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 27,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 27,000

 

Stock options issued to consultants for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 12,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 12,000

 

Stock options issued to director for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 111,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 111,000

 

Conversion of 536 shares of preferred stock into 7,854,545 shares of common stock

 

 

 7,854,545

 

 

 

 1,000

 

 

 

 —

 

 

 

 —

 

 

 

 525,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 526,000

 

Shares of common stock issued for exercise of options

 

 

 166,666

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 23,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 23,000

 

Net loss for the three months ended 12/31/2021

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (1,873,000 )

 

 

 —

 

 

 

 —

 

 

 

 (1,873,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

 

 445,117,433

 

 

 $ 45,000

 

 

 

 15,641,463

 

 

 $ 2,000

 

 

 $ 128,197,000

 

 

 $ (119,045,000 )

 

 

 10,874,593

 

 

 $ (2,254,000 )

 

 $ 6,945,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (179,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (179,000 )

Restricted stock awards of common stock issued to employee for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 2,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 2,000

 

Stock options issued to employee for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 28,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 28,000

 

Stock options issued to consultants for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 10,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 10,000

 

Stock options issued to director for services

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 166,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 166,000

 

Conversion of 335 shares of preferred stock into 11,463,081 shares of common stock

 

 

 11,463,081

 

 

 

 1,000

 

 

 

 —

 

 

 

 —

 

 

 

 328,000

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 329,000

 

Net loss for the three months ended 3/31/2022

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 (1,486,000 )

 

 

 —

 

 

 

 —

 

 

 

 (1,486,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2022

 

 

 456,580,514

 

 

 $ 46,000

 

 

 

 15,641,463

 

 

 $ 2,000

 

 

 $ 128,552,000

 

 

 $ (120,531,000 )

 

 

 10,874,593

 

 

 $ (2,254,000 )

 

 $ 5,815,000

 

 

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

 

 
7

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

(Rounded to nearest thousand, except for shares data) 

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

 $ (5,415,000 )

 

 $ (11,307,000 )

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

 

 

 

 

 

 

 

 

Stock based compensation

 

 

 398,000

 

 

 

 134,000

 

Amortization of patent costs

 

 

 286,000

 

 

 

 283,000

 

Gain on forgiveness of loans payable

 

 

 (172,000 )

 

 

 -

 

Interest expense-preferred stock

 

 

-

 

 

 

 4,672,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and security deposits

 

 

 468,000

 

 

 

 47,000

 

Accounts payable

 

 

 (163,000 )

 

 

 10,000

 

Accrued expenses

 

 

 (277,000 )

 

 

 574,000

 

Accrued officers’ salaries and payroll taxes

 

 

 (357,000 )

 

 

 (1,157,000 )

Operating lease liability

 

 

 (121,000 )

 

 

 (101,000 )

Note payable to officer

 

 

 -

 

 

 

 (53,000 )

Accrued dividend

 

 

 31,000

 

 

 

 5,000

 

Net cash used in operating activities

 

 

 (5,322,000 )

 

 

 (6,893,000 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Patent costs

 

 

 (50,000 )

 

 

 (53,000 )

Net cash used in investing activities

 

 

 (50,000 )

 

 

 (53,000 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Sale of common stock, net of offering costs

 

 

 -

 

 

 

 4,603,000

 

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

 

 

 -

 

 

 

 4,990,000

 

Proceeds from exercise of preferred stock warrants

 

 

 4,983,000

 

 

 

 5,017,000

 

Proceeds from exercise of options

 

 

 23,000

 

 

 

 -

 

Purchase of treasury stock

 

 

 -

 

 

 

 (670,000 )

Repayment of note payable to officer

 

 

 (1,033,000 )

 

 

 -

 

Net cash provided by financing activities

 

 

 3,973,000

 

 

 

 13,940,000

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

 

 (1,399,000 )

 

 

 6,994,000

 

CASH, BEGINNING OF PERIOD

 

 

 10,194,000

 

 

 

 6,018,000

 

CASH, END OF PERIOD

 

 $ 8,795,000

 

 

 $ 13,012,000

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

 $ 44,000

 

 

 $ 44,000

 

Cash paid for tax

 

 $ -

 

 

 $ -

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

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

 

$

 -

 

 

 $ 4,672,000

 

Shares issued as deferred offering costs

 

 $ -

 

 

 $ 1,438,000

 

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

 

 $ -

 

 

 $ 1,438,000

 

Conversion of Series B Convertible Preferred stock to Common stock

 

 $ 3,838,000

 

 

 $ 10,029,000

 

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

 

 $ -

 

 

 $ 342,000

 

 

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

 

 
8

Table of Contents

 

NNOVATION PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2022

(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, 2021, included in our Annual Report on Form 10-K for the year ended June 30, 2021.

 

In the opinion of the management of Innovation Pharmaceuticals Inc., all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month and nine-month periods have been made. Results for the interim periods 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 is intended to 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 condensed consolidated financial statements include the accounts of Innovation Pharmaceuticals Inc., a Nevada corporation, and our wholly-owned subsidiary, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. There was no translation gain and loss for the three and nine months ended March 31, 2022 and 2021.

 

 
9

Table of Contents

 

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 which presently includes Brilacidin and Kevetrin by advancing them along the regulatory pathway as well as engaging in seeking additional health care-related investment opportunities with the aim of diversifying the Company’s assets. As of March 31, 2022, the Company has largely paused clinical development to strategically analyze all the scientific data collected to date across its portfolio of assets - see Item 2 for additional details. Drug manufacturing, scientific report writing, and supportive research activities continue. While the analysis is performed, management is focused on other avenues of business development, including, but not limited to, joint ventures, mergers and acquisitions, strategic investments, and licensing agreements, for the purpose of diversifying corporate assets.

 

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 ulcerative proctitis/ulcerative proctosigmoiditis (“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 March 31, 2022, the Company’s cash amounted to $8.8 million and current liabilities amounted to $4.6 million. The Company has expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. Our net losses incurred for the nine months ended March 31, 2022 and 2021, amounted to $5.4 million and $11.3 million, respectively, and we had working capital of approximately $4.2 million at March 31, 2022 and June 30, 2021.

 

On July 31, 2020, the Company entered into a Common Stock Purchase Agreement (the “2020 Purchase Agreement”) with Aspire Capital Fund, LLC (“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 Purchase Agreement. In consideration for entering into the 2020 Purchase 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 Purchase Agreement.

 

During the nine months ended March 31, 2022, the Company did not sell any shares to Aspire Capital under the purchase agreement. During the period from July 31, 2020 to March 31, 2021, the Company generated proceeds of approximately $5.0 million under the 2020 Purchase Agreement with Aspire Capital from the sale of approximately 22.5 million shares of its common stock. As of March 31, 2022, the available balance under the 2020 Purchase Agreement was approximately $25.4 million, however, the trading price for the Company’s common stock has not satisfied the minimum $0.10 price condition under the purchase agreement and no sales may occur thereunder. 

 

We currently anticipate that future budget expenditures will be approximately $4.2 million for the next 12 months, including approximately $2.2 million for development activities, supportive research, and drug manufacturing. Alternatively, if we decide to pursue a more aggressive plan with our clinical trials, we will require additional sources of capital during the fiscal years 2022 and 2023 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.

 

 
10

Table of Contents

 

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 sufficient cash from our 2020 Purchase Agreement with Aspire Capital (which expires on July 31, 2022) or raise additional funds from others, 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.

 

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. Except with respect to certain voting, conversion and transfer rights and as otherwise expressly provided in the Company’s Articles of Incorporation or required by applicable law, shares of the Company’s Class A common stock and Class B common stock have the same rights and privileges and rank equally, share ratably and are identical in all respects as to all matters. Accordingly, basic and diluted net income (loss) per share are the same for both classes. 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 nine months ended March 31, 2022 and 2021, 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:

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Net loss per share, basic and diluted

 

 $ (0.01 )

 

 $ (0.03 )

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Class A common stock

 

 

 441,553,649

 

 

 

 362,864,883

 

Class B common stock

 

 

 15,641,463

 

 

 

 7,465,415

 

Total weighted average shares outstanding

 

 

 457,195,112

 

 

 

 370,330,298

 

 

 

 

 

 

 

 

 

 

Antidilutive securities not included:

 

 

 

 

 

 

 

 

Stock options

 

 

 10,298,269

 

 

 

 6,849,265

 

Stock options arising from convertible note payable and accrued interest

 

 

 525,260

 

 

 

 3,085,242

 

Restricted stock grants

 

 

 58,392

 

 

 

 116,786

 

Convertible preferred stock

 

 

 38,477,064

 

 

 

 —

 

Total

 

 

 49,358,985

 

 

 

 10,051,293

 

 

 
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Treasury Stock

 

The Company accounts for treasury stock using the cost method. There were 8,516,056 shares of Class A common stock and 2,358,537 shares of Class B common stock held in treasury, purchased at a total cumulative cost of approximately $2.3 million as of March 31, 2022 and June 30, 2021 (see Note 14. Equity Transactions).

 

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

 

The Company follows the guidance of accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers, and all the related amendments.

 

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

 

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

 

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

 

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

 

 

(i)

identify the contract(s) with a customer;

 

(ii)

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

 

(iii)

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

 

(iv)

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

 

(v)

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

 

 
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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.

 

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

 

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

 

 
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Accounting for Stock Based Compensation

 

The stock-based compensation expense incurred by the Company for employees, non-employees and directors in connection with its stock option plan is based on 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.”

 

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

 

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

(years)

 

 

March 31,

2022

 

 

June 30,

2021

 

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

 

 

 

 1,330,000

 

 

 

 1,280,000

 

Total patents cost

 

 

 

 

 

 

 5,556,000

 

 

 

 5,506,000

 

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

 

 

 

 

 

 

 (2,600,000 )

 

 

 (2,373,000 )

Accumulated amortization for Patents-Kevetrin and related compounds

 

 

 

 

 

 

 (438,000 )

 

 

 (379,000 )

Patents, net

 

 

 

 

 

 $ 2,518,000

 

 

 $ 2,754,000

 

 

 
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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 March 31, 2022 and 2021 was approximately $95,000 and $95,000, respectively and was approximately $286,000, and $283,000 for the nine months ended March 31, 2022 and 2021, respectively.

 

At March 31, 2022, the future amortization period for all patents was approximately 3.43 years to 16.75 years. Future estimated amortization expenses are approximately $95,000 for the year ending June 30, 2022, $382,000 for each year from 2023 to 2025, $372,000 for the year ending June 30, 2026 and a total of $905,000 for the year ending June 30, 2027 and thereafter.

 

5. Accrued Expenses - Related Parties and Other

 

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

 

 

 

March 31,

2022

 

 

June 30,

2021

 

 

 

 

 

 

 

 

Accrued research and development consulting fees

 

 $ 50,000

 

 

 $ 340,000

 

Accrued rent (Note 10) - related parties

 

 

 8,000

 

 

 

 8,000

 

Accrued interest (Note 11) - related parties

 

 

 13,000

 

 

 

 —

 

 

 

 

 

 

 

 

 

 

Total

 

 $ 71,000

 

 

 $ 348,000

 

 

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

 

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

 

 

 

March 31,

2022

 

 

June 30,

2021

 

 

 

 

 

 

 

 

Accrued salaries - related parties

 

 $ 1,480,000

 

 

 $ 1,785,000

 

Accrued payroll taxes - related parties

 

 

 71,000

 

 

 

 130,000

 

Withholding tax - payroll

 

 

 84,000

 

 

 

 77,000

 

 

 

 

 

 

 

 

 

 

Total

 

 $ 1,635,000

 

 

 $ 1,992,000

 

 

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 UP/UPS.

 

 
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Under the terms of the License Agreement, Alfasigma made an initial upfront non-refundable payment of $0.4 million to the Company in July, 2019 and will make additional payments of up to $24.0 million to the Company based upon the achievement of certain milestones, including a $1.0 million payment due following commencement of the first Phase 3 clinical trial of Brilacidin for UP/UPS and an additional $1.0 million payment upon the filing of a marketing approval application with the U.S. Food and Drug Administration or the European Medicines Agency. At this time, Alfasigma has completed a Phase 1 clinical trial with Brilacidin. In addition to the milestones, Alfasigma will pay a royalty to the Company equal to six percent of net sales of Brilacidin for UP/UPS, subject to adjustment as provided in the License Agreement. The Company received an initial upfront non-refundable payment of $0.4 million and reported as revenue in July, 2019 and the Company did not receive any further payment during the nine months ended March 31, 2022 and 2021.

 

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.

 

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 was fully impaired on December 31, 2019. As such, the Company recognized an impairment loss of approximately $643,000, after recording amortization of the right-of-use asset for July, August, and September 2019 totaling approximately $27,000, resulting in a carrying value of $0 since December 31, 2019. The Company vacated the leased office space in December 2019, and in January 2020 the Company initiated a lawsuit against the lessor relating to an automatic extension of the lease for the office space and related matters (See Note 9. Commitments and Contingencies).

 

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

 

 

 

Nine months

Ended

March 31,

2022

 

Lease Cost

 

 

 

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

 

 $ 47,000

 

Variable lease cost

 

 

 9,000

 

 

 

 $ 56,000

 

Other Information

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities for the nine months ended March 31, 2022

 

 $ 121,000

 

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

March 31,

2022

 

Operating leases

 

 

 

Short-term operating lease liabilities

 

 $ 189,000

 

Long-term operating lease liabilities

 

 

 107,000

 

 

 

 

 

 

Total operating lease liabilities

 

 $ 296,000

 

 

The following table provides maturities of the Company’s lease liabilities at March 31, 2022 as follows:

 

 

 

Operating

Leases

 

Fiscal Year Ending June 30,

 

 

 

 

 

 

 

2022

 

 

 56,000

 

2023

 

 

 223,000

 

2024 (remaining 3 months)

 

 

 57,000

 

Total lease payments

 

 

 336,000

 

Less: Imputed interest/present value discount

 

 

 (40,000 )

 

 

 

 

 

Present value of lease liabilities

 

 $ 296,000

 

 

Operating lease cost for the three months and the nine months ended March 31, 2022 was approximately $17,000 and $56,000, respectively. Operating lease cost for the three months and the nine months ended March 31, 2021 was approximately $24,000 and $76,000, respectively.

 

 
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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 terminated in September 2018, because 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. The total lease amount is approximately $0.6 million. 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 $1.1 million to contract research organizations as of March 31, 2022. 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 Scientific, Inc. (“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 March 31, 2022 and June 30, 2021.

 

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 March 31, 2022 and June 30, 2021, 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.

 

 
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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 180,000,000 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).

 

During the nine months ended March 31, 2022, the Company repaid the principal of $1,033,000 to Mr. Ehrlich, the Company’s Chairman and CEO. As of March 31, 2022 and June 30, 2021, the principal balance of this convertible note payable to Mr. Ehrlich, the Company’s Chairman and CEO was approximately $250,000 and $1,283,000, respectively.

 

As of March 31, 2022 and June 30, 2021, the balance of accrued interest payable was $13,000 and $0, respectively (see Note 5. Accrued Expenses - Related Parties and Other).

 

As of March 31, 2022 and June 30, 2021, the total outstanding balances of principal and interest were approximately $263,000 and $1,283,000, respectively.

 

12. Loan payable

 

On May 10, 2020 and April 19, 2021, the Company received loan proceeds in the amount of approximately $93,000 and $79,000, respectively, 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.

 

 
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During the nine months ended March 31, 2022, the Company obtained the approval of the forgiveness of the above mentioned two loans, and the Company recorded the total loan forgiveness of $172,000 under other income.

 

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 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.

 

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 October 10, 2021, the Board of Directors approved amendments to the 2016 Plan to increase the number of shares of common stock available for issuance thereunder to 225,000,000 shares and to increase the annual limit on the number of awards under such Plan to outside directors from 1,500,000 to 5,000,000, among other changes.

 

Up to 225,000,000 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).

 

Amendments to the 2016 Equity Incentive Plan

 

The Compensation Committee approved, and the Board of Directors ratified on October 10, 2021, amendments to the Plan to increase the number of shares of common stock available for issuance thereunder to 225 million shares, among other amendments.

 

Stock Options

 

The fair value of options granted for the nine months ended March 31, 2022 and 2021 was estimated on the date of grant using the Black-Scholes-Merton Model that uses assumptions noted in the following table.

 

 

 

Nine months ended

March 31,

 

 

 

2022

 

 

2021

 

Expected term (in years)

 

5-10

 

 

5-10

 

Expected stock price volatility

 

80.84 to 112.37

%

 

89.88 to 95.47

%

Risk-free interest rate

 

0.69% to 1.61

%

 

0.48 to 0.68

%

Expected dividend yield

 

 

 0

 

 

 

 0

 

 

The components of stock-based compensation expense included in the Company’s Condensed Statement of Operations for the three months and nine months ended March 31, 2022 and 2021 are as follows (rounded to nearest thousand):

 

 

 

Three months ended

March 31

 

 

Nine months ended

March 31

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 $ 40,000

 

 

 $ 41,000

 

 

 $ 121,000

 

 

 $ 134,000

 

General and administrative expenses

 

 

 166,000

 

 

 

 —

 

 

 

 277,000

 

 

 

 —

 

Total stock-based compensation expense

 

 $ 206,000

 

 

 $ 41,000

 

 

 $ 398,000

 

 

 $ 134,000

 

 

 
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During the nine months ended March 31, 2022 and 2021

 

Directors and Employee

 

On October 10, 2021, the Compensation Committee approved the issuance of 2 million stock options to purchase shares of the Company’s common stock to the Company’s two independent directors in total and 1 million stock options to purchase shares of Company’s common stock to Mr. Ehrlich, the CEO, which are exercisable for 10 years at $0.24 per share of common stock. These 3 million stock options with 1 year vesting period were valued at approximately $585,000, based on the closing bid price as quoted on the OTC on October 10, 2021 at $0.24 per share. During the nine months ended March 31, 2022, the Company recorded approximately $277,000 of stock-based compensation costs and charged to additional paid-in capital as of March 31, 2022. The assumptions used in the Black Scholes option-pricing model are disclosed above.

 

On October 10, 2021, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 500,000 options to purchase common stock, which are exercisable for 10 years at $0.24 per share of common stock. These stock options with 1 year vesting period were valued at approximately $98,000, based on the closing bid price as quoted on the OTC on October 10, 2021 at $0.24 per share. During the nine months ended March 31, 2022, the Company recorded approximately $46,000 of related stock-based compensation. The assumptions used in the Black Scholes option-pricing model are disclosed above.

 

On September 11, 2020, the Company also issued to Ms. Harness 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options with 3 years vesting period were valued at approximately $33,000 and these 58,394 shares of the Company’s common stock were valued at approximately $13,000, based on the closing bid price as quoted on the OTC on September 11, 2020 at $0.22 per share. During the nine months ended March 31, 2022, the Company recorded approximately $11,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $8,000 of stock option expense and $3,000 of stock awards. During the nine months ended March 31, 2021, the Company recorded approximately $8,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $6,000 of stock option expense and $2,000 of stock awards.

 

On February 23, 2020, the Company issued (i) options for the purchase of 500,000 shares of 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.

 

On September 1, 2019, the Company also issued to Ms. Harness 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options with a 3 year vesting period were valued at approximately $20,000, based on the closing bid price as quoted on the OTC on August 30, 2019 at $0.132 per share. During the nine months ended March 31, 2022, the Company recorded approximately $7,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $5,000 of stock option expense and $2,000 of stock awards. During the nine months ended March 31, 2021, the Company recorded approximately $7,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $5,000 of stock option expense and $2,000 of stock awards.

 

 
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Table of Contents

 

On September 1, 2018, the Company also issued to Ms. Harness 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $63,000, based on the closing bid price as quoted on the OTCQB on August 31, 2018 at $0.40 per share. During the nine months ended March 31, 2022, the Company recorded approximately $5,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $4,000 of stock option expense and $1,000 of stock awards. During the nine months ended March 31, 2021, the Company recorded approximately $22,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $16,000 of stock option expense and $6,000 of stock awards.

 

Consultants

 

On January 1, 2022, the Company agreed to issue stock options to purchase 75,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.044 per share and vest 33 1/3% on January 1, 2022, 33 1/3% on July 1, 2022 and 33 1/3% on January 1, 2023. The value of these options was approximately $3,000. During the nine months ended March 31, 2022, the Company recorded approximately $1,000 of related stock-based compensation. The assumptions used in the Black Scholes option-pricing model are disclosed above.

 

On July 30, 2021, the Company agreed to issue stock options to purchase 100,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.27 per share and vest 33 1/3% on July 30, 2021, 33 1/3% on January 30, 2022, and 33 1/3% on July 30, 2022. The value of these options was approximately $19,000. During the nine months ended March 31, 2022, the Company recorded approximately $15,000 of related stock-based compensation. The assumptions used in the Black Scholes option-pricing model are disclosed above.

 

On July 1, 2021, the Company agreed to issue stock options to purchase 225,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.21 per share and vest 33 1/3% on July 1, 2021, 33 1/3% on January 1, 2022, and 33 1/3% on July 1, 2022. The value of these options was approximately $33,000. During the nine months ended March 31, 2022, the Company recorded approximately $27,000 of related stock-based compensation. The assumptions used in the Black Scholes option-pricing model are disclosed above.

 

On February 10, 2021, the Company agreed to issue stock options to purchase 75,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.38 per share and vest 33 1/3% on February 10, 2021, 33 1/3% on July 1, 2021, and 33 1/3% on January 1, 2022. The value of these options was approximately $20,000. During the nine months ended March 31, 2022 and 2021, the Company recorded approximately $7,000 and $10,000 of related stock-based compensation, respectively. The assumptions used in the Black Scholes option-pricing model are disclosed above.

 

On July 23, 2020, the Company agreed to issue stock options to purchase 100,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.32 per share and vest 33 1/3% on July 23, 2020, 33 1/3% on January 23, 2021, and 33 1/3% on July 23, 2021. The value of these options was approximately $28,000. During the nine months ended March 31, 2022 and 2021, the Company recorded approximately $1,000 and $22,000 of related stock-based compensation, respectively. The assumptions used in the Black Scholes option-pricing model are disclosed above.

 

 
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On May 18, 2020, the Company agreed to issue stock options to purchase 500,000 shares of the Company’s common stock each to two consultants for their one-year contracts. These options were issued with an exercise price of $0.14 per share and vest 33 1/3% on July 1, 2020, 33 1/3% on January 1, 2021, and 33 1/3% on July 1, 2021. The value of these options was approximately $78,000. During the nine months ended March 31, 2022 and 2021, the Company recorded approximately $0 and $39,000 of related stock-based compensation, respectively.

 

Exercise of options

 

During the nine months ended March 31, 2022, the Company received approximately $23,000 of net proceeds from the exercise of 166,666 stock options at $0.14 per share. The details of exercises of options to purchase Class B common stock during the nine months ended March 31, 2021 are disclosed in Note 14. Equity Transactions.

 

Forfeiture of options

 

There was forfeiture of 215,000 options and 294,330 options to purchase Class A common stock during the nine months ended March 31, 2022 and the year ended June 30, 2021, respectively, relating to the expiry of options of consultants.

 

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, 2020

 

 

 22,803,098

 

 

 $ 0.18

 

 

 

 1.83

 

 

 $ 5,857,312

 

Granted

 

 

 452,987

 

 

 $ 0.27

 

 

 

 6.96

 

 

 

 —

 

Exercised

 

 

 (16,181,820 )

 

 $ 0.11

 

 

 

 —

 

 

 

 —

 

Forfeited/expired

 

 

 (294,330 )

 

 $ 0.55

 

 

 

 —

 

 

 

 —

 

Outstanding at June 30, 2021

 

 

 6,779,935

 

 

 $ 0.35

 

 

 

 4.45

 

 

 $ 345,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

 3,900,000

 

 

 $ 0.24

 

 

 

 9.00

 

 

 

 —

 

Exercised

 

 

 (166,666 )

 

 $ 0.14

 

 

 

 —

 

 

 

 —

 

Forfeited/expired

 

 

 (215,000 )

 

 $ 0.51

 

 

 

 —

 

 

 

 —

 

Outstanding at March 31, 2022

 

 

 10,298,269

 

 

 $ 0.30

 

 

 

 5.77

 

 

 $ —

 

Exercisable at March 31, 2022

 

 

 6,466,949

 

 

 $ 0.34

 

 

 

 3.70

 

 

 $ —

 

Unvested stock options at March 31, 2022

 

 

 3,831,320

 

 

 $ 0.23

 

 

 

 9.26

 

 

 $ —

 

 

 
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Restricted Stock Awards Outstanding

 

The following summarizes our restricted stock activity:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Number of

 

 

Grant Date

 

 

 

Shares

 

 

Fair Value

 

Total unvested shares outstanding at June 30, 2020

 

 

 116,787

 

 

 $ 0.32

 

 

 

 

 

 

 

 

 

 

Total shares granted

 

 

 58,394

 

 

 $ 0.22

 

Total shares vested

 

 

 (58,395 )

 

 $ 0.41

 

Total shares forfeited

 

 

 —

 

 

 $ —

 

Total unvested shares outstanding at June 30, 2021

 

 

 116,786

 

 

 $ 0.22

 

 

 

 

 

 

 

 

 

 

Total shares granted

 

 

 —

 

 

 $ —

 

Total shares vested

 

 

 (58,394 )

 

 $ 0.25

 

Total shares forfeited

 

 

 —

 

 

 $ —

 

Total unvested shares outstanding at March 31, 2022

 

 

 58,392

 

 

 $ 0.19

 

 

Scheduled vesting for outstanding restricted stock awards at March 31, 2022 is as follows:

 

 

 

Year Ending June 30,

 

 

 

2023

 

 

2024

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Scheduled vesting

 

 

 38,928

 

 

 

 19,464

 

 

 

 58,392

 

 

As of March 31, 2022, there was approximately $7,000 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 $5,000 of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 1.30 years.

 

14. Equity Transactions

 

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

 

On July 31, 2020, the Company entered into the 2020 Stock Purchase Agreement (the “2020 Purchase Agreement”)  with Aspire Capital Fund, LLC (“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 Purchase 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 Purchase Agreement. The amortized amount of approximately $0.5 million was recorded to additional paid-in capital for the nine months ended March 31, 2022 and 2021. The unamortized portion is carried on the balance sheet as deferred offering costs and was approximately $0.2 million and $0.8 million at March 31, 2022 and June 30, 2021.

 

 
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During the nine months ended March 31, 2022, the Company did not sell any shares to Aspire Capital under the 2020 Purchase Agreement. During the period from July 31, 2020 to March 31, 2021, the Company generated proceeds of approximately $4.6 million under the 2020 Purchase Agreement with Aspire Capital from the sale of approximately 22.5 million shares of its common stock. As of March 31, 2022, the available balance under the 2020 Purchase Agreement was approximately $25.4 million, however, the recent trading price for the Company’s common stock has not satisfied the minimum $0.10 price condition under the purchase agreement and no sales may occur thereunder. 

 

Class B Common Stock

 

On September 8, 2020, Mr. Ehrlich exercised 2.2 million options to purchase 2.2 million shares of Class B common stock at the option exercise price of $0.11 per share. Mr. Ehrlich paid for this exercise of his option by the cancellation of debt to Mr. Ehrlich of $242,000 to satisfy the exercise price (See Note 11. Convertible Note Payable). The Company issued 1,787,762 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 412,238 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes.

 

On October 2, 2020, Mr. Ehrlich exercised 909,090 options to purchase 909,090 shares of Class B common stock at the option exercise price of $0.11 per share. Mr. Ehrlich paid for this exercise of his option by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (See Note 11. Convertible Note Payable to the condensed consolidated financial statements). The Company issued 727,994 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 181,096 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes.

 

On December 28, 2020, Mr. Ehrlich exercised his option to purchase 13,072,730 shares of Class B common stock, at the option exercise price at $0.11 per shares for the shares, paid by the cancellation of 6,980,583 shares of Class A common stock held by Mr. Ehrlich of $1,438,000 to satisfy the exercise price. The total taxable compensation to Mr. Ehrlich for the 13,072,730 shares was approximately $540,000, based upon the closing stock price on December 29, 2020 of $0.21 a share. The Company withheld 1,765,203 shares of Class B common stock and cancelled an additional 854,419 shares of Class A common stock held by Mr. Ehrlich. As a result, the Company issued 11,307,527 shares of Class B common shares (net of 1,765,203 shares of Class B common shares withheld to satisfy taxes), and cancelled 7,835,002 shares of Class A common stock held by Mr. Ehrlich. These shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

 

As of March 31, 2022 and June 30, 2021, the total issued number of shares of Class B common stock were 18 million shares and the total outstanding number of shares of Class B common stock were 15,641,463.

 

Series B-2 5% convertible preferred stock (“2020 Series B-2 5% convertible preferred stock”)

 

On December 4, 2020, the Company entered into a securities purchase agreement (the “Series B-2 Securities Purchase Agreement”) with KIPS Bay Select LP for the sale of an aggregate of 5,089 shares of the Company’s Series B-2 5% convertible preferred stock (the “Series B-2 preferred stock”), for aggregate gross proceeds of approximately $5.0 million. An initial closing for the sale of 3,053 shares of the Series B-2 preferred stock closed on December 9, 2020 for aggregate gross proceeds of approximately $3.0 million, and a second closing for the sale of 2,036 shares of the Series B-2 preferred stock closed on February 8, 2021 for aggregate gross proceeds of approximately $2.0 million. Under the Series B-2 Securities Purchase Agreement, the Company also issued to the investors warrants to purchase up to an additional 10,178 shares of preferred stock.

 

 
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Table of Contents

 

The Series B-2 preferred stock is mandatorily redeemable under certain circumstances and, as such, is presented as a liability on the condensed consolidated balance sheets. The Company has elected to measure the value of its preferred stock using the fair value method with offsetting discounts associated with the fair value allocated to the warrants and for the intrinsic value attributed to the beneficial conversion feature (“BCF”). The fair value of the Series B-2 preferred stock (without the warrants) will be assessed at each subsequent reporting date with changes in fair value recorded in the profit and loss as a separate line item below the “loss from operations” section (See ASC 480-10-35-5).

 

The warrants issued in connection with the Series B-2 preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity under additional paid in capital, based on a relative fair value allocation of proceeds, that is the warrants’ relative fair value to the Series B-2 preferred stock fair value (without the warrants), with an offsetting discount to the Series B-2 preferred stock. Given that the Series B-2 preferred stock is convertible at any time under these features, the underlying warrant discounts were accreted upon issuance and recorded as interest, resulting in no remaining discount to the Series B-2 preferred stock liability after the issuance.

 

The Company recorded the December 9, 2020 issuance of 3,053 shares Series B-2 Preferred Stock at approximately $2.1 million and the underlying Series 1 and Series 2 warrants at approximately $0.9 million in total by allocating the gross proceeds to Series B-2 preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.8 million associated with the issuance of the 3,053 shares of Series B-2 preferred stock to additional paid-in capital. The Company then recorded interest of approximately $2.7 million for the BCF and warrant discounts as a first day interest given that the Series B-2 preferred shares can be converted at any time to common stock and given no set term.

 

The issuance costs associated with the Series B-2 preferred stock transaction were attributed to the Series B-2 preferred stock (without the warrants) and to the Series 1 and Series 2 warrants based on their relative fair values. The issuance costs attributed to the warrants of approximately $10,000 were reflected as a reduction to additional paid-in capital. The issuances costs associated with the Series B-2 preferred stock liability of $25,000 was recorded immediately as an element of interest cost, which are reflected in interest expense - preferred stock on December 11, 2020.

 

The Company recorded the February 8, 2021 issuance of 2,036 shares Series B-2 Preferred Stock at approximately $1.5 million and the underlying Series 1 and Series 2 warrants at approximately $0.5 million in total by allocating the gross proceeds to Series B-2 preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.5 million associated with the issuance of the 2,036 shares of Series B-2 preferred stock to additional paid-in capital. The Company then recorded interest of approximately $2.0 million for the BCF and warrant discounts as a first day interest given that the Series B-2 preferred shares can be converted at any time to common stock and given no set term. In addition to the aforesaid $2.7 million for the BCF and warrant discounts, the total interest of approximately $31,000 and $4.7 million was reported in Interest expense - preferred stock liability during the nine months ended March 31, 2022 and 2021, respectively, in the Condensed Consolidated Statements of Operations.

 

The change in fair value of the total Series B-2 preferred stock was $0 during the nine months ended March 31, 2022 and 2021 in the Condensed Consolidated Statements of Operations.

 

 
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Table of Contents

 

Underlying Series B-2 preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B-2 preferred stock) on a daily basis given fixed dividend terms under the Series B-2 preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B-2 preferred stock and the total dividends accrued of approximately $31,000 and $15,000 were treated as interest during the nine months ended March 31, 2022 and 2021, respectively, in the Condensed Consolidated Statements of Operations.

 

Terms of the 2020 Series B-2 5% convertible preferred stock

 

The rights and preferences of the preferred stock are set forth in a Certificate of Designation of Preferences, Rights and Limitations of Series B-2 5% Convertible Preferred Stock filed with the Nevada Secretary of State on December 4, 2020 (the “Certificate of Designation”). Each share of preferred stock has an initial stated value of $1,080 and may be converted at any time at the holder’s option into shares of the Company’s common stock at a conversion price equal of the lower of (i) $0.35 until August 15, 2021 and $0.50 thereafter, and (ii) 85% of the lowest volume weighted average price of the Company’s common stock on a trading day during the ten trading days prior to and ending on, and including, the conversion date. The conversion price may be adjusted following certain triggering events and subsequent equity sales and is subject to appropriate adjustment in the event of stock splits, stock dividends, recapitalization or similar events affecting the Company’s common stock.

 

The holders of the preferred stock are limited in the amount of stated value of the preferred stock they can convert on any trading day. The conversion cap limits conversions by the holders to the greater of $75,000 and an amount equal to 30% of the aggregate dollar trading volume of the Company’s common stock for the five trading days immediately preceding, and including, the conversion date. However, the conversion cap will be increased if the trading volume in the first 30 minutes of any trading session exceeds certain trailing average daily volume amounts. In addition, the holders of the preferred stock may not convert shares of preferred stock if, after giving effect to the conversion, a holder together with its affiliates would beneficially own in excess of 9.99% of the outstanding shares of the Company’s common stock.

 

Redemption Rights

 

Following 90 days after the scheduled date for the second closing date, the Company may elect to redeem the preferred stock for 120% of the aggregate stated value then outstanding, plus all accrued but unpaid dividends and all liquidated damages and other amounts due in respect of the preferred stock. The Company’s right to redeem the preferred stock is contingent upon it having complied with a number of conditions, including compliance with its obligations under the Certificate of Designation. Shares of preferred stock generally have no voting rights, except as required by law and except that the Company shall not take certain actions without the consent of the holders of the preferred stock.

 

2020 Series B-2 5% convertible preferred stock warrants

 

Each share of preferred stock was sold together with two warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase one share of preferred stock at $982.50 per share, or 5,089 shares of preferred stock in the aggregate for approximately $5.0 million in aggregate exercise price, for a period of up to 18 months following issuance, and (ii) a Series 2 warrant, which entitles the holder thereof to purchase one share of preferred stock at $982.50 per share, or 5,089 shares of preferred stock in the aggregate for approximately $5.0 million in aggregate exercise price, for a period of up to 24 months following issuance.

 

 
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Table of Contents

 

Subject to the satisfaction of certain circumstances, the Company may call for cancellation any or all of the warrants following 90 days after their issuance, for a payment in cash equal to 8% of the aggregate exercise price of the warrants being called. The warrants subject to any such call notice will be cancelled 10 days following the Company’s payment of the call fee, provided that the warrant holders have not exercised the warrants prior to cancellation.

 

Exercise of 2020 Series B-2 5% convertible preferred stock warrants

 

During the nine months ended March 31, 2022, the Company issued 5,072 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of approximately $5.0 million, upon exercise of 3,036 Series 1 warrants and exercise of 2,036 Series 2 warrants issued by the Company. With regard to the exercise of these 5,072 warrants, the Company recorded gross proceeds of approximately $5.0 million to the preferred stock liability.

 

As of March 31, 2022, there was no Series 1 and 2 warrants outstanding since all warrants were exercised, and there were 1,165 shares of Series B-2 5% convertible preferred stock outstanding.

 

During the period from December 4, 2020 (date of securities purchase agreement) to June 30, 2021, the Company issued 3,053 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of approximately $3.0 million, upon exercise of 3,053 Series 1 warrants issued by the Company. In addition, the Company issued 2,053 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of approximately $2.0 million, upon exercise of 2,053 Series 2 warrants issued by the Company. With regard to the exercise of these 5,106 warrants, the Company recorded gross proceeds of approximately $5.0 million to the preferred stock liability.

 

As of June 30, 2021, there was 5,072 Series 1 and 2 warrants to purchase 5,072 shares of Series B-2 5% convertible preferred stock outstanding and there was no Series B-2 5% convertible preferred stock outstanding.

 

Conversion of 2020 Series B-2 5% convertible preferred stock to common stock

 

During the nine months ended March 31, 2022, the 2020 Series B-2 5% convertible preferred stockholder converted a total of 3,907 shares of Series B-2 preferred stock into a total of approximately 38,256,706 shares of common stock. With regard to conversions, the Company reversed Series B-2 5% convertible preferred stock liability relating to the conversion and recorded $3.8 million as Additional paid-in capital at par value. The Company reversed the amount of approximately $3.8 million based on the proportion of Series B-2 5% convertible preferred stock converted relative to the original total issued.

 

As of March 31, 2022, Series B-2 5% convertible preferred stock liability is approximately $1.1 million.

 

During the period from December 4, 2020 (date of securities purchase agreement) to June 30, 2021, the 2020 Series B-2 5% convertible preferred stockholder converted a total of 10,207 shares of Series B-2 preferred stock into a total of 68,034,812 shares of common stock. With regard to conversions, the Company reversed Series B-2 5% convertible preferred stock liability relating to the conversion and recorded $10.0 million as Additional paid-in capital at par value. The Company reversed the amount of approximately $10.0 million based on the proportion of Series B-2 5% convertible preferred stock converted relative to the original total issued.

 

As of June 30, 2021, Series B-2 5% convertible preferred stock liability was $0.

 

 
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Table of Contents

 

Treasury Stock

 

Regarding the exercise of options to purchase 2.2 million shares of Class B common stock on September 8, 2020 by Mr. Ehrlich, the Company issued 1,787,762 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 412,238 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes and were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

 

Regarding the exercise of options to purchase 909,090 shares of Class B common stock on October 2, 2020, the Company issued 727,994 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 181,096 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes and were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

 

Regarding the exercise of options to purchase 13,072,730 shares of Class B common stock on December 28, 2020, the Company cancelled 6,980,583 shares of Class A common stock held by Mr. Ehrlich with a fair value of $1,438,000 to satisfy the exercise price. The Company withheld 1,765,203 shares of Class B common stock and cancelled an additional 854,419 shares of Class A common stock held by Mr. Ehrlich to satisfy tax withholding obligations. As a result, the Company issued 11,307,527 shares of Class B common shares (net of 1,765,203 shares of Class B common shares withheld to satisfy tax withholding obligations), and cancelled 7,835,002 shares of Class A common stock held by Mr. Ehrlich. Both the 1,765,203 shares of Class B common stock and the 7,835,002 shares of Class A common stock were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

 

There were 8,516,056 shares of Class A common stock and 2,358,537 shares of Class B common stock held in treasury, purchased at a total cumulative cost of approximately $2.3 million as of March 31, 2022 and June 30, 2021.

 

15. Fair Value Measurement

 

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.

 

The three levels of valuation hierarchy are defined as follows:

 

 

●

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

 

 

 

 

●

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

 

 

 

 

●

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

 

The Company has elected to measure its preferred stock using the fair value method. The fair value of the preferred stock is the estimated amount that would be paid to redeem the liability in an orderly transaction between market participants at the measurement date. The Company calculates the fair value of the Series B-2 Preferred stock using a lattice model that takes into consideration the future redemption value on the instrument, which is tied to the Company’s stock price.

 

 
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These valuations are considered to be Level 3 fair value measurements as the significant inputs are unobservable and require significant management judgment or estimation. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.

 

The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 Series B-2 preferred stock liability balance for the nine months ended March 31, 2022 and for the year ended June 30, 2021:

 

 

 

FY 2021

 

Balance, July 1, 2020

 

 $ -

 

Issuance of Series B-2 preferred stock at fair value

 

 

 5,000,000

 

Exercise of Series 1 and 2 warrants

 

 

 5,017,000

 

Conversion of Series B-2 preferred stock to common stock

 

 

 (10,017,000 )

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

 

(—)

 

Balance, June 30, 2021

 

 $ —

 

 

 

 

 

 

Exercise of Series 1 and 2 warrants

 

 

 4,983,000

 

Conversion of Series B-2 preferred stock to common stock

 

 

 (3,838,000 )

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

 

(—)

 

Balance, March 31, 2022

 

 $ 1,145,000

 

 

(1)

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

(2)

The 5% accrued dividend is reported in interest expense-preferred stock in the statement of operation and the remaining accrued dividends of $46,000 and $15,000 was included under current liability as of March 31, 2022 and June 30, 2021, respectively.

 

16. Subsequent Events

 

The Company has evaluated events occurring subsequent to March 31, 2022 through the date these financial statements were issued and determined the following items requiring disclosure:

 

On April 13, 2022, the Company entered a Patent Assignment Agreement with Fox Chase Chemical Diversity Center, Inc. (“FCCDC”), pursuant to which the Company assigned the title, rights and interest in and to the applications of certain patents in accordance with an earlier collaborative research agreement related to antifungal drug discovery work to which the Company had rights.

 

On May 3, 2022, the Company was notified it would receive payment from FCCDC based on FCCDC’s third-party license of broad-spectrum anti-fungals and a separate agreement between Innovation and FCCDC. Some of the preliminary data used in the FCCDC research program had been obtained as part of an earlier collaboration with the Company supported by funding from the National Institutes of Health. Additional payments from FCCDC to the Company may also be made in the future.

 

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

 

The following management’s discussion and analysis of financial condition and results of operations supplements and should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included in this Form 10-Q and with our Annual Report on Form 10-K for the year ended June 30, 2021. 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 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 OF OUR BUSINESS

 

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 class of compounds called defensin-mimetics, and Kevetrin (thioureidobutyronitrile), our anti-cancer compound. The Company is also engaged in seeking additional health care-related investment opportunities with the aim of diversifying the Company’s assets. As of March 31, 2022, the Company has largely paused clinical development to strategically analyze all the scientific data collected to date across its portfolio of assets - See discussion by indication below. Drug manufacturing, scientific report writing, and supportive research activities continue. While the analysis is performed, management is focused on other avenues of business development, including, but not limited to, joint ventures, mergers and acquisitions, strategic investments, and licensing agreements, for the purpose of diversifying corporate assets. While no assurances are expressed or implied that any agreement will be consummated in the future, the Company is committed toward executing on opportunities at hand.

 

Recent Developments

 

Brilacidin is being studied by independent researchers funded by US Government grants, as a potential broad-spectrum antiviral therapeutic for the treatment of viruses, including the novel coronavirus (SARS-CoV-2), which is responsible for COVID-19.  We anticipate these studies to continue as long as researchers remain positive about the antiviral properties and therapeutic potential of Brilacidin and government funding is available.

 

On November 11, 2021, the Company released topline results for its Phase 2 COVID-19 trial. Brilacidin did not show a difference compared to placebo in reducing Time to Sustained Recovery Through Day 29, the study’s primary endpoint. Safety data showed Brilacidin was generally well-tolerated, with frequency of treatment-emergent adverse events similar between study arms.

 

In November 2021, it was announced that further data analysis and review of the COVID-19 trial was underway, with the aim potentially to identify positive trends in the data that might support Brilacidin for inclusion in government-sponsored COVID-19 platform trials. Additionally, new in vitro research into Brilacidin’s antiviral properties against human coronaviruses, published as a preprint, was highlighted.

 

 
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In early March 2022, the Company was notified by Alfasigma that Phase 2 multinational clinical trial planning/regulatory submissions have commenced, for planned Brilacidin treatment in Ulcerative Proctitis/Ulcerative Proctosigmoiditis (UP/UPS. Phase 1 studies in healthy volunteers for treatment of UP/UPS, using Brilacidin in a proprietary Alfasigma formulation, were earlier successfully completed.

 

On March 7, 2022, the Company reported further findings from the Phase 2 COVID-19 clinical trial and compassionate use of Brilacidin in critically-ill COVID-19 patients.

 

 

·

In the Phase 2 clinical trial, beneficial Brilacidin treatment effects were observed on National Early Warning Score 2 (NEWS2) secondary endpoints, as well as on the primary endpoint for patient subgroups (with most elevated biomarker/viral load levels). For this study population, early treatment with Brilacidin from onset of symptoms appeared to have a positive impact on time to sustained recovery: if a patient started study treatment within fewer than 7 days of onset of COVID-19 symptoms, patients in the Brilacidin 5-dose group achieved sustained recovery more quickly compared to the pooled placebo group (p=0.03).

 

 

 

 

·

From compassionate use of Brilacidin in critically-ill COVID-19 patients, noticeable treatment effects attributed to the use of Brilacidin were reported by investigators. Patients receiving compassionate use of Brilacidin were at advanced stages of disease and had exhausted other conventional treatment options. Compassionate use cases comprised Brilacidin being administered to critically-ill COVID‑19 patients over a longer duration (up to 10 days of treatment) than in the Phase 2 COVID-19 clinical trial (3 and 5 day dosing), with some patients also receiving higher and more frequent (twice daily) dosing. There appeared to be a potentially favorable treatment response based on increased Brilacidin dosing. For the Brilacidin compassionate use cases, in general, investigators observed more stable disease with initial improvements evident on chest x-rays and in COVID-19 disease biomarkers (e.g., C-Reactive Protein and ferritin). While nearly all of these critically-ill patients ultimately succumbed to severe hypoxic respiratory failure (secondary to COVID-19 viral pneumonia) and expired, survival time for these patients who initially were not expected to live beyond a few days was appreciably extended.

 

On March 7, 2022, the Company also noted that collaborative research with National Institutes of Health (NIH) and other scientists remains ongoing. Brilacidin’s broad-spectrum in vitro antiviral activity is generating positive data, including results showing Brilacidin is potent against the Alpha, Gamma and Delta variants of SARS-CoV-2, with publications and conference abstracts related to this research in process of preparation.

 

On March 15, 2022, the Company highlighted coronavirus research published by William F. DeGrado, PhD, and colleagues, which characterized the antiviral activity of Brilacidin against multiple endemic human coronaviruses (HCoVs), including HCoV-OC43, HCoV-229E, HCoV-NL63, and SARS-CoV-2, in human cell lines.

 

Given the promising treatment effects observed with Brilacidin in treatment of COVID-19 (from the Phase 2 clinical trial and compassionate use cases), combined with the broad-spectrum in vitro antiviral data, the Company plans to submit Brilacidin to government-sponsored platforms for possible inclusion in clinical trials and additional development funding support.

 

 
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Business Development and Licensing

 

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

 

In July 2019, the Company entered into a license agreement with Alfasigma S.p.A. (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and commercialize rectally administered Brilacidin for ulcerative proctitis/ulcerative proctosigmoiditis (“UP/UPS”). The license agreement provides Alfasigma with a right of first refusal for Brilacidin for the treatment of more extensive forms of inflammatory bowel disease (IBD), such as ulcerative colitis and Crohn’s disease, as well as a right of first negotiation for Brilacidin in other gastrointestinal indications. Phase 1 studies in healthy volunteers using Brilacidin in a proprietary Alfasigma formulation have successfully completed, and Alfasigma has notified the Company that Phase 2 multinational clinical trial planning/regulatory submissions have commenced (1Q2022); Brilacidin drug substance has been manufactured under direction of the Company for delivery to Alfasigma for use in this study. The Company is eligible to receive $24 million in upfront and milestone payments, and a 6 percent royalty (net sales) upon the successful marketing of Brilacidin for UP/UPS.

 

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

 

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 1/2 UC Safety/toleration/PK and Proof of Concept in preparation

 

ABSSSI (Acute Bacterial Skin and Skin Structure Infection)

Phase 2 (completed)

 

COVID-19

Phase 2 Study (completed)

Kevetrin

Ovarian Cancer

Phase 2 Study (completed)

 

We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Milestone payments from our licensee are also dependent on clinical/regulatory milestones. We are actively engaged in business development for partnering our drugs. Developing pharmaceutical products, however, is a lengthy and very expensive process and there can be no assurance that we will complete such development or commercialize such pharmaceutical products for several years, if ever.

 

 
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The Company devotes most of its efforts and resources on Brilacidin. 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.

 

As of March 31, 2022, the Company has largely paused clinical development to strategically analyze all the scientific data collected to date across its portfolio of assets. 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:

 

Brilacidin

 

In December 2020, the U.S. Food and Drug Administrations (FDA) approved the Company’s Investigational New Drug (IND) application to proceed with initiation of a randomized, placebo-controlled Phase 2 clinical trial of Brilacidin in moderate-to-severe hospitalized patients with COVID-19. Similar regulatory approval was obtained from the Russian Ministry of Health. This Phase 2 clinical trial of intravenously-administered Brilacidin for COVID-19 conducted at sites in the United States and Russa has since completed (n=120). The study was a randomized, double-blind, placebo-controlled, multi-center study to evaluate the efficacy and safety of Brilacidin in COVID-19 hospitalized patients. Investigational treatment (Brilacidin or placebo) was provided in addition to standard of care treatments, and the investigational treatment regimens tested were three daily doses or five daily doses. The trial’s primary endpoint is time to sustained recovery through Day 29, using a clinical status ordinal scale based on that used in the series of National Institute of Allergy and Infectious Diseases (NIAID) Adaptive COVID-19 Treatment Trials (ACTTs). Additional endpoints included: in-hospital outcomes (e.g., duration of hospitalization, time to discharge), all-cause mortality, measurement of disease biomarkers (e.g., CRP, ferritin) and inflammation-related biomarkers (e.g., IL-1β, IL-6, IL-10, total IL-18, TNF-α), changes to SARS-CoV-2 viral load, as well as other key measures.

 

The Company reported topline results that Brilacidin did not show a difference compared to placebo in reducing Time to Sustained Recovery Through Day 29, the study’s primary endpoint. While separation between treatment groups was not evident for the primary endpoint when including all patients in a treatment group, there was evidence of beneficial Brilacidin treatment effects on this endpoint for patient subgroups.

 

 

·

Among patients with the most elevated biomarker levels [for C-Reactive Protein (CRP) and Interleukin-6 (IL-6)] at baseline, more patients in the Brilacidin 5-dose subgroup achieved sustained recovery through Day 29 (the primary endpoint) compared to those patients in the pooled placebo subgroup. Time to sustained recovery also was on average shorter in the Brilacidin 5-dose subgroup.

 

 

 

 

·

Additionally, among patients with the most elevated SARS-CoV-2 viral load levels, more patients in the Brilacidin 5-dose subgroup achieved sustained recovery through Day 29 compared to placebo, and time to sustained recovery for those Brilacidin-treated patients also was on average shorter.

 

 
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For the study population, early treatment with Brilacidin from onset of symptoms appeared to have a positive impact on time to sustained recovery: if a patient started study treatment within fewer than 7 days of onset of COVID-19 symptoms, patients in the Brilacidin 5-dose group achieved sustained recovery more quickly compared to the pooled placebo group (p=0.03).

 

Also, Brilacidin did show treatment effects on the National Early Warning Score 2 (NEWS2) secondary endpoints, with more patients in the Brilacidin 5-dose group achieving and maintaining (for at least 24 hours), a NEWS2 of ≤2 by 10 days (from randomization); plus, in addition, mean change from baseline in NEWS2 was greater for the Brilacidin treatment groups than for the pooled placebo group, at all assessment timepoints (Study Days 3, 5, 8, 11, 15, and 29).

 

Safety data showed Brilacidin was generally well-tolerated, with an overall safety profile in COVID-19 patients consistent with previous clinical studies. The incidence of patients with at least one treatment-emergent adverse event (TEAE) was higher for Brilacidin treatment compared to placebo. However, the proportion of patients with TEAEs is similar across groups (72 percent on active, 65 percent on placebo) after excluding the Brilacidin-related adverse events of tingling (paresthesia) and hypoesthesia (numbness), which are known, transient, mostly mild, non-serious adverse events related to Brilacidin IV treatment. The incidence of serious adverse events was the same (12 percent on active, 12 percent on placebo), and no serious adverse events were reported as related to study treatment. There was also no difference in mortality between active and placebo, with both groups experiencing low mortality rates (7 percent) compared to other studies that evaluated patients with moderate-to-severe COVID-19.

 

Achieving clinical trial success in hospitalized COVID-19 patients for the primary endpoint of “Time to Sustained Recovery Through Day 29” - showing a separation between the new treatment study arm and standard of care arm- has become more challenging due to the emergence of SARS-CoV-2 variants. The proliferation of the Delta variant, for example, which became prevalent during the enrollment of our Brilacidin COVID-19 trial likely caused physicians to follow aggressive treatment regimens for their hospitalized patients, i.e., with high doses of steroid, anti-inflammatory and other supportive medications not previously used, as the in-hospital mortality in the Delta wave was significantly higher than previous variants. We believe a lot is still not known as regards how this cocktail of drugs may affect new treatments.

 

In February 2022, Pfizer discontinued the global clinical development program for PF-07304814, an intravenously administered SARS-CoV-2 main protease inhibitor being evaluated in adults hospitalized with severe COVID-19. The NIH initiated a COVID-19 Clinical Trial program (ACTIV-3) to test anti-SARS-CoV-2 monoclonal antibodies and other therapies, including PF-07304814, in patients hospitalized with COVID-19. Brii Biosciences, Eli Lilly, GlaxoSmithKline and Novartis were among drug developers to contribute candidates to the NIH ACTIV-3 study. All those candidates failed to show significant clinical improvement in hospitalized patients with severe COVID-19, which has resulted in a persistent unmet need.

 

Given this unmet need, concerning potential future Brilacidin trials in hospitalized COVID-19 patients, the Company is planning to submit Brilacidin to government-sponsored COVID-19 trial platforms. Pursing a biomarker-driven approach, increasing Brilacidin dosing, targeting different patient populations, testing Brilacidin in combination with other drugs (e.g., remdesivir, given strong synergistic in vitro data)-all are areas under consideration. Compassionate use of Brilacidin may also continue.

 

The Company is collaborating with a Regional Biocontainment Laboratory (RBL) researcher, and other scientists, including NIH scientific staff, to further investigate Brilacidin as a treatment for the SARS-CoV-2 virus, endemic Human Coronaviruses (H-CoVs), as well as other types of acutely infectious viruses. Brilacidin in vitro testing results in H-CoVs has been accepted for peer review publication, as has a manuscript detailing Brilacidin’s antiviral blocking properties. Research conducted at the RBL in bunyaviruses and alphaviruses has been submitted for peer review publication. Attendance at antiviral conferences is planned, along with grant applications for federally-funded antiviral research.

 

 
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IBD, Ulcerative Proctitis/Proctosigmoiditis (UP/UPS) study - A Phase 2a trial has previously been completed by the Company, comprised of three sequential cohorts, with progressive dose escalation by cohort: cohort A (6 patients) - 50 mg, cohort B (6 patients) - 100 mg, and cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The primary efficacy endpoint of clinical remission (accounting for stool frequency, rectal bleeding and endoscopy findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient quality of life (as assessed by the short inflammatory bowel disease questionnaire, or SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. In July 2019, the Company entered into a license agreement with Alfasigma, granting Alfasigma the worldwide right to develop, manufacture and commercialize rectally administered Brilacidin for UP/UPS. Phase 1 studies in healthy volunteers using Brilacidin in a proprietary Alfasigma formulation have successfully completed, and Alfasigma has notified the Company that Phase 2 multinational clinical trial planning/regulatory submissions have commenced (1Q2022); Brilacidin drug substance has been manufactured under direction of the Company for delivery to Alfasigma for use in this study. See Note 7. Exclusive License Agreement of the notes to condensed consolidated financial statements.

 

IBD, Ulcerative Colitis (UC) - Brilacidin has also been developed as a treatment in more extensive forms of IBD.

 

Development of a delayed release oral formulation has been in progress, with development work expanding into immediate release formulations due to unexpected findings encountered. Such findings appear due to the inherent physiochemical properties of the compound, and those of polymers used to achieve delayed release. An immediate release, multi-particulate, capsule formulation has been developed, although further work has since been halted due to instability of that formulation being identified. Hence, further advancement in the indication of ulcerative colitis requires conduct of additional formulation development work prior to Phase 1 testing of that oral formulation. Completion of formulation/analytical development work, clinical trial supply manufacturing, and subsequent progression into clinical trials, are pending securing sufficient drug supply and working capital.

 

Oral Mucositis (OM) study - In a randomized, double-blind Phase 2 study of Brilacidin for the prevention and control of OM in patients receiving chemoradiation for treatment of Head and Neck Cancer (HNC), Brilacidin markedly reduced the rate of severe OM (WHO Grade ≥ 3), delayed onset of severe OM and decreased duration of severe OM. The Company made available on its website a comparative data table (based on public information) showing Brilacidin compares favorably to other compounds in development for preventing and treating severe OM. The Company and the FDA have completed an End-of-Phase 2 meeting concerning the continuing development of Brilacidin oral rinse to decrease the incidence of severe OM in HNC patients receiving chemoradiation. Both parties agreed to an acceptable Brilacidin Phase 3 development pathway, including studying Brilacidin oral rinse effects on severe OM when cisplatin, the preferred chemotherapy regimen in HNC care, is administered in higher concentrations (80-100 mg/m2) every 21 days, and at lower concentrations (30-40 mg/m2) administered weekly as part of the chemoradiation regimen.

 

An optimized oral rinse formulation has been developed, and ongoing stability testing will be finished this year. Further advancement in the indication of oral mucositis requires additional drug formulation/analytical work, followed by clinical trial supply manufacturing prior to progressing to Phase 3 clinical trials. Given the low price per share of our common stock and the many multiple million dollar costs associated with a Phase 3 program, at this time clinical trial supply manufacturing and Phase 3 clinical trial conduct are delayed, with such activities pending securing sufficient working capital and or partnership.

 

 
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ABSSSI - In February 2016, the Company submitted a Special Protocol Assessment (SPA) request, along with a final protocol, to the FDA, for a Phase 3 clinical trial of 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 the 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 approximately $0.6 million and $1.0 million during the three months ended March 31, 2022 and 2021, respectively, and approximately $2.9 million and $3.3 million during the nine months ended March 31, 2022 and 2021, respectively.

 

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. Presently we are focusing our resources on Brilacidin, our other lead candidate.

 

Expenditures on Kevetrin were insignificant during the quarters ended March 31, 2022 and 2021, respectively.

 

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.

 

 
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Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations are based upon our accompanying financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, and which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Note 3. Significant Accounting Policies and Recent Accounting Pronouncements, to the condensed consolidated financial statements, 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.

 

Results of Operations

 

We expect to incur losses from operations for the next few years. We currently anticipate that future budget expenditures will be approximately $4.2 million for the next 12 months, including approximately $2.2 million for development activities, supportive research, and drug manufacturing. 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 March 31, 2022 and 2021

 

Revenue

 

We did not generate revenue for the three months ended March 31, 2022 and 2021.

 

We incurred operating expenses of approximately $1.5 million and $1.9 million for the three months ended March 31, 2022 and 2021, 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

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

 $

 

 

 % 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical studies and development research

 

 $ 677,000

 

 

 $ 1,210,000

 

 

 

 (533,000 )

 

 

 (44 )%

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

 

 

 119,000

 

 

 

 77,000

 

 

 

 42,000

 

 

 

 55 %

Stock-based compensation - employee

 

 

 30,000

 

 

 

 14,000

 

 

 

 16,000

 

 

 

 114 %

Stock-based compensation - consultants

 

 

 10,000

 

 

 

 27,000

 

 

 

 (17,000 )

 

 

 (63 )%

Depreciation and amortization expenses

 

 

 95,000

 

 

 

 95,000

 

 

 

 —

 

 

—

%

Total

 

 $ 931,000

 

 

 $ 1,423,000

 

 

 

 (492,000 )

 

 

 (35 )%

 

 
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Research and development expenses for proprietary programs decreased during the three months ended March 31, 2022 compared with the three months ended March 31, 2021, primarily due to less spending on our Brilacidin program for the three months ended March 31, 2022.

 

Employees payroll and payroll tax expenses increased during the three months ended March 31, 2022 compared with the three months ended March 31, 2021, due to a new hire of an employee during the first quarter of fiscal 2022.

 

Stock-based compensation for employee increased during the three months ended March 31, 2022 due to one new issuance of 500,000 stock options to purchase shares of Company’s common stock to the Company’s Senior Vice President, Clinical Sciences and Portfolio Management in October, 2021 (see Note 13).

 

Stock-based compensation - consultants decreased during the three months ended March 31, 2022 due to less options being issued to consultants during the three months ended March 31, 2022 compared with the three months ended March 31, 2021.

 

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 decrease 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. 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

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

 $

 

 

 % 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance and health expense

 

 $ 68,000

 

 

 $ 109,000

 

 

 

 (41,000 )

 

 

 (38 )%

Rent and utility expense

 

 

 17,000

 

 

 

 25,000

 

 

 

 (8,000 )

 

 

 (32 )%

Stock-based compensation-Officers

 

 

 166,000

 

 

 

 —

 

 

 

 166,000

 

 

—

%

Other G&A

 

 

 69,000

 

 

 

 111,000

 

 

 

 (42,000 )

 

 

 (38 )%

Total

 

 $ 320,000

 

 

 $ 245,000

 

 

 

 75,000

 

 

 

 31 %

 

 
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General and administrative expenses increased during the three months ended March 31, 2022, primarily due to the increase in stock-based compensation-Officers of $166,000, offset by a decrease in insurance expense of $41,000 and a decrease in other G&A expense of $42,000 due to less business development consultants’ fees and business events during the three months ended March 31, 2022. Stock-based compensation for officers increased during the three months ended March 31, 2022 due to one new issuance of 3 million stock options to purchase shares of Company’s common stock to the Company’s two independent directors and the CEO in October, 2021 (see Note 13).

 

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

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

$

 

 

% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Officer’ payroll and payroll tax expenses

 

$

126,000

 

 

$

126,000

 

 

 

—

 

 

 

—

%

 

Officers’ payroll and payroll tax expenses were stable during the three months ended March 31, 2022.

 

Professional Fees

 

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

 

 

 

Three months ended

 

 

Change

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

$

 

 

% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit, legal and professional fees

 

$

81,000

 

 

$

124,000

 

 

 

(43,000

)

 

 

(35

)%

 

Professional fees decreased during the three months ended March 31, 2022 primarily related to fewer transactions in fiscal 2022 compared to the prior year period. Professional fees during the three months ended March 31, 2021 primarily related to the 2020 Securities Purchase Agreement and issuance of Series B-2 preferred stock.

 

Other Income (Expense)

 

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

 

 

 

For the Three months ended

 

 

Change

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

 $

 

 

 % 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense - debt

 

 $ (11,000 )

 

 

 (37,000 )

 

 $ (26,000 )

 

 

 (70 )%

Interest expense - preferred stock liability

 

 

 (17,000 )

 

 

 (2,005,000 )

 

 

 (1,988,000 )

 

 

 (99 )%

Other Income (Expense), net

 

 $ (28,000 )

 

 $ (2,042,000 )

 

 $ (2,014,000 )

 

 

 (99 )%

 

 
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There was a decrease in interest expenses paid on the note payable - related party, because the Company repaid the note payable of $1,033,000 to Mr. Ehrlich, the Company’s Chairman and CEO (see Note 11. Convertible Note Payable - Related Party of the Notes to Condensed Consolidated Financial Statements).

 

There was a decrease in interest expense – preferred stock liability during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 related to the 5% accrued dividend associated with the Series B-2 preferred stock (see Note 14).

 

Net Losses

 

We incurred net losses of $1.5 million and $4.0 million for the three months ended March 31, 2022 and 2021, respectively, because of the above-mentioned factors.

 

For the nine months ended March 31, 2022 and 2021

 

Revenue

 

We did not generate revenue for the nine months ended March 31, 2022 and 2021.

 

We incurred operating expenses of approximately $5.5 million and $6.5 million for the nine months ended March 31, 2022 and 2021, 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 nine months ended

 

 

Change

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

 $

 

 

 % 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical studies and development research

 

 $ 3,185,000

 

 

 $ 4,191,000

 

 

 

 (1,006,000 )

 

 

 (24 )%

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

 

 

 524,000

 

 

 

 310,000

 

 

 

 214,000

 

 

 

 69 %

Stock-based compensation - employee

 

 

 69,000

 

 

 

 46,000

 

 

 

 23,000

 

 

 

 50 %

Stock-based compensation - consultants

 

 

 51,000

 

 

 

 88,000

 

 

 

 (37,000 )

 

 

 (42 )%

Depreciation and amortization expenses

 

 

 286,000

 

 

 

 283,000

 

 

 

 3,000

 

 

 

 1 %

Total

 

 $ 4,115,000

 

 

 $ 4,918,000

 

 

 

 (803,000 )

 

 

 (16 )%

 

Research and development expenses for proprietary programs decreased during the nine months ended March 31, 2022 compared with the nine months ended March 31, 2021, primarily due to less spending on our Brilacidin program for the nine months ended March 31, 2022.

 

Employees payroll and payroll tax expenses increased during the nine months ended March 31, 2022 compared with the nine months ended March 31, 2021, due to a new hire of an employee during the first quarter of fiscal 2022.

 

Stock-based compensation for employee increased during the nine months ended March 31, 2022 due to one new issuance of 500,000 stock options to purchase shares of Company’s common stock to the Company’s Senior Vice President, Clinical Sciences and Portfolio Management in October, 2021 (see Note 13).

 

 
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Stock-based compensation - consultants decreased during the nine months ended March 31, 2022 due to less options being issued to consultants during the nine months ended March 31, 2022 compared with the nine months ended March 31, 2021.

 

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 decrease 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. 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 nine months ended

 

 

Change

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

 $

 

 

 % 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance expense

 

 $ 208,000

 

 

 $ 337,000

 

 

 

 (129,000 )

 

 

 (38 )%

Rent and utility expense

 

 

 58,000

 

 

 

 77,000

 

 

 

 (19,000 )

 

 

 (25 )%

Stock-based compensation-Officers

 

 

 277,000

 

 

 

 —

 

 

 

 277,000

 

 

—

%

Other G&A

 

 

 228,000

 

 

 

 326,000

 

 

 

 (98,000 )

 

 

 (30 )%

Total

 

 $ 771,000

 

 

 $ 740,000

 

 

 

 31,000

 

 

 

 4 %

 

General and administrative expenses increased during the nine months ended March 31, 2022, primarily due to the increase in stock-based compensation-Officers of $277,000, offset by a decrease in insurance expense of $129,000 and a decrease in other G&A expense of $98,000 due to less business development consultants’ fees and business events during the nine months ended March 31, 2022. Stock-based compensation for officers increased during the nine months ended March 31, 2022 due to one new issuance of 3 million stock options to purchase shares of Company’s common stock to the Company’s two independent directors and the CEO in October, 2021 (see note 13).

 

Officers’ Payroll and Payroll Tax Expenses

 

Below is a summary of our Officers’ payroll and payroll tax expenses (rounded to nearest thousand):

 

 

 

Nine months ended

 

 

Change

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

 $

 

 

 % 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Officers’ payroll and payroll tax expenses

 

 $ 308,000

 

 

 $ 378,000

 

 

 

 (70,000 )

 

 

 (19 )%

 

 
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The decrease in officers’ payroll and payroll tax expenses for the Company during the nine months ended March 31, 2022 was due to the adjustment to officer’s accrued payroll taxes.

 

Professional Fees

 

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

 

 

 

Nine months ended

 

 

Change

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

 $

 

 

 % 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit, legal and professional fees

 

 $ 301,000

 

 

 $ 450,000

 

 

 

 (149,000 )

 

 

 (33 )%

 

Professional fees decreased during the nine months ended March 31, 2022 primarily related to fewer transactions in fiscal 2022 compared to the prior year period. Professional fees during the nine months ended March 31, 2021 primarily related to the 2020 Securities Purchase Agreement and issuance of Series B-2 preferred stock.

 

Other Income (Expense)

 

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

 

 

 

For the Nine months ended

 

 

Change

 

 

 

March 31,

 

 

2022 vs. 2021

 

 

 

2022

 

 

2021

 

 

 $