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: September 30, 2023

 

 

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

WakefieldMA 01880

(Address of principal executive offices, Zip Code)

 

(978) 921-4125

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The number of shares outstanding of each of the issuer’s classes of common equity, as of November 14, 2023 is as follows:

 

Class of Securities

 

Shares Outstanding

Common Stock Class A, $0.0001 par value

 

514,013,755

Common Stock Class B, $0.0001 par value

 

4,333,936

 

 

 

 

INNOVATION PHARMACEUTICALS INC.

FORM 10-Q

For the Three Months Ended September 30, 2023

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

4

 

 

Condensed Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Operations for the three months ended September 30, 2023 and 2022 (unaudited)

 

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2023 and 2022 (unaudited)

 

6

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2023 and 2022 (unaudited)

 

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

 

Item 2.

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

 

20

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

Item 4.

Controls and Procedures

 

25

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 1.

Legal Proceedings

 

26

 

Item 1A

Risk Factors

 

26

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

Item 3.

Defaults Upon Senior Securities

 

26

 

Item 4.

Mine Safety Disclosures

 

26

 

Item 5.

Other Information

 

26

 

Item 6.

Exhibits

 

27

 

 

 

 

 

SIGNATURES

 

28

 

 
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; 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., and the potential cancellation of the license agreement; and compliance with regulatory requirements, as well as other factors described elsewhere in this report and our other reports filed with the Securities and Exchange Commission (the “SEC”). Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

 

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

 

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

 

 
3

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2023 AND JUNE 30, 2023

(Unaudited)

(Rounded to nearest thousand except for shares data)

 

 

 

September 30,

 

 

June 30,

 

 

 

2023

 

 

2023

 

ASSETS

 

Current Assets:

 

 

 

 

 

 

Cash

 

$864,000

 

 

$1,518,000

 

Prepaid expenses and other current assets

 

 

76,000

 

 

 

116,000

 

Total Current Assets

 

 

940,000

 

 

 

1,634,000

 

 

 

 

 

 

 

 

 

 

Equity investment

 

 

3,742,000

 

 

 

3,806,000

 

 

 

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

 

 

 

Patent costs - net

 

 

1,907,000

 

 

 

1,999,000

 

Deferred offering costs

 

 

-

 

 

 

-

 

Security deposit

 

 

78,000

 

 

 

78,000

 

Total Other Assets

 

 

1,985,000

 

 

 

2,077,000

 

Total Assets

 

$6,667,000

 

 

$7,517,000

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

 

 

 

 

 

 

 

 

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

 

$3,021,000

 

 

$2,985,000

 

Accrued expenses - (including related party accruals of approx. $42,000 and $24,000, respectively)

 

 

192,000

 

 

 

73,000

 

Accrued salaries and payroll taxes - (including related party accrued salaries of approx. $1,514,000 and $1,613,000, respectively)

 

 

1,587,000

 

 

 

1,690,000

 

Operating lease - current liability

 

 

-

 

 

 

55,000

 

Convertible note payable - related party

 

 

238,000

 

 

 

213,000

 

Accrued dividend - Series B 5% convertible preferred stock

 

 

10,000

 

 

 

5,000

 

Total Current Liabilities

 

 

5,048,000

 

 

 

5,021,000

 

Other Liabilities:

 

 

 

 

 

 

 

 

Series B 5% convertible preferred stock liability at $1,080 stated value; 360 shares and 360 shares issued and outstanding at September 30, 2023 and June 30, 2023

 

 

457,000

 

 

 

457,000

 

Operating lease - long term liability

 

 

-

 

 

 

-

 

Total Liabilities

 

 

5,505,000

 

 

 

5,478,000

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

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, 522,529,811 shares issued as of September 30, 2023 and June 30, 2023, and 514,013,755 shares outstanding as of September 30, 2023 and June 30, 2023.

 

 

51,000

 

 

 

51,000

 

Common Stock - Class B, (10 votes per share); $0.0001 par value, 100,000,000 shares authorized, 6,692,473 shares issued as of September 30, 2023 and June 30, 2023, and 4,333,936 shares outstanding as of September 30, 2023 and June 30, 2023

 

 

1,000

 

 

 

1,000

 

Additional paid-in capital

 

 

129,569,000

 

 

 

129,566,000

 

Accumulated deficit

 

 

(126,205,000)

 

 

(125,325,000)

Treasury Stock, at cost (10,874,593 shares as of September 30, 2023 and June 30, 2023)

 

 

(2,254,000)

 

 

(2,254,000)

Total Stockholders’ Equity

 

 

1,162,000

 

 

 

2,039,000

 

Total Liabilities and Stockholders’ Equity

 

$6,667,000

 

 

$7,517,000

 

 

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

 

 
4

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

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

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

Revenues

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development expenses

 

 

281,000

 

 

 

869,000

 

General and administrative expenses

 

 

133,000

 

 

 

291,000

 

Officers’ payroll and payroll tax expenses

 

 

118,000

 

 

 

118,000

 

Professional fees

 

 

270,000

 

 

 

104,000

 

Total operating expenses

 

 

802,000

 

 

 

1,382,000

 

 

 

 

 

 

 

 

 

 

Other Operating Income and (Loss)

 

 

 

 

 

 

 

 

Equity in loss from an investment

 

 

(64,000 )

 

 

(31,000 )

Total Other Operating Income and (Loss)

 

 

(64,000 )

 

 

(31,000 )

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(866,000 )

 

 

(1,413,000 )

 

 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

 

 

Interest expense - debt

 

 

(9,000 )

 

 

(7,000 )

Interest expense-preferred stock

 

 

(5,000 )

 

 

(8,000 )

Total other expenses

 

 

(14,000 )

 

 

(15,000 )

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(880,000 )

 

 

(1,428,000 )

Provision for income taxes

 

 

 

 

 

 

Net loss

 

$(880,000 )

 

$(1,428,000 )

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$(0.00 )

 

$(0.00 )

 

 

 

 

 

 

 

 

 

Basic and Diluted Weighted Average Common Shares Outstanding

 

 

518,347,691

 

 

 

503,964,459

 

 

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

 

 
5

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

(Rounded to nearest thousand, except for shares data)

 

For the Three Months Ended September 30, 2022

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional

 

 

 

 

Treasury Stock

 

 

Total

 

 

 

Shares

 

 

Par Value

$0.0001

 

 

Shares

 

 

Par Value

$0.0001

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Shares

 

 

Amount

 

 

Stockholders’ Equity

 

Balance at June 30, 2022

 

 

488,225,673

 

 

$49,000

 

 

 

15,641,463

 

 

$2,000

 

 

$129,090,000

 

 

$(122,157,000 )

 

 

10,874,593

 

 

$(2,254,000 )

 

$4,730,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(59,000 )

 

 

 

 

 

 

 

 

 

 

 

(59,000 )

Restricted common stock award issued to employee for services

 

 

97,323

 

 

 

 

 

 

 

 

 

 

 

 

1,000

 

 

 

 

 

 

 

 

 

 

 

 

1,000

 

Stock options issued to employee for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,000

 

 

 

 

 

 

 

 

 

 

 

 

28,000

 

Stock options issued to consultants for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

Stock options issued to director for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

147,000

 

 

 

 

 

 

 

 

 

 

 

 

147,000

 

Net loss for the three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,428,000 )

 

 

 

 

 

 

 

 

(1,428,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2022

 

 

488,322,996

 

 

$49,000

 

 

 

15,641,463

 

 

$2,000

 

 

$129,209,000

 

 

$(123,585,000 )

 

 

10,874,593

 

 

$(2,254,000 )

 

$3,421,000

 

 

For the Three Months Ended September 30, 2023

 

 

 

Common Stock A

 

 

Common Stock B

 

 

Additional

 

 

 

 

Treasury Stock

 

 

Total

 

 

 

Shares

 

 

Par Value

$0.0001

 

 

Shares

 

 

Par Value

$0.0001

 

 

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Shares

 

 

Amount

 

 

Stockholders’ Equity

 

Balance at June 30, 2023

 

 

514,013,755

 

 

$51,000

 

 

 

4,333,936

 

 

$1,000

 

 

$129,566,000

 

 

$(125,325,000 )

 

 

10,874,593

 

 

$(2,254,000 )

 

$2,039,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued to employee for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,000

 

 

 

 

 

 

 

 

 

 

 

 

1,000

 

Stock options issued to employee for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

Net loss for the three months ended September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(880,000 )

 

 

 

 

 

 

 

 

(880,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2023

 

 

514,013,755

 

 

$51,000

 

 

 

4,333,936

 

 

$1,000

 

 

$129,569,000

 

 

$(126,205,000 )

 

 

10,874,593

 

 

$(2,254,000 )

 

$1,162,000

 

 

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

 

 
6

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(Unaudited)

(Rounded to nearest thousand, except for shares data)

 

 

 

2023

 

 

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$(880,000 )

 

$(1,428,000 )

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

 

 

 

 

 

 

 

 

Stock based compensation

 

 

3,000

 

 

 

178,000

 

Amortization of patent costs

 

 

94,000

 

 

 

93,000

 

Equity in loss from an investment

 

 

64,000

 

 

 

31,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and security deposits

 

 

40,000

 

 

 

23,000

 

Accounts payable

 

 

36,000

 

 

 

350,000

 

Accrued expenses

 

 

119,000

 

 

 

(2,000 )

Accrued officers’ salaries and payroll taxes

 

 

(103,000 )

 

 

10,000

 

Accrued dividend

 

 

5,000

 

 

 

 

Operating lease liability

 

 

(55,000 )

 

 

(46,000 )

Net cash used in operating activities

 

 

(677,000 )

 

 

(791,000 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Patent costs

 

 

(2,000 )

 

 

(4,000 )

Net cash used in investing activities

 

 

(2,000 )

 

 

(4,000 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Receipts from (Repayment of) note payable to officer

 

 

25,000

 

 

 

(6,000 )

Dividend paid to Preferred stockholders

 

 

 

 

 

(38,000 )

Net cash provided by financing activities

 

 

25,000

 

 

 

(44,000

 

 

 

 

 

 

 

 

 

 

NET DECREASE IN CASH

 

 

(654,000 )

 

 

(839,000 )

CASH, BEGINNING OF PERIOD

 

 

1,518,000

 

 

 

3,807,000

 

CASH, END OF PERIOD

 

$864,000

 

 

$2,968,000

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$15,000

 

Cash paid for tax

 

$

 

 

$

 

 

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

 

 
7

Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2023

(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, 2023, included in our Annual Report on Form 10-K for the year ended June 30, 2023.

 

In the opinion of the management of Innovation Pharmaceuticals Inc., all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month periods have been made. Results for the interim 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 Company is a clinical stage biopharmaceutical company. The Company’s common stock is quoted on the OTC Pink, 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 months ended September 30, 2023 and 2022.

 

Nature of Operations - Overview

 

We are in the business of developing or licensing innovative small molecule therapies. Our strategy is to maximize the value of our drug compound Brilacidin. The Company also acquired a non-controlling interest in BT BeaMedical Technologies Ltd. (“BTL”), formerly known as Squalus Medical Ltd., a private company developing a novel image guided surgical laser platform.

 

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, Going Concern and Management’s Plan

 

Our financial statements were prepared assuming we will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the three months ended September 30, 2023, the Company had a net loss of $0.9 million and negative cash flow from operations of $0.7 million. As of September 30, 2023, the Company has negative working capital of $4.1 million. As of September 30, 2023, the Company’s cash amounted to $0.9 million and current liabilities amounted to $5.0 million. The Company has expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures, subject to having adequate available funding. We expect to incur further losses in the development of our business and have been dependent on funding operations from inception. These conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans include continuing to finance operations through the private or public placement of debt and/or equity securities, if available, and the reduction of expenditures. However, no assurance can be given at this time as to whether we will be able to achieve these objectives. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

 
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3. Significant Accounting Policies and Recent Accounting Pronouncements

 

During the period covered in this report, there have been no material changes to the significant accounting policies the Company uses and has explained in its Annual Report on Form 10-K for the fiscal year ended June 30, 2023. The information below is intended only to supplement the disclosure in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

 

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 patent costs and other long-lived assets and amortizable intangible 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 and Diluted 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 loss per share are the same for both classes. Common share equivalents consist of stock options, restricted stock, warrants, convertible related party notes payable, and convertible preferred stock. Common share equivalents were excluded from the computation of diluted earnings per share for the three months ended September 30, 2023 and 2022, because their effect was anti-dilutive.

 

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

 

 

 

September 30,

 

 

 

2023

 

 

2022

 

Net loss per share, basic and diluted

 

$(0.00 )

 

$(0.00 )

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Class A common stock

 

 

514,013,755

 

 

 

488,322,996

 

Class B common stock

 

 

4,333,936

 

 

 

15,641,463

 

Total weighted average shares outstanding

 

 

518,347,691

 

 

 

503,964,459

 

 

 

 

 

 

 

 

 

 

Antidilutive securities not included:

 

 

 

 

 

 

 

 

Stock options

 

 

7,778,269

 

 

 

8,268,269

 

Stock options arising from convertible note payable and accrued interest

 

 

519,636

 

 

 

508,448

 

Restricted stock grants

 

 

 

 

 

58,392

 

Convertible preferred stock

 

 

35,571,821

 

 

 

36,000,000

 

Total

 

 

43,869,726

 

 

 

44,835,109

 

 

 
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Treasury Stock

 

The Company accounts for treasury stock using the cost method. The 10,874,593 treasury shares include 8,516,056 shares of Class A common stock and 2,358,537 shares of Class B common stock held in treasury, and they were purchased at a total cumulative cost of approximately $2.3 million as of September 30, 2023 and June 30, 2023 (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 and to satisfy the exercise price on vested stock options, is recorded at its acquisition cost and these shares are not considered outstanding.

 

Recent Accounting Pronouncements

 

The FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This standard requires a financial asset to be presented at the net amount expected to be collected. The financial assets of the Company in scope of ASU 2016-13 will primarily be accounts receivable. The Company will estimate an allowance for expected credit losses on accounts receivable that result from the inability of customers to make required payments. In estimating the allowance for expected credit losses, consideration will be given to the current aging of receivables, historical experience, and a review for potential bad debts. The Company adopted this guidance in the first quarter of fiscal 2023 and it did not have an impact on its results of operations, financial position, and disclosures.

 

4. Equity Investment

 

BT BeaMedical Technologies Ltd. (formerly known as Squalus Medical Ltd.)

 

On June 9, 2022, the Company entered into a Series A Preferred Share Purchase Agreement (the “Purchase Agreement”) with BT BeaMedical Technologies Ltd. (formerly known as Squalus Medical Ltd.), a company established under the laws of the State of Israel (“BTL”), pursuant to which the Company purchased 55,556 shares of BTL’s Series A Redeemable Preferred Shares (the “Series A Shares”) and a warrant to purchase 27,778 Series A Shares for aggregate consideration of $4,000,000, or approximately $72.00 per Series A Share. Following the closing under the Purchase Agreement, the Company owns approximately 35.7% of BTL’s issued and outstanding equity securities and approximately 41.6% of BTL’s equity securities on a fully diluted basis. The Company also entered into customary investor rights and indemnification agreements with BTL. The Company therefore recorded an equity investment on our September 30, 2023 and June 30, 2023 consolidated balance sheets.

 

The Company’s equity in losses in excess of its investment are accounted for under the equity method and consisted of the following as of September 30, 2023 and June 30, 2023 (rounded in nearest thousand):

 

 

 

September 30,

 

 

June 30,

 

 

 

2023

 

 

2023

 

BT BeaMedical Technologies Ltd.

 

 

 

 

 

 

Ownership Interest

 

 

35.7%

 

 

35.7%

Carrying Amount

 

 

 

 

 

 

 

 

Total contributions

 

$4,000,000

 

 

$4,000,000

 

Less: Share of the loss in investment in BTL

 

 

(258,000 )

 

 

(194,000 )

Equity losses in excess of investment

 

$3,742,000

 

 

$3,806,000

 

 

The Company invested $4,000,000 in BTL as of September 30, 2023 and June 30, 2023. The cash balance in BTL at September  30, 2023 and June 30, 2023 was approximately $0.6 million and the short-term time deposits in BTL at September 30, 2023 was approximately $2.4 million and $2.7 million, respectively.

 

During the three months ended September 30, 2023 and 2022, BTL incurred a loss of approximately $179,000 and $86,000, respectively and accordingly, the Company recorded its share of the loss in investment in BTL, in accordance with the provisions in the Purchase Agreement, of approximately $64,000 and $31,000, respectively, in the accompanying condensed consolidated statement of operations.

 

 
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Summarized balance sheet information for the Company’s equity method investee BTL as of September 30, 2023 and June 30, 2023 is presented in the following table (rounded to nearest thousand):

 

 

 

September 30,

 

 

June 30,

 

BT BeaMedical Technologies Ltd.

 

2023

 

 

2023

 

Assets

 

 

 

 

 

 

Cash

 

$584,000

 

 

$575,000

 

Short term investment

 

 

2,442,000

 

 

 

2,694,000

 

Other current assets

 

 

215,000

 

 

 

144,000

 

Total current assets

 

$3,241,000

 

 

$3,413,000

 

Long-term assets

 

 

149,000

 

 

 

162,000

 

Total assets

 

$3,390,000

 

 

$3,575,000

 

 

 

 

 

 

 

 

 

 

Liabilities and equity

 

 

 

 

 

 

 

 

Current liabilities

 

$236,000

 

 

$230,000

 

Long-term liabilities

 

 

56,000

 

 

 

101,000

 

Total liabilities

 

$292,000

 

 

$331,000

 

Equity

 

 

 

 

 

 

 

 

Equity

 

$3,837,000

 

 

$3,804,000

 

Accumulated deficits

 

 

(739,000 )

 

 

(560,000 )

Total equity

 

 

3,098,000

 

 

 

3,244,000

 

Total liabilities and equity

 

$3,390,000

 

 

$3,575,000

 

 

Summarized income statement information for the Company’s equity method investee BTL is presented in the following table for the three months ended September 30, 2023 and 2022 (rounded to nearest thousand):

 

 

 

For the Quarter Ended

 

 

 

September 30,

 

BT BeaMedical Technologies Ltd.

 

2023

 

 

2022

 

 

 

 

 

 

 

 

Net sales and revenue

 

$6,000

 

 

$6,000

 

 

 

 

 

 

 

 

 

 

Research and development costs

 

$208,000

 

 

$47,000

 

Administrative expenses

 

 

21,000

 

 

 

63,000

 

Total operating expense

 

$229,000

 

 

$110,000

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

$(223,000 )

 

$(104,000 )

Other income (expense)

 

 

44,000

 

 

 

18,000

 

Net loss

 

$(179,000 )

 

$(86,000 )

 

5. Patents, net

 

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

 

 

 

Useful life

(years)

 

 

September 30,

2023

 

 

June 30,

2023

 

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 - Brilacidin and other compounds

 

 

17

 

 

 

1,208,000

 

 

 

1,206,000

 

Total patents cost

 

 

 

 

 

 

5,434,000

 

 

 

5,432,000

 

Less: Accumulated amortization

 

 

 

 

 

 

(3,527,000 )

 

 

(3,433,000 )

Patents, net

 

 

 

 

 

$1,907,000

 

 

$1,999,000

 

 

Costs incurred to file patent applications and acquired intangibles are capitalized when the Company believes that there is a high likelihood that the patent will be issued and there will be future economic benefit associated with the patent. 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. All costs associated with abandoned patent applications are expensed. In addition, the Company reviews the carrying value of patents for indicators of impairment on a periodic basis and if it determines that the carrying value is impaired, it values the patent at fair value. In accordance with the provisions of the applicable authoritative guidance, the Company’s long-lived assets and amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company assesses the recoverability of such assets by determining whether their carrying value can be recovered through undiscounted future operating cash flows, including its estimates of revenue driven by assumed market segment share and estimated costs. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. The Company recently learned that Alfasigma (as defined below) is considering terminating further work under the License Agreement (as defined below) with the Company (see Note 8 for further information about the License Agreement). If Alfasigma were to terminate the License Agreement or cease further work under the License Agreement, the Company could be required to impair some or all of the patent assets associated with Brilacidin.

 

 
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Amortization expense for the three months ended September 30, 2023 and 2022 was approximately $94,000 and $93,000, respectively.

 

At September 30, 2023, the future amortization period for all patents was approximately 2 years to 16.75 years. Future estimated amortization expenses are approximately $280,000 for the year ending June 30, 2024, $375,000 for the year ending June 30, 2025, $365,000 for the year ending June 30, 2026, $363,000 for the year ending June 30, 2027, $125,000 for the year ending June 30, 2028 and a total of $399,000 for the year ending June 30, 2029 and thereafter.

 

6. Accrued Expenses - Related Parties and Other

 

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

 

 

 

September 30,

2023

 

 

June 30,

2023

 

 

 

 

 

 

 

 

Accrued research and development consulting fees

 

$150,000

 

 

$49,000

 

Accrued rent - related parties (Note 11. Related Party Transactions)

 

 

8,000

 

 

 

8,000

 

Accrued interest - related parties (Note 12. Convertible Note Payable - Related Party)

 

 

22,000

 

 

 

16,000

 

Accrued Directors' fees - related

 

 

12,000

 

 

 

 

Total

 

$192,000

 

 

$73,000

 

 

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

 

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

 

 

 

September 30,

2023

 

 

June 30,

2023

 

 

 

 

 

 

 

 

Accrued salaries - related parties

 

$1,443,000

 

 

$1,543,000

 

Accrued payroll taxes - related parties

 

 

71,000

 

 

 

71,000

 

Withholding tax - payroll

 

 

73,000

 

 

 

76,000

 

 

 

 

 

 

 

 

 

 

Total

 

$1,587,000

 

 

$1,690,000

 

 

8. Exclusive License Agreement and Patent Assignment 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.

 

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 Phase 1 clinical research 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 milestone payment during the three months ended September 30, 2023 and 2022. The Company recently learned that Alfasigma is considering terminating further work under the License Agreement, although as of the date of this report, Alfasigma has not notified the Company of the termination of the License Agreement or a cessation of further work under the License Agreement.

 

 
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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 received payment of $18,000 from FCCDC based on FCCDC’s third-party license of broad-spectrum anti-fungals and a separate agreement between the Company and FCCDC. On January 18, 2023, the Company was notified by FCCDC that its third-party license with Basilea Pharmaceutica for development of broad-spectrum antifungals was terminated by the licensee.

 

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

 

 

 

Three Months

Ended

September 30,

2023

 

Lease Cost

 

 

 

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

 

$1,000

 

Variable lease cost

 

 

3,000

 

 

 

$4,000

 

Other Information

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities for the three months ended September 30, 2023

 

$55,000

 

Weighted average remaining lease term – the operating leases ended on September 30, 2023

 

 

0

 

Average discount rate - operating leases

 

 

18%

 

Operating lease cost for the three months ended September 30, 2023 and 2022 was approximately $4,000 and $13,000, respectively.

 

10. 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, as the Company’s prior principal executive offices did not automatically extend for an additional five years, return of the Company’s security deposit, and damages. On August 29, 2023, the trial for this case commenced and as of date of this filing, this trial is ongoing. The Company is currently unable to determine the probability of the trial outcome or reasonably estimate the loss or gain, if any.

 

 
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Contractual Commitments

 

The Company has total non-cancellable contractual minimum commitments of approximately $0.5 million to contract research organizations as of September 30, 2023. Expenses are recognized when services are performed by the contract research organizations.

 

Contingent Liability - Disputed Invoices

 

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 (see Note 7. Accrued Salaries and Payroll Taxes). As described in Note 11. 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.

 

As of September 30, 2023 and June 30, 2023, all of the above disputed invoices were reflected as current liabilities.

 

11. 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 to conduct research study. At September 30, 2023 and June 30, 2023, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable. Dr. Menon, the Company’s ex-principal shareholder and Director, 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.

 

Since September 1, 2013, the Company no longer leases space from KARD. As of September 30, 2023 and June 30, 2023, rent payables to KARD of approximately $8,000, were included in accrued expenses.

 

12. 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 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.

 

During the quarter ended September 30, 2023, Mr. Ehrlich advanced an additional $25,000 to the Company under the convertible note and during the quarter ended September 30, 2022, the Company repaid $6,000 to Mr. Ehrlich.

 

As of September 30, 2023 and June 30, 2023, the principal balance of this convertible note payable to Mr. Ehrlich was approximately $238,000 and $213,000, respectively.

 

As of September 30, 2023 and June 30, 2023, the balance of accrued interest payable was $22,000 and $16,000, respectively (see Note 6. Accrued Expenses - Related Parties and Other).

 

As of September 30, 2023 and June 30, 2023, the total outstanding balances of principal and interest were approximately $260,000 and $229,000, respectively.

 

 
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13. Equity Incentive Plans and Stock-Based Compensation

 

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 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).

 

Stock Options

 

There was no new option grant during the three months ended September 30, 2023 and 2022. The components of stock-based compensation expense related to stock options and restricted stock awards included in the Company’s Statements of Operations for the three months ended September 30, 2023 and 2022 are as follows (rounded to nearest thousand):

 

 

 

Three months ended

September 30,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

Research and development expenses

 

$3,000

 

 

$31,000

 

General and administrative expenses

 

 

 

 

 

147,000

 

Total stock-based compensation expense

 

$3,000

 

 

$178,000

 

 

During the three months ended September 30, 2023 and 2022

 

On September 11, 2020, the Company 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 three months ended September 30, 2023, the Company recorded approximately $3,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $2,000 of stock option expense and $1,000 of stock awards. During the three months ended September 30, 2022, the Company recorded approximately $4,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $3,000 of stock option expense and $1,000 of stock awards.

 

Stock Options Issued and Outstanding

 

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

 

 

 

Number of

Stock Options

 

 

Weighted Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual Life

(Years)

 

 

Aggregate

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2023

 

 

7,778,269

 

 

$0.23

 

 

 

6.31

 

 

$

 

Granted

 

 

 

 

$

 

 

 

 

 

 

 

Exercised

 

 

 

 

$

 

 

 

 

 

 

 

Forfeited/expired

 

 

 

 

$

 

 

 

 

 

 

 

Outstanding at September 30, 2023

 

 

7,778,269

 

 

$0.23

 

 

 

6.05

 

 

$

 

Exercisable at September 30, 2023

 

 

7,778,269

 

 

$0.23

 

 

 

6.05

 

 

$

 

Unvested stock options at September 30, 2023

 

 

 

 

$

 

 

 

 

 

$

 

 

 
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Table of Contents

 

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, 2023

 

 

19,464

 

 

$0.22

 

 

 

 

 

 

 

 

 

 

Total shares granted

 

 

 

 

$

 

Total shares vested

 

 

 

 

$

 

Total shares forfeited

 

 

(19,464 )

 

$0.22

 

Total unvested shares outstanding at September 30, 2023

 

 

 

 

$

 

 

14. Equity Transactions

 

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. All warrants were exercised in 2020 and 2021.

 

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 convertible 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 convertible preferred shares can be converted at any time to common stock and given no set term.

 

 
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Underlying Series B-2 preferred stock dividends, paid quarterly, were 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 5% accrued dividend is reported in interest expense-preferred stock in the condensed consolidated statements of operation. The Company accrued 5% dividends of $5,000 and $8,000 during the quarter ended September 30, 2023 and 2022, respectively. The unpaid accrued dividends of $10,000 and $5,000 were included under current liability as of September 30, 2023 and June 30, 2023, respectively.

 

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

 

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.

 

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

 

During the quarter ended September 30, 2023 and 2022, there was no conversion of 2020 Series B-2 5% convertible preferred stock to common stock.

 

As of September 30, 2023 and June 30, 2023, Series B-2 5% convertible preferred stock liability was approximately $0.5 million.

 

The fair value of the Series B convertible preferred stock is measured in accordance with ASC 820 “Fair Value Measurement,” using option pricing methodologies, incorporating the following inputs:

 

 

 

June 30,

2023

 

 

 

 

 

Expected dividend yield

 

 

5%

Expected stock-price volatility

 

 

60%

Risk-free interest rate

 

 

2.92%

Stock price

 

$0.03

 

Exercise price

 

$982.5

 

 

 
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Treasury Stock

 

All treasury stock, representing shares of the Company’s common stock that have been acquired for payroll tax withholding on vested stock grants and to satisfy the exercise price on vested stock options, is recorded at its acquisition cost and these shares are not considered outstanding.

 

As of September 30, 2023 and June 30, 2023, the Company had the total of 10,874,593 treasury shares, representing 8,516,056 shares of Class A common stock and 2,358,537 shares of Class B common stock held in treasury, and they were purchased at a total cumulative cost of approximately $2.3 million as of September 30, 2023 and June 30, 2023.

 

Surrender of Shares

 

On December 29, 2022, Mr. Ehrlich entered into a Share Surrender Agreement with the Company pursuant to which Mr. Ehrlich permanently surrendered all legal right, title, and interest in 11,307,527 shares of Class B common stock to the Company and relinquished all rights in such shares, free and clear of any liens, mortgages, adverse claims, charges, security interests, encumbrances, any interest of any third party, or other restrictions or limitations whatsoever of any kind. Mr. Ehrlich received no consideration from the Company or any other party in connection with the surrender. Mr. Ehrlich effected the Surrender solely for his individual tax planning purposes. These 11,307,527 shares of Class B common stock were retired and returned to Class B common stock on the same day.

 

15. Fair Value Measurements

 

We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:

 

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

 

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, accrued liabilities and preferred stock liability. At September 30, 2023 and 2022, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due to their short-term maturities.

 

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.

 

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.

 

 
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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 quarter ended September 30, 2023 and for the year ended June 30, 2023:

 

 

 

FY 2023

 

Balance, June 30, 2022

 

$786,000

 

 

 

 

 

 

Conversion of Series B-2 preferred stock to common stock

 

 

(329,000 )

Change in fair value of Series B-2 preferred stock

 

 

 

Balance, June 30, 2023

 

$457,000

 

 

 

 

 

 

Conversion of Series B-2 preferred stock to common stock

 

 

 

Change in fair value of Series B-2 preferred stock

 

 

 

Balance, September 30, 2023

 

$457,000

 

 

(1)

The 5% accrued dividend is reported in interest expense-preferred stock in the condensed consolidated statements of operations. The Company accrued 5% accrued dividend of $5,000 and $8,000 during the quarter ended September 30, 2023 and 2022, respectively. The unpaid accrued dividends of $10,000 and $5,000 was included under current liability as of September 30, 2023 and June 30, 2023, respectively.

 

16. Subsequent Events

 

The Company has evaluated events subsequent to September 30, 2023 through the issuance of these financial statements and determined that there were no additional events requiring disclosure.

 

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

 

The following discussion and plan of operations should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K for the year ended June 30, 2023. 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.

 

Overview

 

Innovation Pharmaceuticals Inc. is a clinical stage pharmaceutical company. The Company’s lead drug candidate Brilacidin is in a class of compounds called defensin-mimetics, small compounds that mimic the structure and function of defensins, also known as host defense peptides. The Company’s efforts are primarily focused on business development for the advancement of Brilacidin. The Company also owns an interest in BT BeaMedical Technologies Ltd. (“BTL”), formerly known as Squalus Medical Ltd., a private company developing a novel image guided surgical laser platform.

 

Recent Developments

 

The Company recently learned that Alfasigma is considering terminating further work under the License Agreement, although as of the date of this report, Alfasigma has not notified the Company of the termination of the License Agreement or a cessation of further work under the License Agreement.

 

Brilacidin is being studied by NIH/NIAID-affiliated and other independent researchers funded by US Government grants, as a potential broad-spectrum antifungal. We anticipate these studies to continue as long as researchers remain positive about the antifungal properties and therapeutic potential of Brilacidin and government funding is available.

 

On August 28, 2023, the Company announced a milestone in the development of BTL’s StingRay Laser System. At that time, BTL was in final preparations to submit its family of specially designed fiber optics for FDA clearance which BTL has since submitted.

 

Management’s Plan of Operation

 

The Company historically devoted most of its efforts and resources on business development, regulatory matters, and clinical trials. Presently, the Company does not have sufficient financial resources to advance our drug candidates meaningfully or at all. Contingent upon sufficient funding, we anticipate that our efforts would primarily focus on advancement of our drug candidate Brilacidin for decreasing the incidence of severe oral mucositis as a complication of chemoradiation in Oral Mucositis. The antiviral and antifungal properties of Brilacidin also present potential clinical development opportunities going forward should sufficient funding be obtained via grants and/or pharmaceutical company partnerships.

 

The Company is monitoring BTL’s progress in advancing its novel laser-based thermal ablation technology platform targeting epilepsy and oncology procedures. BTL will use the FDA 510(k) pathway to achieve its goal of marketing approval in the United States. BTL recently received certification of ISO13485 for their new facility. ISO 13485 is the medical industry’s medical device standard, which is designed to ensure that all medical devices meet the proper regulatory compliance laws and customer needs.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses in the financial statements and accompanying notes. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results which are found in Note 3 - Significant Accounting Policies and Recent Accounting Pronouncements, to the financial statements included in Part II, Item 8 of our 2023 Annual Report on Form 10-K for the fiscal year ended June 30, 2023 and in Part I, Item 1 of this report. 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. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.

 

 
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Recently Issued Accounting Pronouncements

 

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

 

Results of Operations

 

We expect to incur losses from operations for at least the next few years. Contingent upon sufficient funding, we currently anticipate that future budget expenditures will be approximately $1.8 million for the next 12 months, including approximately $0.6 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 capital from existing or new financing sources. There can be no assurance as to the availability or terms upon which such financing and capital might be available.

 

For the three months ended September 30, 2023 and 2022

 

Revenue

 

We generated no revenue and incurred operating expenses of approximately $0.8 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively.

 

Research and Development Expenses for Proprietary Programs

 

Below is a summary of our research and development expenses for our proprietary programs by categories of costs (rounded to nearest thousand):

 

 

 

For the three months ended

 

 

Change

 

 

 

September 30,

 

 

2023 vs. 2022

 

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical studies and development research

 

$71,000

 

 

$633,000

 

 

$(562,000 )

 

 

(89 )%

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

 

$113,000

 

 

$112,000

 

 

$1,000

 

 

 

1%

Stock-based compensation - employee

 

$3,000

 

 

$29,000

 

 

$(26,000 )

 

 

(90 )%

Stock-based compensation - consultants

 

$

 

 

$2,000

 

 

$(2,000 )

 

 

(100 )%

Depreciation and amortization expenses

 

$94,000

 

 

$93,000

 

 

$1,000

 

 

 

1%

Total

 

$281,000

 

 

$869,000

 

 

$(588,000 )

 

 

(68 )%

 

Research and development expenses for proprietary programs decreased during the three months ended September 30, 2023 compared with the three months ended September 30, 2022, primarily due to limited spending on our Brilacidin program for the three months ended September 30, 2023 because of our limited financial resources.

 

Employees payroll and payroll tax expenses were consistent during the three months ended September 30, 2023 compared with the three months ended September 30, 2022, due to no personnel changes during the three months ended September 30, 2023.

 

Stock-based compensation for employees decreased during the three months ended September 30, 2023, because there were no options issued to employees during the three months ended September 30, 2023.

 

Stock-based compensation - consultants decreased during the three months ended September 30, 2023, because there were no options issued to consultants during the three months ended September 30, 2023.

 

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.

 

 
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General and Administrative Expenses

 

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

 

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

 

 

 

For the three months ended

 

 

Change

 

 

 

September 30,

 

 

2023 vs. 2022

 

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance, health and working compensation expense

 

$56,000

 

 

$68,000

 

 

$(12,000)

 

 

(18)%

Directors’ fees

 

$38,000

 

 

$38,000

 

 

$

 

 

%

Rent and utility expense

 

$19,000

 

 

$13,000

 

 

$6,000

 

 

 

46%

Stock-based compensation - Officers & Directors

 

$

 

 

$147,000

 

 

$(147,000)

 

 

(100)%

Other G&A

 

$20,000

 

 

$25,000

 

 

$(5,000)

 

 

(20)%

Total

 

$133,000

 

 

$291,000

 

 

$(158,000)

 

 

(54)%

 

General and administrative expenses decreased during the three months ended September 30, 2023, primarily due to the decrease in stock-based compensation - Officers & Directors of $147,000 and the net decrease in insurance and other general and administrative expenses of $12,000 during the three months ended September 30, 2023.

 

Officers’ Payroll and Payroll Tax Expenses

 

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

 

 

 

Three months ended

 

 

Change

 

 

 

September 30,

 

 

2023 vs. 2022

 

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Officers’ payroll and payroll tax expenses

 

$118,000

 

 

$118,000

 

 

$

 

 

 

%

 

There was no change in officers’ payroll and payroll tax expenses for the Company during the three months ended September 30, 2023.

 

Professional Fees

 

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

 

 

 

Three months ended

 

 

Change

 

 

 

September 30,

 

 

2023 vs. 2022

 

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audit, legal and professional fees

 

$270,000

 

 

$104,000

 

 

$166,000

 

 

 

160%

 

Professional fees increased during the three months ended September 30, 2023 primarily related to increase in legal fees due to the lawsuit against Cummings Properties, LLC (see Note 10. Commitments and Contingencies).

 

 
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Other Expense

 

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

 

 

 

For the Three months ended

 

 

Change

 

 

 

September 30,

 

 

2023 vs. 2022

 

 

 

2023

 

 

2022

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense - debt

 

$9,000

 

 

$7,000

 

 

$2,000

 

 

 

29%

Interest expense-preferred stock

 

$5,000

 

 

$8,000

 

 

$(3,000 )

 

 

(38 )%

Other Expense, net

 

$14,000

 

 

$15,000

 

 

$(1,000 )

 

 

(7 )%

 

There was an increase in interest expenses paid on the note payable - related party, because of the increase in the note payable balance of $25,000 due to Mr. Ehrlich, the Company’s Chairman and CEO (see Note 12. Convertible Note Payable - Related Party of the Notes to Condensed Consolidated Financial Statements).

 

Net Losses

 

We incurred net losses of $0.9 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively, because of the above-mentioned factors.

 

Liquidity, Going Concern and Capital Resources

 

Projected Future Working Capital Requirements - Next 12 Months

 

As of September 30, 2023, we had approximately $0.9 million in cash compared to $1.5 million of cash as of June 30, 2023, and as of the date of this filing, we have approximately $0.6 million in cash. Contingent upon sufficient funding, we currently anticipate that future budget expenditures will be approximately $1.8 million for the next 12 months, including approximately $0.6 million for development activities, supportive research, and drug manufacturing.

 

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

 

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

 

As a result of our increasingly limited financial resources, we have stopped or limited discretionary spending in recent months, resulting in a significant decline in our research and development expenses, among other expenditures. In the event that we are unable to raise additional funds from others, we may be required to further delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could have a material adverse effect on our future business, operating results, financial condition and long-term prospects. There can be no assurance as to the availability or terms upon which such financing and capital might be available to us.

 

Going Concern

 

Our financial statements were prepared assuming we will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have negative working capital of $4.1 million and have incurred losses since inception of $126.2 million. We expect to incur further losses in the development of our business and have been dependent on raising capital to fund operations from inception. These conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans include continuing to finance operations through the private or public placement of debt and/or equity securities and the reduction of expenditures. However, no assurance can be given at this time as to whether we will be able to achieve these objectives. Through the date of this report, management has been unable to secure additional financing, and the ability of the Company to continue as a going concern is becoming increasingly unlikely. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

 
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Cash Flows

 

The following table provides information regarding our cash position, cash flows and capital expenditures for the three months ended September 30, 2023 and 2022 (rounded to nearest thousand):

 

 

 

Three Months ended

 

 

Change

 

 

 

September 30,

 

 

Increase/

 

 

 

2023

 

 

2022

 

 

(Decrease)

 

 

 

 

 

 

 

%

 

Net cash used in operating activities

 

$(677,000 )

 

$(791,000 )

 

 

(14 )%

Net cash used in investing activities

 

$(2,000 )

 

$(4,000 )

 

 

(50 )%

Net cash provided by (used in) financing activities

 

$25,000

 

 

$(44,000 )

 

 

(157 )%

Net increase (decrease) in cash

 

$(654,000 )

 

$(839,000 )

 

 

(22 )%

 

Operating Activities

 

Net cash used in operating activities for the three months ended September 30, 2023 and 2022 was $0.7 million and $0.8 million, a decrease of $0.1 million. For the quarter ended September 30, 2023 operating cash flows reflect our net loss of $0.9 million, noncash charges (stock-based compensation expense and amortization expense) of $0.2 million and a net decrease from changes in our working capital accounts of approximately $0.1 million.

 

For the quarter ended September 30, 2022 operating cash flows reflect our net loss of $1.4 million, noncash charges (stock-based compensation expense and amortization expense) of $0.3 million and a net increase from changes in our working capital accounts of approximately $0.3 million.

 

Investing activities

 

Net cash used in our investing activities for the three months ended September 30, 2023, as compared to net cash used in our investing activities in 2022, decreased by approximately $2,000. The decrease was due primarily to a decrease in patent costs.

 

Financing activities

 

Net cash provided by financing activities for the three months ended September 30, 2023, as compared to net cash used in our financing activities in 2022, increased by approximately $0.1 million. The change was due primarily to a noted payable received in the current period, compared to a note repayment in the prior period, and decreases in dividends paid to preferred stockholders in the current period.

 

During the three months ended September 30, 2023, the Company did not raise any funds and received a note payable of $25,000 and paid no dividends on preferred stock.

 

During the three months ended September 30, 2022, the Company did not raise any funds, repaid a note payable of $6,000 and paid dividends on preferred stock of $38,000.

 

Requirement for Additional Working Capital

 

The Company, contingent on future sales of its securities, currently expects to incur total operating expenses of approximately $1.8 million for the next 12 months, including approximately $0.6 million for development activities, supportive research, and drug manufacturing. The Company has limited experience with pharmaceutical product development. As such, this budget estimate may change in the future. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or a change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget and on our projected timeline of drug development.

 

As a result of our increasingly limited financial resources, we have stopped or limited discretionary spending in recent months, resulting in a significant decline in our research and development expenses, among other expenditures. In the event that we are unable to raise additional funds from others, we may be required to further delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could have a material adverse effect on our future business, operating results, financial condition and long-term prospects. There can be no assurance as to the availability or terms upon which such financing and capital might be available to us.

 

 
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Commitments and Contingencies

 

Please see Note 10. Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q, for a discussion of recent contractual commitments and contingent liability - disputed invoices.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

As of September 30, 2023, management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on such evaluation, as of September 30, 2023, the principal executive officer and principal financial officer of the Company has concluded that the Company’s disclosure controls and procedures are not effective due to the material weakness in the Company’s internal control over financial reporting as of June 30, 2023 as described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

 

Notwithstanding the conclusion that the Company’s disclosure controls and procedures were not effective as of September 30, 2023, management believes that the Company’s unaudited condensed consolidated financial statements and other information contained in this report present fairly, in all material respects, our business, financial condition and results of operations for the periods presented.

 

Material Weakness and Remediation Plan

 

As a result of the assessment of the Company’s internal control over financial reporting as of June 30, 2023, management concluded that the Company’s accounting procedures relevant to an unconsolidated foreign investment are not sufficiently formal that management can determine whether the applicable control objectives are met and adequate documentation supporting the procedures is in place. Specifically, the Company does not have sufficient controls to conclude that data from the unconsolidated foreign investee underlying the Company’s financial statements is captured completely, accurately and timely, in accordance with the Company’s policies and procedures. This material weakness could result in a misstatement of the recorded equity investment as well as the equity in loss from equity investment that would not be prevented or detected on a timely basis.

 

Management intends to enhance the Company’s internal control environment by refining policies and procedures applicable to the unconsolidated foreign investment, which may include (subject to securing adequate financial resources) the use of qualified consultants to assist the Company in addressing the design, operation and testing of such policies and procedures.

 

Changes in Internal Controls

 

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

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

 

 
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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

See Note 10. Commitments and Contingencies in the accompanying condensed consolidated financial statements.

 

ITEM 1A. RISK FACTORS

 

Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2023, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended June 30, 2023.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

ITEM 5. OTHER INFORMATION

 

None

 

 
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ITEM 6. EXHIBITS

 

(a) Exhibit index

 

(1)

The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.

 

EXHIBIT INDEX

 

Exhibit No.

 

Title

 

Method of Filing

 

 

 

 

 

31.1

 

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

 

Filed herewith

 

 

 

 

 

32.1

 

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

 

Furnished herewith

 

 

 

 

 

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2023 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes

 

Filed herewith

 

 

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

Filed herewith

 

 
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SIGNATURES

 

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

 

 

INNOVATION PHARMACEUTICALS INC.

 

 

 

 

 

Dated: November 20, 2023

By:

/s/ Leo Ehrlich

 

 

Name:

Leo Ehrlich

 

 

Title:

Chief Executive Officer, Chief Financial Officer,

Principal Accounting Officer, and Secretary

 

 

 
28

 

nullnullv3.23.3
Cover - shares
3 Months Ended
Sep. 30, 2023
Nov. 14, 2023
Document Information Line Items    
Entity Registrant Name INNOVATION PHARMACEUTICALS INC.  
Entity Central Index Key 0001355250  
Document Type 10-Q  
Amendment Flag false  
Current Fiscal Year End Date --06-30  
Entity Small Business true  
Entity Shell Company false  
Entity Emerging Growth Company false  
Entity Current Reporting Status Yes  
Document Period End Date Sep. 30, 2023  
Entity Filer Category Non-accelerated Filer  
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2024  
Document Quarterly Report true  
Document Transition Report false  
Entity File Number 001-37357  
Entity Incorporation State Country Code NV  
Entity Tax Identification Number 30-0565645  
Entity Address Address Line 1 301 Edgewater Place  
Entity Address Address Line 2 Suite 100  
Entity Address City Or Town Wakefield  
Entity Address State Or Province MA  
Entity Address Postal Zip Code 01880  
City Area Code 978  
Local Phone Number 921-4125  
Entity Interactive Data Current Yes  
Common Class A [Member]    
Document Information Line Items    
Entity Common Stock Shares Outstanding   514,013,755
Common Class B [Member]    
Document Information Line Items    
Entity Common Stock Shares Outstanding   4,333,936
v3.23.3
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
Sep. 30, 2023
Jun. 30, 2023
Current Assets:    
Cash $ 864,000 $ 1,518,000
Prepaid expenses and other current assets 76,000 116,000
Total Current Assets 940,000 1,634,000
Equity investment 3,742,000 3,806,000
Other Assets:    
Patent costs - net 1,907,000 1,999,000
Deferred offering costs 0 0
Security deposit 78,000 78,000
Total Other Assets 1,985,000 2,077,000
Total Assets 6,667,000 7,517,000
Current Liabilities:    
Accounts payable - (including related party payables of approx. $1,511,000 and $1,511,000, respectively) 3,021,000 2,985,000
Accrued expenses - (including related party accruals of approx. $42,000 and $24,000, respectively) 192,000 73,000
Accrued salaries and payroll taxes - (including related party accrued salaries of approx. $1,514,000 and $1,613,000, respectively) 1,587,000 1,690,000
Operating lease - current liability 0 55,000
Convertible note payable - related party 238,000 213,000
Accrued dividend - Series B 5% convertible preferred stock 10,000 5,000
Total Current Liabilities 5,048,000 5,021,000
Other Liabilities:    
Series B 5% convertible preferred stock liability at $1,080 stated value; 360 shares and 360 shares issued and outstanding at September 30, 2023 and June 30, 2023 457,000 457,000
Operating lease - long term liability 0 0
Total Liabilities 5,505,000 5,478,000
Stockholders' Equity    
Preferred stock, $0.001 par value, 10,000,000 designated shares, no shares issued and outstanding 0 0
Additional paid-in capital 129,569,000 129,566,000
Accumulated deficit (126,205,000) (125,325,000)
Treasury Stock, at cost (10,874,593 shares as of September 30, 2023 and June 30, 2023) (2,254,000) (2,254,000)
Total Stockholders' Equity 1,162,000 2,039,000
Total Liabilities and Stockholders' Equity 6,667,000 7,517,000
Common Class B [Member]    
Current Liabilities:    
Common Stock, value 1,000 1,000
Common Class A [Member]    
Current Liabilities:    
Common Stock, value $ 51,000 $ 51,000
v3.23.3
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
Sep. 30, 2023
Jun. 30, 2023
Related party payables $ 1,511,000 $ 1,511,000
Related party accruals 42,000 24,000
Related party accrued salaries $ 1,514,000 $ 1,613,000
Series B 5% Preferred Stock, Shares Outstanding 360 360
Series B 5% Preferred Stock, Shares issued 360 360
Series B 5% convertible preferred stock liability $ 1,080 $ 1,080
Preferred Stock, Par Value $ 0.001 $ 0.001
Preferred Stock, Shares Designated 10,000,000 10,000,000
Preferred Stock, Shares Issued 0 0
Preferred Stock, Shares Outstanding 0 0
Treasury Stock Shares 10,874,593 10,874,593
Common Class B [Member]    
Common Stock, Par Value $ 0.0001 $ 0.0001
Common Stock, Shares Authorized 100,000,000 100,000,000
Common Stock, Shares Issued 6,692,473 4,333,936
Common Stock, Shares Outstanding 6,692,473 4,333,936
Common Class A [Member]    
Common Stock, Par Value $ 0.0001 $ 0.0001
Common Stock, Shares Authorized 600,000,000 600,000,000
Common Stock, Shares Issued 522,529,811 514,013,755
Common Stock, Shares Outstanding 522,529,811 514,013,755
v3.23.3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
3 Months Ended
Sep. 30, 2023
Sep. 30, 2022
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)    
Revenues $ 0 $ 0
Operating expenses:    
Research and development expenses 281,000 869,000
General and administrative expenses 133,000 291,000
Officers' payroll and payroll tax expenses 118,000 118,000
Professional fees 270,000 104,000
Total operating expenses 802,000 1,382,000
Other Operating Income and (Loss)    
Equity in loss from an investment (64,000) (31,000)
Total Other Operating Income and (Loss) (64,000) (31,000)
Loss from operations (866,000) (1,413,000)
Other expenses    
Interest expense - debt (9,000) (7,000)
Interest expense-preferred stock (5,000) (8,000)
Total other expenses (14,000) (15,000)
Loss before provision for income taxes (880,000) (1,428,000)
Provision for income taxes 0 0
Net loss $ (880,000) $ (1,428,000)
Net loss per share, basic and diluted $ (0.00) $ (0.00)
Basic and Diluted Weighted Average Common Shares Outstanding 518,347,691 503,964,459