UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31,September 30, 2018

¨ 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

(Exact name of registrant as specified in its charter)

100 CummingsCumming Center, Suite 151-B

Beverly, MA 01915

(Address of principal executive offices, Zip Code)

(978)-921-4125

(Registrant’s telephone number, including area code)

(Former Name, Former Address and Former Fiscal Year if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x 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.

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. o¨

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

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 6,November 2, 2018 is as follows:

INNOVATION PHARMACEUTICALS INC.

FORM 10-Q

For the Quarter Ended March 31,September 30, 2018

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

PART II – OTHER INFORMATION

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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, statements concerning our future drug development plans and projected timelines for the initiation and completion of preclinical and clinical trials; statements relating to potential licensing, partnering or similar arrangements concerning our drug compounds; 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; any statements regarding our future financial performance, results of operations expenditures or sufficiency of capital resources to fund our operating requirements; 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 continue to fund and successfully progress internal research and development efforts and to create effective, commercially-viable drugs; our ability to effectively and timely conduct clinical trials; and our ability to ultimately distribute our drug candidates; compliance with regulatory requirements; and our capital needs,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.”

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INNOVATION PHARMACEUTICALS INC.

CONDENSED BALANCE SHEETS

(Rounded to nearest thousand except for shares data)

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

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INNOVATION PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31SEPTEMBER 30, 2018 AND 2017

(Unaudited)

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

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

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INNOVATION PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF CASH FLOWFLOWS

FOR THE NINETHREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2018 AND 2017

(Unaudited)

(Rounded to nearest thousand)

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

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INNOVATION PHARMACEUTICALS INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

MARCH 31SEPTEMBER 30, 2018

 (Unaudited)

Note 1. Basis of Presentation and Nature of Operations

Unaudited Interim Financial Information

The accompanying unaudited condensed 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 financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2017,2018, included in our Annual Report on Form 10-K for the year ended June 30, 2017.2018.

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

Basis of Presentation and Name Change

Innovation Pharmaceuticals Inc. (the “Company”) was incorporated on August 1, 2005 in the State of Nevada. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the name change was not required.

The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. The Company’s common stock is quoted on OTCQB, symbol “IPIX”.

Nature of Operations - Overview

We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of inflammatory diseases, cancer, dermatology and anti-infectives. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Brilacidin, Kevetrin and Prurisol and advancing them as quickly as possible along the regulatory pathway. We will develop the highest quality data and broadest intellectual property to support our compounds.

We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.

Note 2. Going Concern and Liquidity

As of June 30, 2017,These financial statements have been prepared on the assumption that the Company adopted Accounting Standards Codification 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue asis a going concern, which contemplates the realization of its assets and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosurethe settlement of its liabilities in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the resultsnormal course of management’s assessment, plans and conclusion of the Company’s ability to continue as a going concern.

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operations.

We have incurred recurring losses since inception and expect to continue to incur losses as a result of costs and expenses related to our research and continued development of our compounds and our corporate general and administrative expenses. As of March 31,September 30, 2018, the Company has an accumulated deficit of approximately $81.1$88.0 million, representative of recurring losses since inception. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) approval. As a result, the Company expects to continue to incur losses over the next 12 months from the date of this filing. Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $14 million for the next twelve months, raise substantial doubt about its ability to continue as a going concern.

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At March 31,September 30, 2018, the Company’s cash amounted to $1.3$0.3 million and current liabilities amounted to $9.5$8.3 million, of which $6.5$6.7 million were payables to related parties with no immediate payment terms (See Note 8- Related Party TransactionsTransactions). Subsequent to September 30, 2018, in October 2018, aggregate gross proceeds of approximately $2.0 million were raised through the Notes to Condensed Financial Statements sectionsale of convertible preferred stock (see below). The Company had expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. The Company’s net cash used in operating activities for the ninethree months ended March 31,September 30, 2018 was approximately $10.4$2.1 million, and current projections indicate that the Company will have continued negative cash flows from operating activities for the foreseeable future. Our net losses incurred for the ninethree months ended March 31,September 30, 2018 and 2017, amounted to $11.5$2.1 million and $10.3$4.5 million, respectively, and we had a working capital deficit of approximately $8.0$7.9 million and $6.1 million, respectively at March 31,September 30, 2018 and June 30, 2017.2018.

Accordingly,The Company's primary sources of liquidity are cash and cash equivalents as well as issuances of its equity securities. The Company is party to a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) that provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company's common stock over the 36-month term of the Purchase Agreement. As of September 30, 2018, the available balance under the Purchase Agreement is approximately $22.3 million. However, as of date of this report, the conditions for sales under the Purchase Agreement are not satisfied and no sales may occur thereunder. In particular, the Purchase Agreement provides that the Company and Aspire Capital will not affect any sales under the Purchase Agreement when the closing sales price of the Company’s planned operations, including total budgeted expenditures of approximately $12.2 millioncommon stock is less than $0.25 per share. Recently, the Company’s common stock has traded below $0.25 per share, and there is substantial uncertainty regarding the Company’s continued ability to sell shares under the Purchase Agreement in order to meet the Company's projected working capital requirements for the next twelve12 months raise doubt aboutfrom the date of the issuance of the financial statements (or available to be issued).

After the date of the financial statements, on October 5, 2018, the Company entered into a securities purchase agreement with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock for aggregate gross proceeds of approximately $2.0 million. Under the securities purchase agreement, the Company issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds will be available when needed.

The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships) and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available. The Company will be unable to proceed with its abilityplanned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without additional financing from Aspire Capital, the multi-family office or another source of capital. These financial statements do not include any adjustments related to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern. The Company’s plans to alleviate the doubt of its ability to continue as a going concern primarily include controlling the timing and spending on its research and development programs, thereby being able to decrease its current budgeted expenditures mentioned above for the next 12 months, as needed and to continue raising additional funds through equity financings from its common stock purchase agreement with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”). The Company may consider other plans to fund operations including: (1) raising additional capital through debt financings or from other sources; (2) additional funding through new relationships to help fund future clinical trial costs (i.e. licensing and partnerships); (3) reducing spending on one or more research and development programs by discontinuing development; and/or (4) restructuring operations to change its overhead structure. The Company may issue securities, including shares of common stock, shares of preferred stock and stock purchase contracts through private placement transactions or registered public offerings, pursuant to its registration statement on Form S-3 filed with the SEC on September 11, 2017 and declared effective on September 21, 2017. Pursuant to the instructions to Form S-3, if the Company’s non-affiliate market capitalization as of an applicable measurement time, such as upon the filing of the Company’s Annual Report on Form 10-K, does not equal or exceed $75 million, the Company will be unable to offer and sell securities from its effective shelf registration statement on Form S-3.

The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of its product candidates and key development and regulatory events and its decisions in the future.

The Company believes that the actions discussed above are probable of occurring and alleviating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs twelve months from the issuance of the accompanying financial statements.

On September 6, 2017, the Company entered into a new $30 million common stock purchase agreement with Aspire Capital (the “2017 Agreement”) to replace the prior 2015 $30 million common stock purchase agreement with Aspire Capital (the “2015 Agreement”). During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under the 2015 Agreement from the sale of approximately 2.6 million shares of its common stock. During the period from September 6, 2017 to March 31, 2018, the Company generated proceeds of approximately $5.7 million under the 2017 Agreement from the sale of approximately 8.7 million shares of its common stock. As of March 31, 2018, the available balance under the 2017 Agreement is approximately $24.3 million.

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Note 3. Significant Accounting Policies and Recent Accounting Pronouncements

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include contract research accruals, recoverability of long-lived assets, measurementvaluation of stock-based compensation,equity grants and the periods of performance under collaborative research and development agreements.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.

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NetBasic Loss Perper Share

Basic and diluted loss per share is computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, convertible notes payable underlying shares and unvested restricted stock. Common share equivalents of 47 million56,271,542 and 46 million47,242,085 shares of common stock were excluded from the computation of diluted loss per share for the ninethree months ended March 31,September 30, 2018 and 2017, respectively, because we incurred net losses for the ninethree months ended March 31,September 30, 2018 and 2017, and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive and are therefore not included in the calculations.

Treasury Stock

The Company accounts for treasury stock using the cost method. There were 0 shares and 262,080 shares of treasury stock outstanding, purchased at a total cumulative cost of $0 and $220,000 at March 31, 2018 and June 30, 2017, respectively (see Note 10).

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

Accounting for Stock Based Compensation

The stock-based compensation expense incurred by the Company for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 an employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. tax“tax regulations”. Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.

ASC 505-50-30-11 further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:

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

The components of stock-based compensation expense included in the requisite service periodCompany’s Condensed Statement of Operations for the equity awards.three months ended September 30, 2018 and 2017 are as follows (rounded to nearest thousand):

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The components of stock-based compensation expense included in the Company’s Condensed Statements of Operations for the three months and nine months ended March 31, 2018 and 2017 are as follows (rounded to nearest thousand):

Recent Adopted Accounting Pronouncements

Stock Compensation -In March 2016,July 2017, the FASB issued ASU 2016-09, Compensation – Stock Compensation2017-11, Earnings Per Share (Topic 718)260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Improvements to Employee Share-Based PaymentI. Accounting which simplifiedfor Certain Financial Instruments with Down Round Features; and II. Replacement of the income tax consequences,Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for forfeitures and classificationcertain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the Statementbasis of Cash Flowsthe pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with (i) excess tax benefits being classified as cash inflows provided by operating activities,down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and (ii) cash paid to taxing authorities arising from the withholdingcertain mandatorily redeemable non-controlling interests. The amendments in Part II of shares from employees being classified as cash outflows used in financing activities.this update do not have an accounting effect. This standardASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016,2018, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, 2018, did not have any impact on the financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. This new pronouncement washas been adopted on July 1, 2016in the fourth quarter of fiscal 2018 and did not have a material effect on the Company’s financial position, or results of operations but had an effect of the classification ofor cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.

In June 2014, the FASB issued ASU 2014-12, “Compensation—Stock Compensation.” The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This ASU is the final version of Proposed ASU EITF-13D, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The implementation of this standard did not have a material impact on the Company’s accompanying condensed financial statements.flows.

Recently Issued Accounting Guidance

In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a five-step, principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until 2019. In addition, the FASB is allowing companies to early adopt this guidance for non-public entities beginning in fiscal year 2017. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply this new guidance when it becomes effective and has not yet selected a transition method. The Company, due to not having any revenue currently and in the foreseeable future, has concluded that the impact of the adoption of this accounting standard on its financial statements will not be material.

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In February 2016,June 2018, the FASB issued ASU No. 2016-02, “Leases2018-07, Compensation – Stock Compensation (Topic 842)”.718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. The guidance requires the following for finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. The guidance requires the following for operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. The amendments in Topic 842 are effective for fiscal years beginning after December 15, 2018, includingand interim periods within those fiscal years. Management has determined that based on current accounting and lease contract information theannual periods. The adoption of ASU No. 2016-02 is2018-07 will not expected to have a significantmaterial impact on the Company’s financial position, results of operations and disclosures. However, management is continually evaluating the future impact of ASU No. 2016-02 based on changes in the Company’s financial statements through the period of adoption.statements.

Intangibles, Goodwill and Other —In January 2017,In February 2016, the FASB issued ASUAccounting Standards Update ("ASU") No. 2017-04, “Intangibles – Goodwill2016-02 (Topic 842) Leases, which requires lessees to recognize a right-of-use asset and Other (Topic 350) – Simplifying the Testlease liability for Goodwill Impairment” (“ASU No. 2017-04”). To simplify the subsequent measurement of goodwill, ASU No. 2017-04 eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, ASU No. 2017-04 requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU No. 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2019.2018, with early adoption permitted, and must be adopted using the modified retrospective approach. The Company willintends to adopt the standard on the effective date of December 30, 2018. Interpretations are on-going and could have a material impact on the Company's implementation. Currently, the Company expects that the adoption of the ASU No. 2017-04 commencing in the first quarter of fiscal 2021. The Company does not believe this standard2016-02 (Topic 842) Leases will have a material impact on its financial statements orconsolidated balance sheet due to the related footnote disclosures.recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases, and expects it to have a material impact on our results of operations.

Statement of Cash Flows — In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company will adopt ASU No. 2016-15 commencing inadopted the first quarternew standard effective July 1, 2018. The application of fiscal 2019. The Company does not believe this standard willdid not have a material impact on its financialthe Company’s unaudited condensed statements or the related footnote disclosures.of cash flows.

Note

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4. Patents, net

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

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The patents are amortized on a straight-line basis over the useful lives of the assets, determined to be 12-17 years from the date of acquisition.

Amortization expense was approximately $96,000 and $95,000, for the three months ended March 31,September 30, 2018 and 2017 respectively and was approximately $289,000,$94,000 and $277,000 for the nine months ended March 31, 2018 and 2017,$96,000, respectively.

At March 31,September 30, 2018, the future amortization period for all patents was approximately 7.436.93 years to 16.75 years. Future estimated annual amortization expenses are approximately $96,000$282,000 for the year ending June 30, 2018, $383,0002019, $376,000 for each year from 20192020 to 2025, $374,000$367,000 for the year ending June 30, 2026, $371,000$364,000 for the year ending June 30, 2027, $134,000$127,000 for the year ending June 30, 2028, $80,000$73,000 for the years ending June 30, 2029 through the years ended 2031, $53,000 for the year ending June 30, 2032, $41,000$24,000 for the year ending June 30, 2033, $10,000$9,000 for the year ending June 30, 2034 and $2,000$3,000 for the year ending June 30, 2035.

Compounds with Activity Against Gram-Negative Bacteria and Fungi

As research at the Company is now focused on supporting its clinical trials, we have reduced costs associated with the licensing of intellectual property for gram-negative bacteria and anti-fungal compounds by returning our patent portfolio titled “Compounds and Methods for Treating Candidiasis and Aspergillus Infections” back to the university co-licensor. The Company at this time does not have any active gram-negative or anti-fungal programs and therefore has decided not to pay for the maintenance of these Patent Rights. The net book value of the impaired patent as of March 31, 2018 is not material.

Note 5. Accrued Expenses – Related Parties and Other

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

Note

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

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

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Note 7. Commitments and Contingencies

Lease Commitments

Operating Leases – Rental Property

The Company signed aOn September 30, 2018, the Company’s lease extension agreement with Cummings Properties which began on October 1, 2013.automatically renewed. The lease is for a term of five years ending on September 30, 2018,2023, and requires monthly payments of $18,000. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease and subleases 200 square feet of space previously used by the Company and pays the Company $900 per month.approximately $19,000.

As of March 31,September 30, 2018, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):

Rent expense, net of lease income, under this operating lease agreement was approximately $53,000$52,000 and $52,000 for the three months ended March 31,September 30, 2018 and 2017, respectively and was approximately $157,000 and $153,000 for the nine months ended March 31, 2018 and 2017, respectively. Before September 2013, the Company paid rent to Kard Scientific for office space and details are shown at Note 8 - Related Party Transactions below.

Operating Leases - Equipment

We leased equipment under a non-cancelable operating lease that expired in April, 2018. As of March 31, 2018, there was no future minimum rental commitment for our operating lease for the next twelve months.

Contractual Commitments

The Company has total non-cancelable contractual minimum commitments of approximately $1.0$3 million to contract research organizations as of March 31,September 30, 2018. Expenses are recognized when services are performed by the contract research organizations.

Note

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8. Related Party Transactions

Office Lease

The Company charged Kard Scientific $1,800 for space for the two months of July and August, 2018. Dr. Menon, the Company’s principal shareholder, and former President of Research, and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007,Scientific. Dr. Menon’s employment was terminated with the Company began renting office space from KARD, and sinceon September 18, 2018. Dr. Menon continues to serve on the Company’s Board of Directors. As of September 1, 2013, the Company2018, KARD no longer leases space from KARD. At March 31, 2018 and June 30, 2017, rent payable to KARD of approximately $13,000 and $21,000, respectively, were included in accrued expenses.

In September 2013, the Company signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $18,000. The Company had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., (“Innovative Medical”) a company owned by Mr. Ehrlich and Dr. Menon, officers of the Company, has co-signed the lease and rents approximately 200 square feet of office space, the space previously used by the Company and pays the Company $900 per month, the same amount the Company previously paid KARD. Innovative Medical paid total rent of approximately $3,000 and $9,000 to the Company for both of the three months and nine months ended March 31, 2018 and 2017 and the rental payment was offset with the accrued rent owed to KARD.Company.

Clinical Studies

The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company now has its own research study capabilities and no longer uses KARD. At March 31,September 30, 2018 and June 30, 2017,2018, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable.

Other related party transactions are disclosed in Note 9 below.

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Note 9. Convertible Note Payable - Related Party

During the year ended June 30, 2010, Mr. Ehrlich loaned the Company a total of approximately $973,000. A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note, Ehrlich Promissory Note C. The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s Class A common stock at $0.50 per share. The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the Ehrlich Promissory Note C and agreed to retroactively convert accrued interest of approximately $97,000 through December 31, 2010 into additional principal. During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional (approximate)approximately $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of this demand note to approximately $2,022,000.

On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principal and interest of approximately $2,248,000, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten (10) years from the date of issuance.

At March 31,As of September 30, 2018 and June 30, 2017,2018, approximately $12,000$36,000 and $17,000,$48,000, respectively, is the accrued interest payable on this note.

At March 31,As of September 30, 2018 and June 30, 2017,2018, principal balance of this demand note was approximately $2,022,000.

Note

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

Current Equity Incentive PlanPlans

2016 Equity Incentive Plan

On June 30, 2016, the Board of Directors adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan became effective upon adoption by the Board of Directors on June 30, 2016.

Up to 20,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that (1) no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and (2) no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of ISOs, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.

In connection with adoption of the 2016 Plan, the Board of Directors also approved forms of Incentive Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Non-Employee Directors, Restricted Stock Award Agreement for Employees and Restricted Stock Award Agreement for Non-Employee Directors that will be utilized by the Company to grant options and restricted shares under the 2016 Plan.

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Stock Options Issued and Outstanding

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

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The fair value of options granted for the ninethree months ended March 31,September 30, 2018 and 2017 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.

Stock-Based Compensation

The Company recognized approximately $265,000$229,000 and $336,000$369,000 of total stock-based compensation costs related to stock and stock optionsequity grant awards for the three months ended March 31,September 30, 2018 and 2017, respectively. The Company recognized approximately $1,665,000 and $1,026,000$229,000 of total stock-based compensation costs related to stock and stock options awards for the nine months ended March 31, 2018 and 2017, respectively.

The $1,665,000 of total stock-based compensation expense for the ninethree months ended March 31,September 30, 2018 included approximately $677,000$102,000 of stock options expense and $988,000$127,000 of restricted stock awards.

ForThe $369,000 of stock-based compensation expense for the ninethree months ended March 31,September 30, 2017 included approximately $141,000 of stock options expense and $228,000 of restricted stock awards. (see Note 11).

During the three months ended September 30, 2018

On FebruarySeptember 1, 2018, the Company agreed to issue options to purchase 75,000 shares of common stock to each of two consultants for specified services to be provided from February 1, 2018 to January 31, 2019 in accordance with agreements with the consultants. During the nine months ended March 31, 2018, the Company recorded approximately $8,000 of related stock-based compensation.

On February 10, 2017, the Company entered into verbal agreements with two consultants to issue options to purchase 50,000 shares of common stock and 75,000 shares of common stock, respectively, to the two consultants for services to be performed from February 13, 2017 to January 31, 2018 in accordance with their consulting agreements. The Company formally signed the agreements with the two consultants on March 13, 2018. During the nine months ended March 31, 2018, the Company recorded approximately $72,000 of related stock-based compensation.

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On September 1, 2017, the Company agreed to grantissued to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, under the 2016 Plan (i)for his services rendered 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock, at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1)vesting 50% upon the first anniversary of the effectivegrant date and the remaining 50% upon the second anniversary of the effective date; (2)grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock close above $3.00 per share (as may be adjusted for any stock splits or similar actions); (3) the commencement of trading of shares of the Company’s common stock on a national securities exchange; or (4) upon a change in control of the Company. The 1,066,667 shares wereoptions are valued at approximately $752,000$225,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.398 per share. These options were issued with an exercise price of $0.398 and vest 50% upon the 617,839 stock options valued at approximately $399,000. Both shares and options will be amortized over 2 years to September 1, 2019 unless the probabilityfirst anniversary of the other above vesting requirements occurring are met at an earlier date. At March 31, 2018,grant date and 50% upon the Company determined that it was not probable that these accelerated vesting provisions would occur earlier thansecond anniversary of the scheduled vesting date.grant date, with acceleration as defined in award agreement, with a ten year option term. These options have piggyback registration rights. During the three months and nine months ended March 31,September 30, 2018, the Company recorded approximately $144,000 and $336,000 of total stock-based compensation, respectively. The $144,000$26,000 of stock-based compensation expense for the three months ended March 31, 2018 includedthese equity grants, including approximately $50,000$9,000 of stock option expense and $94,000 of stock awards. The $336,000 of stock-based compensation expense$17,000 for the nine months ended March 31, 2018 included approximately $117,000 of stock option expense and $219,000 of stock awards.

On September 1, 2017,2018, the Company agreed to grantalso issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, under the 2016 Plan (i) 58,394 shares of restricted stock and (ii) a ten-year option to purchase 172,987 shares of the Company’s Class A common stock, at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) one third33 1/3% vesting upon the first anniversary of the effectivegrant date, one third33 1/3% upon the second anniversary of the effectivegrant date and the remaining one third33 1/3% upon the third anniversary of the effective date; or (2) upon a changegrant date, with acceleration in control ofcertain circumstances as provided in the Company.award agreement. The 58,394 shares wereCompany also issued 172,987 options to purchase common stock. These stock options are valued at approximately $41,000 and$63,000, based on the 172,987 stock options valued at approximately $112,000. Both shares and options will be amortized over 3 years to September 1, 2020 unlessclosing bid price as quoted on the other vesting requirements are met sooner. During the three months and nine months ended MarchOTC on August 31, 2018 the Company recorded approximately $13,000 and $30,000 of total stock-based compensation, respectively. The $13,000 of stock-based compensation expense for the three months ended March 31, 2018 included approximately $9,000 of stock option expense and $4,000 of stock awards. The $30,000 of stock-based compensation expense for the nine months ended March 31, 2018 included approximately $22,000 of stock option expense and $8,000 of stock awards.

On September 1, 2017, the Company agreed to grant to Anne Ponugoti, under the 2016 Plan, ten-yearat $0.398 per share. These options to purchase 5,000 shares of the Company’s common stock atwere issued with an exercise price of $0.705 per share, which shall$0.398 and vest upon the earliest to occur of the following: (1) one third33 1/3% upon the first anniversary of the effectivegrant date, one-third33 1/3% upon the second anniversary of the effectivegrant date, and the remaining one-third33 1/3% upon the third anniversary of the effective date; or (2)grant date, with acceleration of vesting upon a change in control of the Company. The 5,000 stock options were valued at approximately $3,000 and will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner.certain events. During the three months and nine months ended March 31,September 30, 2018, the Company recorded approximately $300 and $700 of stock option expense for this option grant.

On January 9, 2017, the Company and Ms. Ponugoti entered into an executive employment agreement as the Company’s Associate Director, Clinical Sciences, effective on February 1, 2017. Pursuant to the employment agreement, the Company issued 10,000 shares of restricted stock and options to purchase 30,000 shares of common stock under the 2016 Plan. During the three months and nine months ended March 31, 2018, the Company recorded approximately $3,000 and $9,000 of total stock-based compensation, respectively. The $3,000$2,000 of stock-based compensation expense for the three months ended March 31, 2018 includedthese equity grants, including approximately $2,000$1,000 of stock option expense and $1,000 offor the stock awards. The $10,000 of stock-based compensation expense for the nine months ended March 31, 2018 included approximately $7,000 of stock option expense and $3,000 of stock awards.

Purchase of Treasury Stock - cash paid to Federal and State Taxing Authorities arising from the withholding of common shares from officers’ vested restricted stock grant issuance and issuance of Treasury Stock and the reversal of outstanding stock subscription receivable

On September 1, 2017, 19,465 shares of the Company’s restricted stock vested to Ms. Harness according to Ms. Harness’s employment agreement. The total taxable compensation to Ms. Harness for the 19,465 vested shares was $14,000, which is priced at the closing stock price on September 1, 2017 at $0.705 a share.

The Company issued 12,409 common shares (net share issuance amount), which is approximately 64% of the total vested common share amount of 19,465 common shares due to be issued to Ms. Harness. The remaining 7,056 shares of common stock were withheld from Ms. Harness for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

On December 22, 2017, 533,334 shares of the Company’s restricted stock vested to Dr. Bertolino according to Dr. Bertolino’s employment agreement. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was $373,334, which is priced at the closing stock price on December 21, 2017 at $0.7 a share.

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The Company issued 295,286 common shares (net share issuance amount), which is approximately 55% of the total vested common share amount of 533,334 common shares due to be issued to Dr. Bertolino. The remaining 238,048 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

In addition, the Company reversed an outstanding stock subscription receivable of $26,000 for 60,000 shares of common stock and recorded this amount as the cost of treasury stock.

On February 1, 2018, 3,333 shares of the Company’s restricted stock vested to Ms. Anne Ponugoti according to Ms. Ponugoti’s employment agreement. The total taxable compensation to Ms. Ponugoti for the 3,333 vested shares was $2,433, which is priced at the closing stock price on January 31, 2018 at $0.73 a share. The Company issued 2,645 common shares (net share issuance amount), which is approximately 79% of the total vested common share amount of 3,333 common shares due to be issued to Ms. Ponugoti. The remaining 688 shares of common stock were withheld from Ms. Ponugoti for the payment of payroll taxes to the Federal and State taxing authorities.

On February 5, 2018, the Board of Directors approved the retirement of 567,872 shares of its common stock in treasury, which shares are issued but are not outstanding. These shares included the 688 shares withheld from Ms. Ponugoti, as a result, all treasury shares of the Company were retired.

There were 0 shares and 262,080 shares of treasury stock outstanding at March 31, 2018 and June 30, 2017, respectively, purchased at a total cumulative cost of $0 and $220,000 at March 31, 2018 and June 30, 2017, respectively.

Restricted Stock Awards Outstanding

The following summarizes our restricted stock activity for our restricted stock issuances:

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Scheduled vesting for outstanding restricted stock awards at March 31,September 30, 2018 is as follows: