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: ~~December 31, 2018~~September 30, 2019

¨ 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.)

incorporation or organization)

100 ~~Cumming~~Cummings Center, Suite 151-B

Beverly, MA 01915

(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 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 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 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”,~~filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	¨	Accelerated Filer	x ¨
Non-Accelerated Filer	¨x	Smaller reporting company	x
		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 x

The number of shares outstanding of each of the issuer’s classes of common equity, as of ~~February 5,~~November 8, 2019 is as follows:

Class of Securities		Shares Outstanding
Common Stock Class A, $0.0001 par value		~~179,572,948~~212,369,124
Common Stock Class B, $0.0001 par value		909,090

INNOVATION PHARMACEUTICALS INC.

FORM 10-Q

For the Quarter Ended ~~December 31, 2018~~September 30, 2019

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018~~2019 (unaudited)		4
	Condensed Consolidated Statements of Operations for the three months ended September 30, 2019 and ~~six months ended December 31,~~ 2018 ~~and 2017~~ (unaudited)		5
	Condensed Consolidated Statements of Stockholders’ Deficiency for the three months ended September 30, 2019 and 2018 (unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2019 and ~~six months ended December 31,~~ 2018 ~~and 2017~~ (unaudited)	6	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	7	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34	41
Item 4.	Controls and Procedures	34	42

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	35	43
Item 1A	Risk Factors	35	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35	43
Item 3.	Defaults Upon Senior Securities	35	43
Item 4.	Mine Safety Disclosures	35	43
Item 5.	Other Information	35	43
Item 6.	Exhibits	36	44

SIGNATURES		37	45

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; ~~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 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; our ability to achieve certain future regulatory, development and commercialization milestones under our license agreement with Alfasigma S.p.A.; 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

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Rounded to nearest thousand except for shares data)

	December 31,			June 30,				September 30,			June 30,
	2018			2018				2019			2019
ASSETS							ASSETS
Current Assets:
Cash	$	748,000		$	2,424,000			$	910,000		$	579,000
Prepaid expenses and other current assets		104,000			98,000				57,000			46,000
Security deposits		-			78,000
Total Current Assets		852,000			2,600,000				967,000			625,000

Other Assets:
Patents – net		3,476,000			3,780,000
Equipment – net		1,000			2,000
Deferred offering costs - net		-			159,000
Security deposits		78,000			-
Patent costs - net									3,270,000			3,342,000
Property, plant and equipment -net									-			1,000
Security deposit									78,000			78,000
Total Other Assets		3,555,000			3,941,000				3,348,000			3,421,000
Total Assets	$	4,407,000		$	6,541,000			$	4,315,000		$	4,046,000

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY							LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities:
Accounts payable - (including related party payables of approximately $1,505,000 and 1,504,000, respectively)	$	2,446,000		$	3,185,000
Accrued expenses - (including related party accruals of approximately $44,000 and $58,000, respectively)		330,000			266,000
Accrued salaries and payroll taxes - (including related party accrued salaries of approximately $3,129,000 and $2,953,000, respectively)		3,164,000			3,219,000
Convertible note payable - related party		2,022,000			2,022,000
Accounts payable - (including related party payables of approx. $1,498,000 and $1,511,000, respectively)								$	2,143,000		$	2,127,000
Accrued expenses - (including related party accruals of approx. $42,000 and $45,000, respectively)									82,000			85,000
Accrued salaries and payroll taxes -(including related party accrued salaries of approx. $3,129,000 and $3,129,000, respectively)									3,201,000			3,162,000
Operating lease current liability									120,000			-
Note payable - related party									1,922,000			1,922,000
Total Current Liabilities		7,962,000			8,692,000				7,468,000			7,296,000
Other Liabilities:
Series B convertible preferred stock liability at $1,080 stated value; 1,190 and 0 shares issued and outstanding at December 31, 2018 and June 30, 2018, respectively		681,000			-
Series B 5% convertible preferred stock liability at $1,080 stated value; 1,584 and 1,196 shares issued and outstanding at September 30, 2019 and June 30, 2019, respectively									868,000			879,000
Operating lease long term liability									523,000			-
Total Liabilities		8,643,000			8,692,000				8,859,000			8,175,000

Commitments and contingencies (Note 7)

Commitments and contingencies (Note 9)
Stockholders’ Deficiency
Preferred stock, $0.001 par value, 10,000,000 designated shares, no shares issued and outstanding		-			-				-			-
Common Stock - Class A, $0.0001 par value, 300,000,000 shares authorized, 176,497,078 shares and 163,103,927 shares issued as of December 31, 2018 and June 30, 2018, respectively, 176,268,860 shares and 163,103,927 shares outstanding as of December 31, 2018 and June 30, 2018, respectively		18,000			17,000
Common Stock - Class B, (10 votes per share); $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of December 31, 2018 and June 30, 2018		-			-
Common Stock - Class A, $0.0001 par value, 600,000,000 shares and 300,000,000 shares authorized, as of September 30, 2019 and June 30, 2019, respectively, 213,028,572 shares and 202,860,141 shares issued as of September 30, 2019 and June 30, 2019, respectively, 212,369,124 shares and 202,631,923 shares outstanding as of September 30, 2019 and June 30, 2019, respectively									22,000			21,000
Common Stock - Class B, (10 votes per share); $.0001 par value, 100,000,000 shares authorized, 909,090 shares and 909,090 shares issued and outstanding as of September 30, 2019 and June 30, 2019, respectively									-			-
Additional paid-in capital		87,781,000			83,747,000				91,726,000			90,537,000
Accumulated deficit		(91,944,000	)		(85,915,000	)			(96,146,000	)		(94,596,000	)
Treasury Stock, at cost (228,218 shares and 0 shares as of December 31, 2018 and June 30, 2018, respectively)		(91,000	)		-
Treasury Stock, at cost (659,448 shares and 228,218 shares as of September 30, 2019 and June 30, 2019, respectively)									(146,000	)		(91,000	)
Total Stockholders’ Deficiency		(4,236,000	)		(2,151,000	)			(4,544,000	)		(4,129,000	)
Total Liabilities and Stockholders’ Deficiency	$	4,407,000		$	6,541,000			$	4,315,000		$	4,046,000

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, 2019 AND ~~SIX MONTHS ENDED~~ ~~DECEMBER 31~~, 2018 ~~AND 2017~~

(Unaudited)

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

	For the three Months Ended						For the Six Months Ended
	December 31,						December 31,
	2018			2017			2018			2017
													2019			2018
Revenues	$	-		$	-		$	-		$	-
Licensing income													$	400,000		$	-

Operating expenses:
Research and development expenses		1,399,000			3,963,000			2,756,000			7,768,000			803,000			1,357,000
General and administrative expenses		432,000			297,000			692,000			594,000			265,000			260,000
Officers' payroll and payroll tax expenses		118,000			130,000			241,000			260,000
Officers’ payroll and payroll tax expenses														118,000			123,000
Professional fees		45,000			78,000			304,000			330,000			155,000			259,000

Total operating expenses		1,994,000			4,468,000			3,993,000			8,952,000			1,341,000			1,999,000

Loss from operations		(1,994,000	)		(4,468,000	)		(3,993,000	)		(8,952,000	)		(941,000	)		(1,999,000	)

Other income (expense)
Interest income		-			-			-			1,000
Other income		40,000			-			40,000			-
Interest expense														(48,000	)		(51,000	)
Interest expense – debt		(50,000	)		(50,000	)		(101,000	)		(101,000	)
Interest expense – preferred stock liability		(1,975,000	)		-			(1,975,000	)		-
Other expense, net		(1,985,000	)		(50,000	)		(2,036,000	)		(100,000	)
Interest expense- preferred stock														(20,000	)		-
Change in fair value of preferred stock														102,000			-
Impairment expense of operating lease														(643,000	)		-
Total other expense - net														(609,000	)		(51,000	)

Loss before provision for income taxes		(3,979,000	)		(4,518,000	)		(6,029,000	)		(9,052,000	)		(1,550,000	)		(2,050,000	)
Provision for income taxes		-			-			-			-			-			-

Net loss	$	(3,979,000	)	$	(4,518,000	)	$	(6,029,000	)	$	(9,052,000	)	$	(1,550,000	)	$	(2,050,000	)

Basic and diluted loss per share attributable to common stockholders	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.07	)	$	(0.01	)	$	(0.01	)

Weighted average number of common shares		170,541,226			140,749,557			170,541,225			138,960,684			205,666,583			163,284,314

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

5

Table of Contents

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ DEFICIENCY

FOR THE ~~SIX~~THREE MONTHS ENDED ~~DECEMBER 31,~~SEPTEMBER 30, 2019 AND 2018 ~~AND 2017~~

(Unaudited)

(Rounded to nearest ~~thousand)~~thousand, except for shares data)

For the Six Months
Ended
December 31,

2018

2017

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$ (6,029,000 )

$ (9,052,000 )
Adjustments to reconcile net loss to net cash used in operating activities:

Common stock and stock options issued as employee compensation and payment for services rendered and financing costs

516,000

1,400,000

Amortization of patent costs

185,000

192,000

Patent write off

155,000

-

Depreciation of equipment

1,000

18,000

(Gain) Loss on disposal of equipment

(40,000 )

-

Interest expense-preferred stock liability

1,975,000

-

Changes in operating assets and liabilities:

Prepaid expenses and security deposits

(6,000 )

214,000

Accounts payable

(738,000 )

151,000

Accrued expenses

64,000

(163,000 )
Accrued officers' salaries and payroll taxes

(56,000 )

53,000

Net cash used in operating activities

(3,973,000 )

(7,187,000 )

CASH FLOWS FROM INVESTING ACTIVITIES:

Sales proceeds of property, plant and equipment

40,000

-

Patent costs

(36,000 )

(80,000 )

Net cash provided by (used in) investing activities

4,000

(80,000 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Sales of common stock, net of offering costs

-

6,478,000

Purchase of treasury stock

(91,000 )

(171,000 )
Proceeds from issuance of preferred stock and warrants, net of offering costs

2,384,000

-

Net cash provided by financing activities

2,293,000

6,307,000

NET DECREASE IN CASH

(1,676,000 )

(960,000 )

CASH, BEGINNING OF PERIOD

2,424,000

4,141,000

CASH, END OF PERIOD

$ 748,000

$ 3,181,000

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid of income taxes

$ -

-

Cash paid for interest

$ 111,000

$ 96,000

SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW

INVESTING AND FINANCING ACTIVITIES

Commitment shares issued as deferred offering costs

$ -

$ 215,000

Reversal of subscription receivable to treasury stock

$ -

$ 26,000

Conversion of Series B Convertible Preferred stock to Common stock

$ 963,000

-

For the Three Months Ended September 30, 2018

Common Stock A

Common Stock B

Par
Value

Par
Value

Additional
Paid-in

Accumulated

Treasury Stock

Shares

$
0.0001

Shares

$
0.0001

Capital

Deficit

Shares

Amount

Total

Balance at June 30, 2018

163,103,927

$ 17,000

-

$ -

$ 83,747,000

$ (85,915,000 )

-

$ -

$ (2,151,000 )

Shares issued to consultant for services at $0.84 - $1.38

-

-

-

-

3,000

-

-

-

3,000

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

-

-

-

-

112,000

-

-

-

112,000

Stock options issued to consultant for services at $0.43 - $0.73

-

-

-

-

10,000

-

-

-

10,000

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

-

-

-

-

60,000

-

-

-

60,000

Issuance of 572,264 shares to Officer and employee

572,264

-

-

-

-

-

-

-

-

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

-

-

-

-

12,000

-

-

-

12,000

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

-

-

-

-

32,000

-

-

-

32,000

Net loss for the three months ended 9/30/2018

-

-

-

-

(2,050,000 )

-

-

(2,050,000 )
Balance at September 30, 2018

163,676,191

$ 17,000

-

$ -

$ 83,976,000

$ (87,965,000 )

-

$ -

$ (3,972,000 )
For the Three Months Ended September 30, 2019

Common Stock A

Common Stock B

Par
Value

Par
Value

Additional
Paid-in

Accumulated

Treasury Stock

Shares

$
0.0001

Shares

$
0.0001

Capital

Deficit

Shares

Amount

Total

Balance at June 30, 2019

202,631,923

$ 21,000

909,090

$ -

$ 90,537,000

$ (94,596,000 )

228,218

$ (91,000 )

$ (4,129,000 )

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

-

-

-

-

65,000

-

-

-

65,000

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

-

-

-

-

124,000

-

-

-

124,000

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

-

-

-

-

28,000

-

-

-

28,000

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

-

-

-

-

10,000

-

-

-

10,000

Shares issued to consultant for services at $0.43

-

-

-

-

3,000

-

-

-

3,000

Stock options issued to consultant for services at $0.43 - $0.73

-

-

-

-

6,000

-

-

-

6,000

Issuance of 12,500 shares to Consultant

12,500

-

-

-

-

-

-

-

-

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

1,066,667

-

-

-

-

-

-

-

-

Issuance of shares for tax purposes as Treasury Shares

(421,611 )

-

-

-

-

-

421,611

(54,000 )

(54,000 )
Issuance of 58,394 shares to employee & 9,619 shares were withheld for tax purposes as Treasury shares

58,394

-

-

-

-

-

-

-

-

Issuance of shares for tax purposes as Treasury Shares

(9,619 )

-

-

-

-

-

9,619

(1,000 )

(1,000 )
Conversion of 890 preferred stocks to 9,030,870 common stock

9,030,870

1,000

-

-

475,000

-

-

-

476,000

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

-

-

-

-

478,000

-

-

-

478,000

Net loss for the 3 months ended 9/30/2019 - unaudited

-

-

-

-

-

(1,550,000 )

-

-

(1,550,000 )

Balance at September 30, 2019

212,369,124

$ 22,000

909,090

$ -

$ 91,726,000

$ (96,146,000 )

659,448

$ (146,000 )

$ (4,544,000 )

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

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Table of Contents
INNOVATION PHARMACEUTICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
(Rounded to nearest thousand)

2019

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$ (1,550,000 )

$ (2,050,000 )
Adjustments to reconcile net loss to net cash used in operating activities:

Common stock and stock options issued as compensation

236,000

229,000

Amortization of patent costs

93,000

94,000

Interest expense-preferred stock

20,000

-

Change in fair value of preferred stock

(102,000 )

-

Impairment expense of operating lease

643,000

-

Changes in operating assets and liabilities:

Prepaid expenses and security deposits

(11,000 )

43,000

Accounts payable

16,000

(395,000 )
Accrued expenses

(3,000 )

(92,000 )
Accrued officers’ salaries and payroll taxes

38,000

72,000

Net cash used in operating activities

(620,000 )

(2,099,000 )

CASH FLOWS FROM INVESTING ACTIVITIES:

Patent costs

(21,000 )

(19,000 )

Net cash used in investing activities

(21,000 )

(19,000 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from exercise of warrants

1,027,000

-

Purchase of treasury stock

(55,000 )

-

Net cash provided by financing activities

972,000

-

NET DECREASE IN CASH

331,000

(2,118,000 )

CASH, BEGINNING OF PERIOD

579,000

2,424,000

CASH, END OF PERIOD

$ 910,000

$ 306,000

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid for interest

$ 51,000

$ 63,000

Cash paid for tax

$ -

$ -

SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INVESTING AND FINANCING ACTIVITIES

Conversion of Series B Convertible Preferred stock to Common stock

$ 476,000

$ -

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

$ 478,000

$ -

The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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INNOVATION PHARMACEUTICALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
~~DECEMBER 31, 2018~~SEPTEMBER 30, 2019
(Unaudited)

Note 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, ~~2018,~~2019, included in our Annual Report on Form 10-K for the year ended June 30, ~~2018.~~2019.

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 six-month~~ periods have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms “Company,” “we,” “us” or “our” mean Innovation Pharmaceuticals Inc.

Basis of Presentation

Innovation Pharmaceuticals Inc. (“Innovation”) was incorporated on August 1, 2005 in the State of Nevada. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. On February 15, 2019, the Company formed IPIX Pharma Limited (“IPIX Pharma”), a wholly-owned subsidiary incorporated under the Companies Act 2014 of Ireland. IPIX Pharma is a Private Company Limited by Shares. The subsidiary will serve as a key hub for strategic collaboration with European companies and medical communities in addition to providing cost-saving efficiencies and flexibility with respect to developing Brilacidin under European Medicines Agency standards.

The Company is a clinical stage biopharmaceutical ~~company and has no customers, products or revenues to date.~~company. The Company’s common stock is quoted on OTCQB, symbol “IPIX.”
Basis of Consolidation
These consolidated financial statements include the accounts of Innovation, a Nevada corporation, and our wholly-owned subsidiary, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. Translation gains and losses for the three months ended September 30, 2019 and 2018 were not significant.
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Nature of Operations - Overview

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

We currently own all development and marketing rights to our ~~products.~~products, other than the rights granted to Alfasigma S.p.A. in July 2019, for the development, manufacturing and commercialization of locally-administered Brilacidin for UP/UPS. In order to successfully develop and market our products, we may have to partner with ~~other~~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.

Note 2. Going Concern and Liquidity

These financial statements have been prepared on the assumption that the Company is a going concern, which contemplates the realization of its assets and the settlement of its liabilities in the normal course of operations.

We have incurred recurring losses since inception and expect to continue to incur losses as a result of costs and expenses related to our research and ~~continued~~ development of our compounds and our corporate general and administrative expenses. As of ~~December 31, 2018,~~September 30, 2019, the Company has an accumulated deficit of approximately ~~$92.0~~$96.1 million, representative of recurring losses since inception. The Company ~~is a development stage pharmaceutical company that has no sales~~earned $0.4 million as itan initial upfront payment under the terms of the License Agreement with Alfasigma (see Note 7. Exclusive License Agreement to the condensed consolidated financial statements). The Company does not currently have any products inon the market and will continue to not have ~~any~~significant revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) ~~approval.~~and/ or other health authorities approval, or generates income from the licensing of its drugs. 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 ~~$13.5~~$11.5 million for the next twelve months, raise substantial doubt about its ability to continue as a going concern.

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~~At December 31, 2018,~~As of September 30, 2019, the Company’s cash amounted to ~~$0.7~~$0.9 million and current liabilities amounted to ~~$8.0~~$7.5 million, of which ~~$6.7~~$3.5 million were payables to related parties with no immediate payment terms ~~(See~~and $2.9 million was payable to one shareholder who is our former director and officer of the Company (see Note 810. Related Party Transactions and Note 11. Convertible Note Payable - Related Party ~~Transactions)~~to the condensed consolidated financial statements). 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 ~~six~~three months ended ~~December 31, 2018~~September 30, 2019 was approximately ~~$4.0~~$0.6 million, and current projections indicate that the Company will continue to have ~~continued~~ negative cash flows from operating activities for the foreseeable future. Our net losses incurred for the ~~six~~three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ amounted to ~~$6.0~~$1.6 million and ~~$9.1~~$2.1 million, respectively, and we had a working capital deficit of approximately ~~$7.1~~$6.5 million and ~~$6.1~~$6.7 million, respectively at ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018.~~2019.

The ~~Company's~~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~~During 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 December 31, 2018, the available balance under the Purchase Agreement is approximately $22.3 million. However, as of the 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 thatthree months ended September 30, 2019, the Company and Aspire Capital will not affect any sales under the Purchase Agreement when the closing sales price of the Company’s common 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 12 months from the date of the issuance of the financial statements (or available to be issued).
~~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~~issued 1,045 shares of ~~the Company’s newly-created~~its Series B 5% convertible preferred stock, for aggregate gross proceeds of ~~approximately $2.0 million. Under this securities purchase agreement, the Company issued to the investors~~$1.0 million, upon exercise of 1,045 warrants. As of September 30, 2019, Series 1-4 warrants to purchase ~~up to an additional 8,000~~6,675 shares of Series B preferred ~~stock. The Company received the proceeds from exercise of 500 Series 1 warrants of approximately $0.5 million from October to December 2018.~~stock were outstanding. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds or other funds will be available when ~~needed.~~needed (see Note 13. Equity Transactions to to the condensed consolidated financial statements).

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The amount of cash and cash equivalents at September 30, 2019 is approximately $0.9 million. 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 planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without raising additional ~~financing from Aspire Capital,~~capital in the ~~multi-family office or another source of capital.~~future. 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.

~~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, 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.

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Basic Loss per 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 and Series B Convertible Preferred Stock at a conversion price at approximately $0.09 per share.~~stock. Common share equivalents of ~~70.1 million shares~~52,456,967 and ~~46.7 million~~56,271,542 shares of common stock were excluded from the computation of diluted loss per share for the three ~~and six~~ months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~respectively, because we incurred net losses for the ~~six~~three months ended ~~December 31,~~September 30, 2019 and 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.~~anti-dilutive.

Treasury Stock

The Company accounts for treasury stock using the cost method. There were ~~228,218~~659,448 shares and 0228,218 shares of treasury stock outstanding, purchased at a total cumulative cost of $146,000 and $91,000 as of September 30, 2019 and ~~$0, at December 31, 2018 and 2017,~~June 30, 2019, respectively (see Note 1112. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding to the ~~notes to the~~ condensed consolidated financial statements).

Treasury stock, representing shares of the Company’s common stock that have been acquired for payroll tax withholding on vested stock grants, is recorded at its acquisition cost and these shares are not considered outstanding.
Revenue Recognition
On July 1, 2019, the Company adopted the new accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of July 1, 2019. The adoption of ASC Topic 606 did not have impact on the Company’s consolidated financial statements or cash flows, for the Company had no revenue and no contracts which were not completed as of July 1, 2019.
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The Company has acquired and further developed license rights to Functional Intellectual Property (“functional IP”) that it licenses to customers for defined license periods. A functional IP license is a license to intellectual property that has significant standalone functionality that does not include supporting or maintaining the intellectual property during the license period. The Company’s patented drug formulas have significant standalone functionality in the form of their abilities to treat a disease or condition. Further, there is no expectation that the Company will undertake any activities to change the functionality of the drug formulas during the license periods (see Note 7. Exclusive License Agreement to the condensed consolidated financial statements).
Under the terms of the License Agreement, Alfasigma made an initial non-refundable payment of $0.4 million to the Company and will make additional payments of up to $24.0 million to the Company based upon the achievement of certain milestones, including a $1.0 million payment due following commencement of the first phase III clinical trial of Brilacidin for UP/UPS and an additional $1.0 million payment upon the filing of a marketing approval application with the U.S. Food and Drug Administration or the European Medicines Agency. In addition, 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.
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.
Pursuant to ASC 606, a customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps:
(i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract;
(iii) determine the transaction price, including the constraint on variable consideration;
(iv) allocate the transaction price to the performance obligations in the contract; and
(v) recognize revenue when (or as) the Company satisfies each performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. If a promised good or service is not distinct, it is combined with other performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The terms of the Company’s licensing agreement include the following:
(i) up-front fees;
(ii) milestone payments related to the achievement of development, regulatory, or commercial goals; and
(iii) royalties on net sales of licensed products.
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License of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. If not distinct, the license is combined with other performance obligations in the contract. For licenses that are combined with other performance obligations, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone Payments: At the inception of each arrangement that includes developmental and regulatory milestone payments, the Company evaluates whether the achievement of each milestone specifically relates to the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service within a performance obligation. If the achievement of a milestone is considered a direct result of the Company’s efforts to satisfy a performance obligation or transfer a distinct good or service and the receipt of the payment is based upon the achievement of the milestone, the associated milestone value is allocated to that distinct good or service. If the milestone payment is not specifically related to the Company’s effort to satisfy a performance obligation or transfer a distinct good or service, the amount is allocated to all performance obligations using the relative standalone selling price method. The Company also evaluates the milestone to determine whether they are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price to be allocated, otherwise, such amounts are constrained and excluded from the transaction price. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the transaction price. Any such adjustments to the transaction price are allocated to the performance obligations on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied) in accordance with the royalty recognition constraint.

Accounting for Stock Based Compensation

The stock-based compensation expense incurred by the Company for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. “tax regulations.” Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50. Effective July 1, 2019, the Company adopted ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.

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The Company followed the accounting guidance in ASC 505-50-30-11 ~~further~~until July 1, 2019 which provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:

i.
The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and

ii.
The date at which the counterparty’s performance is complete.

~~We have elected to use~~Upon the ~~Black-Scholes-Merton pricing model to determine~~adoption of ASU 2018-07, the Company measured the fair value of ~~stock options~~equity instruments for nonemployee based payment awards on the ~~dates of grant. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line method.~~grant date.

The components of stock-based compensation expense included in the Company’s Condensed Statement of Operations for the three months ended September 30, 2019 and ~~six months ended December 31,~~ 2018 ~~and 2017~~ are as follows (rounded to nearest thousand):

Three months ended
December 31

Six months ended
December 31

Three months ended
September 30

2018

2017

2018

2017

2019

2018

Stock-based compensation expense

Research and development expenses

Professional fees

$ 12,000

$ -

$ 25,000

$ -

$ 9,000

$ 13,000

Employees’ bonus

49,000

42,000

93,000

74,000

38,000

44,000

Officers’ bonus

226,000

989,000

398,000

1,326,000

189,000

172,000

Total stock-based compensation expense

$ 287,000

$ 1,031,000

$ 516,000

$ 1,400,000

$ 236,000

$ 229,000

Recent Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. This new pronouncement has been adopted in the first quarter of fiscal 2020 and did not have a material effect on the Company’s financial position, results of operations or cash flows.
Prior to July 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective July 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients,’ which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs; and all of the new standard’s available transition practical expedients. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on July 1, 2019 resulted in the recognition of operating lease right-of-use assets of approximately $670,000, lease liabilities for operating leases of approximately $670,000, and a zero cumulative-effect adjustment to accumulated deficit. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (“short-term leases”). Lease expense is recognized on a straight-line basis over the lease term. The Company determined that the operating lease right-of-use asset is impaired as of September 30, 2019, and it recognized an impairment loss of approximately $643,000, after recording amortization of the right-of-use asset for July, August, and September 2019 totaling approximately $27,000, resulting in a carrying value of $0 at September 30, 2019 (see Note 8. Operating Lease to the condensed consolidated financial statements).

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~~Fair Value of Financial Instruments and Fair Value Measurements~~
FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current liabilities, convertible notes and preferred stock liability (all as defined below) are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of all other financial liabilities at cost approximates fair value.
~~Recently Adopted Accounting Pronouncements~~

In July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, ~~2018,~~2019, did not have any impact on the financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. This new pronouncement has been adopted in the fourth quarter of fiscal 2018 and did not have a material effect on the Company’s financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which 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. This new pronouncement has been adopted in the first quarter of fiscal 2019 and did not have a material effect on the Company’s financial position, results of operations or 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 adopted the new standard effective July 1, 2018. The application of this standard did not have a material impact on the Company’s unaudited condensed statements of cash flows.
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~~Recently Issued Accounting Guidance~~
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The adoption of ASU 2018-07 will not have a material impact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02,” Lease (Topic 842)" which requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using the modified retrospective approach. The Company will adopt this new pronouncement beginning July 1, 2019. 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 2016-02 (Topic 842) Leases will have a material impact on its consolidated balance sheet due to the 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.
~~Note~~ 4. Patents, net

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

Useful life

December 31,
2018

June 30,
2018

Useful life

September 30,
2019

June 30,
2019

Purchased Patent Rights- Brilacidin, and related compounds

14

$ 4,082,000

$ 4,082,000

14

$ 4,082,000

$ 4,082,000

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

12

144,000

144,000

12

144,000

144,000

Patents - Kevetrin and related compounds

17

1,068,000

1,219,000

17

1,139,000

1,118,000

5,294,000

5,445,000

5,365,000

5,344,000

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

(1,614,000 )

(1,462,000 )

(1,841,000 )

(1,765,000 )
Accumulated amortization for Patents-Kevetrin and related compounds

(204,000 )

(203,000 )

(254,000 )

(237,000 )
Total

$ 3,476,000

$ 3,780,000

$ 3,270,000

$ 3,342,000

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

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Amortization expense for the three months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~ was approximately ~~$92,000~~$93,000 and ~~$96,000, respectively and was approximately $185,000, and $192,000 for the six months ended December 31, 2018 and 2017,~~$94,000, respectively.

During the six months ended December 31, 2018 and 2017, the Company has written off the Prurisol patent and other patents of approximately $155,000 and $0, respectively and included in general and administrative expenses.
At ~~December 31, 2018,~~September 30, 2019, the future amortization period for all patents was approximately ~~6.68~~5.93 years to 16.75 years. Future estimated annual amortization expenses are approximately ~~$183,000~~$278,000 for the year ending June 30, ~~2019, $366,000~~2020, $371,000 for each year from ~~2020~~2021 to ~~2022,~~2024, and total of ~~$2,195,000~~$1,508,000 for the year ending June 30, ~~2023~~2025 and thereafter.

~~Note~~ 5. Accrued Expenses – Related Parties and Other

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

December 31,
2018

June 30,
2018

September 30,
2019

June 30,
2019

Accrued research and development consulting fees

$ 286,000

$ 208,000

$ 40,000

$ 40,000

Accrued rent (Note 8) - related parties

8,000

10,000

Accrued interest (Note 9) - related parties

36,000

48,000

Accrued rent (Note 10) - related parties

8,000

8,000

Accrued interest (Note 11) - related parties

34,000

37,000

Total

$ 330,000

$ 266,000

$ 82,000

$ 85,000

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

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

December 31,
2018

June 30,
2018

September 30,
2019

June 30,
2019

Accrued salaries - related parties

$ 2,999,000

$ 2,823,000

$ 2,999,000

$ 2,999,000

Accrued payroll taxes - related parties

130,000

130,000

130,000

130,000

Accrued employee bonuses

-

214,000

Withholding tax - payroll

35,000

52,000

Withholding tax – payroll & other taxes

72,000

33,000

Total

$ 3,164,000

$ 3,219,000

$ 3,201,000

$ 3,162,000

~~Note 7. Commitments and Contingencies~~7. Exclusive License Agreement

~~Lease Commitments~~On July 18, 2019, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Alfasigma S.p.A., a global pharmaceutical company (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for the treatment of ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS).
Under the terms of the License Agreement, Alfasigma made an initial upfront non-refundable payment of $0.4 million to the Company and will make additional payments of up to $24.0 million to the Company based upon the achievement of certain milestones, including a $1.0 million payment due following commencement of the first phase III clinical trial of Brilacidin for UP/UPS and an additional $1.0 million payment upon the filing of a marketing approval application with the U.S. Food and Drug Administration or the European Medicines Agency. 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.
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8. Operating Leases
The Company renewed a 60-month lease to lease approximately 12,500 square feet of office space on October 1, 2018 for an additional 5 years with an automatic extension for additional successive periods of 5 years unless written notice is given not more than 12 months or less than 6 months prior to the expiration of the then current lease period. Base monthly rent is approximately $19,000 per month, subject to annual changes in the consumer price index, plus operating expenses. A deposit of $78,000 was paid at the commencement of the lease. This office space serves as the Company’s principal executive offices.

Operating ~~Leases – Rental Property~~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.

~~On October 1, 2018,~~We have lease agreements with lease and non-lease components. We have elected to account for these lease and non-lease components as a single lease component. We are also electing not to apply the recognition requirements to short-term leases of twelve months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term.
The Company determined that the operating lease right-of-use asset is fully impaired as of September 30, 2019 because of the Company’s current lack of working capital (see Note 2. Going Concern and Liquidity to the condensed consolidated financial statements) resulting in its limited usage of the leased office. The Company has been unable to enter into a sub-lease agreement for this leased office as of September 30, 2019. As such, the Company recognized an impairment loss of approximately $643,000, after recording amortization of the right-of-use asset for July, August, and September 2019 totaling approximately $27,000, resulting in a carrying value of $0 at September 30, 2019.
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The components of lease expense and supplemental cash flow information related to leases for the period are as follows:

Three Months Ended
September 30,
2019

Lease Cost

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

$ 56,000

Variable lease cost

2,000

$ 58,000

Other Information

Cash paid for amounts included in the measurement of lease liabilities for the three months ended September 30, 2019

$ 58,000

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

3.92 years

Average discount rate – operating leases

18.00 %
The supplemental balance sheet information related to leases for the period is as follows:

At
September 30,
2019

Operating leases

Short-term operating lease liabilities

$ 120,000

Long-term operating lease liabilities

523,000

Total operating lease liabilities

$ 643,000

The following table provides maturities of the Company’s lease ~~agreement with Cummings Properties automatically renewed. The lease is for a term of five years ending on~~liabilities at September 30, ~~2023, and requires monthly payments of approximately $19,000.~~2019 as follows:

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

2019

$ 114,000

2020

228,000

Fiscal Year Ending June 30,

Operating Leases

2020 (remaining 9 months)

$ 168,000

2021

228,000

223,000

2022

228,000

223,000

2023

228,000

223,000

$ 1,026,000

2024 (remaining 3 months)

60,000

Total lease payments

897,000

Less: Imputed interest/present value discount

(254,000 )
Present value of lease liabilities

$ 643,000

~~Rent expense, net of lease income, under this operating lease agreement was~~Lease expenses were approximately ~~$54,000~~$58,000 and ~~$52,000 for~~$56,000 during the three months ended ~~December 31,~~September 30, 2019 and 2018, respectively.
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9. Commitments and 2017, respectively and was approximately $107,000 and $103,000 for the six months ended December 31, 2018 and 2017, respectively. As of September 1, 2018, KARD Scientific no longer leases space from the Company (See Note 8 to the notes to the condensed financial statements).Contingencies

Contractual Commitments

The Company has total non-cancelable contractual minimum commitments of approximately ~~$2.4~~$2 million to contract research organizations as of ~~December 31, 2018.~~September 30, 2019. Expenses are recognized when services are performed by the contract research organizations.

~~Note 8.~~10. Related Party Transactions

Office Lease

The Company charged Kard Scientific (“KARD”)~~$1,800~~ $1,800 for space for the two months of July and August, 2018. Dr. Menon, a significant shareholder of the ~~Company’s principal shareholder,~~Company and the former President of Research and former director of the Company, also serves as the Chief Operating Officer and Director of Kard Scientific. 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. As of September 1, 2018, KARD no longer leases space from the Company.

~~Clinical~~Pre-clinical Studies

The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company no longer uses KARD. At ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018,~~2019, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable. The Company is now reviewing these charges.

Other related party transactions are disclosed in Note ~~9 to the notes to the condensed financial statements~~11 below.

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~~Note 9.~~11. 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 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. 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 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 of approximately $2,022,000 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 years from the date of issuance.

On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s Chairman and CEO, for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).
As of ~~December 31, 2018~~September 30, 2019 and June 30, 2019, the principal balance of this convertible note payable to Mr. Ehrlich, the Company’s Chairman and CEO was approximately $1,922,000 after the above mentioned cancellation of debt of $100,000 to satisfy the exercise price of his option on January 29, 2019.
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Table of Contents
During the three months ended September 30, 2019 and 2018, ~~approximately $36,000~~the Company accrued interest of $48,000 and ~~$48,000,~~$52,000 to Mr. Ehrlich, respectively isand paid the interests in cash of $51,000 and $63,000 to Mr. Ehrlich, respectively. As of September 30, 2019 and June 30, 2019, the balance of accrued interest payable ~~on this note~~were $34,000 and $37,000, respectively (see Note 55. Accrued Expenses – Related Parties and Other to the ~~notes to the~~ condensed consolidated financial statements).

As of ~~December 31, 2018~~September 30, 2019 and June 30, ~~2018,~~2019, the total outstanding balances of principal ~~balance of this demand note was~~and interest were approximately ~~$2,022,000. Subsequent to balance sheet date, Mr. Leo Ehrlich, the Company’s Chairman~~$1,955,000 and CEO, cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 Class B shares at the option exercise price of $0.11 (see Note 14 to the notes to the condensed financial statements).$1,959,000, respectively.

~~Note 10.~~ 12. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding
~~Equity Incentive Plans~~

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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~~Table of Contents~~
On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s Chairman and CEO (see Note 11. Convertible Note Payable - Related Party to the condensed consolidated financial statements).

Stock Options Issued and Outstanding

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

Number of
Options

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life
(Years)

Aggregate
Intrinsic Value

Number of
Options

Weighted
Average Exercise Price

Weighted Average Remaining Contractual Life (Years)

Aggregate
Intrinsic Value

Outstanding at June 30, 2018

41,643,571

0.22

2.76

$ 17,523,113

41,643,571

$ 0.22

2.76

$ 17,523,113

Granted

795,826

0.40

9.68

1,195,826

$ 0.31

7.64

Exercised

-

-

(909,090 )

$ 0.11

Forfeited/expired

(1,050,000 )

1.74

(19,260,424 )

$ 0.21

Outstanding at December 31, 2018

41,389,397

0.19

2.46

$ -

Exercisable at December 31, 2018

40,036,913

$ 0.18

2.24

$ -

Outstanding at June 30, 2019

22,669,883

$ 0.24

2.41

$ 1,340,000

Granted

790,826

$ 0.13

10.0

Exercised

-

$ -

-

Forfeited/expired

(7,500 )

$ 1.38

0

Outstanding at September 30, 2019

23,453,209

$ 0.24

2.42

$ -

Exercisable at September 30, 2019

22,034,643

$ 0.24

2.00

$ -

Unvested stock options at September 30, 2019

1,418,566

$ 0.23

8.95

$ -

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Table of Contents

The fair value of options granted for the ~~six~~three months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~ was estimated on the date of grant using the ~~Black Scholes model~~Black-Scholes-Merton Model that uses assumptions noted in the following table.

Six months ended
December 31,

Three months ended
September 30,

2018

2017

2019

2018

Expected term (in years)

10

10

10

10

Expected stock price volatility

104.11 %

106.01 %

92.21 %

104.11 %
Risk-free interest rate

2.86 %

2.15 %

1.50 %

2.86 %
Expected dividend yield

0

0

0

0

Stock-Based Compensation

The Company recognized approximately ~~$516,000~~$236,000 and ~~$1,400,000~~$229,000 of total stock-based compensation costs related to equity grant awards for the ~~six~~three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ respectively.
The ~~$516,000~~$236,000 of stock-based compensation expense for the ~~six~~three months ended ~~December 31, 2018~~September 30, 2019 included approximately ~~$226,000~~$140,000 of stock options expense and ~~$290,000~~$96,000 of restricted stock awards.

During the three months ended September 30, 2019 and 2018
On September 1, 2019, the Company issued to Dr. Bertolino for his services rendered 1,066,667 shares of common stock, vesting 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The ~~$1,400,000~~Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $71,000, based on the closing bid price as quoted on the OTC on August 30, 2019 at $0.132 per share. These options were issued with an exercise price of $0.132 and vest 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration as defined in award agreement, with a ten year option term. During the three months ended September 30, 2019, the Company recorded approximately $8,000 of stock-based compensation expense ~~for~~in connection with the ~~six~~foregoing equity awards, including approximately $3,000 of stock option expense and $5,000 of stock awards.
On September 1, 2019, the Company also issued to Ms. Harness 58,394 shares of the Company’s common stock, 33 1/3% vesting upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date and 33 1/3% upon the third anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $20,000, based on the closing bid price as quoted on the OTC on August 30, 2019 at $0.132 per share. These options were issued with an exercise price of $0.132 and vest 33 1/3% upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and 33 1/3% upon the third anniversary of the grant date, with acceleration of vesting upon certain events. During the three months ended ~~December 31, 2017 included~~September 30, 2019, the Company recorded approximately ~~$516,000~~$1,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $1,000 of stock ~~options expense and $884,000 of restricted stock awards (see Note 11 to the notes to the condensed financial statements).~~option expense.

~~During the six months ended December 31, 2018~~
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Table of Contents

On September 1, 2018, the Company issued to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, for his services rendered 1,066,667 shares of common stock, vesting 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $225,000, based on the closing bid price as quoted on the ~~OTC~~OTCQB on August 31, 2018 at $0.40 per share. These options were issued with an exercise price of $0.40 per share and vest 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration as defined in award agreement, with a ten year option term. ~~These options have piggyback registration rights.~~ During the three months ~~and six months~~ ended ~~December 31, 2018,~~September 30, 2019, the Company recorded approximately $82,000 ~~and $108,000 of stock-based compensation, respectively. The $82,000~~ of stock-based compensation expense ~~for~~in connection with the ~~three months ended December 31, 2018 included~~foregoing equity awards, including approximately $28,000 of stock option expense and $54,000 of stock awards. ~~The $108,000~~During the three months ended September 30, 2018, the Company recorded approximately $26,000 of stock-based compensation expense ~~for~~in connection with the ~~six months ended December 31, 2018 included~~foregoing equity awards, including approximately ~~$37,000~~$9,000 of stock option expense and ~~$71,000~~$17,000 of stock awards.
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~~Table of Contents~~

On September 1, 2018, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 58,394 shares of the Company’s common stock, 33 1/3% vesting upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date and 33 1/3% upon the third anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $63,000, based on the closing bid price as quoted on the ~~OTC~~OTCQB on August 31, 2018 at $0.40 per share. These options were issued with an exercise price of $0.40 per share and vest 33 1/3% upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and 33 1/3% upon the third anniversary of the grant date, with acceleration of vesting upon certain events. During the three months ~~and six months~~ ended ~~December 31, 2018,~~September 30, 2019, the Company recorded approximately $7,000 ~~and $10,000 of total stock-based compensation, respectively. The $7,000~~ of stock-based compensation expense ~~for~~in connection with the ~~three months ended December 31, 2018 included~~foregoing equity awards including approximately $5,000 of stock option expense and $2,000 of stock awards. ~~The $10,000~~During the three months ended September 30, 2018, the Company recorded approximately $2,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $1,000 of stock option expense and $1,000 of stock awards.
On September 1, 2017, the Company agreed to grant to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, under the 2016 Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) 50% upon the first anniversary of the effective date and the remaining 50% upon the second anniversary of the effective date; (2) shares of the Company’s common stock close above $3.00 per share (as may be adjusted for any stock splits or similar actions); (3) the ~~six~~commencement of trading of shares of the Company’s common stock on a national securities exchange; or (4) upon a change in control of the Company. The 1,066,667 shares were valued at approximately $752,000 and the 617,839 stock options valued at approximately $399,000. Both shares and options were planned to be amortized over 2 years to September 1, 2019 unless the probability of the other above vesting requirements occurring were met at an earlier date. At June 30, 2018, the Company determined that it was not probable that these accelerated vesting provisions would occur earlier than the scheduled vesting date. During the three months ended ~~December 31,~~September 30, 2019, the Company recorded approximately $99,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $34,000 of stock option expense and $65,000 of stock awards. During the three months ended September 30, 2018, ~~included~~the Company recorded approximately ~~$7,000~~$146,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $51,000 of stock option expense and $95,000 of stock awards.
On September 1, 2017, the Company agreed to grant to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company under the 2016 Plan (i) 58,394 shares of restricted stock and (ii) a ten-year option to purchase 172,987 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one third upon the second anniversary of the effective date, and the remaining one third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 58,394 shares were valued at approximately $41,000 and the 172,987 stock options valued at approximately $112,000. Both shares and options were planned to be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the three months ended September 30, 2019, the Company recorded approximately $13,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $10,000 of stock option expense and $3,000 of stock awards. During the three months ended September 30, 2018, the Company recorded approximately $13,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $10,000 of stock option expense and $3,000 of stock awards.

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Table of Contents
On September 1, ~~2018,~~2016, the Company ~~also issued~~and Jane Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Project Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. ~~Anne Ponugoti, Associate Director, Clinical Sciences~~Harness under the Company 2016 Equity Incentive Plan (i) 58,394 shares of restricted stock, which shall vest upon the earliest to occur of the ~~Company, 5,000~~following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 172,987 shares of the Company’s common stock were also granted at an exercise price of $1.37 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and ~~5,000~~the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 58,394 shares were valued at approximately $80,000, which were amortized over three years to September 1, 2019. The 172,987 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They were amortized over 3 years to ~~purchase common~~September 1, 2019. During the three months ended September 30, 2019, the Company recorded approximately $17,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $12,000 of stock option expense and $5,000 of stock awards. During the three months ended September 30, 2018, the Company recorded approximately $25,000 of stock-based compensation expense in connection with ~~same vesting periods as~~ the ~~common~~foregoing equity awards including approximately $18,000 of stock option expense and ~~options~~$7,000 of stock awards.
During the three months ended September 30, 2019, the Company recorded approximately $9,000 of stock-based compensation expense to consultants in connection with the foregoing equity awards including approximately $6,000 of stock option expense and $3,000 of stock awards. During the three months ended September 30, 2018, the Company recorded approximately $13,000 of stock-based compensation expense to consultants in connection with the foregoing equity awards including approximately $10,000 of stock option expense and $3,000 of stock awards.
Purchase of Treasury Stock
On September 1, 2019, 58,394 restricted shares issued to Ms. ~~Ponugoti.~~Harness vested. The total ~~value~~taxable compensation to Ms. Harness for the 58,394 vested shares was approximately $1,222, based upon the closing stock price on August 31, 2019 of $0.13 a share. The Company issued 48,775 common shares (net share issuance amount), to Ms. Harness. The remaining 9,619 shares of common stock were withheld from Ms. Harness for the ~~5,000~~payment of payroll taxes to the Federal and State taxing authorities and these shares ~~and 5,000 options were approximately $2,000 each, based~~withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
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Table of Contents
On September 1, 2019, 1,066,667 restricted shares issued to Dr. Bertolino vested. The total taxable compensation to Dr. Bertolino for the 1,066,667 vested shares was approximately $53,545, based upon the closing ~~bid~~stock price on August 30, 2019 of $0.13 a share. The Company issued 645,056 common shares (net share issuance amount), to Dr. Bertolino. The remaining 421,611 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 ~~quoted~~treasury stock, at cost, on the ~~OTC~~Company’s accompanying balance sheets.
On September 1, 2018, 38,930 restricted shares issued to Ms. Harness vested. The total taxable compensation to Ms. Harness for the 38,930 vested shares was approximately $3,690, based upon the closing stock price on August 31, 2018 of $0.40 a share. The Company issued 29,658 common shares (net share issuance amount), to Ms. Harness. The remaining 9,272 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 ~~$0.40 per share. During~~cost, on the ~~three months and six months ended December~~Company’s accompanying balance sheets.
On September 1, 2018, 533,334 restricted shares issued to Dr. Bertolino vested. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was approximately $87,140, based upon the closing stock price on August 31, 2018 of $0.40 a share. The Company issued 314,387 common shares (net share issuance amount), to Dr. Bertolino. The remaining 218,946 shares of common stock were withheld from Dr. Bertolino for the ~~stock-based compensation expense was not significant.~~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.
There were 659,448 shares and 228,218 shares of treasury stock outstanding, purchased at a total cumulative cost of $146,000 and $91,000 as of September 30, 2019 and June 30, 2019, respectively.

Restricted Stock Awards Outstanding

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

Weighted

Average

Weighted

Grant

Average

Number of

Date Fair

Number of

Grant Date

Shares

Value

Shares

Fair Value

Total awards outstanding at June 30, 2018

1,208,157

$ 0.72

1,208,157

$ 0.72

Total shares granted

1,130,061

$ 0.40

1,130,061

$ 0.40

Total shares vested

(584,763 )

$ 0.72

(597,263 )

$ 0.72

Total shares forfeited

-

$ -

(11,667 )

$ 0.76

Total unvested shares outstanding at December 31, 2018

1,753,455

$ 0.51

Total unvested shares outstanding at June 30, 2019

1,729,288

$ 0.51

Total shares granted

1,125,061

$ 0.13

Total shares vested

(1,125,061 )

$ 0.57

Total shares forfeited

-

$ -

Total unvested shares outstanding at September 30, 2019

1,729,288

$ 0.23

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Table of Contents

Scheduled vesting for outstanding restricted stock awards at ~~December 31, 2018~~September 30, 2019 is as follows:

Year Ending June 30,

2019

2020

2021

2022

Total

Scheduled vesting

15,833

1,142,563

573,929

21,130

1,753,455

Year Ending June 30,

2020

2021

2022

2023

Total

Scheduled vesting

12,500

1,125,062

572,262

19,464

1,729,288

As of ~~December 31, 2018,~~September 30, 2019, there was approximately ~~$0.7~~$0.4 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately ~~$0.5~~$0.3 million of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of ~~1.29~~1.37 years.

Exercise of options

During the three months ended September 30, 2019 and ~~six months ended December 31,~~ 2018, ~~and 2017,~~ there were no stock options exercised.

Stock Warrants Outstanding

Warrants to Purchase ~~Preferred Stock~~5% convertible preferred stock (“Series B preferred stock”)

On October 5, 2018, the Company entered into a ~~securities purchase agreement (the “Securities~~Securities Purchase Agreement (“Securities Purchase Agreement”) with one multi-family office for the sale ~~of an aggregate~~ of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock ~~(the “Series~~(“Series B preferred stock”), for aggregate gross proceeds of approximately $2.0 million. Each share of preferred stock was initially sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance (later extended to 15 months following issuance), (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance.
15
~~Table of Contents~~
On May 9, 2019, the Company entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and warrants pursuant to which the Company issued an additional 100 shares of Series B preferred stock and Series 4 warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to $2.0 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. The Series 4 warrant entitles the holder thereof to purchase 2,500 shares of preferred stock at $982.50 per share for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance. In addition, the Company extended the termination date for the Series 1 warrants by six months, and agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock.

The warrants issued in connection with the Series B preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B preferred stock fair value (without the warrants)) with an offsetting discount to the Series B preferred stock. ~~There were 500~~
24
Table of Contents
Exercise of warrants
During the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019, the Company issued 2,780 shares of its Series 1B 5% convertible preferred stock, for aggregate gross proceeds of $2.73 million, upon exercise of 2,780 warrants ~~exercised~~issued by the Company in ~~November and December,~~October 2018. As of ~~December 31, 2018, 7,500~~June 30, 2019, Series ~~1-3~~1-4 warrants to purchase ~~7,500~~7,720 shares of Series B preferred stock were ~~outstanding~~outstanding.
During the three months ended September 30, 2019, the Company issued 1,045 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $1.0 million, upon exercise of 1,045 warrants. As of September 30, 2019, Series 1-4 warrants to purchase 6,675 shares of Series B preferred stock were outstanding. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds or other funds will be available when needed (see Note 1213. Equity Transactions to the ~~notes to the~~ condensed consolidated financial statements).

The following table summarizes the outstanding preferred stock warrants:

Warrants

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life (Years)

Aggregate
Intrinsic Value

Outstanding at June 30, 2018

-

$ -

-

$ -

Granted

8,000

982.50

1.37

Exercised

(500 )

982.50

0.66

Expired

-

-

-

Outstanding at December 31, 2018

7,500

$ 985.50

1.18

$ -

The following table summarizes the outstanding Series B preferred stock warrants:

Warrants

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life (Years)

Aggregate
Intrinsic Value

Outstanding at June 30, 2018

-

$ -

-

$ -

Granted

10,500

982.50

2.00

Exercised

(2,780 )

982.50

2.00

Expired

-

-

Outstanding at June 30, 2019

7,720

$ 985.50

1.21

$ 752,700

Granted

-

-

-

Exercised

(1,045 )

982.50

1.43

Expired

-

-

Outstanding at September30, 2019

6,675

$ 985.50

1.06

$ 650,813

Warrants to Purchase Common Stock
~~During the six months ended December 31, 2018 and 2017, there were no warrants issued to purchase common stock.~~

On June 28, 2018, the Company entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company ~~has~~ agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent. The Company issued to Aspire Capital warrants to purchase 8,000,000 shares of its common stock exercisable for 5 years at an exercise price of $0.38 per ~~share (see Note 11 to the notes to the condensed financial statements).~~share. The warrants were recorded within stockholders’ deficiency. The fair value of the warrants issued on June 28, 2018 was estimated on the date of issuance using the ~~Black Scholes~~Black-Scholes-Merton Model that uses assumptions noted in the following table. The value of the warrants issued was approximately $1.7 million.

~~Expected term (in years)~~
3
~~Expected stock price volatility~~
~~82.36~~ %
~~Risk-free interest rate~~
~~2.73~~ %
~~Expected dividend yield~~
0
The following table summarizes the outstanding common stock warrants:

Warrants

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life (Years)

Aggregate
Intrinsic Value

Outstanding at June 30, 2018

8,000,000

$ 0.38

5.0

$ -

Granted

-

-

-

Exercised

-

-

-

Expired

-

-

-

Outstanding at December 31, 2018

8.000.000

$ 0.38

4.5

$ -

Year Ended June 30,

2019

2018

Expected term (in years)

5 - 10

3

Expected stock price volatility

67.34% - 104.11%

82.36 %
Risk-free interest rate

2.51% - 2.86%

2.73 %
Expected dividend yield

0

0

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~~Note 11.~~The following table summarizes the outstanding common stock warrants:

Warrants

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life (Years)

Aggregate
Intrinsic Value

Outstanding at June 30, 2018

8,000,000

$ 0.38

5.0

$ -

Extended

-

-

-

Granted

-

-

-

Exercised

-

-

-

Expired

-

-

-

Outstanding at June 30, 2019

8,000,000

$ 0.38

4.0

$ -

Extended

-

-

-

Granted

-

-

-

Exercised

-

-

-

Expired

-

-

-

Outstanding at September 30, 2019

8,000,000

$ 0.38

4.0

$ -

As of September 30, 2019 and June 30, 2019, 8,000,000 warrants to purchase shares of the Company’s common stock exercisable for 5 years at an exercise price of $0.38 per share were outstanding.
13. Equity Transactions

~~Purchase of Treasury Stock~~Class B common stock

On ~~September 1, 2018, 38,930~~January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s ~~restricted stock vested~~Chairman and CEO (See Note 11. Convertible Note Payable to ~~Ms. Harness according to Ms. Harness’s employment agreement. The total taxable compensation to Ms. Harness for~~ the ~~38,930 vested shares was approximately $3,690, which is priced at the closing stock price on~~condensed consolidated financial statements). As of September ~~1, 2018 at $0.40 a share.~~
The Company issued 29,658 common shares (net share issuance amount), which was approximately 76% of the total vested common share amount of 38,930 common shares due to be issued to Ms. Harness. The remaining 9,27230, 2019 and June 30, 2019, 909,090 shares of Class B 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~~outstanding.
Series B 5% convertible preferred stock ~~at cost, on the Company’s accompanying balance sheets.~~purchase agreement

On ~~September 1,~~October 5, 2018, ~~533,334 shares of~~as modified on May 9, 2019 (see Warrant Restructuring and Additional Issuance Agreement as described below), 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 approximately $87,140, which is priced at the closing stock price on September 1, 2018 at $0.40 a share.
~~The~~ Company issued 314,387 common shares (net share issuance amount), which was approximately 59% of the total vested common share amount of 533,334 common shares due to be issued to Dr. Bertolino. The remaining 218,946 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.
There were 228,218 shares and 0 shares of treasury stock outstanding at December 31, 2018 and June 30, 2018, respectively, purchased at a total cumulative cost of $90,830 and $0 at December 31, 2018 and June 30, 2018, respectively.
~~Securities Purchase Agreement Dated June 28, 2018~~
~~On June 28, 2018, we~~ entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company has agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent.
~~Pursuant to the~~ (“Securities Purchase Agreement, and in connection with Aspire Capital’s commitment to purchase additional securities from the Company, on June 28, 2018, the Company agreed to (i) sell to Aspire Capital 5,263,158 shares for a purchase price of $2.0 million and (ii) issue to Aspire Capital 2,736,842 shares of common stock and warrants to purchase 8,000,000 shares of common stock, with such warrants having an exercise price equal to $0.38 per share (the “Commitment Fee”). The Securities Purchase Agreement provides for the sale of up to an additional $5.0 million of the Company’s common stock to Aspire Capital upon the achievement of certain milestones by September 30, 2018, which were not achieved by the Company.
The total commitment fee of $2.7 million was allocated to the $2 million offering first based on historical price discounts that Aspire Capital has received and the balance of the commitment fee was allocated to the $5 million of potential future milestone funding from Aspire Capital. The portion of the commitment fee allocated to the $2 million of initial proceeds was approximately $0.5 million and was effectively netted against the $2 million of initial proceeds, resulting in a discounted purchase price of $0.29 per share. The remaining $2.2 million of the commitment fee was allocated to the future milestone funding and was fully expensed under Other Expenses as of June, 30, 2018. As of December 31, 2018, the $5 million of milestone funding was not received and expired.
~~$30 million Class A Common Stock Purchase Agreement with Aspire Capital~~
On September 6, 2017, the Company entered into the Purchase Agreement with Aspire Capital, which replaced the prior 2015 $30 million Aspire Capital stock purchase agreement and provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Stock Purchase Agreement. The Company issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The commitment fee of approximately $215,000 is amortized pro-rata as the funding is received. The amortized amount of the commitment fee of $55,000 was recorded to additional paid-in capital for the year ended June 30, 2018. The remaining $159,000 of the unamortized portion of the commitment fee was carried on the balance sheet as deferred offering costs and was fully expensed on December 31, 2018. The Company registered the sale of all shares that Aspire Capital will purchase under this common stock purchase agreement. To the extent Aspire Capital purchases shares under this Purchase Agreement and subsequently sells those shares purchased, the other holders of shares of our Class A common stock may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A common stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we might otherwise wish to effect sales.
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During the period from September 6, 2017 to June 30, 2018, the Company generated proceeds of approximately $7.7 million under the 2017 agreement with Aspire Capital from the sale of approximately 16.7 million shares of its common stock. During the six months ended December 31, 2018, we did not have any financing from the 2017 agreement with Aspire Capital, the available balance under the new equity line agreement was 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. See Note 2 to the notes to the condensed financial statements- Going Concern and Liquidity.
On March 30, 2015, the Company entered into its prior common stock purchase agreement with Aspire Capital, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the 2015 purchase agreement. In consideration for entering into this stock purchase agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 was amortized as the funding was received. The unamortized portion of deferred offering costs from this stock purchase agreement of $227,000 was recorded to additional paid-in capital in September 2017, since the Company entered into a new $30 million common stock purchase agreement with Aspire Capital, to replace this prior $30 million 2015 Aspire Capital agreement, on September 6, 2017. During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under this 2015 agreement with Aspire Capital, from the sale of approximately 2.6 million shares of its common stock.
~~Note 12. Series B 5% convertible preferred stock~~
~~On October 5, 2018, the Company entered into a securities purchase agreement (the “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 ~~(the~~( “Series B preferred stock” or “preferred stock”), for aggregate gross proceeds of approximately $2.0 million. An initial closing for the sale of 1,250 shares of the Series B preferred stock closed on October 9, 2018, and a second closing for the sale of 750 shares of the Series B preferred stock closed on October 12, 2018. Under the Securities Purchase Agreement, the Company also issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock.

The Series B preferred stock is mandatorily redeemable under certain circumstances and, as such, is presented as a liability on the 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 ~~BCF.~~beneficial conversion feature (“BCF”). The fair value of the Series B 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~~in accordance with ASC ~~480-10-35-5).~~480-10-35-5.

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

The Company recorded the October 9, 2018 issuance of 1,250 shares Series B Preferred Stock at approximately $0.7 million and the underlying Series 1, Series 2 and Series 3 warrants at approximately $0.5 million in total by allocating the gross proceeds to Series B preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.2 million associated with the issuance of the 1,250 shares of Series B preferred stock to additional paid-in capital. The Company then recorded interest of approximately $1.2 million for the BCF and warrant discounts as a first day interest given that the Series B preferred shares can be converted at any time to common stock and given no set term.
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~~Table of Contents~~

The Company recorded the October 12, 2018 issuance of 750 shares Series B Preferred Stock at approximately $0.4 million and the underlying Series 1, Series 2 and Series 3 warrants at approximately $0.3 million in total by allocating the gross proceeds to Series B preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $0.7 million associated with the issuance of the 750 shares of Series B preferred stock to additional paid-in capital. The Company then recorded interest of approximately $0.7 million for the BCF and warrant discounts as a first day interest given that Series B preferred shares can be converted at any time to common stock and given no set term.

The issuance costs associated with the Series B preferred stock transaction were attributed to the Series B preferred stock (without the warrants) and to the Series 1, Series 2 and Series 3 warrants based on their relative fair values. The issuance costs attributed to the warrants of $32,000 were reflected as a reduction to additional paid-in capital. The issuances costs associated with the Series B preferred stock liability of $41,000 was recorded immediately as an element of interest cost, which are reflected in interest expense - preferred stock. The Company recognized change in fair value of ~~the total Series B~~ preferred stock ~~was not significant during~~liabilities of $102,000 and $0 under Other (income) expense in the ~~quarter~~accompanying consolidated Statements of Operations for the three months ended ~~December 31,~~September 30, 2019 and 2018, ~~which is reflected in interest expense—preferred stock liability.~~respectively.

Underlying Series B preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B preferred stock) on a daily basis given fixed dividend terms under the Series B preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B preferred stock at ~~December 31, 2018~~September 30, 2019 and ~~the~~June 30, 2019
The total dividends ~~accrued~~ of ~~$17,000~~approximately $42,000 are treated as interest during the ~~quarter~~period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019. The approximately $17,000 dividends was paid by issuance of Series B preferred stocks, so the remaining accrued dividends of $25,000 was recorded under Preferred stock liability as of June 30, 2019 and was paid by issuance of Series B preferred stocks subsequent to the balance sheet date.
The total dividends of approximately $20,000 are treated as interest expense – preferred stock during the three months ended ~~December 31, 2018.~~September 30, 2019. The approximately $24,000 of the Series B preferred stock dividends was paid by issuance of Series B preferred stocks, so the remaining accrued dividends of $21,000 was included at Preferred stock liability as of September 30, 2019.
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Table of Contents

Terms of the Preferred Stock

The rights and preferences of the preferred stock are set forth in a Certificate of Designation of Preferences, Rights and Limitations of Series B 5% Convertible Preferred Stock filed with the Nevada Secretary of State on October 5, 2018 (the “Certificate of Designation”). Each share of preferred stock has an initial stated value of $1,080 and may be converted at any time at the holder’s option into shares of the Company’s common stock at a conversion price equal of the lower of (i) $0.32 per share and (ii) 85% of the lowest volume weighted average price of the Company’s common stock on a trading day during the ten trading days prior to and ending on, and including, the conversion date. The conversion price may be adjusted following certain triggering events and subsequent equity sales and is subject to appropriate adjustment in the event of stock splits, stock dividends, recapitalization or similar events affecting the Company’s common stock.

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

Redemption Rights

Following 30 days after the initial closing, the Company may elect to redeem the preferred stock for 120% of the aggregate stated value then outstanding, plus all accrued but unpaid dividends and all liquidated damages and other amounts due in respect of the preferred stock. The Company’s right to redeem the preferred stock is contingent upon it having complied with a number of conditions, including compliance with its obligations under the Certificate of Designation. Shares of preferred stock generally have no voting rights, except as required by law and except that the Company shall not take certain actions without the consent of the holders of the preferred stock.

Warrants

Each share of preferred stock was initially sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance (later extended to 15 months following issuance), (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance. On May 9, 2019, the Company entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and warrants pursuant to which the Company issued an additional 100 shares of Series B preferred stock and Series 4 warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to $2.0 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. The Series 4 warrant entitles the holder thereof to purchase 2,500 shares of preferred stock at $982.50 per share for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance. In addition, the Company extended the termination date for the Series 1 warrants by six months, and agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock, all 400 shares of which had been issued as of September 30, 2019.

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~~Subject~~The Series B Preferred shareholders’ warrants held were modified on May 9, 2019 (see Warrant Restructuring and Additional Issuance Agreement described below). Pursuant to ~~the satisfaction of certain circumstances,~~this warrant restructuring agreement, the Company had the option to compel ~~the holders~~these shareholders to exercise each month up to ~~$250,000~~$400,000 of ~~the~~their Series 1 warrants. These warrant holders exercised a total of approximately $2.5 million of their Series 1 to 4 warrants, 30 days after the initial closing of the sale of the preferred stock. On November 2, 2018, the Company notified the holders of the warrants of the Company’s election to compel the exercise of $245,625 of warrants, which exercise closed on or about November 12, 2018.starting from May 2019 through September 2019. In addition, subject to the satisfaction of certain circumstances, the Company may call for cancellation any or all of the warrants following 90 days after their issuance, for a payment in cash equal to 8% of the aggregate exercise price of the warrants being called. The warrants subject to any such call notice will be cancelled 30 days following the Company’s payment of the call fee, provided that the warrant holders have not exercised the warrants prior to cancellation.

~~Exercise of warrants~~
On November 12, 2018, the Company issued 250 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $245,625, upon exercise of warrants issued by the Company in October 2018. The exercise of the warrants was pursuant to a provision in the warrants that permitted the Company to compel the warrant holders to exercise up to $250,000 of the warrants 30 days after the initial closing of the sale of the preferred stock.
On November 28, 2018, the Company issued 100 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $98,125, upon exercise of warrants issued by the Company in October 2018.
On December 11, 2018, the Company issued 50 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $49,125, upon exercise of warrants issued by the Company in October 2018.
On December 17, 2018, the Company issued 100 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $98,125, upon exercise of warrants issued by the Company in October 2018.
With regard to the exercise of these 500 warrants, the Company recorded gross proceeds of approximately $491,000, together with the value of the 500 warrants of approximately $21,000 (proportion of value exercised) to the preferred stock liability. As of December 31, 2018, 7,500 Series 1-3 warrants to purchase 7,500 shares of Series B preferred stock were outstanding.
Conversion of preferred stock to ~~Common~~common stock

~~In December, 2018, one~~During the year ended June 30, 2019, the two preferred ~~stockholder~~stockholders converted ~~all of its 1,300~~3,891 shares of Series B preferred stock into ~~12,734,258~~39.2 million shares of common stock; another preferred stockholder converted 10 shares of Series B preferred stock into 74,130 shares of common stock, with a total of 12,808,388 shares of common stock being issued upon conversion of the Series B preferred stock.
With regard to conversions, the Company reversed Series B preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately ~~$963,000~~$3,068,000 based on the proportion of Series B preferred stock converted relative to the original total issued.
As of ~~December 31, 2018, 1,190~~June 30, 2019, 1,096 shares of Series B 5% convertible preferred stock were outstanding.

During the three months ended September 30, 2019, the two preferred stockholders converted 890 shares of Series B preferred stock into 9.0 million shares of common stock. As of September 30, 2019, 1,584 shares of Series B 5% convertible preferred stock were outstanding.
Warrant Restructuring and Additional Issuance Agreement
On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (“Issuance Agreement”) with the Series B investors of its Series B preferred stock and warrants to purchase Series B preferred stock. Pursuant to the Issuance Agreement, the Series B investors have agreed, subject to the conditions set forth therein, to exercise existing warrants to purchase 500 shares of preferred stock and to amend the existing warrants to permit the Company to compel the exercise of up to $400,000 of existing warrants each calendar month commencing June 3, 2019 and ending November 1, 2019, or, if earlier, until the aggregate amount of the forced exercises is $2,000,000. As consideration for the Series B investors entering into the Issuance Agreement, the Company has issued 100 shares of preferred stock and warrants to purchase 2,500 shares of preferred stock (“Series 4 warrants”) to the Series B investors. In addition, the Company extended the termination date for the Series 1 warrants issued in October 2018 by six months, and has agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock, all 400 shares of which had been issued as of September 30, 2019.
The warrants were modified in accordance with ASC 470-50 and, as a result, immediately prior to the modification, the Company recognized a loss of approximately $63,000 to change in fair value of preferred stock liabilities under Other (income) expense in the accompanying consolidated Statements of Operations.
Subsequent to the modification, the Company recognized an expense of approximately $294,000 due to the above modification of Series B preferred stock terms in the accompanying consolidated statements of operations

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Table of Contents

~~Note 13. Fair Value Measurement~~
~~The Company has elected to measure its preferred stock using the fair value method.~~ The fair value of the Series B convertible preferred stock is measured in accordance with ASC 820 “Fair Value Measurement,” using “Monte Carlo simulation” modeling, incorporating 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:~~following inputs:

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

June 30,
2019

May 9,
2019

Expected dividend yield

0.00 %

0.00 %
Expected stock-price volatility

54.5 %

51.9 %
Risk-free interest rate

2.18 %

2.43 %
Expected term of warrants (years)

0.1

0.25

Stock price

$ 535.12

$ 535.12

Exercise price

$ 982.50

$ 982.50

~~The three levels of valuation hierarchy are defined as follows:~~14. Fair Value Measurement
●
~~Level 1: Observable inputs such as quoted prices in active markets;~~
●
~~Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and~~
●
~~Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.~~

The Company has elected to measure its preferred stock using the fair value method. The fair value of the preferred stock is the estimated amount that would be paid to redeem the liability in an orderly transaction between market participants at the measurement date. The Company calculates the fair value of the Series B 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.

The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 preferred stock liability balance for the ~~year ended December 31, 2018.~~period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019 and September 30, 2019.

2018

Balance, beginning of period

$ —

Issuance of preferred stock at fair value

1,116,000

Issuance of preferred stock by exercise of 500 warrants

491,000

Conversion of preferred stock to common stock

(963,000 )
Value of the 500 warrants exercise

20,000

Change in fair value of preferred stock (1)

(-
)
5% dividend

17,000

Balance, end of period

$ 681,000

Series B 5% convertible preferred stock liability

Balance, July 1, 2018

$ —

Issuance of preferred stock at fair value

1,116,000

Issuance of preferred stock by exercise of warrants

2,895,000

Conversion of preferred stock to common stock

(3,068,000 )
Change in fair value of preferred stock due to modification of terms

(357,000 )
Issuance of 100 shares valued at $535.12 per share Series B Preferred Stock per May 2019 Modification

54,000

Contingent consideration of 400 extra shares

214,000

5% accrued dividend (1)

25,000

Balance, June 30, 2019

$ 879,000

Issuance of preferred stock through accrued dividend, valued at fair value

12,000

Issuance of preferred stock by exercise of warrants

559,000

Conversion of preferred stock to common stock

(476,000 )
Change in fair value of preferred stock due to modification of terms

(102,000 )
5% accrued dividend (1)

20,000

Settlement of accrued dividend by issuance of PS

(24,000 )
Balance, September 30, 2019

$ 868,000

(1)
~~Change in fair value of preferred stock~~The 5% accrued dividend is reported in interest expense—preferred stock.
The total dividends of approximately $20,000 are treated as interest expense – preferred stock during the three months ended September 30, 2019. The approximately $24,000 of the Series B preferred stock dividends was paid by issuance of Series B preferred stocks, so the remaining accrued dividends of $21,000 was included at Preferred stock liability as of September 30, 2019.

~~Note 14. Subsequent Events~~
On January 7, 2019, Arthur P. Bertolino, MD, PhD, MBA, the Company’s President and Chief Medical Officer, joined the Board of Directors. The Company is currently exploring options for further Board additions in preparation for late-stage clinical trials and ongoing portfolio development.
On January 29, 2019, Leo Ehrlich, the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 Class B shares at the option exercise price of $0.11.
From January 1, 2019 to February 5, 2019, the Company issued 275 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of approximately $270,000, upon exercise of 275 warrants issued by the Company in January 2019. In addition, there were 215 preferred stock being converted to 3,127,300 common stock.
Subsequent to the balance sheet date, the Company is establishing a wholly-owned European subsidiary for the purpose of the development of its drug candidates internationally. The subsidiary will serve as a key hub for strategic collaboration with European companies and medical communities in addition to providing cost-saving efficiencies and flexibility with respect to developing Brilacidin under European Medicines Agency standards.

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

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

Management’s Plan of Operation

Overview

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

Recent Developments

On ~~January 7,~~May 1, 2019, ~~Arthur P. Bertolino, MD, PhD, MBA,~~ the ~~Company’s President~~Company announced receipt of End-of-Phase 2 Meeting Minutes from the Food and ~~Chief Medical Officer, joined~~Drug Administration (FDA) to align its Phase 3 oral rinse Brilacidin program for the ~~Board~~prevention of ~~Directors. The Company is currently exploring options for further Board additions~~severe OM in ~~preparation for late-stage clinical trials and ongoing portfolio development.~~HNC patients receiving chemoradiation.

On ~~January 29,~~June 6, 2019, ~~Leo Ehrlich, the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by~~ the Company announced initiation, in partnership with BDD Pharma, of oral development of Brilacidin in tablet form, utilizing BDD Pharma’s patented OralogiK™ tablet technology, which employs controlled erosion of a time-dependent barrier layer during small intestine transit to ~~satisfy the exercise price for the purchase of 909,090 Class B shares~~provide effective colon targeting.
In June 2019, a scientific abstract presented at the ~~option exercise price~~European Hematological Association (EHA) 2019 Annual Meeting was published—”Kevetrin Dampens MYC Expression and Cellular Metabolism in Acute Myeloid Leukemia”—in collaboration with independent cancer researchers.
On July 18, 2019, the Company entered into a license agreement with Alfasigma S.p.A. (“Alfasigma”), an Italy-based global pharmaceutical company, for worldwide rights to develop Brilacidin for localized treatment of ~~$0.11.~~ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS).
On September 20, 2019, the Company amended its Articles of Incorporation to increase the number of authorized shares of Class A common stock from 300 million to 600 million, following stockholder approval.

Business Development and Licensing

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

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In July 2019, the Company entered into a license agreement with Alfasigma, granting Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for UP/UPS. Under the terms of the license agreement, Alfasigma made an initial payment to the Company and will make additional payments of up to $24.0 million to the Company based upon the achievement of certain milestones, including a $1.0 million payment due following commencement of the first phase III clinical trial of Brilacidin for UP/UPS and an additional $1.0 million payment upon the filing of a marketing approval application with the U.S. Food and Drug Administration or the European Medicines Agency. In addition, 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. Alfasigma is obligated to use commercially reasonable efforts (as defined in the license agreement) to develop, manufacture and commercialize Brilacidin for UP/UPS, and to achieve specified developmental milestones. Alfasigma will be solely responsible for all costs and expenses associated with developing, manufacturing and commercializing Brilacidin for UP/UPS. The license agreement also provides Alfasigma with a right of first refusal for Brilacidin for the treatment of more extensive forms of inflammatory bowel disease (IBD), such as ulcerative colitis and Crohn’s disease, and a right of first negotiation for Brilacidin in other gastrointestinal indications.
Active Clinical Development Programs

Compound
Target/Indication
Clinical Status
Brilacidin
Oral Mucositis
Phase 2 Study (completed)/
Phase 3 in preparation

Inflammatory Bowel Disease
Phase 2 Proof of Concept Study (completed)
Phase 1 Safety/toleration/PK of oral dosage form in preparation

ABSSSI (Acute Bacterial Skin and Skin Structure Infection)
Phase 2 (completed)
Kevetrin
Ovarian Cancer
Phase 2 Study (completed)

We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Milestone payments from our licensee are also dependent on clinical/regulatory milestones. We are actively engaged in business development for partnering our drug for IBD and OM. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety or efficacy issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate for several years, if ever.
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The Company devotes most of its efforts and resources on its compounds Brilacidin and Kevetrin, which are in clinical development. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process which include: (i) design and oversight of clinical trials; (ii) development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) interactions with regulatory authorities domestically and internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required for a promising compound to be identified and brought into clinical trials.

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Set forth below is an overview our most recent research and development efforts on Brilacidin and Kevetrin ~~during fiscal 2019 and~~ through the date of this Quarterly Report on Form 10-Q:

Brilacidin

Two trials of topical Brilacidin have been completed: a double-blind Phase 2 clinical trial of ~~Brilacidin-OM~~Brilacidin for the treatment of Oral Mucositis (OM); and an open-label Phase 2 Proof-of-Concept (P-o-C) trial of Brilacidin for the treatment of Ulcerative Proctitis/Proctosigmoiditis (UP/UPS), two types of Inflammatory Bowel ~~Diseases~~Disease (IBD). Appropriate regulatory and other activities aimed at moving the programs forward into further clinical testing are currently underway.

Topical Administration (Oral Mucositis/IBD)

Oral Mucositis (OM) study— In this randomized, double-blind Phase 2 study of Brilacidin for the prevention and control of OM in patients receiving chemoradiation for treatment of Head and Neck Cancer (HNC), analysis of patients who received at least 55 Gy cumulative units of radiation showed that Brilacidin markedly reduced the rate of severe OM (WHO Grade ≥ 3), delayed onset of severe OM and decreased duration of severe OM. The Company made available, in a blog published on its website, a comparative data table (based on public information) showing Brilacidin compares favorably to other compounds in development for preventing and treating severe OM. The Company and the U.S. Food and Drug Administration (FDA) have completed an End-of-Phase 2 meeting concerning the continuing development of Brilacidin oral rinse to decrease the incidence of severe OM in HNC patients receiving chemoradiation. Both parties agreed to an acceptable Brilacidin Phase 3 development pathway, including studying Brilacidin oral rinse effects on severe OM when cisplatin, the preferred chemotherapy regimen in HNC care, is administered in higher concentrations (80-100 mg/m²)m2) every 21 days, and at lower concentrations (30-40 mg/m²)m2) administered weekly as part of the chemoradiation regimen.

IBD (UP/UPS) study — —(see Note 7. Exclusive License Agreement to the condensed consolidated financial statements). This Phase 2a trial comprises three sequential cohorts, with progressive dose escalation by cohort—cohort A (6 patients) - 50 mg, cohort B (6 patients) - 100 mg, and cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The primary efficacy endpoint of clinical remission (accounting for stool frequency, rectal bleeding and endoscopy findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient quality of life (as assessed by the short inflammatory bowel disease questionnaire, or SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. To obtain maximum value of the Brilacidin-IBD asset, the Company plans to develop the drug candidate as an oral dose (pill or tablet). The Company has completed early testing evaluating the stability of Brilacidin in simulated gastric fluid—a synthetic form of the fluid found in the stomach. Results showed very minimal degradation of Brilacidin across 4 hours, suggesting a simple formulation of Brilacidin likely would not be subject to rapid breakdown once in the stomach. This finding should enable initial clinical testing with a simple formulation of the drug candidate delivered to the gut while a more elegant, tailored oral dosage form of Brilacidin is developed and refined, in parallel. Planned next steps in the development of Brilacidin for oral delivery include initial clinical testing of a radio (gamma) isotope labeled Brilacidin oral formulation in healthy volunteers to assess targeting, dispersion, safety, toleration, and ~~toleration,~~ the pharmacokinetic ~~profile and effects on the gut’s microbiome. Clinical~~profile. Following multidose testing, clinical trials in IBD including Ulcerative Colitis, ~~and~~then Crohn’s Disease, would then ~~follow.~~be planned.
Ulcerative Colitis (UC) — Brilacidin is also being developed as a treatment in more extensive forms of IBD, with formulation development plans including oral tablets first aimed for the treatment of ulcerative colitis and then Crohn’s disease. The Company has partnered with BDD Pharma for oral development of Brilacidin in tablet form. Initial formulation is underway utilizing BDD Pharma’s patented OralogiK™ tablet technology to achieve selective delivery of Brilacidin to the colon. A first-in-human safety/toleration/PK clinical single-dose escalation trial is anticipated to be conducted later this year to be followed by multidose testing. If an adequate profile is achieved, a placebo-controlled Phase 2 trial in UC patients would be targeted to begin in the second half of calendar year 2020. We aim to design this patient clinical trial to firmly anchor proof-of-concept for treatment of ulcerative colitis towards attracting a partnership deal.

As stated above, we see significant opportunities in treating Oral Mucositis and IBD with Brilacidin. These data also suggest that other inflammatory conditions including various dermatology disorders and conditions may, likewise, be treated locally and efficaciously with Brilacidin.
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ABSSSI

In February 2016, the Company submitted a Special Protocol Assessment (SPA) request, along with a final protocol, to the FDA, for a Phase 3 clinical trial of Brilacidin for the treatment of Acute Bacterial Skin and Skin Structure Infection (ABSSSI) caused by gram-positive bacteria, including methicillin-resistant Staphylococcus aureus (MRSA). We received from the FDA comments and considerations for incorporation into our study design. Management decided to delay its response to FDA due to the low price per share of our common stock and the approximately $30 million costs required for this ~~study, the financing of which would likely result in significant dilution to our shareholders.~~study. Our strategy, for now, is to achieve success with other trials and attract partnering opportunities that may provide significant upfront payments and milestone payments, which can then be used to fund the ABSSSI program. Although we recognize significant generic competition for treating ABSSSI, pharmaceutical industry and governmental interest is re-emerging to develop novel anti-infectives given growing bacterial resistance to current antibiotics, thereby supporting the potential value of Brilacidin in treating infectious disease. We ~~also~~ see ABSSSI as the appropriate gateway indication in infectious diseases, enabling potential further studies of Brilacidin’s use for implant coating and biofilm infections.

Expenditures on Brilacidin were approximately ~~$1.1~~$0.2 million and ~~$1.2~~$0.4 million during the ~~six months~~quarter ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ respectively.
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Kevetrin

The Company has completed a Phase 2a trial of Kevetrin in treating late-stage Ovarian Cancer. The main objective of the trial focused on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. The study was successful in demonstrating modulation of p53 directly in ovarian cancer tumor tissue in patients. ~~We are currently focused on development of an oral formulation of Kevetrin for treating cancer.~~ Pharmacokinetic data collected on Kevetrin during the ~~initial~~ Phase 1 clinical trial ~~demonstrates~~demonstrated that the compound has a short half-life of approximately two hours. ~~Kevetrin’s~~This short half-life makes it a compelling candidate for an oral drug delivery treatment for the main purpose of allowing simple daily, or multiple-times daily administrations within or outside the hospital setting. Compared to injectable or intravenous treatments, oral therapy is the preferred drug delivery method of patients. Preliminary laboratory studies are encouraging and support the potential of developing an oral formulation, but there are no assurances made or implied that the Company will be successful in completing development of an oral formulation. Toxicology studies for the oral formulation of Kevetrin are approximately half completed, with the remainder of this work ~~now prioritized as~~to be completed when the Company secures additional financial resources. Next steps in the development of Kevetrin include: completing bridging toxicology work for an oral formulation; developing the oral formulation (pill or tablet); requesting an FDA meeting to discuss trial results to date and the design of future trials; and performing a dosing safety study in healthy volunteers once the oral formulation has been developed. Once completed, these steps would likely quickly lead ~~directly~~ to Phase 2 testing of oral Kevetrin in both solid tumors and leukemias, with ovarian cancer likely continuing to be the lead indication.

Expenditures on Kevetrin were ~~approximately $0.1 million and $0.3 million~~insignificant during the ~~six months~~both quarters ended ~~December 31, 2018~~September 30, 2019 and ~~2017, respectively.~~2018.

~~Prurisol (discontinued)~~We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Developing pharmaceutical products, however, is a lengthy and very expensive process. Assuming we do not encounter any unforeseen safety or efficacy issues during the course of developing our product candidates, we do not expect to complete the development of a product candidate for several years, if ever.

The Company has terminated its Prurisol program for treating moderate to severe plaque psoriasis. On December 14, 2018, the Company completed its review of preliminary topline results for its Phase 2b clinical trial of oral Prurisol in moderate-to-severe chronic plaque psoriasis. Prurisol did not meet the primary endpoint in either treatment arm (300mg and 400mg) assessed as a measure of efficacy (active versus control) using the Psoriasis Area and Severity Index (PASI) scale—specifically, the proportion of subjects achieving at least a 75 percent reduction from baseline in PASI score (PASI75) at Week 12.
While additional analysis of the Prurisol data is planned, based on these trial results, the Company discontinued the Prurisol psoriasis program and will focus development efforts on advancing its other clinical assets, Kevetrin and Brilacidin, both of which have shown therapeutic potential in treating multiple indications.
~~As of December 31, 2018, the Company has recorded an impairment expense for all Prurisol capitalized expenditures in the amount of $0.2 million.~~
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Going Concern

We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. ~~At December 31, 2018,~~As of September 30, 2019, the Company’s cash amounted to ~~$0.7~~$0.9 million and as of the date of this report, the Company’s current cash amounted to approximately $0.3 million, and current liabilities amounted to ~~$8.0~~$7.5 million, of which ~~$6.7~~$3.5 million were payables to related parties with no immediate payment ~~terms.~~terms and $2.9 million was payable to one shareholder who is our former director and officer of the Company (see Note 10. Related Party Transactions and Note 11. Convertible Note Payable - Related Party to the condensed consolidated financial statements). The ~~Company~~Company’s only revenue during the three months ended September 30, 2019 is ~~a development stage pharmaceutical company that has~~$0.4 million under the terms of the License Agreement with Alfasigma (see Note 7. Exclusive License Agreement to the condensed consolidated financial statements). We have no product sales as ~~it does~~we do not have any products in the market and will continue to not have ~~any~~significant revenues until ~~it begins~~we begin to market ~~its~~our products after ~~it has~~we have obtained the necessary 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 ~~$13.5~~$11.5 million for the next twelve months, raise doubt about its ability to continue as a going ~~concern.~~concern for the next 12 months. If we are not able to continue as a going concern, it is likely that holders of our common stock will lose all of their investment. Our ~~condensed~~ financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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~~Table of Contents~~

To continue as a going concern, we must secure additional funding to support our current operating ~~plan in the fiscal quarter ended March 31, 2019.~~plan. The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships), such as the license agreement with Alfasigma, and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our accompanying condensed consolidated financial statements, which have been prepared in conformity with U.S. GAAP, and which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. Our actual results could differ significantly from these estimates under different assumptions or conditions.

Please see Note 3 of the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the summary of significant accounting policies. In addition, please see Part II, Item 7, “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended June 30, ~~2018.~~2019. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended June 30, ~~2018.~~2019.

Recently Issued Accounting Pronouncements

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

We expect to incur losses from operations for the next few years. We expect to incur increasing research and development expenses, including expenses related to additional clinical trials for our proprietary programs. We expect that our general and administrative expenses will also increase in the future as we expand our business development, by adding employees, consultants, additional infrastructure and incurring other additional costs. Based upon our expected rate of expenditures over the next ~~twelve~~12 months, ~~and beyond,~~ we ~~will need~~expect to raise additional ~~working~~ capital through, among other things, the sale of equity or debt securities to meet all of our anticipated ~~clinical trial~~ obligations for our current operations through our fiscal year end of June 30, 2020. However, continuing operations for the next 12 months from the date of this filing is very much dependent upon our ability to raise equity from existing or new financing sources. There can be no assurance as to the availability or terms upon which such financing and ~~other working~~ capital ~~requirements.~~might be available.

For the three months ended ~~December 31,~~September 30, 2019 and 2018 ~~and 2017~~

Revenue

We generated no revenue ~~and incurred operating expenses~~ of ~~approximately $2.0~~$0.4 million and ~~$4.5~~$0 million for the three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017,~~ respectively. Revenue during the three months ended September 30, 2019 represented the initial non-refundable payment from the exclusive license agreement signed with Alfasigma S.p.A., a global pharmaceutical company (see Note 7. Exclusive License Agreement to the condensed consolidated financial statements).

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We incurred operating expenses of approximately $1.3 million and $2.0 million for the three months ended September 30, 2019 and 2018, 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 ~~for the three months ended December 31, 2018 and 2017, respectively~~ (rounded to nearest thousand):

For the three months ended

Change

For the three months ended

Change

December 31,

2019 vs. 2018

September 30,

2019 vs. 2018

2018

2017

$

%

2019

2018

$

%

Clinical studies and development research

$ 797,000

$ 2,341,000

(1,544,000 )

-66
%

$ 290,000

$ 617,000

(327,000 )

(53 )%
Officers’ payroll and payroll tax expenses related to R&D Department

113,000

223,000

(110,000 )

-49
%

114,000

233,000

(119,000 )

(51 )%
Employees payroll and payroll tax expenses related to R&D Department

111,000

262,000

(151,000 )

-58
%

70,000

184,000

(114,000 )

(62 )%
Stock-based compensation - officers

226,000

989,000

(763,000 )

-77
%

189,000

172,000

17,000

10 %
Stock-based compensation - employees

49,000

42,000

7,000

17 %

38,000

44,000

(6,000 )

(14 )%
Stock-based compensation - consultants

12,000

-

12,000

-
%

9,000

13,000

(4,000 )

(31 )%
Depreciation and amortization expenses

91,000

106,000

(15,000 )

-14
%

93,000

94,000

(1,000 )

(1 )%
Total

$ 1,399,000

$ 3,963,000

(2,564,000 )

-65
%

$ 803,000

$ 1,357,000

(554,000 )

(41 )%

Research and development expenses for proprietary programs decreased during the three months ended ~~December 31, 2018~~September 30, 2019 primarily due to less spending on our programs. Clinical studies and development expenses may decrease in future reporting periods depending on the Company’s current and future financial liquidity.

Officers’ payroll decreased ~~due to a reduction in salary of~~during the three months ended September 30, 2019 because the Company’s President of Research ~~from July~~resigned in September 2018, which led to ~~December, 2018. The officer formally resigned from his officer position [on~~the decrease in officers’ payroll during the quarter ended September ~~18, 2018] and as a director of the Company on December 11, 2018.~~30, 2019.
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Employees payroll and payroll tax expenses decreased during the three months ended ~~December 31, 2018~~September 30, 2019 related to fewer employees engaged in preclinical development, ~~after December 31, 2017,~~ which led to the decrease in employees’ payroll during the quarter ended ~~December 31, 2018.~~September 30, 2019.

~~Stock- based~~Stock-based compensation - officers increased during the three months ended September 30, 2019 primarily because of lower stock-based compensation expense for an award granted to our President and Chief Medical Officer on September 1, 2018 compared to an award granted on September 1, 2019.
Stock-based compensation - employees decreased during the three months ended ~~December 31, 2018 primarily related to the decrease in the valuation of the annual stock-based compensation given to an officer~~September 30, 2019 due to ~~the decrease in the Company’s stock price.~~
~~Stock-based compensation- employee increased during the three months ended December 31, 2018 due to the increase vesting in the number~~valuation of stock awards ~~granted~~vesting being lower to employees during the quarter ended ~~December 31, 2018~~September 30, 2019 compared with the same period in ~~2017.~~2018.

Stock-based ~~compensation- consultant increased~~compensation - consultants decreased during the three months ended ~~December 31, 2018~~September 30, 2019 due to ~~one~~less stock ~~award was~~awards were granted to ~~a consultant~~consultants during the quarter ended ~~December 31,~~September 30, 2019 compared with the same period in 2018.

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. We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects when possible; however, many activities occurring simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on an individual program basis.

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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 ~~for the three months ended December 31, 2018 and 2017, respectively~~ (rounded to nearest thousand):

For the three months ended

Change

For the three months ended

Change

December 31,

2019 vs. 2018

September 30,

2019 vs. 2018

2018

2017

$

%

2019

2018

$

%

Insurance and health expense

$ 124,000

$ 109,000

15,000

14 %

$ 128,000

$ 131,000

(3,000 )

(2 )%
Rent and utility expense

61,000

65,000

(4,000 )

-6
%

59,000

61,000

(2,000 )

(3 )%
Other G&A

247,000

123,000

124,000

101 %

78,000

68,000

10,000

15 %
Total

$ 432,000

$ 297,000

135,000

45 %

$ 265,000

$ 260,000

5,000

2 %

General and administrative expenses increased during the three months ended ~~December 31, 2018~~September 30, 2019 primarily related to the increases in promotion, advertising and office expenses.
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Officers’ Payroll and Payroll Tax Expenses

Below is a summary of our Officers’ payroll and payroll tax expenses ~~for the three months ended December 31, 2018 and 2017, respectively~~ (rounded to nearest thousand):

Three months ended

Change

December 31,

2019 vs. 2018

2018

2017

$

%

Officers’ payroll and payroll tax expenses

$ 118,000

$ 130,000

(12,000 )

-9
%

Three months ended

Change

September 30,

2019 vs. 2018

2019

2018

$

%

Officers’ payroll and payroll tax expenses

$ 118,000

$ 123,000

(5,000 )

(2 )%

Officers’ payroll and payroll tax expenses for the Company ~~was~~slightly decreased during the three months ended December 31, 2018 and 2017. The Company recorded 10% of payroll and payroll tax expenses paid for Dr. Menon under Officers’ Payroll and Payroll Tax Expenses and recorded 90% of payroll paid to Dr. Menon under Research and Development Expense. The decrease in officers’ payroll and payroll tax expenses for the Company during the three ended December 31, 2018 and 2017 mainly because of the decrease in the10% of payroll and payroll tax expenses paid for 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.~~
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30, 2019.

Professional Fees

Below is a summary of our Professional fees ~~for the three months ended December 31, 2018 and 2017, respectively~~ (rounded to nearest thousand):

Three months ended

Change

December 31,

2019 vs. 2018

2018

2017

$

%

Audit, legal and professional fees

$ 45,000

78,000

(33,000 )

-42
%

Three months ended

Change

September 30,

2019 vs. 2018

2019

2018

$

%

Audit, legal and professional fees

$ 155,000

259,000

(104,000 )

(40 )%

Professional fees decreased during the three months ended ~~December 31, 2018~~September 30, 2019 primarily related to decrease in legal fees and other professional fees for less legal review of various contracts in ~~2018.~~2019.

Other Income (Expense)

Below is a summary of our other income (expense) ~~for the three months ended December 31, 2018 and 2017, respectively~~ (rounded to nearest thousand):

Three months ended

Change

December 31,

2019 vs. 2018

2018

2017

$

%

Other Income

$ 40,000

-

$ 40,000

-
%
Interest expense-debt

(50,000 )

(50,000 )

-

-
%
Interest expense-preferred stock liability

(1,975,000 )

-

(1,975,000 )

-
%
Other Income (Expense), net

$ (1,985,000 )

(50,000 )

(1,935,000 )

3,870 %

For the Three months ended

Change

September 30,

2019 vs. 2018

2019

2018

$

%

Interest expense – debt

(48,000 )

(51,000 )

(3,000 )

6 %
Interest expense – preferred stock liability

(20,000 )

-

20,000

-
%
Change in fair value – Series B preferred stock

102,000

-

(102,000 )

-
%
Impairment expense of operating lease

(643,000 )

-

643,000

-
%
Other Income (Expense), net

$ (609,000 )

$ (51,000 )

$ 558,000

(1,094 )%
There was a decrease in interest income of approximately $1,000 relating to the decrease in bank deposits.
There was a decrease in interest expenses paid on the note payable – related party, because the decrease in the note payable due to the Company’s Chairman and CEO since January 29, 2019 (see Note 11. Convertible Note Payable - Related Party to the condensed consolidated financial statements).

There was an increase in interest expense – preferred stock liability of approximately ~~$1,975,000~~20,000 relating to the ~~issuance of~~5% dividend accrued for the Series B preferred stock ~~that has been recorded as a liability on~~for the ~~accompanying balance sheets. There was no change in interest expenses paid on the note payable – related party (see Note 9 to the notes to the condensed financial statements).~~three months ended September 30, 2019. There was an increase in ~~other income~~change in value related to the Series B preferred stock (see Note 14. Fair Value Measurement to the condensed consolidated financial statements).
There was an increase in impairment expense of operating lease of approximately ~~$40,000 which represented~~$643,000, related to the ~~gain on disposal of lab equipment.~~operating lease right-of-use asset (see Note 8 – Operating Leases to the condensed consolidated financial statements).

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Table of Contents

Net Losses

We incurred net losses of ~~$4.0~~$1.6 million and ~~$4.5~~$2.1 million for the three months ended ~~December 31,~~September 30, 2019 and 2018, ~~and 2017, respectively because of the above-mentioned factors.~~
~~For the six months ended December 31, 2018 and 2017~~
~~Revenue~~
~~We generated no revenue and incurred operating expenses of approximately $4.0 million and $9.0 million for the six months ended December 31, 2018 and 2017, 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 for the six months ended December 31, 2018 and 2017, respectively (rounded to nearest thousand):

For the six months ended

Change

December 31,

2019 vs. 2018

2018

2017

$

%

Clinical studies and development research

$ 1,414,000

$ 5,124,000

(3,710,000 )

-72
%
Officers’ payroll and payroll tax expenses related to R&D Department

346,000

441,000

(95,000 )

-22
%
Employees payroll and payroll tax expenses related to R&D Department

295,000

592,000

(297,000 )

-50
%
Stock-based compensation - officers

398,000

1,326,000

(928,000 )

-70
%
Stock-based compensation - employees

93,000

74,000

19,000

26 %
Stock-based compensation - consultants

25,000

-

25,000

-
%
Depreciation and amortization expenses

185,000

211,000

(26,000 )

-12
%
Total

$ 2,756,000

$ 7,768,000

(5,012,000 )

-65
%
Research and development expenses for proprietary programs decreased during the six months ended December 31, 2018 primarily due to less spending on our programs due to our current lack of working capital. Clinical studies and development expenses will continue to decrease in future reporting periods if there is no increase in the Company’s financial liquidity.
Officers’ payroll decreased due to a reduction in salary of the Company’s President of Research from July to December, 2018. The officer formally resigned from his officer position [on September 18, 2018] and as a director of the Company on December 11, 2018.
Employees payroll and payroll tax expenses decreased during the six months ended December 31, 2018 related to fewer employees engaged in preclinical development after December 31, 2017, which led to the decrease in employees’ payroll during the six months ended December 31, 2018.
Stock- based compensation - officers decreased during the six months ended December 31, 2018 primarily related to the decrease in the valuation of the annual stock-based compensation given to an officer due to the decrease in the Company’s stock price.
Stock-based compensation - employee increased during the six months ended December 31, 2018 due to the increase vesting in the number of stock awards granted to employees during the six months ended December 31, 2018 compared with the same period in 2017.
~~Stock-based compensation- consultant increased during the six months ended December 31, 2018 due to more stock awards were granted to consultants during the six months ended December 31, 2018.~~
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. We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects when possible; however, many activities occurring simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on an individual program basis.
29
~~Table of Contents~~
~~General and Administrative Expenses~~
General and administrative expenses consist mainly of compensation and associated fringe benefits not included in 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, facilities, depreciation and other office expenses.
~~Below is a summary of our general and administrative expenses for the six months ended December 31, 2018 and 2017, respectively (rounded to nearest thousand):~~

For the six months ended

Change

December 31,

2019 vs. 2018

2018

2017

$

%

Insurance and health expense

$ 255,000

$ 236,000

19,000

8 %
Rent and utility expense

122,000

127,000

(5,000 )

-4
%
Other G&A

315,000

231,000

84,000

36 %
Total

$ 692,000

$ 594,000

98,000

17 %
~~General and administrative expenses increased during the six months ended December 31, 2018 primarily related to increases in promotion, advertising and office expenses.~~
~~Officers’ Payroll and Payroll Tax Expenses~~
~~Below is a summary of our Officers’ payroll and payroll tax expenses for the six months ended December 31, 2018 and 2017, respectively (rounded to nearest thousand):~~

For the six months ended

Change

December 31,

2019 vs. 2018

2018

2017

$

%

Officers’ payroll and payroll tax expenses

$
241,000

$
260,000

(19,000
)

-7
%
Officers’ payroll and payroll tax expenses for the Company was decreased during the six months ended December 31, 2018 and 2017. The Company recorded 10% of payroll and payroll tax expenses paid for Dr. Menon under Officers’ Payroll and Payroll Tax Expenses and recorded 90% of payroll paid to Dr. Menon under Research and Development Expense. The decrease in officers’ payroll and payroll tax expenses for the Company during the six ended December 31, 2018 and 2017 mainly because of the decrease in the10% of payroll and payroll tax expenses paid for 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.
30
~~Table of Contents~~
~~Professional Fees~~
~~Below is a summary of our Professional fees for the six months ended December 31, 2018 and 2017, respectively (rounded to nearest thousand):~~

For the six months ended

Change

December 31,

2019 vs. 2018

2018

2017

$

%

Audit, legal and professional fees

$ 304,000

330,000

(26,000 )

-8
%
~~Professional fees decreased during the six months ended December 31, 2018 primarily related to decrease in legal fees for less legal review of various contracts in 2018.~~
~~Other Income (Expense)~~
~~Below is a summary of our other income (expense) for the six months ended December 31, 2018 and 2017, respectively (rounded to nearest thousand):~~

For the six months ended

Change

December 31,

2019 vs. 2018

2018

2017

$

%

Interest Income

$ -

1,000

(1,000 )

-100
%
Other Income

40,000

-

40,000

-
%
Interest expense – debt

(101,000 )

(101,000 )

-

-
%
Interest expense – preferred stock liability

(1,975,000 )

-

(1,975,000 )

-
%
Other Income (Expense), net

$ (2,036,000 )

(100,000 )

(1,936,000 )

1,936 %
There was an increase in interest expense – preferred stock liability of approximately $1,975,000 relating to the issuance of Series B preferred stock that has been recorded as a liability on the accompanying balance sheets. There was no change in interest expenses paid on the note payable – related party (see Note 9 to the notes to the condensed financial statements). There was an increase in other income of approximately $40,000 which represented the gain on disposal of lab equipment.
~~Net Losses~~
~~We incurred net losses of $6.0 million and $9.1 million for the six months ended December 31, 2018 and 2017,~~ respectively because of the above-mentioned factors.

Liquidity and Capital Resources

Projected Future Working Capital Requirements - Next 12 Months

As of ~~December 31, 2018,~~September 30, 2019, we had approximately ~~$0.7~~$0.9 million in cash compared to ~~$2.4~~$0.6 million of cash as of June 30, ~~2018. On October 5, 2018,~~2019. The amount of cash and cash equivalents on the ~~Company entered into a securities purchase agreement with one multi-family office for the sale of an aggregate of 2,000 shares~~balance sheet as of the ~~Company’s newly-created Series B 5% convertible preferred stock for aggregate gross proceeds~~date of this filing is approximately ~~$2.0 million. An initial closing for the sale of 1,250 shares of preferred stock closed on October 9, 2018,~~$0.3 million and ~~a subsequent closing for the sale of 750 shares of preferred stock closed on October 12, 2018. Under the securities purchase agreement, the Company also issued~~is not adequate to the investors warrants to purchase up to an additional 8,000 shares of preferred stock for an aggregate purchase price of approximately $7.9 million. The Company received the proceeds from exercise of 500 Series 1 warrants of approximately $0.5 million from October to December, 2018. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds or other funds will be available when needed.
fund our operations. We anticipate that future budget expenditures, based upon us obtaining the adequate financial resources to enable us to operate at our budgeted operations, will be approximately ~~$13.5~~a total of $11.5 million for the next twelve months, including approximately ~~$9.0~~$7.5 million for clinical activities, supportive research, and drug product. 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 projection.
Therefore, our current projected budgeted average monthly cash flow shortfall is anticipated to average approximately $1 million per month for the next 12 months from the date of the filing of this report. We are working to reduce our projected monthly cash flow shortfall and we are currently seeking new sources of financing to fund our additional research and development work and general and administrative expenses over the next 12 months from the date of this filing. We have the ability to delay incurring certain operating expenses in the next 12 months, which could reduce our cash flow shortfall, if needed.
We do not currently satisfy the requirements for use of Form S-3 for the primary offerings of our securities but we may utilize Form S-1 to register the future issuance of our securities. The current primary potential source of cash available to us is proceeds from the exercise of outstanding warrants to purchase shares of our Series B preferred stock, which warrants we issued in October 2018 and May 2019. In addition, we may receive payments upon the achievement of milestones pursuant to our license agreement with Alfasigma or similar license agreements in the future. There can be no assurance of the exercise of these warrants or the receipt of these milestone payments in the future.

Our ability to successfully raise sufficient funds through the sale of equity securities, to meet our current and future operating expenditures is uncertain and subject to market conditions generally, the market for our common stock, and our ability to sell our common stock and other risks. These factors, among others, raise substantial doubt about our ability to continue as a going concern for the next 12 months. IfIn the event that we are unable to raise sufficient additional funds, we may be required to ~~meet~~delay, reduce or severely curtail our ~~current~~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 ~~future obligations,~~long-term prospects. In addition, we ~~will~~may be forced to cease all operations, in which event investors may lose their entire investment in the Company. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 22. Going Concern and Liquidity to the ~~condensed~~ financial statements included elsewhere in this ~~Quarterly Report on Form 10-Q~~report for a further discussion of our liquidity and the conditions and events which raise substantial doubt regarding our ability to continue as a going ~~concern.~~concern for the next 12 months.
The Company does not currently satisfy the conditions for use of Form S-3 for primary offerings of securities, and the Company will not be able to use a registration statement on Form S-3 to raise capital until the aggregate market value of the Company’s common equity held by non-affiliates equals or exceeds $75 million or the Company lists its common stock on a national securities exchange such as Nasdaq or the NYSE. The Company will utilize Form S-1 to register the sale of its securities, although Form S-1 offers less flexibility on the timing and types of offerings compared to Form S-3.

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Table of Contents

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

Three Months Ended

Change

September 30,

Increase/

2019

2018

(Decrease)

%

Net cash used in operating activities

$ (620,000 )

$ (2,099,000 )

(70 )%
Net cash used in investing activities

(21,000 )

(19,000 )

(11 )%
Net cash provided by financing activities

972,000

-

-
%
Net decrease in cash

$ 331,000

$ (2,118,000 )

(116 )%
The decrease in net cash used in operating activities of $1.5 million versus the prior-year three-month period was mainly due to decreases in our losses from operations of $0.4 million, largely attributable to increase in initial non-refundable payment from the exclusive license agreement signed with Alfasigma S.p.A., a global pharmaceutical company (see Note 7. Exclusive License Agreement to the condensed consolidated financial statements) and less spending for research and development expenses.
Our operating activities used cash of $0.6 million and $2.1 million for the three months ended September 30, 2019 and 2018, respectively. The use of cash in these periods principally resulted from our losses from operations, mentioned above, as adjusted for non-cash charges for stock-based compensation, patent amortization change in fair value of preferred stock, interest expense on preferred stock, impairment expense of operating lease, and changes in our working capital accounts.
Investing activities
The increase in net cash used in investing activities versus the prior-year three-month period was due to an increase in patent costs.
Financing activities
During the three months ended September 30, 2019 and 2018, our total net financing activities provided cash of $1.0 million and $0, respectively.
During the three months ended September 30, 2019, we raised approximately $1.0 million in net cash proceeds, from issuance of Series B preferred stock and exercise of warrants, offset by purchase of treasury stock of $0.1 million.
During the three months ended September 30, 2018, we did not have any financing activity.
Requirement for Additional Working Capital
The Company, dependent on its future sale of its securities, plans to incur total expenses of approximately $11.5 million for the next 12 months, including approximately $7.5 million for clinical activities, supportive research, and drug product development. The Company has limited experience with pharmaceutical drug development. As such, the budget estimate may not be accurate. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or a change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget and on our projected timeline of drug development.
40
Table of Contents
The Company will be unable to proceed with its planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without raising additional capital in the next several months. The current primary potential source of cash available to ~~us in~~ the ~~future~~Company is proceeds from ~~the issuances of our equity securities, including through our common stock purchase agreement with Aspire Capital Fund, LLC (“Aspire Capital”) dated September 6, 2017, and~~ the exercise of warrants to purchase shares of Series B preferred stock, which warrants were issued ~~under the~~in October 2018 ~~securities purchase agreement. As of date of this report, the conditions for sales under the Aspire Capital purchase agreement are not satisfied~~ and no sales may occur thereunder. In particular, the common stock purchase agreement provides that the Company and Aspire Capital will not affect any sales under the agreement when the closing sales price of our common stock is less than $0.25 per share. In recent months, our common stock has traded below this threshold, and there is substantial uncertainty regarding our continued ability to sell shares under the common stock purchase agreement.May 2019. In addition, the ~~October 2018 securities~~Company may receive payments upon the achievement of milestones pursuant to its license agreement with Alfasigma or similar license agreements in the future. There can be no assurance of the exercise of warrants or the receipt of milestone payments by the Company in the future.
During the three months ended September 30, 2019, the Company issued 1,045 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $1.0 million, upon exercise of 1,045 warrants. As of September 30, 2019, Series 1-4 warrants to purchase ~~agreement prohibits sales under~~6,675 shares of Series B preferred stock were outstanding. As the ~~Aspire Capital purchase agreement through January 10, 2019, with sales thereafter subject~~Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds or other funds will be available when needed (see Note 13. Equity Transactions to the ~~satisfaction of certain conditions.~~
Our current projected average monthly cash flow shortfall is anticipated to average approximately $700,000 per month for the next 12 months from the date of the filing of this report. We are working to reduce our projected monthly cash flow shortfall and we are currently seeking new sources of financing to fund our additional research and development work over the next 12 months from the date of this filing. We have the ability to delay incurring certain operating expenses in the next 12 months, which could reduce our cash flow shortfall, if needed.
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"financial statements, included in Part I, Item 1A1 of ~~our Annual~~this Quarterly Report on Form ~~10-K and in this report under “Part II, Item 1A, Risk Factors.” and in other reports we filed with the SEC.~~
If we are unable to generate enough working capital from our current or future financing agreements when needed or secure additional sources of funding, we will significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including more costly Phase 2 and Phase 3 clinical trials on our wholly-owned development programs as these programs progress into later stage development. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us and our stockholders than we would otherwise choose in order to obtain up-front license fees needed to fund operations. These events could prevent us from successfully executing our operating plan.10-Q).

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

Commitments and Contingencies
~~$75 Million Shelf Registration Statement~~Contractual Commitments

The Company has ~~an effective shelf registration statement on Form S-3, registering~~total non-cancelable contractual minimum commitments of approximately $2 million to contract research organizations as of September 30, 2019. Expenses are recognized when services are performed by the sale of up to $75 million of the Company’s securities. The Company filed with the Securities and Exchange Commission (i) a prospectus supplement, dated November 13, 2017, registering up to $30 million of our common stock that have been or may be offered and sold to Aspire Capital from time to time, (ii) a prospectus supplement, dated June 28, 2018, registering $7.0 million of our common stock and warrants to purchase 8.0 million shares of our common stock in a registered direct offering, and (iii) a prospectus supplement, dated October 5, 2018, registering $10.0 million of our preferred stock, warrants to purchase preferred stock, and underlying shares of our common stock in a registered direct offering, leaving approximately $23 million available under the Company’s effective shelf registration statement. Depending on the Company’s public float, the Company may not be eligible to utilize Form S-3 for future primary offerings of its securities following the filing of its Annual Reports on Form 10-K in 2019 and 2020. The Company anticipates that in the future, if it were to no longer eligible to use Form S-3, that it may utilize Form S-1 to register the sale of its securities, including through future financing agreements with Aspire Capital.
32
~~Table of Contents~~
~~Cash Flows~~
~~The following table provides information regarding our cash position, cash flows and capital expenditures for the six months ended December 31, 2018 and 2017 (rounded to nearest thousand):~~

Six Months Ended

Change

December 31,

Increase/

2018

2017

(Decrease)

%

Net cash used in operating activities

$ (3,973,000 )

$ (7,187,000 )

(45 )%
Net cash used in investing activities

4,000

(80,000 )

(105 )%
Net cash provided by financing activities

2,293,000

6,307,000

(64 )%
Net decrease in cash

$ (1,676,000 )

$ (960,000 )

75 %
The decrease in net cash used in operating activities of $3.2 million versus the prior-year six-month period was mainly due to decreases in our losses from operations of $3.0 million, largely attributable to our less spending forcontract research ~~and development expenses.~~
Our operating activities used cash of $4.0 million and $7.2 million for the six months ended December 31, 2018 and 2017, respectively. The use of cash in these periods principally resulted from our losses from operations, as adjusted for non-cash charges for stock-based compensation, amortization and depreciation, and changes in our working capital accounts.
~~Investing activities~~
~~The decrease in net cash used in investing activities versus the prior-year six-month period was due to a decrease in patents costs.~~
~~Financing activities~~
During the six months ended December 31, 2018, we raised approximately $2.4 million in net cash proceeds, from issuance of preferred stock and warrants, offset by purchase of treasury stock of $0.1 million.
During the six months ended December 31, 2017, we raised approximately $6.5 million in net cash proceeds from the sale of 9.2 million shares of our common stock to Aspire Capital offset by cash paid to taxing authorities arising from the withholding of shares from employees of $172,000.organizations.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements, as defined in Item 304(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
33
~~Table of Contents~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
41
Table of Contents

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 ~~December 31, 2018,~~September 30, 2019, 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 ~~December 31, 2018,~~September 30, 2019, the principal executive officer and principal financial officer of the Company ~~have~~has concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting during the quarter ended ~~December 31, 2018,~~September 30, 2019, 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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Table of Contents

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

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 ~~most recent~~ Annual Report on Form 10-K ~~as revised or supplemented by~~for the year ended June 30, 2019, which could adversely affect our ~~most recent Quarterly Reports on Form 10-Q, each of which are on file with the SEC and are incorporated herein by reference, as well as any risks described in our other filings with the SEC. Our~~ business, financial condition, or results of operations, ~~could be materially adversely affected by any of these risks.~~
~~Our Series B preferred stock converts into shares of common stock at a discount to~~cash flows, and the ~~market~~trading price of our common and capital stock. ~~As a result, our common stockholders will experience substantial additional dilution if shares of our Series B preferred stock are converted into common stock.~~
Our Series B preferred stock may be converted at any time at the holder’s option into shares of our common stock at a conversion price equal of the lower of (i) $0.31625 per share and (ii) 85% of the lowest volume weighted average sale prices of our Class A common stock as reported on Bloomberg L.P. on a trading day during the ten trading days prior to and ending on, and including, the conversion date. In addition, the conversion price may be decreased following certain triggering events. As a result, the number of shares of common stock that the holders of our Series B preferred stock will receive upon conversion will increase as our common stock price decreases, and there isThere have been no floor to the conversion price, and our common stockholders will experience substantial dilution as shares of our Series B Preferred Stock offered hereby are converted into our common stock. Any dilution or potential dilution may cause our stockholders to sell their shares, which may contribute to a downward movement in the stock price of our common stock.
~~Management will have broad discretion as to the use of the proceeds from the Series B preferred stock offering, and we may not use the proceeds effectively.~~
Our management will have broad discretion in the application of the proceeds from sales of our securities in the preferred stock offering, and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material ~~adverse effect on our business and cause the price of our common stock to decline.~~
In addition to potential dilution associated with future fundraising transactions, we currently have significant numbers of securities outstanding that are exercisable for our common stock, which could result in significant additional dilution and downward pressure on our stock price.
As of February 5, 2019, there were 179,572,948 shares of our common stock outstanding. In addition, as of December 31, 2018 there were outstanding stock options, warrants and a convertible note representing the potential issuance of approximately an additional 70.1 million shares of our common stock. The issuance of these shares in the future would result in significant dilutionchanges to our ~~current stockholders and could adversely affect~~risk factors since our Annual Report on Form 10-K for the price of our common stock and the terms on which we could raise additional capital. In addition, the issuance and subsequent trading of shares could cause the supply of our common stock available for purchase in the market to exceed the purchase demand for our common stock. Such supply in excess of demand could cause the market price of our common stock to decline.year ended June 30, 2019.

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

3543

Table of Contents

ITEM 6. EXHIBITS

(a) Exhibit index

(1)
The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.

EXHIBIT INDEX

Exhibit No.

Title

Method of Filing

3.1

~~Certificate~~Amended and Restated Articles of ~~Designation~~Incorporation of ~~Preferences, Rights and Limitations of Series B 5% Convertible Preferred Stock.~~Innovation Pharmaceuticals Inc.

Exhibit 3.1 to the ~~Current Report on~~ Form ~~8-K of~~10-K for the ~~Company~~year ended June 30, 2019 filed on ~~October 9, 2018 (File No. 001-37357)~~September 30, 2019

~~4.1~~
~~Form of Warrant.~~
~~Exhibit 4.1 to the Current Report on Form 8-K of the Company filed on October 9, 2018 (File No. 001-37357)~~

10.1

~~Securities Purchase~~Exclusive License Agreement, dated ~~October 5, 2018,~~July 18, 2019, between the Company and ~~the investors party thereto.~~Alfasigma S.p.A.

Exhibit 10.1 to the Current Report on Form 8-K of the Company filed on ~~October 9, 2018 (File No. 001-37357)~~July 22, 2019

31.1

President and Chief Medical Officer Certifications required under Section 302 of the Sarbanes Oxley Act of 2002

Filed herewith

31.2

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

Filed herewith

32.1

President and Chief Medical Officer Certifications required under Section 906 of the Sarbanes Oxley Act of 2002

Furnished herewith

32.2

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 ~~six~~three months ended ~~December 31, 2018~~September 30, 2019 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

3644

Table of Contents

SIGNATURES

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

INNOVATION PHARMACEUTICALS INC.

Dated: ~~February 8,~~November 13, 2019
By:
/s/ Leo Ehrlich

Name:
Leo Ehrlich

Title:
Chief Executive Officer and Chief Financial Officer
(Principal Executive, Accounting and Financial Officer)

Dated: ~~February 8,~~November 13, 2019
By:
/s/ Arthur P. Bertolino

Name:
Arthur P. Bertolino

Title:
President and Chief Medical Officer

37
45

	Common Stock A				Common Stock B
			Par Value				Par Value		Additional Paid-in		Accumulated			Treasury Stock
	Shares		$	0.0001	Shares		$	0.0001	Capital		Deficit			Shares		Amount		Total
Balance at June 30, 2018		163,103,927	$	17,000		-	$	-	$	83,747,000	$	(85,915,000	)		-	$	-	$	(2,151,000	)

Shares issued to consultant for services at $0.84 - $1.38		-		-		-		-		3,000		-			-		-		3,000
Shares issued to officer as equity awards at $0.398 to $0.705		-		-		-		-		112,000		-			-		-		112,000
Stock options issued to consultant for services at $0.43 - $0.73		-		-		-		-		10,000		-			-		-		10,000
Stock options issued to officer as equity awards at $0.398 to $0.705		-		-		-		-		60,000		-			-		-		60,000
Issuance of 572,264 shares to Officer and employee		572,264		-		-		-		-		-			-		-		-
Shares issued to employee for services at $0.398 - $1.37		-		-		-		-		12,000		-			-		-		12,000
Stock options issued to employee for services at $0.398 - $1.37		-		-		-		-		32,000		-			-		-		32,000
Net loss for the three months ended 9/30/2018		-		-		-		-				(2,050,000	)		-		-		(2,050,000	)
Balance at September 30, 2018		163,676,191	$	17,000		-	$	-	$	83,976,000	$	(87,965,000	)		-	$	-	$	(3,972,000	)

	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,550,000	)	$	(2,050,000	)
*Adjustments to reconcile net loss to net cash used in operating activities:*
Common stock and stock options issued as compensation		236,000			229,000
Amortization of patent costs		93,000			94,000
Interest expense-preferred stock		20,000			-
Change in fair value of preferred stock		(102,000	)		-
Impairment expense of operating lease		643,000			-
*Changes in operating assets and liabilities:*
Prepaid expenses and security deposits		(11,000	)		43,000
Accounts payable		16,000			(395,000	)
Accrued expenses		(3,000	)		(92,000	)
Accrued officers’ salaries and payroll taxes		38,000			72,000

Net cash used in operating activities		(620,000	)		(2,099,000	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Patent costs		(21,000	)		(19,000	)

Net cash used in investing activities		(21,000	)		(19,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants		1,027,000			-
Purchase of treasury stock		(55,000	)		-

Net cash provided by financing activities		972,000			-

NET DECREASE IN CASH		331,000			(2,118,000	)

CASH, BEGINNING OF PERIOD		579,000			2,424,000

CASH, END OF PERIOD	$	910,000		$	306,000

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	51,000		$	63,000
Cash paid for tax	$	-		$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INVESTING AND FINANCING ACTIVITIES
Conversion of Series B Convertible Preferred stock to Common stock	$	476,000		$	-
Excess of exercise price of 1,045 warrants over fair value	$	478,000		$	-

	(i)	identify the contract(s) with a customer;

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

	(iii)	determine the transaction price, including the constraint on variable consideration;

	(iv)	allocate the transaction price to the performance obligations in the contract; and

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

	(i)	up-front fees;

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

	(iii)	royalties on net sales of licensed products.

	i.	The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and

	ii.	The date at which the counterparty’s performance is complete.

	Three months ended December 31				Six months ended December 31				Three months ended September 30
	2018		2017		2018		2017		2019		2018
Stock-based compensation expense
Research and development expenses
Professional fees	$	12,000	$	-	$	25,000	$	-	$	9,000	$	13,000
Employees’ bonus		49,000		42,000		93,000		74,000		38,000		44,000
Officers’ bonus		226,000		989,000		398,000		1,326,000		189,000		172,000
Total stock-based compensation expense	$	287,000	$	1,031,000	$	516,000	$	1,400,000	$	236,000	$	229,000

	Useful life	December 31, 2018			June 30, 2018			Useful life		September 30, 2019			June 30, 2019

Purchased Patent Rights- Brilacidin, and related compounds	14	$	4,082,000		$	4,082,000			14	$	4,082,000		$	4,082,000
Purchased Patent Rights-Anti-microbial- surfactants and related compounds	12		144,000			144,000			12		144,000			144,000
Patents - Kevetrin and related compounds	17		1,068,000			1,219,000			17		1,139,000			1,118,000
			5,294,000			5,445,000					5,365,000			5,344,000
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds			(1,614,000	)		(1,462,000	)				(1,841,000	)		(1,765,000	)
Accumulated amortization for Patents-Kevetrin and related compounds			(204,000	)		(203,000	)				(254,000	)		(237,000	)
Total		$	3,476,000		$	3,780,000				$	3,270,000		$	3,342,000

	Three Months Ended September 30, 2019
Lease Cost
Operating lease cost (included in general and administrative in the Company’s condensed consolidated statement of operations)	$	56,000
Variable lease cost		2,000
	$	58,000

Other Information
Cash paid for amounts included in the measurement of lease liabilities for the three months ended September 30, 2019	$	58,000
Weighted average remaining lease term – operating leases (in years)	3.92 years
Average discount rate – operating leases		18.00	%

	At September 30, 2019
Operating leases
Short-term operating lease liabilities	$	120,000
Long-term operating lease liabilities		523,000
Total operating lease liabilities	$	643,000

Year ending June 30,
2019	$	114,000
2020		228,000
Fiscal Year Ending June 30,			Operating Leases
2020 (remaining 9 months)			$	168,000
2021		228,000		223,000
2022		228,000		223,000
2023		228,000		223,000
	$	1,026,000
2024 (remaining 3 months)				60,000
Total lease payments				897,000
Less: Imputed interest/present value discount				(254,000	)
Present value of lease liabilities			$	643,000

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value		Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value

Outstanding at June 30, 2018		41,643,571			0.22		2.76	$	17,523,113		41,643,571		$	0.22		2.76	$	17,523,113

Granted		795,826			0.40		9.68				1,195,826		$	0.31		7.64
Exercised		-			-						(909,090	)	$	0.11
Forfeited/expired		(1,050,000	)		1.74						(19,260,424	)	$	0.21
Outstanding at December 31, 2018		41,389,397			0.19		2.46	$	-
Exercisable at December 31, 2018		40,036,913		$	0.18		2.24	$	-
Outstanding at June 30, 2019											22,669,883		$	0.24		2.41	$	1,340,000
Granted											790,826		$	0.13		10.0
Exercised											-		$	-		-
Forfeited/expired											(7,500	)	$	1.38		0
Outstanding at September 30, 2019											23,453,209		$	0.24		2.42	$	-
Exercisable at September 30, 2019											22,034,643		$	0.24		2.00	$	-
Unvested stock options at September 30, 2019											1,418,566		$	0.23		8.95	$	-

	Six months ended December 31,						Three months ended September 30,
	2018			2017			2019			2018
Expected term (in years)		10			10			10			10
Expected stock price volatility		104.11	%		106.01	%		92.21	%		104.11	%
Risk-free interest rate		2.86	%		2.15	%		1.50	%		2.86	%
Expected dividend yield		0			0			0			0

				Weighted
				Average					Weighted
				Grant					Average
	Number of			Date Fair		Number of			Grant Date
	Shares			Value		Shares			Fair Value
Total awards outstanding at June 30, 2018		1,208,157		$	0.72		1,208,157		$	0.72
Total shares granted		1,130,061		$	0.40		1,130,061		$	0.40
Total shares vested		(584,763	)	$	0.72		(597,263	)	$	0.72
Total shares forfeited		-		$	-		(11,667	)	$	0.76
Total unvested shares outstanding at December 31, 2018		1,753,455		$	0.51
Total unvested shares outstanding at June 30, 2019							1,729,288		$	0.51

Total shares granted							1,125,061		$	0.13
Total shares vested							(1,125,061	)	$	0.57
Total shares forfeited							-		$	-
Total unvested shares outstanding at September 30, 2019							1,729,288		$	0.23

The following table summarizes the outstanding preferred stock warrants:

	Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value

Outstanding at June 30, 2018		-		$	-		-	$	-

Granted		8,000			982.50		1.37
Exercised		(500	)		982.50		0.66
Expired		-			-		-
Outstanding at December 31, 2018		7,500		$	985.50		1.18	$	-

~~Expected term (in years)~~	3
~~Expected stock price volatility~~	~~82.36~~	%
~~Risk-free interest rate~~	~~2.73~~	%
~~Expected dividend yield~~	0

	Year Ended June 30,
	2019		2018
Expected term (in years)	5 - 10			3
Expected stock price volatility	67.34% - 104.11%			82.36	%
Risk-free interest rate	2.51% - 2.86%			2.73	%
Expected dividend yield		0		0

	June 30, 2019			May 9, 2019

Expected dividend yield		0.00	%		0.00	%
Expected stock-price volatility		54.5	%		51.9	%
Risk-free interest rate		2.18	%		2.43	%
Expected term of warrants (years)		0.1			0.25
Stock price	$	535.12		$	535.12
Exercise price	$	982.50		$	982.50

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

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

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


	2018
Balance, beginning of period	$	—
Issuance of preferred stock at fair value		1,116,000
Issuance of preferred stock by exercise of 500 warrants		491,000
Conversion of preferred stock to common stock		(963,000	)
Value of the 500 warrants exercise		20,000
Change in fair value of preferred stock (1)	(-		)
5% dividend		17,000
Balance, end of period	$	681,000

Series B 5% convertible preferred stock liability
Balance, July 1, 2018	$	—
Issuance of preferred stock at fair value		1,116,000
Issuance of preferred stock by exercise of warrants		2,895,000
Conversion of preferred stock to common stock		(3,068,000	)
Change in fair value of preferred stock due to modification of terms		(357,000	)
Issuance of 100 shares valued at $535.12 per share Series B Preferred Stock per May 2019 Modification		54,000
Contingent consideration of 400 extra shares		214,000
5% accrued dividend (1)		25,000
Balance, June 30, 2019	$	879,000

Issuance of preferred stock through accrued dividend, valued at fair value		12,000
Issuance of preferred stock by exercise of warrants		559,000
Conversion of preferred stock to common stock		(476,000	)
Change in fair value of preferred stock due to modification of terms		(102,000	)
5% accrued dividend (1)		20,000
Settlement of accrued dividend by issuance of PS		(24,000	)
Balance, September 30, 2019	$	868,000

(1)	~~Change in fair value of preferred stock~~The 5% accrued dividend is reported in interest expense—preferred stock.

	The total dividends of approximately $20,000 are treated as interest expense – preferred stock during the three months ended September 30, 2019. The approximately $24,000 of the Series B preferred stock dividends was paid by issuance of Series B preferred stocks, so the remaining accrued dividends of $21,000 was included at Preferred stock liability as of September 30, 2019.

Compound	Target/Indication	Clinical Status
Brilacidin	Oral Mucositis	Phase 2 Study (completed)/ Phase 3 in preparation
	Inflammatory Bowel Disease	Phase 2 Proof of Concept Study (completed) Phase 1 Safety/toleration/PK of oral dosage form in preparation
	ABSSSI (Acute Bacterial Skin and Skin Structure Infection)	Phase 2 (completed)
Kevetrin	Ovarian Cancer	Phase 2 Study (completed)

	For the three months ended				Change						For the three months ended				Change
	December 31,				2019 vs. 2018						September 30,				2019 vs. 2018
	2018		2017		$			%			2019		2018		$			%

Clinical studies and development research	$	797,000	$	2,341,000		(1,544,000	)		-66	%	$	290,000	$	617,000		(327,000	)		(53	)%
Officers’ payroll and payroll tax expenses related to R&D Department		113,000		223,000		(110,000	)		-49	%		114,000		233,000		(119,000	)		(51	)%
Employees payroll and payroll tax expenses related to R&D Department		111,000		262,000		(151,000	)		-58	%		70,000		184,000		(114,000	)		(62	)%
Stock-based compensation - officers		226,000		989,000		(763,000	)		-77	%		189,000		172,000		17,000			10	%
Stock-based compensation - employees		49,000		42,000		7,000			17	%		38,000		44,000		(6,000	)		(14	)%
Stock-based compensation - consultants		12,000		-		12,000			-	%		9,000		13,000		(4,000	)		(31	)%
Depreciation and amortization expenses		91,000		106,000		(15,000	)		-14	%		93,000		94,000		(1,000	)		(1	)%
Total	$	1,399,000	$	3,963,000		(2,564,000	)		-65	%	$	803,000	$	1,357,000		(554,000	)		(41	)%

	Three months ended				Change
	December 31,				2019 vs. 2018
	2018		2017		$			%

Officers’ payroll and payroll tax expenses	$	118,000	$	130,000		(12,000	)		-9	%

	For the six months ended				Change
	December 31,				2019 vs. 2018
	2018		2017		$			%

Clinical studies and development research	$	1,414,000	$	5,124,000		(3,710,000	)		-72	%
Officers’ payroll and payroll tax expenses related to R&D Department		346,000		441,000		(95,000	)		-22	%
Employees payroll and payroll tax expenses related to R&D Department		295,000		592,000		(297,000	)		-50	%
Stock-based compensation - officers		398,000		1,326,000		(928,000	)		-70	%
Stock-based compensation - employees		93,000		74,000		19,000			26	%
Stock-based compensation - consultants		25,000		-		25,000			-	%
Depreciation and amortization expenses		185,000		211,000		(26,000	)		-12	%
Total	$	2,756,000	$	7,768,000		(5,012,000	)		-65	%

	Six Months Ended						Change
	December 31,						Increase/
	2018			2017			(Decrease)
							%
Net cash used in operating activities	$	(3,973,000	)	$	(7,187,000	)		(45	)%
Net cash used in investing activities		4,000			(80,000	)		(105	)%
Net cash provided by financing activities		2,293,000			6,307,000			(64	)%
Net decrease in cash	$	(1,676,000	)	$	(960,000	)		75	%

Exhibit No.	Title	Method of Filing

3.1	~~Certificate~~Amended and Restated Articles of ~~Designation~~Incorporation of ~~Preferences, Rights and Limitations of Series B 5% Convertible Preferred Stock.~~Innovation Pharmaceuticals Inc.	Exhibit 3.1 to the ~~Current Report on~~ Form ~~8-K of~~10-K for the ~~Company~~year ended June 30, 2019 filed on ~~October 9, 2018 (File No. 001-37357)~~September 30, 2019

~~4.1~~	~~Form of Warrant.~~	~~Exhibit 4.1 to the Current Report on Form 8-K of the Company filed on October 9, 2018 (File No. 001-37357)~~

10.1	~~Securities Purchase~~Exclusive License Agreement, dated ~~October 5, 2018,~~July 18, 2019, between the Company and ~~the investors party thereto.~~Alfasigma S.p.A.	Exhibit 10.1 to the Current Report on Form 8-K of the Company filed on ~~October 9, 2018 (File No. 001-37357)~~July 22, 2019

31.1	President and Chief Medical Officer Certifications required under Section 302 of the Sarbanes Oxley Act of 2002	Filed herewith

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

32.1	President and Chief Medical Officer Certifications required under Section 906 of the Sarbanes Oxley Act of 2002	Furnished herewith

32.2	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 ~~six~~three months ended ~~December 31, 2018~~September 30, 2019 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

	INNOVATION PHARMACEUTICALS INC.

Dated: ~~February 8,~~November 13, 2019	By:	/s/ Leo Ehrlich
	Name:	Leo Ehrlich
	Title:	Chief Executive Officer and Chief Financial Officer (Principal Executive, Accounting and Financial Officer)

Dated: ~~February 8,~~November 13, 2019	By:	/s/ Arthur P. Bertolino
	Name:	Arthur P. Bertolino
	Title:	President and Chief Medical Officer