The accompanying notes are an integral part of these condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30
, 201
7
(Unaudited)
Note 1. Basis of Presentation and Nature of Operations
Unaudited Interim Financial Information
The accompanying unaudited condensed financial statements of Innovation Pharmaceuticals Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2017, included in our Annual Report on Form 10-K for the year ended June 30, 2017.
In the opinion of the management of Innovation Pharmaceuticals Inc., all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three month periods have been made. Results for the interim 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 and Name Change
Innovation Pharmaceuticals Inc. (the “Company”) was incorporated as Econoshare, Inc. on August 1, 2005, in the State of Nevada. On December 6, 2007, the Company acquired Cellceutix Pharma, Inc., a privately owned corporation formed under the laws of the State of Delaware on June 20, 2007. Following the acquisition, the Company changed its name to Cellceutix Corporation. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the name change was not required.
The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. The Company’s common stock is quoted on OTCQB, symbol “IPIX”.
Nature of Operations -Overview
We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of cancer, antibiotics and inflammatory disease. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Brilacidin, Kevetrin and Prurisol and advancing them as quickly as possible along the regulatory pathway. We will develop the highest quality data and broadest intellectual property to support our compounds.
We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.
Note 2. Going Concern and Liquidity
As of June 30, 2017, the Company adopted Accounting Standards Codification 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of management’s assessment, plans and conclusion of the Company’s ability to continue as a going concern.
As of September 30, 2017, the Company has an accumulated deficit of $74.1 million, representative of recurring losses since inception. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) approval. As a result, the Company expects to continue to incur losses.
At September 30, 2017, the Company’s cash amounted to $2.9 million and current liabilities amounted to $10.8 million, of which $6.6 million were payables to related parties with no immediate payment terms (See Note 8- Related Party Transactions in the Notes to Condensed Financial Statements section below). The Company had expended substantial funds on its clinical trials and expects to increase this spending. The Company’s net cash used in operating activities for the three months ended September 30, 2017 was approximately $3.7 million, and current projections indicate that the Company will have continued negative cash flows for the foreseeable future. Our net losses incurred for the three months ended September 30, 2017 and 2016, amounted to $4.5 million and $3.0 million, respectively, and working capital deficits was approximately $7.6 million and $6.1 million at September 30, 2017 and June 30, 2017, respectively.
Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $15 million for the next twelve months, raise doubt about its ability to continue as a going concern. The Company’s plans to alleviate the doubt of its ability to continue as a going concern primarily include controlling the timing and spending on its research and development programs and raising additional funds through equity financings from its common stock purchase agreement with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”). The Company may consider other plans to fund operations including: (1) raising additional capital through debt financings or from other sources; (2) additional funding through new relationships to help fund future clinical trial costs (i.e. licensing and partnerships); (3) reducing spending on one or more research and development programs by discontinuing development; and/or (4) restructuring operations to change its overhead structure. The Company may issue securities, including shares of common stock, shares of preferred stock and stock purchase contracts through private placement transactions or registered public offerings, pursuant to its registration statement on Form S-3 filed with the SEC on September 11, 2017. The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of its product candidates and key development and regulatory events and its decisions in the future.
The Company believes that the actions discussed above are probable of occurring and alleviating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs twelve months from the issuance of the accompanying financial statements.
On September 6, 2017, the Company entered into a new $30 million common stock purchase agreement with Aspire Capital (the “2017 Agreement”) to replace the prior 2015 $30 million common stock purchase agreement with Aspire Capital (the “2015 Agreement”). During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under the 2015 Agreement from the sale of approximately 2.6 million shares of its common stock. During the period from September 6, 2017 to September 30, 2017, the Company generated proceeds of approximately $0.4 million under the 2017 Agreement from the sale of approximately 0.6 million shares of its common stock. As of September 30, 2017, the available balance under the 2017 equity line agreement is approximately $29.6 million.
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, measurement of stock-based compensation, and the periods of performance under collaborative research and development agreements. 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.
Net 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. Common share equivalents of 47,242,085 and 45,036,175 shares of common stock were excluded from the computation of diluted loss per share for the three months ended September 30, 2017 and 2016, respectively, because we incurred net losses for the three months ended September 30, 2017 and 2016, and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive and are therefore not included in the calculations.
Treasury Stock
The Company accounts for treasury stock using the cost method. There were 329,136 shares and 262,080 shares of treasury stock outstanding, purchased at a total cumulative cost of $251,000 and $220,000 at September 30, 2017 and June 30, 2017, respectively (see Note 10).
Treasury stock, representing shares of the Company’s common stock that have been acquired after having been issued, is recorded at its acquisition cost and these shares are no longer considered outstanding.
Accounting for Stock Based Compensation
The stock-based compensation expense incurred by the Company for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718, an employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. tax regulations”. Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.
ASC 505-50-30-11 further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:
|
i.
|
The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and
|
|
ii.
|
The date at which the counterparty’s performance is complete.
|
We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock is measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line vesting method over the requisite service period of the equity awards.
The components of stock-based compensation expense included in the Company’s Condensed Statement of Operations for the three months ended September 30, 2017 and 2016 are as follows (rounded to nearest thousand):
|
|
Three months ended September 30
|
|
|
|
2017
|
|
|
2016
|
|
Research and development expenses
|
|
|
|
|
|
|
Professional fees
|
|
$
|
-
|
|
|
$
|
42,000
|
|
Employees’ bonus
|
|
|
32,000
|
|
|
|
13,000
|
|
Officers’ bonus
|
|
|
337,000
|
|
|
|
289,000
|
|
Total stock-based compensation expense
|
|
$
|
369,000
|
|
|
$
|
344,000
|
|
Recent Adopted Accounting Pronouncements
Going Concern
— In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). The ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual periods, and interim periods within those annual periods, starting after December 15, 2016. We have implemented this new accounting standard and updated our liquidity disclosures, as required.
Deferred Taxes –
During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified on a net basis as non-current in a statement of financial position. Early adoption of this ASU did not have an effect on our deferred tax assets and deferred tax liabilities on our accompanying balance sheets.
Debt Issuance Costs -
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The new standard will more closely align the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS standards. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the balance sheet as assets and amortized as interest expense. The costs will continue to be amortized to interest expense using the effective interest method. Subsequent to the issuance of ASU 2015-03 the SEC staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance, which clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03, is effective upon adoption of ASU 2015-03. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.
Stock Compensation -
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will simplify the income tax consequences, accounting for forfeitures and classification on the Statement of Cash Flows (i) excess tax benefits be classified as cash inflows provided by operating activities, and (ii) cash paid to taxing authorities arising from the withholding of shares from employees be classified as cash outflows used in financing activities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This new pronouncement has been adopted on July 1, 2016 and did not have a material effect on the Company’s financial position, results of operations, but had an effect of the classification of cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.
In June 2014, the FASB issued ASU 2014-12, “Compensation—Stock Compensation.” The amendments in this ASU apply to reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period. This ASU is the final version of Proposed ASU EITF-13D, “Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which has been deleted. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The implementation of this standard did not have a material impact on the Company’s accompanying condensed financial statements.
Recently Issued Accounting Guidance
In May 2014, the FASB issued authoritative guidance that defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a five-step, principles based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until 2019. In addition, the FASB is allowing companies to early adopt this guidance for non-public entities beginning in fiscal year 2017. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. The Company will apply this new guidance when it becomes effective and has not yet selected a transition method. The Company, due to not having any revenue currently and in the foreseeable future, has concluded that the impact of the adoption of this accounting standard on its financial statements will not be material.
In February 2016, FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. The guidance requires the following for finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. The guidance requires the following for operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous U.S. GAAP. The amendments in Topic 842 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management has determined that based on current accounting and lease contract information the adoption of ASU No. 2016-02 is not expected to have a significant impact on the Company’s financial position, results of operations and disclosures. However, management is continually evaluating the future impact of ASU No. 2016-02 based on changes in the Company’s financial statements through the period of adoption.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Measurement of Credit Losses on Financial Instruments”, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning January 1, 2020 and we are currently evaluating the impact that ASU 2016-13 will have on our condensed financial statements.
In November 2016, the FASB issued ASU 2016-18, “Restricted Cash”. The amendments in this update address diversity in practice that exists in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for the Company beginning January 1, 2018 and is required to be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact that ASU 2016-18 will have on our condensed cash flows.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business”, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively and will be effective for the Company beginning January 1, 2018. The impact on our condensed financial statements will depend on the facts and circumstances of any specific future transactions.
In February 2017, the FASB issued ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”, which defines the term “in-substance nonfinancial asset” and clarifies the scope and accounting of a financial asset that meets the definition. ASU 2017-05 also provides guidance for partial sales of nonfinancial assets. ASU 2017-05 may be adopted under a retrospective or modified retrospective approach and is effective for the Company beginning January 1, 2018. We are currently evaluating the impact that ASU 2017-05 will have on our condensed financial statements.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires that the service cost component of the Company’s net periodic pension cost and net periodic postretirement benefit cost be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of net periodic benefit cost being classified outside of a subtotal of income from operations. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. ASU 2017-07 is effective for the Company beginning January 1, 2018 and is required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement. ASU 2017-07 allows a practical expedient for the estimation basis for applying the retrospective presentation requirements and requires the prospective adoption, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit cost in assets. The Company, due to not having any pension currently and in the foreseeable future, has concluded that the impact of the adoption of this accounting standard on its financial statements will not be material.
Note 4. Patents, net
Patents, net consisted of the following (rounded to nearest thousand):
|
|
|
Useful life
(years)
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
Purchased Patent Rights – Brilacidin, and related compounds
|
|
|
14
|
|
|
$
|
4,082,000
|
|
|
$
|
4,082,000
|
|
Purchased Patent Rights – Anti-microbial – surfactants and related compounds
|
|
|
12
|
|
|
|
144,000
|
|
|
|
144,000
|
|
Patents – Kevetrin and related compounds
|
|
|
17
|
|
|
|
1,330,000
|
|
|
|
1,308,000
|
|
|
|
|
|
|
|
|
5,556,000
|
|
|
|
5,534,000
|
|
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds
|
|
|
|
|
|
|
(1,234,000
|
)
|
|
|
(1,158,000
|
)
|
Accumulated amortization for Patents –Kevetrin and related compounds
|
|
|
|
|
|
|
(184,000
|
)
|
|
|
(164,000
|
)
|
|
|
|
|
|
|
$
|
4,138,000
|
|
|
$
|
4,212,000
|
|
The patents are amortized on a straight-line basis over the estimated remaining useful lives of the assets, determined to be 12-17 years from the date of acquisition.
Amortization expense for the three months ended September 30, 2017 and 2016 was approximately $96,000 and $91,000, respectively.
At September 30, 2017, the future amortization period for all patents was approximately 7.93 years to 17 years. Future estimated annual amortization expenses are approximately $284,000 for the year ending June 30, 2018, $378,000 for each year from 2019 to 2025, $369,000 for the year ending June 30, 2026, $366,000 for the year ending June 30, 2027, $128,000 for the year ending June 30, 2028, $75,000 for the years ending June 30, 2029 through the years ended 2032, $35,000 for the year ending June 30, 2033 and $10,000 for the year ending June 30, 2034.
Note 5. Accrued Expenses
Accrued expenses consisted of the following (rounded to nearest thousand):
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
Accrued research and development consulting fees
|
|
$
|
302,000
|
|
|
$
|
673,000
|
|
Accrued rent (Note 8) – related parties
|
|
|
18,000
|
|
|
|
21,000
|
|
Accrued interest – (Note 9) related parties
|
|
|
36,000
|
|
|
|
17,000
|
|
Total
|
|
$
|
356,000
|
|
|
$
|
711,000
|
|
Note 6. Accrued Salaries and Payroll Taxes – Related Parties and Other
Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
Accrued salaries - related parties
|
|
|
2,823,000
|
|
|
|
2,823,000
|
|
Accrued payroll taxes - related parties
|
|
|
130,000
|
|
|
|
130,000
|
|
Accrued employee bonuses
|
|
|
-
|
|
|
|
86,000
|
|
Withholding tax
|
|
|
85,000
|
|
|
|
105,000
|
|
Total
|
|
$
|
3,038,000
|
|
|
$
|
3,144,000
|
|
On December 29, 2010, the Company entered into employment agreements with its two executive officers, Leo Ehrlich, the Company’s Chief Executive Officer, and Dr. Krishna Menon, Chief Scientific Officer. Both agreements provide for a three-year term with each executive receiving an annual base salary of $350,000 per year commencing January 1, 2011, with an annual increase of 10% for each year commencing January 2012. The Board, at its discretion, may increase the base salary based upon relevant circumstances. On January 1, 2014 the Board approved the extension of these employment agreements for a one-year period with a 10% increase in salary from the calendar year 2013 annual salary of $423,500, to an annual salary of $465,850. Until new employment agreements are entered into, we will continue paying these officer’s salaries at this salary rate per annum.
Note 7. Commitments and Contingencies
Lease Commitments
Operating Leases – Rental Property
The Company signed a lease extension agreement with Cummings Properties which began on October 1, 2013. The lease is for a term of five years ending on September 30, 2018, and requires monthly payments of $18,000. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease and subleases 200 square feet of space previously used by the Company and pays the Company $900 per month.
As of September 30, 2017, 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,
|
|
|
|
2018
|
|
$
|
163,000
|
|
2019
|
|
|
54,000
|
|
Total minimum payments
|
|
$
|
217,000
|
|
Rent expense, net of lease income, under this operating lease agreement was approximately $52,000 and $51,000 for the three months ended September 30, 2017 and 2016, respectively. Before September 2013, the Company paid rent to Kard Scientific for share of office space and details are shown at Note 8 - Related Party Transactions below.
Operating Leases - Equipment
We lease equipment under a non-cancelable operating lease that expires in April, 2018. The future minimum rental commitment for our operating lease for the next twelve months is $6,000, as of September 30, 2017 and was disclosed under Prepaid expenses.
Contractual Commitments
The Company has total contractual minimum commitments of approximately $4 million to contract research organizations as of September 30, 2017. Expenses are recognized when services are performed by the contract research organizations.
Note 8. Related Party Transactions
Office Lease
Dr. Menon, the Company’s principal shareholder, President of Research, and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007, the Company began renting office space from KARD, and since September 1, 2013, the Company no longer leases space from KARD. At September 30, 2017 and June 30, 2017, rent payable to KARD of approximately $18,000 and $21,000, respectively, were included in accrued expenses.
In September 2013, the Company signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $18,000. The Company had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., (“Innovative Medical”) a company owned by Mr. Ehrlich and Dr. Menon, officers of the Company, has co-signed the lease and rents approximately 200 square feet of office space, the space previously used by the Company and pays the Company $900 per month, the same amount the Company previously paid KARD. Innovative Medical paid total rent of approximately $3,000, to The Company for both of the three months ended September 30, 2016 and 2015 and the rental payment was offset with the accrued rent owed to KARD.
Clinical Studies
The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company now has its own research study capabilities and no longer uses KARD. At September 30, 2017 and June 30, 2017, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable.
Other related party transactions are disclosed in Note 9 below.
Note 9. Convertible Note Payable - Related Party
During the year ended June 30, 2010, Mr. Ehrlich loaned the Company a total of approximately $973,000. A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note, Ehrlich Promissory Note C. The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s Class A common stock at $0.50 per share. The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the Ehrlich Promissory Note C and agreed to retroactively convert accrued interest of approximately $97,000 through December 31, 2010 into additional principal. During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional (approximate) $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of this demand note to approximately $2,022,000.
On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principal and interest of approximately $2,248,000, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten (10) years from the date of issuance.
At September 30, 2017 and June 30, 2017, approximately $36,000 and $17,000, respectively, is the accrued interest payable on this note.
At September 30, 2017 and June 30, 2017, principal balance of this demand note was approximately $2,022,000.
Note 10. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding
Current Equity Incentive Plan
2016 Equity Incentive Plan
On June 30, 2016, the Board of Directors adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan became effective upon adoption by the Board of Directors on June 30, 2016.
Up to 20,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that (1) no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and (2) no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of ISOs, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.
In connection with adoption of the 2016 Plan, the Board of Directors also approved forms of Incentive Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Non-Employee Directors, Restricted Stock Award Agreement for Employees and Restricted Stock Award Agreement for Non-Employee Directors that will be utilized by the Company to grant options and restricted shares under the 2016 Plan.
Stock Options Issued and Outstanding
The following table summarizes all stock option activity under the Company’s equity incentive plans:
|
|
Number of
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at June 30, 2017
|
|
|
40,655,245
|
|
|
$
|
0.22
|
|
|
|
3.61
|
|
|
$
|
31,662,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
795,826
|
|
|
|
0.71
|
|
|
|
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(32,500
|
)
|
|
|
0.59
|
|
|
|
|
|
|
|
-
|
|
Outstanding at September 30, 2017
|
|
|
41,418,571
|
|
|
$
|
0.23
|
|
|
|
3.49
|
|
|
$
|
22,864,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
40,168,501
|
|
|
$
|
0.21
|
|
|
|
3.30
|
|
|
$
|
22,844,500
|
|
The fair value of options granted for the three months ended September 30, 2017 and 2016 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.
|
|
Three months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Expected term (in years)
|
|
|
10
|
|
|
3-10
|
|
Expected stock price volatility
|
|
|
106.01
|
%
|
|
57.63%-111.62
|
%
|
Risk-free interest rate
|
|
|
2.15
|
%
|
|
0.71%-1.73
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Stock-Based Compensation
The Company recognized approximately $369,000 and $344,000 of total stock-based compensation costs related to equity grant awards for the three months ended September 30, 2017 and 2016, respectively. The $369,000 of stock based compensation expense for the three months ended September 30, 2017 included approximately $141,000 of stock options expense and $228,000 of restricted stock awards.
For the three months ended September 30, 2017
On September 1, 2017, the Company agreed to grant to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, under the 2016 Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) 50% upon the first anniversary of the effective date and the remaining 50% upon the second anniversary of the effective date; (2) shares of the Company’s common stock close above $3.00 per share (as may be adjusted for any stock splits or similar actions); (3) the commencement of trading of shares of the Company’s common stock on a national securities exchange; or (4) upon a change in control of the Company. The 1,066,667 shares were valued at approximately $752,000 and the 617,839 stock options valued at approximately $399,000. Both shares and options will be amortized over 2 years to September 1, 2019 unless the other vesting requirements are met sooner. At September 30, 2017, the Company determined that it was not probable that these accelerated vesting provisions would occur earlier than the scheduled vesting date and recorded approximately $48,000 of stock-based compensation expense for these equity grants, including approximately $17,000 of stock option expense and $31,000 for the stock awards.
On September 1, 2017, the Company agreed to grant to Ms. Jane Harness, the Vice President, Clinical Sciences and Portfolio Management of the Company under the 2016 Plan (i) 58,394 shares of restricted stock and (ii) a ten-year option to purchase 172,987 shares of the Company’s Class A common stock at an exercise price of $0.705 per share. Both shares and options shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one third upon the second anniversary of the effective date, and the remaining one third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 58,394 shares were valued at approximately $41,000 and the 172,987 stock options valued at approximately $112,000. Both shares and options will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the three months ended September 30, 2017, the Company recorded approximately $4,000 of stock-based compensation expense for these equity grants, including approximately $3,000 of stock option expense and $1,000 for the stock awards.
On September 1, 2017, the Company agreed to grant to Ms. Ponugoti, under the 2016 Plan, ten-year options to purchase 5,000 shares of the Company’s common stock at an exercise price of $0.705 per share, which shall vest upon the earliest to occur of the following: (1) one third upon the first anniversary of the effective date, one-third upon the second anniversary of the effective date, and the remaining one-third upon the third anniversary of the effective date; or (2) upon a change in control of the Company. The 5,000 stock options valued at approximately $3,000 and it will be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the three months ended September 30, 2017, the Company recorded approximately $100 of stock option expense for this option grant.
Purchase of Treasury Stock - cash paid to Federal and State Taxing Authorities arising from the withholding of common shares from an officer’s vested restricted stock grant issuance and issuance of Treasury Stock and the reversal of outstanding stock subscription receivable
On September 1, 2017, 19,465 shares of the Company’s restricted stock vested to Ms. Harness according to Ms. Harness’s employment agreement. The total taxable compensation to Ms. Harness for the 19,465 vested shares was $14,000, which is priced at the closing stock price on September 1, 2017 at $0.705 a share.
The Company issued 12,409 common shares (net share issuance amount), which is approximately 64% of the total vested common share amount of 19,465 common shares due to be issued to Ms. Harness. The remaining 7,056 shares of common stock were withheld from Ms. Harness for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
In addition, the Company reversed an outstanding subscription receivable of $26,000 for 60,000 shares of common stock and recorded this amount as the cost of treasury stock. There were 329,136 shares and 262,080 shares of treasury stock outstanding, purchased at a total cumulative cost of $251,000 and $220,000 at September 30, 2017 and June 30, 2017, respectively.
Restricted Stock Awards Outstanding
The following summarizes our restricted stock activity for our restricted stock issuances:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
|
|
|
|
Total awards outstanding at June 30, 2017
|
|
|
601,728
|
|
|
$
|
1.39
|
|
Total shares granted
|
|
|
1,125,061
|
|
|
|
0.71
|
|
Total shares vested
|
|
|
(19,465
|
)
|
|
|
1.37
|
|
Total shares forfeited
|
|
|
-
|
|
|
|
|
|
Total unvested shares outstanding at September 30, 2017
|
|
|
1,707,324
|
|
|
$
|
0.94
|
|
Scheduled vesting for outstanding restricted stock awards at September 30, 2017 is as follows:
|
|
Year Ending June 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled vesting
|
|
|
1,070,000
|
|
|
|
575,597
|
|
|
|
42,263
|
|
|
|
19,464
|
|
|
|
1,707,324
|
|
As of September 30, 2017, there was $1.4 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 $0.9 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 1.48 years.
For the three months ended September 30, 2016
Issuances of Common Stock and Stock Options – Pursuant to New Employment Agreements
On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement as our President and Chief Medical Officer of the Company, effective on June 27, 2016 and the Company agreed to grant to Dr. Bertolino under the Company’s 2016 Equity Incentive Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $1.39 per share. See Note 10 for additional information concerning the restricted stock and stock options granted to Dr. Bertolino.
On July 18, 2016, the Company issued 7,500 stock options to purchase shares of the Company’s common stock to a consultant for services rendered, exercisable for 3 years at $1.38 per share of common stock. The value of these 7,500 options was approximately $4,000. During the three months ended September 30, 2016, the Company recorded approximately $4,000 of stock option expense for this option grant.
On September 1, 2016, the Company and Ms. Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Portfolio Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness, under the 2016 Plan (i) 58,394 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third 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 (as defined in the employment agreement) of the Company, and (ii) 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 upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 58,394 shares were valued at approximately $80,000, which will be amortized over three years to September 1, 2019. The 172,987 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 1, 2019. During the three months ended September 30, 2017 and 2016, the Company recorded approximately $25,000 and $8,000 of stock-based compensation expense for these equity grants, respectively. The $25,000 included approximately $18,000 of stock option expense and $7,000 for the stock awards and the $8,000 included approximately $6,000 of stock option expense and $2,000 for the stock awards.
On September 15, 2016, the Company and Dr. Lang entered into an executive employment agreement as the Company’s VP, Regulatory Affairs, effective on September 15, 2016. Commencing on September 15, 2016, the Company agreed to pay Dr. Lang an annual salary of $250,000. In addition, the Company agreed to grant to Dr. Lang under the 2016 Plan (i) 63,492 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one-third 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 (as defined in the employment agreement) of the Company, and (ii) ten-year options to purchase 188,262 shares of the Company’s common stock were also granted at an exercise price of $1.26 per share, which shall vest upon the earliest to occur of the following: (1) one-third upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 63,492 shares were valued at approximately $80,000, which will be amortized over three years to September 15, 2019. The 188,262 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 15, 2019. During the three months ended September 30, 2017 and 2016, the Company recorded approximately $0 and $4,000 of stock-based compensation expense for these equity grants, respectively. There was no stock-based compensation expense for Dr. Lang since she resigned on March 17, 2017 and the 63,492 restricted shares and the 188,262 stock options were forfeited. The $4,000 included approximately $3,000 of stock option expense and $1,000 for the stock awards.
Issuance of Common Stock to Consultants
On July 18, 2016, the Company issued 7,500 shares to a consultant for service rendered. The value of these 7,500 shares at $1.38 per share was approximately $10,000.
On August 1, 2016, the Company issued 11,720 shares to a consultant for service rendered. The value of these 11,720 shares at $1.28 per share was approximately $15,000.
Exercise of options
During the three months ended September 30, 2017 and 2016, there were no stock options exercised.
Stock Warrants Outstanding
There were no warrants outstanding as of September 30, 2017 and December 31, 2016.
Note 11. Equity Transactions
For the three months ended September 30, 2017
$30 million Class A Common Stock Purchase Agreement with Aspire Capital
On September 6, 2017, the Company entered into a common stock purchase agreement with Aspire Capital, which replaced the prior 2015 $30 million Aspire Capital stock purchase agreement and provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Stock Purchase Agreement. The Company issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The commitment fee of approximately $215,000 is amortized pro-rata as the funding is received. The amortized amount of $3,000 was recorded to additional paid-in capital for the three months ended September 30, 2017. The unamortized portion is carried on the balance sheet as deferred offering costs and was $212,000 at September 30, 2017. The Company registered the resale of all shares that Aspire Capital will purchase under this common stock purchase agreement. To the extent Aspire Capital purchases shares under this Purchase Agreement and subsequently sells those shares purchased, the other holders of shares of our Class A common stock may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A common stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we might otherwise wish to effect sales.
During the period from September 6, 2017 to September 30, 2017, the Company generated proceeds of approximately $0.4 million under the new 2017 agreement with Aspire Capital from the sale of approximately 0.6 million shares of its common stock. As of September 30, 2017, the available balance under the new equity line agreement was approximately $29.6 million.
On March 30, 2015, the Company entered into its prior common stock purchase agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Purchase Agreement. In consideration for entering into this stock purchase agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 was amortized as the funding is received. The unamortized portion of deferred offering costs from this stock purchase agreement of $227,000, was recorded to additional paid-in capital during the three months ended September 30, 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 has 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. Subsequent Events
Equity Transactions
From October 1, 2017 to November 6, 2017, the Company has generated additional proceeds of approximately $0.9 million under the 2017 Common Stock Purchase Agreement with Aspire Capital from the sale of approximately 1.4 million shares of its common stock.