The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2022 AND 2021
1. Basis of Presentation and Nature of Operations
Innovation Pharmaceuticals Inc. was incorporated on August 1, 2005 in the State of Nevada. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. On February 15, 2019, the Company formed IPIX Pharma Limited (“IPIX Pharma”), a wholly-owned subsidiary incorporated under the Companies Act 2014 of Ireland. IPIX Pharma is a Private Company Limited by Shares. The subsidiary is intended to serve as a key hub for strategic collaboration with European companies and medical communities in addition to providing cost-saving efficiencies and flexibility with respect to developing Brilacidin under European Medicines Agency standards.
The Company is a clinical stage biopharmaceutical company. The Company’s common stock is quoted on OTCQB, symbol “IPIX.”
Basis of Consolidation
These consolidated financial statements include the accounts of Innovation Pharmaceuticals Inc., a Nevada corporation, and our wholly-owned subsidiary, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. There was no translation gain and loss for the year ended June 30, 2022 and 2021.
Nature of Operations - Overview
We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of inflammatory diseases, cancer, dermatology and anti-infectives. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline which presently includes Brilacidin by advancing indications along the regulatory pathway as well as seeking additional health care-related investment opportunities with the aim of diversifying the Company’s assets. Ongoing activities include Brilacidin drug manufacturing, scientific report writing, and supportive research activities. The Company also acquired an interest in BT BeaMedical Technologies Ltd. (formerly known as Squalus Medical Ltd.), a private company developing a novel image guided surgical laser platform. Management is focused on other avenues of business development, including, but not limited to, joint ventures, mergers and acquisitions, strategic investments, and licensing agreements, for the purpose of diversifying corporate assets. While no assurances are expressed or implied that any agreement will be consummated in the future, the Company is committed toward executing on opportunities at hand.
We currently own all development and marketing rights to our products, other than the license rights granted to Alfasigma S.p.A. in July 2019 for the development, manufacturing and commercialization of locally-administered Brilacidin for ulcerative proctitis/ulcerative proctosigmoiditis (“UP/UPS”). In order to successfully develop and market our products, we may have to partner with additional companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.
2. Liquidity, Going Concern and Management’s Plan
Our financial statements were prepared assuming we will continue as a going concern which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the fiscal year ended June 30, 2022, the Company had a net loss of $7.0 million and negative cash flow from operations of $6.3 million. As of June 30, 2022, the Company has negative working capital of $0.9 million. As of June 30, 2022, the Company’s cash amounted to $3.8 million and current liabilities amounted to $4.8 million. The Company has expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. We expect to incur further losses in the development of our business and have been dependent on funding operations from inception. These conditions raise substantial doubt about our ability to continue as a going concern. Management’s plans include continuing to finance operations through the private or public placement of debt and/or equity securities and the reduction of expenditures. However, no assurance can be given at this time as to whether we will be able to achieve these objectives. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
These factors raise a substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
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.
Cash
Cash consist of bank deposits. There were no cash equivalents at June 30, 2022 and 2021.
Intangible Assets - Patents
Costs incurred to file patent applications and acquired intangibles are capitalized when the Company believes that there is a high likelihood that the patent will be issued and there will be future economic benefit associated with the patent. These costs will be amortized on a straight-line basis over a 12 - 17 years life from the date of patent filing. All costs associated with abandoned patent applications are expensed. In addition, the Company will review the carrying value of patents for indicators of impairment on a periodic basis and if it determines that the carrying value is impaired, it values the patent at fair value. As of June 30, 2022 and 2021, carrying value of patent was approximately $2,312,000 and $2,754,000, respectively. Amortization expense for the fiscal years ended June 30, 2022 and 2021, was approximately $382,000 and $378,000, respectively.
As of June 30, 2022, the Company expensed the costs associated with obtaining patents that have not yet resulted in products or gained market acceptance and the Company has or will let these patents go abandoned. During the years ended June 30, 2022 and 2021, the patent expenses were insignificant.
In accordance with the provisions of the applicable authoritative guidance, the Company’s long-lived assets and amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company assesses the recoverability of such assets by determining whether their carrying value can be recovered through undiscounted future operating cash flows, including its estimates of revenue driven by assumed market segment share and estimated costs. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. During the years ended June 30, 2022 and 2021, the Company has recorded patent write offs of approximately $141,000 and $0, respectively and included in general and administrative expenses.
Certain Risks and Uncertainties
Product Development
We devote significant resources to research and development programs in an effort to discover and develop potential future product candidates. The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes three phases of clinical trials in which we collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease. There are many difficulties and uncertainties inherent in research and development of new products, resulting in a high rate of failure. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and significant cost. Failure can occur at any point in the process, including after the product is approved, based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs of manufacture, alternative therapies or infringement of the patents or intellectual property rights of others. Uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval and which will be commercially viable and generate profits. Successful results in preclinical or clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.
Expenditures for research, development, and engineering of products are expensed as incurred. For the years ended June 30, 2022 and 2021, the Company incurred approximately $4.8 million and $7.0 million of research and development costs, respectively.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit and checking accounts that at times exceed federally insured limits of $250,000. Approximately $3.5 million is subject to credit risk at June 30, 2022. However, these cash balances are maintained at creditworthy financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.
Commitments and Contingencies
The Company follows Subtopic 450-20 of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. The Company’s legal costs associated with contingent liabilities are recorded to expense as incurred.
Accrued Outsourcing Costs
Substantial portions of our preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors, or collectively “CROs.” These CROs generally bill monthly or quarterly for services performed, or bill based upon milestone achievement. For preclinical studies, we accrue expenses based upon estimated percentage of work completed and the contract milestones remaining. For clinical studies, expenses are accrued based upon the number of patients enrolled and the duration of the study. We monitor patient enrollment, the progress of clinical studies and related activities to the extent possible through internal reviews of data reported to us by the CROs, correspondence with the CROs and clinical site visits. Our estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. We periodically evaluate the estimates to determine if adjustments are necessary or appropriate based on information we receive.
Income Taxes
Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has generated net losses since inception and accordingly has not recorded a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset the deferred tax assets. Additionally, the future utilization of the NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company follows the provisions of FASB ASC 740-10 “Uncertainty in Income Taxes” (ASC 740-10). The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Basic and Diluted Loss per Share
Basic and diluted loss per share are computed based on the weighted-average common shares and common share equivalents outstanding during the period. Except with respect to certain voting, conversion and transfer rights and as otherwise expressly provided in the Company’s Articles of Incorporation or required by applicable law, shares of the Company’s Class A common stock and Class B common stock have the same rights and privileges and rank equally, share ratably and are identical in all respects as to all matters. Accordingly, basic and diluted net income (loss) per share are the same for both classes. Common share equivalents consist of stock options, restricted stock, warrants, convertible related party notes payable, and convertible preferred stock. Common share equivalents were excluded from the computation of diluted earnings per share for the years ended June 30, 2022 and 2021, because their effect was anti-dilutive.
Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:
| | Year Ended | |
| | June 30, | |
| | 2022 | | | 2021 | |
Net loss per share, basic and diluted | | $ | (0.01 | ) | | $ | (0.04 | ) |
| | | | | | | | |
Weighted average shares outstanding: | | | | | | | | |
Class A common stock | | | 488,225,673 | | | | 376,659,381 | |
Class B common stock | | | 15,641,463 | | | | 9,503,827 | |
Total weighted average shares outstanding | | | 503,867,136 | | | | 386,163,208 | |
| | | | | | | | |
Antidilutive securities not included: | | | | | | | | |
Stock options | | | 8,268,269 | | | | 6,779,935 | |
Stock options arising from convertible note payable and accrued interest | | | 508,448 | | | | 2,567,476 | |
Restricted stock grants | | | 58,392 | | | | 116,786 | |
Convertible preferred stock | | | 36,000,000 | | | | - | |
Total | | | 44,835,109 | | | | 9,464,197 | |
Treasury Stock
The Company accounts for treasury stock using the cost method. There were 8,516,056 shares of Class A common stock and 2,358,537 shares of Class B common stock held in treasury, purchased at a total cumulative cost of approximately $2.3 million as of June 30, 2022 and 2021 (see Note 15. Equity Transactions).
Treasury stock, representing shares of the Company’s common stock that have been acquired for payroll tax withholding on vested stock grants and to satisfy the exercise price on vested stock options, is recorded at its acquisition cost and these shares are not considered outstanding.
Revenue Recognition
The Company follows the guidance of accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers, and all the related amendments.
The Company has acquired and further developed license rights to Functional Intellectual Property (“functional IP”) that it licenses to customers for defined license periods. A functional IP license is a license to intellectual property that has significant standalone functionality that does not include supporting or maintaining the intellectual property during the license period. The Company’s patented drug formulas have significant standalone functionality in their abilities to treat a disease or condition. Further, there is no expectation that the Company will undertake any activities to change the functionality of the drug formulas during the license periods (see Note 8. Exclusive License Agreement and Patent Assignment 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. |
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, non-employees and directors in connection with its equity incentive plan is based on ASC 718, and the fair market value of the equity awards is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. tax regulations.”
Awards with service-based vesting conditions only: Expense is recognized on a straight-line basis over the requisite service period of the award.
Awards with performance-based vesting conditions: Expense is not recognized until it is determined that it is probable the performance-based conditions will be met. When achievement of a performance-based condition is probable, a catch-up of expense will be recorded as if the award had been vesting on a straight-line basis from the award date. The award will continue to be expensed on a straight-line basis over the requisite service period basis until a higher performance-based condition is met, if applicable.
Awards with market-based vesting conditions: Expense recognized on a straight-line basis over the requisite service period, which is the lesser of the derived service period or the explicit service period if one is present. However, if the market condition is satisfied prior to the end of the requisite service period, the Company will accelerate all remaining expense to be recognized.
Awards with both performance-based and market-based vesting conditions: If an award vesting or exercisability is conditional upon the achievement of either a market condition or performance or service conditions, the requisite service period is generally the shortest of the explicit, implicit, and derived service period.
We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. The grant date is also the valuation date for the non-employee awards. We recognize stock-based compensation using the straight-line method.
Investments
For those investments in common stock or in-substance common stock in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee, the investment is accounted for under the equity method. For those investments in which the Company does not have such significant influence, the Company applies the accounting guidance for certain investments in debt and equity securities.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share for convertible instruments by using the if-converted method. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Adoption is either through a modified retrospective method or a full retrospective method of transition. The adoption of this standard will not materially impact the Company’s consolidated financial statements in 2022.
The FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This standard requires a financial asset to be presented at the net amount expected to be collected. The financial assets of the Company in scope of ASU 2016-13 will primarily be accounts receivable. The Company will estimate an allowance for expected credit losses on accounts receivable that result from the inability of customers to make required payments. In estimating the allowance for expected credit losses, consideration will be given to the current aging of receivables, historical experience, and a review for potential bad debts. The Company will adopt this guidance in the first quarter of fiscal 2023 and does not expect the adoption to have an impact on its results of operations, financial position, and disclosures.
4. Equity Investment
BT BeaMedical Technologies Ltd. (formerly known as Squalus Medical Ltd.)
On June 9, 2022, the Company entered into a Series A Preferred Share Purchase Agreement (the “Purchase Agreement”) with BT BeaMedical Technologies Ltd. (formerly known as Squalus Medical Ltd.), a company established under the laws of the State of Israel (“BTL”), pursuant to which the Company purchased 55,556 shares of BTL’s Series A Redeemable Preferred Shares (the “Series A Shares”) and a warrant to purchase 27,778 Series A Shares for aggregate consideration of $4,000,000, or approximately $72.00 per Series A Share. Following the closing under the Purchase Agreement, the Company owns approximately 35.7% of BTL’s issued and outstanding equity securities and approximately 41.6% of BTL’s equity securities on a fully diluted basis. The Company also entered into customary investor rights and indemnification agreements with BTL. The Company therefore recorded an equity investment on our June 30, 2022 consolidated balance sheet.
The Company’s equity in losses in excess of its investment are accounted for under the equity method consisted of the following as of June 30, 2022 (rounded to nearest thousand):
Investment Name | | Ownership Interest | | | Carrying Amount | |
BT BeaMedical Technologies Limited (“BTL”) | | | 35.7 | % | | | |
Total contributions | | | | | | $ | 4,000,000 | |
Less: Share of the loss in investment in BTL | | | | | | | (22,000 | ) |
Equity losses in excess of investment | | | | | | $ | 3,978,000 | |
The Company invested approximately $4,000,000 in BTL as of June 30, 2022. The cash balance in BTL at June 30, 2022 was approximately $3.8 million. During the year ended June 30, 2022, BTL incurred a loss of approximately $63,000, and accordingly, the Company recorded its share of the loss in investment in BTL, in accordance with the provisions in the purchase agreement, of approximately $22,000 in the accompanying consolidated statement of operations.
We were committed to fund BTL for our share of its liabilities at June 30, 2022. The Company will continue providing additional equity contributions in 2023 and for the foreseeable future.
Summarized balance sheet information for the Company’s equity method investee BTL as of June 30, 2022 is presented in the following table (rounded to nearest thousand):
Current assets | | | |
Cash | | $ | 3,850,000 | |
Other current assets | | | 1,000 | |
Total assets | | $ | 3,851,000 | |
Current liabilities | | $ | (195.000 | ) |
Total liabilities | | $ | (195,000 | ) |
Summarized income statement information for the Company’s equity method investee BTL is presented in the following table for the period from June 9, 2022 (date of acquisition) to June 30, 2022 (rounded to nearest thousand):
Net sales and revenue | | $ | - | |
Research and development costs | | | 7,000 | |
Administrative expenses | | | 55,000 | |
Total operating expense | | $ | 62,000 | |
Loss from operations | | $ | 62,000 | |
Other expense | | | 1,000 | |
Net loss | | $ | 63,000 | |
5. Patents, net
Patents, net consisted of the following (rounded to nearest thousand):
| | Useful life (years) | | | June 30, 2022 | | | June 30, 2021 | |
Purchased Patent Rights- Brilacidin and related compounds | | | 14 | | | $ | 4,082,000 | | | $ | 4,082,000 | |
Purchased Patent Rights-Anti-microbial- surfactants and related compounds | | | 12 | | | | 144,000 | | | | 144,000 | |
Patents – Brilacidin, and other compounds | | | 17 | | | | 1,146,000 | | | | 1,280,000 | |
Total patents cost | | | | | | | 5,372,000 | | | | 5,506,000 | |
Less: Accumulated amortization | | | | | | | (3,060,000 | ) | | | (2,752,000 | ) |
Patents, net | | | | | | $ | 2,312,000 | | | $ | 2,754,000 | |
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.
Amortization expense for the years ended June 30, 2022 and 2021 was approximately $382,000 and $378,000, respectively. During the fiscal years ended June 30, 2022 and 2021, the Company has written off the patent costs relating to Kevetrin of approximately $141,000 and $0, respectively and included these in general and administrative expenses.
At June 30, 2022, the future amortization period for all patents was approximately 12 years to 17 years. Future estimated amortization expenses are approximately $371,000 for each year from 2023 to 2025, $361,000 for the year ending June 30, 2026 and a total of $838,000 for the year ending June 30, 2027 and thereafter.
6. Accrued Expenses - Related Parties and Other
Accrued expenses consisted of the following (rounded to nearest thousand):
| | June 30, 2022 | | | June 30, 2021 | |
| | | | | | |
Accrued research and development consulting fees | | $ | 80,000 | | | $ | 340,000 | |
Accrued rent - related parties (Note 11. Related Party Transactions) | | | 8,000 | | | | 8,000 | |
Accrued interest - related parties (Note 12. Convertible Note Payable - Related Party) | | | 4,000 | | | | - | |
| | | | | | | | |
Total | | $ | 92,000 | | | $ | 348,000 | |
7. Accrued Salaries and Payroll Taxes - Related Parties and Other
Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):
| | June 30, 2022 | | | June 30, 2021 | |
| | | | | | |
Accrued salaries - related parties | | $ | 1,492,000 | | | $ | 1,785,000 | |
Accrued payroll taxes - related parties | | | 71,000 | | | | 130,000 | |
Withholding tax - payroll | | | 77,000 | | | | 77,000 | |
| | | | | | | | |
Total | | $ | 1,640,000 | | | $ | 1,992,000 | |
8. Exclusive License Agreement and Patent Assignment Agreement
On July 18, 2019, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Alfasigma S.p.A., a global pharmaceutical company (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for the treatment of UP/UPS.
Under the terms of the License Agreement, Alfasigma made an initial upfront non-refundable payment of $0.4 million to the Company in July, 2019 and will make additional payments of up to $24.0 million to the Company based upon the achievement of certain milestones, including a $1.0 million payment due following commencement of the first Phase 3 clinical trial of Brilacidin for UP/UPS and an additional $1.0 million payment upon the filing of a marketing approval application with the U.S. Food and Drug Administration or the European Medicines Agency. At this time, Alfasigma has completed a Phase 1 clinical trial with Brilacidin. In addition to the milestones, Alfasigma will pay a royalty to the Company equal to six percent of net sales of Brilacidin for UP/UPS, subject to adjustment as provided in the License Agreement. The Company received an initial upfront non-refundable payment of $0.4 million and reported as revenue in July, 2019 and the Company did not receive any further payment during the years ended June 30, 2022 and 2021.
On April 13, 2022, the Company entered a Patent Assignment Agreement with Fox Chase Chemical Diversity Center, Inc. (“FCCDC”), pursuant to which the Company assigned the title, rights and interest in and to the applications of certain patents in accordance with an earlier collaborative research agreement related to antifungal drug discovery work to which the Company had rights.
On May 3, 2022, the Company received payment of $18,000 from FCCDC based on FCCDC’s third-party license of broad-spectrum anti-fungals and a separate agreement between the Company and FCCDC. Some of the preliminary data used in the FCCDC research program had been obtained as part of an earlier collaboration with the Company supported by funding from the National Institutes of Health. Additional payments from FCCDC to the Company may also be made in the future.
9. Operating Leases
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives. Our variable lease payments primarily consist of maintenance and other operating expenses from our real estate leases. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components. We have elected to account for these lease and non-lease components as a single lease component. We are also electing not to apply the recognition requirements to short-term leases of twelve months or less and instead will recognize lease payments as expense on a straight-line basis over the lease term.
The Company determined that the operating lease right-of-use asset was fully impaired on December 31, 2019. As such, the Company recognized an impairment loss of approximately $643,000, after recording amortization of the right-of-use asset for July, August, and September 2019 totaling approximately $27,000, resulting in a carrying value of $0 since December 31, 2019. The Company vacated the leased office space in December 2019, and in January 2020 the Company initiated a lawsuit against the lessor relating to an automatic extension of the lease for the office space and related matters (See Note 10. Commitments and Contingencies).
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
| | Year Ended June 30, 2022 | |
Lease Cost | | | |
Operating lease cost (included in general and administrative in the Company’s consolidated statements of operations) | | $ | 59,000 | |
Variable lease cost | | | 12,000 | |
| | $ | 71,000 | |
Other Information | | | | |
Cash paid for amounts included in the measurement of lease liabilities for the year ended June 30, 2022 | | $ | 164,000 | |
Weighted average remaining lease term - operating leases (in years) | | | 1.25 | |
Average discount rate - operating leases | | | 18 | % |
The supplemental balance sheet information related to leases for the period is as follows:
| | At June 30, 2022 | |
Operating leases | | | |
Short-term operating lease liabilities | | $ | 197,000 | |
Long-term operating lease liabilities | | | 55,000 | |
| | | | |
Total operating lease liabilities | | $ | 252,000 | |
The following table provides maturities of the Company’s lease liabilities at June 30, 2022 as follows:
| | Operating Leases | |
Fiscal Year Ending June 30, | | | |
2023 | | $ | 223,000 | |
2024 (remaining 3 months) | | | 57,000 | |
Total lease payments | | | 280,000 | |
Less: Imputed interest/present value discount | | | (28,000 | ) |
Present value of lease liabilities | | $ | 252,000 | |
Operating lease cost for the years ended June 30, 2022 was approximately $59,000. Operating lease cost for the years ended June 30, 2021 was approximately $86,000.
10. Commitments and Contingencies
Litigation
On January 22, 2020, the Company filed a complaint against Cummings Properties, LLC in the Superior Court of the Commonwealth of Massachusetts (C.A. No. 20-77CV00101), seeking, among other things, declaratory relief that the lease terminated in September 2018, because the Company’s prior principal executive offices did not automatically extend for an additional five years from September 2018, return of the Company’s security deposit, and damages. The total lease amount is approximately $0.6 million. The Company is currently unable to determine the probability of the outcome or reasonably estimate the loss or gain, if any.
Contractual Commitments
The Company has total non-cancellable contractual minimum commitments of approximately $1.0 million to contract research organizations as of June 30, 2022. Expenses are recognized when services are performed by the contract research organizations.
Contingent Liability - Disputed Invoices
As disclosed in Note 7. Accrued Salaries and Payroll Taxes, the Company accrued payroll to Dr. Krishna Menon, ex-President of Research of approximately $1,443,000 for his past services with the Company, and this amount was included in accrued salaries and payroll taxes. As described in Note 11. Related Party Transactions, the Company has a payable to Kard Scientific, Inc. (“KARD”) of approximately $1,486,000 for its research and development expenses and this amount was included in accounts payable. KARD is a company owned by Dr. Menon. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon resigned from the Company’s Board of Directors on December 11, 2018. Dr. Menon, on behalf of himself and KARD, demanded payment of these amounts in October 2019; however, the Company disputes the underlying basis for these amounts and notified Dr. Menon in November 2019 of the Company’s intent not to pay them.
All of the above disputed invoices were reflected as current liabilities as of June 30, 2022.
11. Related Party Transactions
Pre-clinical Studies
The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company no longer uses KARD. At June 30, 2022 and 2021, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable. Dr. Menon, the Company’s ex-principal shareholder and Director, on behalf of himself and KARD, demanded payment of these amounts in October 2019; however, the Company disputes the underlying basis for these amounts and notified Dr. Menon in November 2019 of the Company’s intent not to pay them.
At June 30, 2022 and 2021, rent payables to KARD of approximately $8,000, were included in accrued expenses.
12. Convertible Note Payable - Related Party
The Ehrlich Promissory Note C is an unsecured demand note with Mr. Ehrlich, the Company’s Chairman and CEO, that originated in 2010, bears 9% simple interest per annum and is convertible into the Company’s Class A common stock at $0.50 per share.
On December 29, 2010, the Company issued 18,000,000 Equity Incentive Options to purchase Class B common stock to Mr. Ehrlich, which are exercisable at $0.11 per share. On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan of approximately $2,022,000 and agreed to change the interest rate from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. All these options were valid for ten years from the date of issuance and expired in May, 2022.
On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).
On March 30, 2020, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).
On September 8, 2020, the Company issued 1,787,762 shares of Class B common shares (net of 412,238 shares of Class B common shares withheld to satisfy taxes) at the option exercise price of $0.11 per share to Mr. Ehrlich for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $242,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).
During the year ended June 30, 2022, the Company repaid the principal of $1,033,000 to Mr. Ehrlich, the Company’s Chairman and CEO. As of June 30, 2022 and June 30, 2021, the principal balance of this convertible note payable to Mr. Ehrlich, the Company’s Chairman and CEO was approximately $250,000 and $1,283,000, respectively.
As of June 30, 2022 and 2021, the balance of accrued interest payable was $4,000 and $0, respectively (see Note 6. Accrued Expenses - Related Parties and Other).
As of June 30, 2022 and 2021, the total outstanding balances of principal and interest were approximately $254,000 and $1,283,000, respectively.
13. Loan payable
On May 10, 2020 and April 19, 2021, the Company received loan proceeds in the amount of approximately $93,000 and $79,000, respectively, under the Paycheck Protection Program (“PPP”) and it was recorded under loan payable. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.
During the year ended June 30, 2022, the Company obtained the approval of the forgiveness of the above mentioned two loans, and the Company recorded the total loan forgiveness of $172,000 under other income.
14. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding
Stock-based Compensation - Stock Options
2016 Equity Incentive Plan (the “2016 Plan”)
On June 30, 2016, the Board of Directors adopted the Company’s 2016 Plan. The 2016 Plan became effective upon adoption by the Board of Directors on June 30, 2016.
On February 23, 2020, the Board of Directors approved an amendment to Section 4.1 of the 2016 Plan to increase the annual limit on the number of awards under such Plan to outside directors from 250,000 to 1,500,000. On October 10, 2021, the Board of Directors approved amendments to the 2016 Plan to increase the number of shares of common stock available for issuance thereunder to 225,000,000 shares and to increase the annual limit on the number of awards under such Plan to outside directors from 1,500,000 to 5,000,000, among other changes.
Up to 225,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan).
Stock Options
The fair value of options granted for the years ended June 30, 2022 and 2021 was estimated on the date of grant using the Black-Scholes-Merton Model that uses assumptions noted in the following table.
| | Years Ended June 30, | |
| | 2022 | | | 2021 | |
Expected term (in years) | | 5-10 | | | 3-10 | |
Expected stock price volatility | | 80.84 to 112.37% | | | 89.88 to 109.33% | |
Risk-free interest rate | | 0.69% to 1.61% | | | 0.31 to 0.68% | |
Expected dividend yield | | | 0 | | | | 0 | |
The components of stock-based compensation expense included in the Company’s Statements of Operations for the years ended June 30, 2022 and 2021 are as follows (rounded to nearest thousand):
| | Years ended June 30, | |
| | 2022 | | | 2021 | |
| | | | | | |
Research and development expenses | | $ | 160,000 | | | $ | 183,000 | |
General and administrative expenses | | | 423,000 | | | | - | |
Total stock-based compensation expense | | $ | 583,000 | | | $ | 183,000 | |
During the year ended June 30, 2022 and 2021
Directors and Employee
On October 10, 2021, the Compensation Committee approved the issuance of 1 million stock options to purchase shares of the Company’s common stock each to 2 independent directors of the Company, and 1 million stock options to purchase shares of Company’s common stock to Mr. Ehrlich, the CEO, which are exercisable for 10 years at $0.24 per share of common stock. These 3 million stock options with 1 year vesting period were valued at approximately $585,000. During the years ended June 30, 2022, the Company recorded approximately $423,000 of stock-based compensation costs and charged to additional paid-in capital as of June 30, 2022. The assumptions used in the Black Scholes option-pricing model are disclosed above.
On October 10, 2021, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 500,000 options to purchase common stock, which are exercisable for 10 years at $0.24 per share of common stock. These stock options with 1 year vesting period were valued at approximately $98,000. During the years ended June 30, 2022, the Company recorded approximately $71,000 of related stock-based compensation. The assumptions used in the Black Scholes option-pricing model are disclosed above.
On September 11, 2020, the Company issued to Ms. Harness 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options with 3 years vesting period were valued at approximately $33,000 and these 58,394 shares of the Company’s common stock were valued at approximately $13,000, based on the closing bid price as quoted on the OTC on September 11, 2020 at $0.22 per share. During the year ended June 30, 2022, the Company recorded approximately $15,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $11,000 of stock option expense and $4,000 of stock awards. During the year ended June 30, 2021, the Company recorded approximately $12,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $9,000 of stock option expense and $3,000 of stock awards.
On February 23, 2020, the Company issued (i) options for the purchase of 500,000 shares of common stock at an exercise price of $0.10 per share, which is 110% of the previous per share closing price of $0.09 on February 21, 2020, and (ii) 500,000 shares of Class A common stock to each member of the Company’s Board of Directors, consisting of Leo Ehrlich, Barry Schechter and Zorik Spektor.
On September 1, 2019, the Company issued to Ms. Harness 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options with a 3 year vesting period were valued at approximately $20,000, based on the closing bid price as quoted on the OTC on August 30, 2019 at $0.132 per share. During the year ended June 30, 2022, the Company recorded approximately $9,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $6,000 of stock option expense and $3,000 of stock awards. During the year ended June 30, 2021, the Company recorded approximately $9,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $7,000 of stock option expense and $2,000 of stock awards.
On September 1, 2018, the Company issued to Ms. Harness 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $63,000, based on the closing bid price as quoted on the OTCQB on August 31, 2018 at $0.40 per share. During the year ended June 30, 2022, the Company recorded approximately $5,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $4,000 of stock option expense and $1,000 of stock awards. During the year ended June 30, 2021, the Company recorded approximately $29,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $21,000 of stock option expense and $8,000 of stock awards.
Consultants
On January 1, 2022, the Company agreed to issue stock options to purchase 75,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.044 per share and vest 33 1/3% on January 1, 2022, 33 1/3% on July 1, 2022 and 33 1/3% on January 1, 2023. The value of these options was approximately $3,000. During the year ended June 30, 2022, the Company recorded approximately $2,000 of related stock-based compensation. The assumptions used in the Black Scholes option-pricing model are disclosed above.
On July 30, 2021, the Company agreed to issue stock options to purchase 100,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.27 per share and vest 33 1/3% on July 30, 2021, 33 1/3% on January 30, 2022, and 33 1/3% on July 30, 2022. The value of these options was approximately $19,000. During the year ended June 30, 2022, the Company recorded approximately $18,000 of related stock-based compensation. The assumptions used in the Black Scholes option-pricing model are disclosed above.
On July 1, 2021, the Company agreed to issue stock options to purchase 225,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.21 per share and vest 33 1/3% on July 1, 2021, 33 1/3% on January 1, 2022, and 33 1/3% on July 1, 2022. The value of these options was approximately $33,000. During the year ended June 30, 2022, the Company recorded approximately $32,000 of related stock-based compensation. The assumptions used in the Black Scholes option-pricing model are disclosed above.
On February 10, 2021, the Company agreed to issue stock options to purchase 75,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.38 per share and vest 33 1/3% on February 10, 2021, 33 1/3% on July 1, 2021, and 33 1/3% on January 1, 2022. The value of these options was approximately $20,000. During the years ended June 30, 2022 and 2021, the Company recorded approximately $7,000 and $13,000 of related stock-based compensation, respectively. The assumptions used in the Black Scholes option-pricing model are disclosed above.
On July 23, 2020, the Company agreed to issue stock options to purchase 100,000 shares of the Company’s common stock to one consultant for his one-year contract. These options were issued with an exercise price of $0.32 per share and vest 33 1/3% on July 23, 2020, 33 1/3% on January 23, 2021, and 33 1/3% on July 23, 2021. The value of these options was approximately $28,000. During the years ended June 30, 2022 and 2021, the Company recorded approximately $1,000 and $27,000 of related stock-based compensation, respectively. The assumptions used in the Black Scholes option-pricing model are disclosed above.
On May 18, 2020, the Company agreed to issue stock options to purchase 500,000 shares of the Company’s common stock each to two consultants for their one-year contracts. These options were issued with an exercise price of $0.14 per share and vest 33 1/3% on July 1, 2020, 33 1/3% on January 1, 2021, and 33 1/3% on July 1, 2021. The value of these options was approximately $78,000. During the years ended June 30, 2022 and 2021, the Company recorded approximately $0 and $53,000 of related stock-based compensation, respectively.
Exercise of options
During the years ended June 30, 2022, the Company received approximately $23,000 of net proceeds from the exercise of 166,666 stock options at $0.14 per share. The details of exercises of options to purchase Class B common stock during the years ended June 30, 2021 are disclosed in Note 15. Equity Transactions.
Forfeiture of options
There was forfeiture of 2,245,000 options and 294,330 options to purchase Class A common stock during the years ended June 30, 2022 and 2021, respectively, relating to the expiry of options of consultants.
Stock Options Issued and Outstanding
The following table summarizes all stock option activity under the Company’s equity incentive plans:
| | Number of Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | |
Outstanding at June 30, 2020 | | | 22,803,098 | | | $ | 0.18 | | | | 1.83 | | | $ | 5,857,312 | |
Granted | | | 452,987 | | | $ | 0.27 | | | | 6.96 | | | | — | |
Exercised | | | (16,181,820 | ) | | $ | 0.11 | | | | — | | | | — | |
Forfeited/expired | | | (294,330 | ) | | $ | 0.55 | | | | — | | | | — | |
Outstanding at June 30, 2021 | | | 6,779,935 | | | $ | 0.35 | | | | 4.45 | | | $ | 345,923 | |
| | | | | | | | | | | | | | | | |
Granted | | | 3,900,000 | | | $ | 0.24 | | | | 8.75 | | | | — | |
Exercised | | | (166,666 | ) | | $ | 0.14 | | | | — | | | | — | |
Forfeited/expired | | | (2,245,000 | ) | | $ | 0.54 | | | | — | | | | — | |
Outstanding at June 30, 2022 | | | 8,268,269 | | | $ | 0.25 | | | | 6.91 | | | $ | — | |
Exercisable at June 30, 2022 | | | 4,436,949 | | | $ | 0.26 | | | | 5.10 | | | $ | — | |
Unvested stock options at June 30, 2022 | | | 3,831,320 | | | $ | 0.23 | | | | 9.06 | | | $ | — | |
Restricted Stock Awards Outstanding
The following summarizes our restricted stock activity:
| | | | | Weighted | |
| | | | | Average | |
| | Number of | | | Grant Date | |
| | Shares | | | Fair Value | |
Total unvested shares outstanding at June 30, 2020 | | | 116,787 | | | $ | 0.32 | |
| | | | | | | | |
Total shares granted | | | 58,394 | | | $ | 0.22 | |
Total shares vested | | | (58,395 | ) | | $ | 0.41 | |
Total shares forfeited | | | — | | | $ | — | |
Total unvested shares outstanding at June 30, 2021 | | | 116,786 | | | $ | 0.22 | |
| | | | | | | | |
Total shares granted | | | — | | | $ | — | |
Total shares vested | | | (58,394 | ) | | $ | 0.25 | |
Total shares forfeited | | | — | | | $ | — | |
Total unvested shares outstanding at June 30, 2022 | | | 58,392 | | | $ | 0.19 | |
Scheduled vesting for outstanding restricted stock awards at June 30, 2022 is as follows:
| | Year Ending June 30, | |
| | 2023 | | | 2024 | | | Total | |
| | | | | | | | | |
Scheduled vesting | | | 38,928 | | | | 19,464 | | | | 58,392 | |
As of June 30, 2022, there was approximately $6,000 of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately $5,000 of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 1.12 years.
15. Equity Transactions
$30 million Class A Common Stock Purchase Agreement with Aspire Capital
On July 31, 2020, the Company entered into the 2020 Stock Purchase Agreement (the “2020 Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 24-month term of the Agreement. In consideration for entering into the 2020 Purchase Agreement, the Company issued to Aspire Capital 6,250,000 shares of its Class A Common Stock as a commitment fee. The commitment fee of approximately $1.4 million was recorded as deferred financing costs and additional paid-in capital and this asset will be amortized over the life of the 2020 Purchase Agreement. The amortized amount of approximately $0.7 million was recorded to additional paid-in capital for the years ended June 30, 2022 and 2021. The unamortized portion is carried on the balance sheet as deferred offering costs and was approximately $0.1 million and $0.8 million at June 30, 2022 and 2021.
During the years ended June 30, 2022, the Company did not sell any shares to Aspire Capital under the 2020 Purchase Agreement. During the period from July 31, 2020 to June 30, 2022, the Company generated proceeds of approximately $4.6 million under the 2020 Purchase Agreement with Aspire Capital from the sale of approximately 22.5 million shares of its common stock. The 2020 Purchase Agreement expired on July 31, 2022.
Class B Common Stock
On September 8, 2020, Mr. Ehrlich exercised 2.2 million options to purchase 2.2 million shares of Class B common stock at the option exercise price of $0.11 per share. Mr. Ehrlich paid for this exercise of his option by the cancellation of debt to Mr. Ehrlich of $242,000 to satisfy the exercise price (See Note 12. Convertible Note Payable – Related Party). The Company issued 1,787,762 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 412,238 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes.
On October 2, 2020, Mr. Ehrlich exercised 909,090 options to purchase 909,090 shares of Class B common stock at the option exercise price of $0.11 per share. Mr. Ehrlich paid for this exercise of his option by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (See Note 12. Convertible Note Payable – Related Party). The Company issued 727,994 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 181,096 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes.
On December 28, 2020, Mr. Ehrlich exercised his option to purchase 13,072,730 shares of Class B common stock, at the option exercise price at $0.11 per shares for the shares, paid by the cancellation of 6,980,583 shares of Class A common stock held by Mr. Ehrlich of $1,438,000 to satisfy the exercise price. The total taxable compensation to Mr. Ehrlich for the 13,072,730 shares was approximately $540,000, based upon the closing stock price on December 29, 2020 of $0.21 a share. The Company withheld 1,765,203 shares of Class B common stock and cancelled an additional 854,419 shares of Class A common stock held by Mr. Ehrlich. As a result, the Company issued 11,307,527 shares of Class B common shares (net of 1,765,203 shares of Class B common shares withheld to satisfy taxes), and cancelled 7,835,002 shares of Class A common stock held by Mr. Ehrlich. These shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
As of June 30, 2022 and 2021, the total issued number of shares of Class B common stock were 18 million shares and the total outstanding number of shares of Class B common stock were 15,641,463.
Series B-2 5% convertible preferred stock (“2020 Series B-2 5% convertible preferred stock”)
On December 4, 2020, the Company entered into a securities purchase agreement (the “Series B-2 Securities Purchase Agreement”) with KIPS Bay Select LP for the sale of an aggregate of 5,089 shares of the Company’s Series B-2 5% convertible preferred stock (the “Series B-2 preferred stock”), for aggregate gross proceeds of approximately $5.0 million. An initial closing for the sale of 3,053 shares of the Series B-2 preferred stock closed on December 9, 2020 for aggregate gross proceeds of approximately $3.0 million, and a second closing for the sale of 2,036 shares of the Series B-2 preferred stock closed on February 8, 2021 for aggregate gross proceeds of approximately $2.0 million. Under the Series B-2 Securities Purchase Agreement, the Company also issued to the investors warrants to purchase up to an additional 10,178 shares of preferred stock.
The Series B-2 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 beneficial conversion feature (“BCF”). The fair value of the Series B-2 preferred stock (without the warrants) will be assessed at each subsequent reporting date with changes in fair value recorded in the profit and loss as a separate line item below the “loss from operations” section (See ASC 480-10-35-5).
The warrants issued in connection with the Series B-2 preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity under additional paid in capital, based on a relative fair value allocation of proceeds, that is the warrants’ relative fair value to the Series B-2 preferred stock fair value (without the warrants), with an offsetting discount to the Series B-2 preferred stock. Given that the Series B-2 preferred stock is convertible at any time under these features, the underlying warrant discounts were accreted upon issuance and recorded as interest, resulting in no remaining discount to the Series B-2 preferred stock liability after the issuance.
The Company recorded the December 9, 2020 issuance of 3,053 shares Series B-2 Preferred Stock at approximately $2.1 million and the underlying Series 1 and Series 2 warrants at approximately $0.9 million in total by allocating the gross proceeds to Series B-2 preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.8 million associated with the issuance of the 3,053 shares of Series B-2 preferred stock to additional paid-in capital. The Company then recorded interest of approximately $2.7 million for the BCF and warrant discounts as a first day interest given that the Series B-2 preferred shares can be converted at any time to common stock and given no set term.
The issuance costs associated with the Series B-2 preferred stock transaction were attributed to the Series B-2 preferred stock (without the warrants) and to the Series 1 and Series 2 warrants based on their relative fair values. The issuance costs attributed to the warrants of approximately $10,000 were reflected as a reduction to additional paid-in capital. The issuances costs associated with the Series B-2 preferred stock liability of $25,000 was recorded immediately as an element of interest cost, which are reflected in interest expense - preferred stock on December 11, 2020.
The Company recorded the February 8, 2021 issuance of 2,036 shares Series B-2 Preferred Stock at approximately $1.5 million and the underlying Series 1 and Series 2 warrants at approximately $0.5 million in total by allocating the gross proceeds to Series B-2 preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.5 million associated with the issuance of the 2,036 shares of Series B-2 preferred stock to additional paid-in capital. The Company then recorded interest of approximately $2.0 million for the BCF and warrant discounts as a first day interest given that the Series B-2 preferred shares can be converted at any time to common stock and given no set term. In addition to the aforesaid $2.7 million for the BCF and warrant discounts, the total interest of approximately $47,000 and $4.7 million was reported in Interest expense - preferred stock liability during the year ended June 30, 2022 and 2021, respectively, in the Consolidated Statements of Operations.
The change in fair value of the total Series B-2 preferred stock were $177,000 and $0 during the year ended June 30, 2022 and 2021 in the Consolidated Statements of Operations.
Underlying Series B-2 preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B-2 preferred stock) on a daily basis given fixed dividend terms under the Series B-2 preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B-2 preferred stock and the total dividends accrued of approximately $47,000 and $15,000 were treated as interest during the year ended June 30, 2022 and 2021, respectively, in the Consolidated Statements of Operations.
Terms of the 2020 Series B-2 5% convertible preferred stock
The rights and preferences of the preferred stock are set forth in a Certificate of Designation of Preferences, Rights and Limitations of Series B-2 5% Convertible Preferred Stock filed with the Nevada Secretary of State on December 4, 2020 (the “Certificate of Designation”). Each share of preferred stock has an initial stated value of $1,080 and may be converted at any time at the holder’s option into shares of the Company’s common stock at a conversion price equal of the lower of (i) $0.35 until August 15, 2021 and $0.50 thereafter, and (ii) 85% of the lowest volume weighted average price of the Company’s common stock on a trading day during the ten trading days prior to and ending on, and including, the conversion date. The conversion price may be adjusted following certain triggering events and subsequent equity sales and is subject to appropriate adjustment in the event of stock splits, stock dividends, recapitalization or similar events affecting the Company’s common stock.
The holders of the preferred stock are limited in the amount of stated value of the preferred stock they can convert on any trading day. The conversion cap limits conversions by the holders to the greater of $75,000 and an amount equal to 30% of the aggregate dollar trading volume of the Company’s common stock for the five trading days immediately preceding, and including, the conversion date. However, the conversion cap will be increased if the trading volume in the first 30 minutes of any trading session exceeds certain trailing average daily volume amounts. In addition, the holders of the preferred stock may not convert shares of preferred stock if, after giving effect to the conversion, a holder together with its affiliates would beneficially own in excess of 9.99% of the outstanding shares of the Company’s common stock.
Redemption Rights
Following 90 days after the scheduled date for the second closing date, the Company may elect to redeem the preferred stock for 120% of the aggregate stated value then outstanding, plus all accrued but unpaid dividends and all liquidated damages and other amounts due in respect of the preferred stock. The Company’s right to redeem the preferred stock is contingent upon it having complied with a number of conditions, including compliance with its obligations under the Certificate of Designation. Shares of preferred stock generally have no voting rights, except as required by law and except that the Company shall not take certain actions without the consent of the holders of the preferred stock.
2020 Series B-2 5% convertible preferred stock warrants
Each share of preferred stock was sold together with two warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase one share of preferred stock at $982.50 per share, or 5,089 shares of preferred stock in the aggregate for approximately $5.0 million in aggregate exercise price, for a period of up to 18 months following issuance, and (ii) a Series 2 warrant, which entitles the holder thereof to purchase one share of preferred stock at $982.50 per share, or 5,089 shares of preferred stock in the aggregate for approximately $5.0 million in aggregate exercise price, for a period of up to 24 months following issuance.
Subject to the satisfaction of certain circumstances, the Company may call for cancellation any or all of the warrants following 90 days after their issuance, for a payment in cash equal to 8% of the aggregate exercise price of the warrants being called. The warrants subject to any such call notice will be cancelled 10 days following the Company’s payment of the call fee, provided that the warrant holders have not exercised the warrants prior to cancellation.
Exercise of 2020 Series B-2 5% convertible preferred stock warrants
During the years ended June 30, 2022, the Company issued 5,072 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of approximately $5.0 million, upon exercise of 3,036 Series 1 warrants and exercise of 2,036 Series 2 warrants issued by the Company. With regard to the exercise of these 5,072 warrants, the Company recorded gross proceeds of approximately $5.0 million to the preferred stock liability.
As of June 30, 2022, there was no Series 1 and 2 warrants outstanding since all warrants were exercised, and there were 620 shares of Series B-2 5% convertible preferred stock outstanding.
During the period from December 4, 2020 (date of securities purchase agreement) to June 30, 2021, the Company issued 3,053 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of approximately $3.0 million, upon exercise of 3,053 Series 1 warrants issued by the Company. In addition, the Company issued 2,053 shares of its Series B-2 5% convertible preferred stock, for aggregate gross proceeds of approximately $2.0 million, upon exercise of 2,053 Series 2 warrants issued by the Company. With regard to the exercise of these 5,106 warrants, the Company recorded gross proceeds of approximately $5.0 million to the preferred stock liability.
As of June 30, 2021, there was 5,072 Series 1 and 2 warrants to purchase 5,072 shares of Series B-2 5% convertible preferred stock outstanding and there was no Series B-2 5% convertible preferred stock outstanding.
Conversion of 2020 Series B-2 5% convertible preferred stock to common stock
During the years ended June 30, 2022, the 2020 Series B-2 5% convertible preferred stockholder converted a total of 4,452 shares of Series B-2 preferred stock into a total of approximately 69,901,865 shares of common stock. With regard to conversions, the Company reversed Series B-2 5% convertible preferred stock liability relating to the conversion and recorded $3.8 million as Additional paid-in capital at par value. The Company reversed the amount of approximately $3.8 million based on the proportion of Series B-2 5% convertible preferred stock converted relative to the original total issued.
During the period from December 4, 2020 (date of securities purchase agreement) to June 30, 2021, the 2020 Series B-2 5% convertible preferred stockholder converted a total of 10,207 shares of Series B-2 preferred stock into a total of 68,034,812 shares of common stock. With regard to conversions, the Company reversed Series B-2 5% convertible preferred stock liability relating to the conversion and recorded $10.0 million as Additional paid-in capital at par value. The Company reversed the amount of approximately $10.0 million based on the proportion of Series B-2 5% convertible preferred stock converted relative to the original total issued.
As of June 30, 2022 and 2021, Series B-2 5% convertible preferred stock liability was approximately $0.8 million and $0, respectively.
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The fair value of the Series B convertible preferred stock is measured in accordance with ASC 820 “Fair Value Measurement,” using option pricing methodologies, incorporating the following inputs:
| | June 30, 2022 | |
| | | |
Expected dividend yield | | | 5 | % |
Expected stock-price volatility | | | 60 | % |
Risk-free interest rate | | | 2.92 | % |
Stock price | | $ | 0.03 | |
Exercise price | | $ | 982.5 | |
Treasury Stock
Regarding the exercise of options to purchase 2.2 million shares of Class B common stock on September 8, 2020 by Mr. Ehrlich, the Company issued 1,787,762 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 412,238 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes and were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
Regarding the exercise of options to purchase 909,090 shares of Class B common stock on October 2, 2020, the Company issued 727,994 shares of Class B common stock (net share issuance amount), to Mr. Ehrlich. The remaining 181,096 shares of Class B common stock were withheld from Mr. Ehrlich for the payment of payroll taxes and were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
Regarding the exercise of options to purchase 13,072,730 shares of Class B common stock on December 28, 2020, the Company cancelled 6,980,583 shares of Class A common stock held by Mr. Ehrlich with a fair value of $1,438,000 to satisfy the exercise price. The Company withheld 1,765,203 shares of Class B common stock and cancelled an additional 854,419 shares of Class A common stock held by Mr. Ehrlich to satisfy tax withholding obligations. As a result, the Company issued 11,307,527 shares of Class B common shares (net of 1,765,203 shares of Class B common shares withheld to satisfy tax withholding obligations), and cancelled 7,835,002 shares of Class A common stock held by Mr. Ehrlich. Both the 1,765,203 shares of Class B common stock and the 7,835,002 shares of Class A common stock were reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
There were 8,516,056 shares of Class A common stock and 2,358,537 shares of Class B common stock held in treasury, purchased at a total cumulative cost of approximately $2.3 million as of June 30, 2022 and 2021.
16. Fair Value Measurements
We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, accrued liabilities and preferred liability. At June 30, 2022 and 2021, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due to their short-term maturities.
The Company has elected to measure its preferred stock using the fair value method. The fair value of the preferred stock is the estimated amount that would be paid to redeem the liability in an orderly transaction between market participants at the measurement date. The Company calculates the fair value of the Series B-2 Preferred stock using a lattice model that takes into consideration the future redemption value on the instrument, which is tied to the Company’s stock price.
These valuations are considered to be Level 3 fair value measurements as the significant inputs are unobservable and require significant management judgment or estimation. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 Series B-2 preferred stock liability balance for the years ended June 30, 2022 and 2021:
| | FY 2022 | |
Balance, July 1, 2020 | | $ | - | |
Issuance of Series B-2 preferred stock at fair value | | | 5,000,000 | |
Exercise of Series 1 and 2 warrants | | | 5,017,000 | |
Conversion of Series B-2 preferred stock to common stock | | | (10,017,000 | ) |
Change in fair value of Series B-2 preferred stock (1) | | | (- | ) |
Balance, June 30, 2021 | | $ | - | |
| | | | |
Exercise of Series 1 and 2 warrants | | | 4,983,000 | |
Conversion of Series B-2 preferred stock to common stock | | | (4,374,000 | ) |
Change in fair value of Series B-2 preferred stock (1) | | | 177,000 | |
Balance, June 30, 2022 | | $ | 786,000 | |
(1) | Change in fair value of preferred stock is reported in interest expense-preferred stock. |
(2) | The 5% accrued dividend is reported in interest expense-preferred stock in the consolidated statements of operation and the remaining accrued dividends of $62,000 and $15,000 was included under current liability as of June 30, 2022 & 2021, respectively. |
17. Income Taxes
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company has a net operating loss carry-forward for federal and state tax purposes of approximately $105.8 million at June 30, 2022, that is potentially available to offset future taxable income. The Tax Cuts and Jobs Act (the “Tax Act”) changes the rules on net operating loss (NOL) carry-forwards. The 20-year limitation was eliminated for losses incurred after January 1, 2018, giving the taxpayer the ability to carry forward losses indefinitely. However, NOL carry forward arising after January 1, 2018, will now be limited to 80% of taxable income. The $105.8 million available at June 30, 2022 includes $51.0 million of post 2017 NOLs without expiration dates and $54.8 million of pre-2018 NOLs expiring from 2024 to 2037. Given the Company’s projections of taxable income for the years between 2024 and 2037, it’s likely these NOLs will expire unused.
The income tax provision benefit differs from the amount of tax determined by applying the Federal and States statutory rates as follows:
| | June 30, 2022 | | | June 30, 2021 | |
Book income at federal statutory rate | | | 21.00 | % | | | 21.00 | % |
State income tax, net of federal tax benefit | | | 6.32 | % | | | 6.32 | % |
Change in valuation allowance | | | (39.84 | %) | | | (25.36 | %) |
General business credit | | | 12.42 | % | | | — | % |
Permanent difference | | | — | % | | | — | % |
Change in Federal Statutory Rate | | | — | % | | | — | % |
Others - net | | | 0.10 | % | | | (1.96 | %) |
Total | | | 0.00 | % | | | 0.00 | % |
There was no current or deferred provision or benefit for income taxes for the fiscal years ended June 30, 2022 and 2021. The components of deferred tax assets as of June 30, 2022 and 2021 are as follows (rounded to nearest thousand):
| | June 30, 2022 | | | June 30, 2021 | |
Deferred tax assets: | | | | | | |
Net operating loss carry forwards | | $ | 28,888,330 | | | $ | 26,958,015 | |
Accrued payroll | | | 806,829 | | | | 806,829 | |
Stock compensation | | | 2,943,278 | | | | 2,943,278 | |
General business credit | | | 6,068,138 | | | | 5,193,602 | |
Other | | | 99,761 | | | | 99,761 | |
| | $ | 38,806,336 | | | $ | 36,001,485 | |
Valuation allowance | | | (38,806,336 | ) | | | (36,001,485 | ) |
Total deferred taxes | | $ | - | | | $ | - | |
