ITEM 1. BUSINESS
OVERVIEW OF OUR BUSINESS
Overview
Innovation Pharmaceuticals Inc. is a clinical stage pharmaceutical company developing innovative therapies with dermatology, oncology, anti-inflammatory and antibiotic applications. The Company owns the rights to numerous drug compounds, including Brilacidin, our lead drug in a new class of compounds called defensin-mimetics, and Kevetrin (thioureidobutyronitrile), our lead anti-cancer compound.
Recent Developments
Brilacidin is being studied by the Company, as well as other independent researchers, as a potential therapeutic for the treatment of the novel coronavirus (SARS-CoV-2), which is responsible for COVID-19.
The Company released the following news over the preceding months:
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Data from a leading U.S. Public Health Research Institute (PHRI) showed that Brilacidin inhibits a SARS-CoV-2 spike pseudotyped virus in a human kidney cell line. Brilacidin, in comparison to vehicle control, exhibited an inhibitory effect on the pseudotyped virus in a dose-dependent manner-an average 29 percent inhibition at 0.1μg/ml (the lowest concentration) to an 85 percent inhibition at 100μg/ml (the highest concentration).
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Ongoing research at a U.S. Regional Biocontainment Laboratory (RBL) has shown consistent Brilacidin antiviral activity against SARS-CoV-2 across the viral lifecycle in human lung and Vero cells-supporting Brilacidin’s potential as a treatment for preventing infection with COVID-19, as well as for treatment of patients once infected. In vitro pre-treatment experiments at the RBL using Vero cells, reduced the viral titer (load) of SARS-CoV-2 by 75 percent and a similar pre-treatment experiment in a human lung epithelial cell line showed Brilacidin reduced viral load by 95 percent and by 97 percent, compared to control, at the efficacious concentrations tested.
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In the ongoing research at the RBL in a human lung epithelial cell line, Brilacidin, when directly incubated with the live (or wild type) virus, was shown to inhibit the virus by 50 percent (the IC50 value) at a mid-nanomolar concentration, while remaining non-cytotoxic to cells at high micromolar concentrations-establishing a preliminary Selectivity Index (a ratio that compares a drug’s cytotoxicity and antiviral activity) for Brilacidin greater than 300 in this lung cell line. Additionally, this new testing in the human lung cell line showed Brilacidin’s IC90 value to be in the low micromolar range.
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A post-infection experiment in the human lung cell line at the RBL showed Brilacidin inhibited SARS-CoV-2. In vitro neutralization experiments (with a pseudotyped virus) and binding experiments (using isolated SARS-CoV-2 Spike protein) at the RBL are also helping to further elucidate Brilacidin’s antiviral mechanisms against SARS-CoV-2.
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The Company collaborated with RBL researchers on a federal grant application, assessing Brilacidin’s pan-coronavirus potential against SARS-CoV-2, SARS-CoV-1 and MERS-CoV, with potential future extension into other viruses.
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In vitro research is ongoing at the RBL as of the date of this filing, the results of which, upon completion, are to be submitted for peer-review publication, with a pre-print made available.
Business Development and Licensing
The Company is actively engaged in business development and licensing initiatives with multiple specialty and global pharmaceutical companies across its entire pipeline of drugs. From time to time, the Company may be party to various indications of interest and term sheets and participate in preliminary discussions and negotiations regarding potential licensing or partnership arrangements. It remains the Company’s primary objective to complete licensing deals, territorial and/or global, to provide access to non-dilutive capital to advance clinical assets forward in the most expeditious and cost-effective manner. The Company can make no assurance that partnerships will occur but is committed toward executing on these potential alliance and partnership opportunities.
In July 2019, the Company entered into a license agreement with Alfasigma, granting Alfasigma the worldwide right to develop, manufacture and commercialize rectally administered Brilacidin for UP/UPS. The license agreement also provides Alfasigma with a right of first refusal for Brilacidin for the treatment of more extensive forms of inflammatory bowel disease (IBD), such as Ulcerative Colitis and Crohn’s disease, and a right of first negotiation for Brilacidin in other gastrointestinal indications.
On July 22, 2020, the Company and Fox Chase Chemical Diversity Center, Inc. (“FCCDC”) amended an earlier collaborative research agreement related to antifungal drug discovery work of which the Company had rights to. In exchange for a six (6) percent fee tied to all potential future proceeds, the Company granted FCCDC all discovery, intellectual property and commercialization rights related to its share of their joint antifungal drug program.
Active Clinical Development Programs
We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Milestone payments from our licensee are also dependent on clinical/regulatory milestones. On July 18, 2019, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Alfasigma S.p.A., a global pharmaceutical company (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for the treatment of ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS). Under the terms of the License Agreement, Alfasigma made an initial upfront non-refundable payment of $0.4 million to the Company during the year ended June 30, 2020. We are actively engaged in business development for partnering our drugs. Developing pharmaceutical products, however, is a lengthy and very expensive process and there can be no assurance that we will complete such development or commercialize such for several years, if ever.
The Company devotes most of its efforts and resources on its compounds Brilacidin and Kevetrin, which are in clinical development. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process which include: (i) design and oversight of clinical trials; (ii) development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) interactions with regulatory authorities domestically and internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required for a promising compound to be identified and brought into clinical trials.
Set forth below is an overview of our most recent research and development efforts on Brilacidin and Kevetrin through the date of this Annual Report on Form 10-K:
Brilacidin
COVID-19 - Recently, due to the global COVID-19 pandemic, the Company has been approached by a number of organizations to research Brilacidin against the novel coronavirus. Material Transfer Agreements were signed with two academic institutions having Biosafety Level 3 Laboratories (BSL 3). Brilacidin drug substance (Brilacidin tetrahydrochloride) was provided for experimental research on the antiviral properties of Brilacidin. The research to date has supported continued evaluation of Brilacidin for treatment of COVID-19, including:
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reducing the viral titer (load) of SARS-CoV-2 (the novel coronavirus responsible for COVID-19) by 75 percent after only 1 hour of preincubation prior to infection at a concentration of 10μM as compared to vehicle control (in vitro experiment using Vero cells);
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exhibiting an inhibitory effect on a SARS-CoV-2 spike pseudotyped virus in a dose-dependent manner compared to vehicle control-an average 29 percent inhibition at 0.1μg/ml (the lowest concentration) to an 85 percent inhibition at 100μg/ml (the highest concentration) (in vitro experiment in a human kidney cell line);
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exhibiting a statistically significant (p<0.0001) and potent inhibitory effect on SARS-CoV-2-reducing viral load by 95 percent and by 97 percent, compared to control, at two efficacious concentrations tested (in vitro experiment in a human lung epithelial cell line); and
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achieving approximately 90 percent inhibition of SARS-CoV-2 in follow-up in vitro testing in the same human lung epithelial cell line at a drug concentration that was one-half lower than the lowest concentration in the first experiments.
The pre-clinical data to date supports Brilacidin being non-cytotoxic in the Vero and human cell lines evaluated at efficacious concentrations. The pre-clinical data further supports Brilacidin showing an ability to inhibit viral entry into cells, a highly desirable mechanism of action as it is the first step in the infection process enabling viruses to be targeted outside the cell.
The Company has collaborated with a Regional Biocontainment Laboratory (RBL) and a federal grant application was submitted seeking funding for the RBL to continue researching Brilacidin as a potential pan-coronavirus therapeutic, for treating SARS-CoV-2, SARS-CoV-1 and MERS-CoV and potentially as a broad-spectrum antiviral.
In a broader context, demonstration of Brilacidin’s direct antiviral activity against the SARS-CoV-2 virus, supports the drug’s unique 3-in-1 therapeutic potential-antiviral, anti-inflammatory, antimicrobial-to treat COVID-19 and its associated complications.
Given the safety and efficacy data already known about Brilacidin from pre-clinical and clinical studies utilizing multiple routes of administration, a Phase 2 clinical trial of intravenously-administered Brilacidin for COVID-19 is being planned, with a trial initiation targeted for the fourth quarter of calendar year 2020. Partnering opportunities with industry and academic partners are ongoing regarding COVID-19.
Oral Mucositis (OM) study - In a randomized, double-blind Phase 2 study of Brilacidin for the prevention and control of OM in patients receiving chemoradiation for treatment of Head and Neck Cancer (HNC), analysis of patients who received at least 55 Gy cumulative units of radiation showed that Brilacidin markedly reduced the rate of severe OM (WHO Grade ≥ 3), delayed onset of severe OM and decreased duration of severe OM. The Company made available, in a blog published on its website, a comparative data table (based on public information) showing Brilacidin compares favorably to other compounds in development for preventing and treating severe OM. The Company and the U.S. Food and Drug Administration (FDA) have completed an End-of-Phase 2 meeting concerning the continuing development of Brilacidin oral rinse to decrease the incidence of severe OM in HNC patients receiving chemoradiation. Both parties agreed to an acceptable Brilacidin Phase 3 development pathway, including studying Brilacidin oral rinse effects on severe OM when cisplatin, the preferred chemotherapy regimen in HNC care, is administered in higher concentrations (80-100 mg/m2) every 21 days, and at lower concentrations (30-40 mg/m2) administered weekly as part of the chemoradiation regimen.
IBD, Ulcerative Proctitis/Proctosigmoiditis (UP/UPS) study -A Phase 2a trial comprised three sequential cohorts, with progressive dose escalation by cohort-cohort A (6 patients) - 50 mg, cohort B (6 patients) - 100 mg, and cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The primary efficacy endpoint of clinical remission (accounting for stool frequency, rectal bleeding and endoscopy findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient quality of life (as assessed by the short inflammatory bowel disease questionnaire, or SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. Future development work with locally-administered Brilacidin for UP/UPS is being conducted by Alfasigma, our licensee. See Note 7. Exclusive License Agreement to the consolidated financial statements.
IBD, Ulcerative Colitis (UC) - Brilacidin is also being developed as a treatment in more extensive forms of IBD, with formulation development plans including oral tablets (or capsules) first aimed for the treatment of ulcerative colitis and then Crohn’s disease.
Initial clinical testing in a Phase 1 single-dose escalation trial was conducted in January 2020, which tested a Brilacidin oral formulation in healthy volunteers to assess targeting colon delivery, dispersion, safety, toleration, and systemic exposure/ pharmacokinetics. Top-line data from the Phase 1 trial (NCT03234465) studying the use of delayed-release tablets of Brilacidin showed the trial met its primary endpoints. In the study, the timed-release formulation of Brilacidin was radiolabeled (with complexed technetium-99m) and evaluated for safety and colonic delivery in 9 healthy volunteers (6 with Brilacidin and 3 placebo). Gamma scintigraphic imaging was used to visualize in vivo performance of the enteric coated delayed release tablets designed to target delivery of Brilacidin (50mg, 100mg, and 200mg) to the colon. For Brilacidin treatments, radiolabel release was observed in the ascending colon for four out of the six subjects and in the terminal ileum for the remaining two. Following release, dispersion of the radiolabel was then observed throughout the colon. Serial blood samples were collected through 24 hours post-dose to assess absorption of oral Brilacidin from the colon. Blood level analysis, using a sensitive limit of quantitation in plasma of 1 ng/mL, demonstrated no quantifiable drug concentrations at any timepoint across treatment cohorts, and appears to show containment of Brilacidin within the target location of the colon when delivered by delayed release tablets. Safety outcomes showed that Brilacidin delayed-release tablets were well tolerated by healthy volunteers across all treatment cohorts with no serious adverse events reported. Of the 9 subjects treated, 2 subjects on Brilacidin and 2 subjects on placebo experienced at least one adverse event. The adverse events were of mild intensity and none were deemed to be related to study treatment.
Future oral program development will be supported by a modified release oral tablet (or capsule) formulation, and the Company is actively engaging a contract manufacturer to develop and produce such a formulation for Phase 2 use (and beyond). Regulatory approval will be sought to initiate a proposed placebo-controlled Phase 2 clinical trial in UC patients, targeted to begin in the first half of calendar year 2021.
ABSSSI - In February 2016, the Company submitted a Special Protocol Assessment (SPA) request, along with a final protocol, to the FDA, for a Phase 3 clinical trial of Brilacidin for the treatment of Acute Bacterial Skin and Skin Structure Infection (ABSSSI) caused by gram-positive bacteria, including methicillin-resistant Staphylococcus aureus (MRSA). We received from the FDA comments and considerations for incorporation into our study design. Management decided to delay its response to FDA due to the low price per share of our common stock and the many multiple million dollar costs associated with a Phase 3 program. Our strategy, for now, is to achieve success with other trials and attract partnering opportunities that may provide significant upfront payments and milestone payments, which can then be used to fund the ABSSSI program. We see ABSSSI as the appropriate gateway indication in infectious diseases, enabling potential further studies of Brilacidin’s use for implant coating and biofilm infections.
Expenditures on Brilacidin were approximately $0.2 million and $0.1 million during the three months ended June 30, 2020 and 2019, respectively, and approximately $0.6 million and $1.1 million during the year ended June 30, 2020 and 2019, respectively.
For Brilacidin overall, we see significant potential in treatment of COVID-19 (by the IV route), and in treatment of Oral Mucositis (by oral rinse) and IBD (by oral tablet/capsule). The available clinical data also suggest that other inflammatory conditions including various dermatology disorders and conditions may, likewise, be treated locally and efficaciously with Brilacidin.
Kevetrin
The Company has completed a Phase 2a trial of Kevetrin in treating late-stage Ovarian Cancer. The main objective of the trial focused on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. The study was successful in demonstrating modulation of p53 directly in ovarian cancer tumor tissue in patients. Pharmacokinetic data collected on Kevetrin during the Phase 1 clinical trial demonstrated that the compound has a short half-life of approximately two hours. This short half-life makes it a compelling candidate for an oral drug delivery treatment for the main purpose of allowing simple daily, or multiple-times daily administrations within or outside the hospital setting. Compared to injectable or intravenous treatments, oral therapy is the preferred drug delivery method of patients. Preliminary laboratory studies are encouraging and support the potential of developing an oral formulation, but there are no assurances made or implied that the Company will be successful in completing development of an oral formulation. Toxicology studies for the oral formulation of Kevetrin are approximately half completed, with the remainder of this work to be completed when the Company secures additional financial resources. Next steps in the development of Kevetrin include: completing bridging toxicology work for an oral formulation; developing the oral formulation (capsule or tablet); requesting an FDA meeting to discuss trial results to date and the design of future trials; and performing a dosing safety study in healthy volunteers once the oral formulation has been developed. Once completed, these steps would likely quickly lead to Phase 2 testing of oral Kevetrin in both solid tumors and leukemias, with ovarian cancer likely continuing to be the lead indication.
Expenditures on Kevetrin were insignificant during the both the quarters and years ended June 30, 2020 and 2019.
We have no product sales to date and we will not receive any product revenue until we receive approval from the FDA or equivalent foreign regulatory agencies to begin marketing a pharmaceutical product. Developing pharmaceutical products, however, is a lengthy and very expensive process and there can be no assurance that we will complete such development or commercialize such for several years, if ever.
INTELLECTUAL PROPERTY
Patents
Set forth below is a description of our patents owned and co-owned, including the current status and jurisdictions in which a patent has been issued or a patent application has been filed.
Categories:
1.
Brilacidin, and related compounds
2.
Arylamide and Salicylamide compounds
3.
Anti-microbial compounds (including anti-Gram negative compounds)
4.
Kevetrin and related compounds
In 2020, the Company filed a patent application with the U.S. Patent and Trademark Office in support of Brilacidin’s use as an anti-viral treatment including the SARS-CoV-2 virus.
We rely on a combination of patents and trade secrets, as well as confidentiality and non-use agreements to protect our intellectual property. Our patent strategy is designed to facilitate commercialization of our current and future product candidates, and create barriers to entry.
Payments Related to Assignment of Compounds
The Company acquired all rights, title, and interest to Kevetrin from Dr. Krishna Menon, a former director and executive officer of the Company. The Company previously had similar rights to seven other pharmaceutical compounds, KM 277, KM 278, KM 362, KM 3174, KM 732, and KM-391, but the Company abandoned the rights to those compounds. The Company has agreed to pay the assignors 5% of net sales of Kevetrin in countries where composition of matter patents have been issued, divided 2% to Dr. Menon, 2% to an unaffiliated third party, and 1% to Leo Ehrlich, our CEO, and 3% of net sales in other countries.
In September 2013, the Company acquired substantially all of the assets of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. (together, “Polymedix”), including Polymedix’s rights to Brilacidin under a patent license agreement with the Trustees of the University of Pennsylvania (“Penn”). Under the terms of the patent license agreement, the Company will pay to Penn a royalty on gross sales of the compounds licensed thereunder ranging from 0.5% to 3.0%, plus certain other payments as provided therein. In addition, the Company will pay Penn 10% of all consideration received from sublicensees.
MANUFACTURING
The Company does not intend to establish manufacturing capabilities or facilities to produce its drug product candidates (compounds) in the near or mid-term. The Company believes it can contract or partner with third parties for the manufacturing of its investigational compounds at sites registered with the FDA and contract with third-party scientists for pharmaco-kinetic, pharmaco-dynamic and toxicology studies. Such studies generally must be completed prior to filing an investigational new drug (IND) application with the FDA, and an IND is necessary to begin the human safety and efficacy trials of its compounds (Phase 1, 2 and 3).
By way of example, the Company contracted with two Contract Drug Manufacturing Organizations, Evonik Corporation and CoreRx, for preparation of Brilacidin commercial-grade drug substance and drug product, respectively.
GOVERNMENT REGULATION
Our operations and activities are subject to extensive regulation by numerous government authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug, and Cosmetic Act (FDCA) and other federal and state statutes and regulations, govern the testing, development, manufacture, quality control, distribution, safety, effectiveness, labeling, storage, record keeping, reporting, approval, advertising and promotion, and import and export of our investigational products. Failure to comply with FDA requirements may result in enforcement action, including warning letters, fines, civil or criminal penalties, suspension or delays in clinical development, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market. Although the discussion below focuses on regulation in the United States, which is our primary initial focus, we anticipate seeking approval to market our products in other countries. Generally, our activities in other countries will be subject to regulation that is similar in nature and scope as that imposed in the U.S., although there can be important differences.
Development and Approval
Product development and the product approval process are very expensive and time consuming, and we cannot be certain that the FDA will grant approval for any of our drug product candidates on a timely basis, if at all. Under the FDCA, the FDA must approve any new drug before it can be sold in the United States. The general process for obtaining FDA approval of a drug is as follows:
Preclinical Testing
Before we can test a drug candidate in humans, we must develop extensive preclinical data, generally derived from laboratory evaluations of product chemistry and formulation, as well as toxicological and pharmacological studies in animals, to generate data to support the drug’s quality and potential safety and benefits. Certain animal studies must be performed in compliance with the FDA’s Good Laboratory Practice, or GLP, regulations and the U.S. Department of Agriculture’s Animal Welfare Act. Presently we have Brilacidin in antiviral studies testing against SARS-CoV-2.
We submit this preclinical data and other information to the FDA in an IND. Human clinical trials cannot commence until an IND application is submitted and becomes effective. Based on the data and information contained in the IND, the FDA must determine whether there is an adequate basis for testing the drug candidate in initial clinical studies in human volunteers. Unless the FDA raises concerns, the IND becomes effective 30 days following its receipt by the FDA.
Clinical Trials
Once the IND goes into effect, we study an investigational drug in human clinical trials to determine if the drug is safe and effective for a particular use. Clinical trials involve the administration of the drug to healthy human volunteers or to patients under the supervision of a qualified investigator. The conduct of clinical trials is subject to extensive regulation, including compliance with the FDA’s bioresearch monitoring regulations and Good Clinical Practice, or GCP, requirements, which establish standards for conducting, recording data from, and reporting the results of clinical trials, and are intended to assure that the data and reported results are credible and accurate, and that the rights, safety, and well-being of study participants are protected. Clinical trials must be conducted under protocols that detail the study objectives, parameters for monitoring safety, and the efficacy criteria, if any, to be evaluated. FDA reviews each protocol that is submitted to the IND. In addition, each clinical trial must be reviewed and approved by, and conducted under the auspices of, an Institutional Review Board, or IRB, for each institution conducting the clinical trial. Companies sponsoring the clinical trials, investigators, and IRBs also must comply with regulations and guidelines for obtaining informed consent from the study subjects, complying with the protocol and investigational plan, adequately monitoring the clinical trial, and timely reporting adverse events. Foreign studies conducted under an IND must meet the same requirements that apply to studies being conducted in the U.S. Data from a foreign study not conducted under an IND may be submitted in support of an NDA if the study was conducted in accordance with GCP and, if necessary, the FDA is able to validate the data through an on-site inspection, if the agency deems such inspection necessary.
In general, clinical trials involve three separate phases that often overlap, can take many years to complete, and are very expensive. These three phases are as follows:
Phase 1. The investigational drug is given to a small number of human subjects to test for safety, dose tolerance, pharmacokinetics, metabolism, distribution and excretion. In most disease states Phase 1 studies are performed in healthy volunteers. In cancer, Phase 1 studies generally are performed in cancer patients.
Phase 2. The investigational drug is given to a limited patient population to determine the initial effect of the drug in treating the disease, the best dose of the drug, and the possible side effects and safety risks of the drug. Phase 2 trials typically are controlled studies.
Phase 3. If Phase 2 clinical trials of a compound yield promising data regarding safety and effectiveness, the compound may be advanced to Phase 3 clinical trials to confirm those results. Phase 3 clinical trials typically are long-term, involve a significantly larger population of patients, are conducted at numerous sites in different geographic regions, and are carefully designed to provide reliable and conclusive data regarding the safety and benefits of a drug and to form the basis for labeling. It is not uncommon for a drug that appears promising in Phase 2 clinical trials to fail in the more rigorous and reliable Phase 3 clinical trials.
At any point in this process, the development of a drug could be stopped for a number of reasons, including safety concerns and lack of treatment benefit. We cannot be certain that any clinical trials that we are currently conducting, or any that we conduct in the future, will be completed successfully or within any specified time period. We may choose, or the FDA or an IRB may require us, to delay or suspend our clinical trials at any time if, for example, it appears that the patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit. Success in early-stage clinical trials does not assure success in later-stage clinical trials, and data obtained from clinical activities are not always conclusive and may be subject to alternative interpretations that could delay, limit or prevent further development and regulatory approval.
FDA Approval Process
If we believe that the data from the Phase 3 clinical trials show an adequate level of safety and effectiveness, we will file a new drug application (NDA) with the FDA seeking approval to sell the drug for a particular use. When an NDA is submitted, the FDA conducts a preliminary review to determine whether the application is sufficiently complete to be accepted for filing. If it is not, the FDA may refuse to file the application and request additional information, in which case the application must be resubmitted with the supplemental information, and review of the application is delayed.
Upon accepting the NDA for filing, the FDA will review the NDA and may hold a public hearing where an independent advisory committee of expert advisors considers key questions regarding the drug. This advisory committee makes a recommendation to the FDA, which is not binding on the FDA, but is generally followed.
Under the Pediatric Research Equity Act, certain applications for approval must include an assessment, generally based on clinical study data, of the safety and effectiveness of the subject drug in relevant pediatric populations. The FDA may waive or defer the requirement for a pediatric assessment, either at the company’s request or by the agency’s initiative. The FDA may determine that a Risk Evaluation and Mitigation Strategy, or REMS, is necessary to ensure that the benefits of a new product outweigh its risks. A REMS may include various elements, ranging from a medication guide or patient package insert to limitations on who may prescribe or dispense the drug, depending on what the FDA considers necessary for the safe use of the drug.
Before approving an NDA, the FDA will inspect the facilities at which the product will be manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities for the drug, including those of companies who manufacture our drugs for us and including foreign establishments that may manufacture the product for sale in the U.S., comply with cGMP requirements (described below) and are adequate to assure consistent production of the product within required specifications.
If the FDA concludes that an NDA does not meet the regulatory standards for approval, the FDA typically issues a Complete Response letter communicating the agency’s decision not to approve the application and outlining the deficiencies in the submission. The Complete Response letter also may request further information, including additional preclinical or clinical data or improvements to manufacturing processes, procedures, or facilities. Even if such additional information and data are submitted, the FDA may decide that the NDA still does not meet the standards for approval.
The FDA may reject an application because, among other reasons, it believes that the drug is not safe enough, or effective enough, or because it does not believe that the data submitted are reliable or conclusive. FDA may interpret data differently than the sponsor. Obtaining regulatory approval often takes a number of years, involves the expenditure of substantial resources, and depends on a number of factors, including the nature of the disease or condition the drug is intended to address, the availability of alternative treatments, and the risks and benefits demonstrated in clinical trials.
If the FDA agrees that the compound has met the required level of safety and effectiveness for a particular use, it will approve the NDA, allowing the Company to sell the drug in the United States for that use. As a condition of approval, the FDA may impose restrictions that could affect the commercial success of a drug. For example, the FDA could require post-approval commitments, including completion within a specified time period of additional clinical studies, which often are referred to as “Phase 4” or “post-marketing” studies. The FDA also may limit the scope of the approved uses of the drug. Certain post-approval modifications to the drug product, such as changes in indications, labeling, or manufacturing processes or facilities, may require a sponsor to develop additional data or conduct additional preclinical or clinical trials, to be submitted in a new or supplemental NDA, which would require FDA approval.
Should our products be approved for marketing, we would also be subject to various other state and federal laws concerning the marketing and cost reimbursement of our products.
Major jurisdictions outside the United States, such as the European Union, Japan and Canada, have similarly rigorous regulatory processes. They may also require studies not required by the FDA, which can add to the cost and risk of development. Products approved by the FDA might not be approved in these other countries. After review by the health authorities, pricing and cost reimbursement are also subject to separate approvals in many of these countries.
Post-Approval Regulation
Even if regulatory approval is granted, a marketed drug product is subject to continuing comprehensive requirements under federal, state and foreign laws and regulations, including requirements and restrictions regarding adverse event reporting, recordkeeping, marketing, and compliance with current good manufacturing practices (cGMP). Adverse events reported after approval of a drug can result in additional restrictions on the use of a drug or requirements for additional post-marketing studies or clinical trials. The FDA or similar agencies in other countries may also require labeling changes to products at any time based on new safety information. If ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market, the FDA or similar agencies in other countries may at any time withdraw product approval or take actions that would suspend marketing or approval.
Good Manufacturing Practices. Companies engaged in manufacturing drug products or their components must comply with applicable cGMP requirements and product-specific regulations enforced by the FDA and other regulatory agencies. If, after approval, a company makes a material change in manufacturing equipment, location, or process (all of which are, to some degree, incorporated in the NDA), additional regulatory review and approval may be required. The FDA also conducts regular, periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product. Failure to comply with applicable cGMP requirements and conditions of product approval may lead the FDA to seek sanctions, including fines, civil penalties, injunctions, suspension of manufacturing operations, operating restrictions, withdrawal of FDA approval, seizure or recall of products, and criminal prosecution.
Advertising and Promotion. The FDA and other federal regulatory agencies closely regulate the marketing and promotion of drugs through, among other things, standards and regulations for advertising, promotion to physicians and patients, communications regarding unapproved uses, and industry-sponsored scientific and educational activities. Failure to comply with applicable FDA requirements and other restrictions in this area may subject a company to adverse publicity and enforcement action by the FDA, the Department of Justice, the Office of the Inspector General of the Department of Health and Human Services, and state authorities, as well as civil and criminal fines and agreements that may materially restrict the manner in which a company promotes or distributes drug products.
Other Requirements. In addition, companies that manufacture or distribute drug products or that hold approved NDAs must comply with other regulatory requirements, including submitting annual reports, reporting information about adverse drug experiences, submitting establishment registrations and drug listings, and maintaining certain records.
Orphan Drug Exclusivity
The Orphan Drug Act established incentives for the development of drugs intended to treat rare diseases or conditions, which generally are diseases or conditions affecting less than 200,000 individuals in the U.S. at the time of the request for orphan designation. If a sponsor demonstrates that a drug is intended to treat a rare disease or condition and meets other applicable requirements, the FDA grants orphan drug designation to the product for that use. In November 2014, the FDA granted orphan drug designation to Kevetrin for use in the treatment of ovarian cancer. The benefits of orphan drug designation include tax credits for clinical testing expenses and exemption from user fees. A drug candidate that is approved for the orphan drug designated use typically is granted seven years of orphan drug exclusivity. During that period, the FDA generally may not approve any other application for the same product for the same indication, although there are exceptions, most notably when the later product is shown to be clinically superior to the product with exclusivity.
Pediatric Exclusivity
Section 505A of the FDCA provides for six months of additional exclusivity if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be safe and effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or Orange Book listed patent protection that cover the drug are extended by six months.
Qualified Infectious Disease Product Exclusivity
The Generating Antibiotic Incentives Now (GAIN) Act amended the FDCA to encourage pharmaceutical companies to develop new antimicrobial drugs to treat serious and life-threatening infections. Among other measures, GAIN grants an additional five years of marketing exclusivity for new antibacterial or antifungal human drugs designated under the law as a “qualified infectious disease product” (QIDP). This five-year period of exclusivity is in addition to any existing regulatory exclusivity, including Hatch-Waxman, orphan drug, or pediatric exclusivity. In addition, QIDPs are eligible for fast-track designation and priority review to facilitate expedited development and review processes with the FDA. Our investigational drug Brilacidin has been granted QIDP designation as a potential new treatment for ABSSSI.
Fast Track Designation and Priority Review
Certain of our product candidates, such as Brilacidin for the indication of Oral Mucositis and Kevetrin for the indication of ovarian cancer, have been awarded Fast Track designation. The Fast Track program is intended to expedite or facilitate the process for reviewing new drugs that demonstrate the potential to address unmet medical needs involving serious or life-threatening diseases or conditions. If a drug receives Fast Track designation, the FDA may consider reviewing sections of the NDA on a rolling basis, rather than requiring the entire application to be submitted to begin the review. Products with Fast Track designation also may be eligible for more frequent meetings and correspondence with the FDA about the product’s development.
Certain of our product candidates, such as Brilacidin, also may qualify for priority review. Priority review is available to a drug that treats a serious condition and that, if approved, would provide a significant improvement in safety or effectiveness. Priority review designation provides for a six-month review goal for an NDA, rather than the standard 10-month review timeframe.
Other FDA programs intended to expedite development and review include accelerated approval, which allows the FDA to approve a drug on the basis of a surrogate endpoint that is reasonably likely to predict clinical benefit, and Breakthrough Therapy designation, which is intended to expedite the development and review of drugs for serious or life-threatening conditions and where preliminary clinical evidence shows that the drug may have substantial improvement on at least one clinically significant endpoint over available therapy.
Even if a product qualifies for Fast Track designation or Breakthrough Therapy designation, the FDA may later decide that the product no longer meets the conditions for qualification and may rescind the designation. Moreover, none of these programs assures ultimate approval of an investigational product. FDA may determine that the product does not meet the standards for approval.
Coronavirus Treatment Acceleration Program
FDA has created a special emergency program for possible coronavirus therapies, the Coronavirus Treatment Acceleration Program (CTAP). The FDA website describes the program as one that “uses every available method to move new treatments to patients as quickly as possible, while at the same time finding out whether they are helpful or harmful.” Subject to FDA approval, the Company plans to utilize this program.
PAYCHECK PROTECTION PROGRAM
On May 10, 2020, the Company received loan proceeds in the amount of approximately $79,000 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.
The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. While the Company believes that its use of the loan proceeds satisfied the conditions for forgiveness of the loan, we cannot assure you that we have not or will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.
COMPETITION
Competition in the pharmaceutical and biotechnology industries is intense. The drugs that we are developing will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. Many pharmaceutical or biotechnology companies have products on the market and are actively engaged in the research and development of products that are competitive with our potential products. Many of these companies and institutions, either alone or together with their collaborative partners, have substantially greater financial, manufacturing, sales, distribution and technical resources and more experience in research and development, clinical trials and regulatory matters, than we do. In addition, our competitors may succeed in developing technologies and drugs that are more effective, better tolerated or less costly than any which are being developed by us or which would render our technology or potential drugs obsolete or noncompetitive.
With respect to Kevetrin, our lead compound for cancer, there are many drugs approved to treat cancers and many more in the publicly disclosed development pipeline. The same is true for our other compound in clinical development, Brilacidin. There are many drugs approved to treat various forms of inflammatory bowel diseases, and ABSSSI, and many more in the publicly disclosed development pipeline. There are many treatments being investigated for COVID-19. There is no drug yet to be approved for preventing severe oral mucositis in head and neck cancer patients.
The key competitive factors affecting the success of all of our product candidates, if approved, are likely to be their efficacy, safety, convenience and price, the effectiveness of alternative products, the level of competition and the availability of coverage and adequate reimbursement from government and other third-party payors.
Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products or therapies that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA, European Medicines Agency, or EMA, or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products.
Our success depends on our ability to identify types of these respective diseases where our drugs have an advantage over existing therapies and those in the publicly disclosed development pipeline.
EMPLOYEES
As of June 30, 2020, the Company had 4 employees. The Company also conducts its operations using contractors and consultants.
CORPORATE INFORMATION
Innovation Pharmaceuticals Inc. was incorporated on August 1, 2005 in the State of Nevada. The Company has as its corporate headquarters 301 Edgewater Place - Suite 100, Wakefield, MA 01880, a facility that maintains our virtual offices, and if needed, the use of physical offices, meeting rooms, and business support services on a fee for use basis. All our employees and consultants work remotely. The corporate headquarters are currently used for various administrative functions. The Company’s telephone number is (978) 921-4125. The Company maintains an internet website at www.IPharmInc.com. The Company makes available, free of charge, through the Investors section of its website, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information on the Company’s website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of our other filings with the SEC.
ITEM 1A.
ITEM 1A. RISK FACTORS
Investing in the Company’s common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this Annual Report on Form 10-K, before purchasing shares of the Company’s common stock. There are numerous and varied risks, known and unknown, that may prevent the Company from achieving its goals. The risks described below are not the only ones the Company will face. If any of these risks actually occur, the Company’s business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of the Company’s common stock could decline and investors in the Company’s common stock could lose all or part of their investment.
Risks Related to Our Business
We need to raise substantial additional capital in the future to fund our operations and we may be unable to raise such funds when needed and on acceptable terms, which could prevent us from fully implementing our business, operating and development plans.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a history of losses, primarily due to being a mid-stage developmental pharmaceutical company. The Company intends on financing its future development activities largely from a variety of sources, including applying for government grants and contracts for the development of Brilacidin for the treatment of COVID-19, the sale of equity securities and seeking relationships with partners to help fund future clinical trial costs. However, there is no assurance these plans will be realized and that any additional financing will be available to us on satisfactory terms and conditions, if at all. In the event that we are unable to raise additional funds, we may be required to delay, reduce or severely curtail our operations or otherwise impede our ongoing efforts to develop our drug candidates, which could have a material adverse effect on our business, operating results, financial condition and long-term prospects.
We currently have an approximate $6.4 million cash balance in the bank as of the date of this filing, but that is insufficient to complete the development and commercialization of any of our proposed products. We expect to incur costs of approximately $8.2 million in the upcoming fiscal year ending June 30, 2021 to operate our business in accordance with our business plans and budgets.
If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, which are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.
Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including costly Phase 2 and Phase 3 clinical trials, and our business, operating results, financial condition and prospects could be materially and adversely affected and we may be unable to continue our operations. As of the date of this report, we have already delayed incurring additional expenses for Kevetrin and completing bridging toxicology work for oral dosing. In the event that we cannot obtain acceptable financing, we would be unable to complete preclinical development projects, and further clinical trials for Brilacidin and Kevetrin. This will delay:
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research and development programs;
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preclinical studies and clinical trials;
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material characterization studies;
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regulatory processes;
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drug substance and drug product manufacturing; and
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establishment of our own laboratory or a search for third party marketing partners to market our products for us.
The amount of capital we may require will depend on many factors, including the:
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progress, timing and scope of our research and development programs;
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progress, timing and scope of our preclinical studies and clinical trials;
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time and cost necessary to obtain regulatory approvals;
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time and cost necessary to establish our own marketing capabilities or to seek marketing partners;
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time and cost necessary to respond to technological and market developments;
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changes made or new developments in our existing collaborative, licensing and other commercial relationships; and
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new collaborative, licensing and other commercial relationships that we may establish.
Our fixed expenses, such as contractual commitments, may increase in the future, as we may:
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enter into leases for new facilities and capital equipment; and
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enter into additional licenses and collaborative agreements.
Our business could be adversely affected by the effects of health epidemics, including the global COVID-19 pandemic.
In December 2019, a novel strain of coronavirus, since named SARS-CoV-2, causing COVID-19 disease, was reported in China. Since then, COVID-19 has spread globally, including throughout the United States. The spread of COVID-19 has resulted in the World Health Organization (WHO) declaring the outbreak of COVID-19 as a “pandemic,” or a worldwide spread of a new disease, on March 11, 2020. Many countries around the world, including the United States, have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus, and have closed non-essential businesses.
As local jurisdictions continue to put restrictions in place, our ability to plan and enroll patients in our planned clinical trials, manufacture our product candidates and pursue collaborations, may also be limited. Such events may result in a period of business and manufacturing disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations.
The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, it has resulted in significant disruption of global financial markets, which could reduce our ability to access capital. In addition, the recession resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
The continued spread of COVID-19 globally could also adversely affect our planned clinical trial operations, including our ability to initiate the trials on the expected timelines and recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs in their geography. Further, the COVID-19 outbreak could result in delays in our clinical trials due to prioritization of hospital resources toward the outbreak, restrictions in travel, potential unwillingness of patients to enroll in trials at this time, or the inability of patients to comply with clinical trial protocols as quarantines or travel restrictions impede patient movement or interrupt healthcare services. In addition, we rely on independent clinical investigators, contract research organizations and other third-party service providers to assist us in managing, monitoring and otherwise carrying out our preclinical studies and clinical trials, and the outbreak may affect their ability to devote sufficient time and resources to our programs or to travel to sites to perform work for us.
Additionally, COVID-19 may also result in delays in receiving approvals from local and foreign regulatory authorities, delays in necessary interactions with local and foreign regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees, and refusals to accept data from clinical trials conducted in these affected geographies.
The global outbreak of COVID-19 continues to rapidly evolve. The extent to which COVID-19 may impact our business, operations and clinical trials will depend on future developments, including the duration of the outbreak, travel restrictions and social distancing in the United States and other countries, the effectiveness of actions taken in the United States and other countries to contain and treat the disease and whether the United States and additional countries are required to move to complete lock-down status. The ultimate long-term impact of COVID-19 is highly uncertain and cannot be predicted with confidence.
We have no products approved for commercial sale, but we signed an Exclusive License Agreement in 2019.
We currently have no products approved for commercial sale. On July 18, 2019, the Company entered into an Exclusive License Agreement (the “License Agreement”) with Alfasigma S.p.A., a global pharmaceutical company (“Alfasigma”), granting Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for the treatment of ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS).
Our ability to generate revenue depends heavily on:
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successful demonstration in clinical trials that our drug candidates, Brilacidin and Kevetrin are safe and effective;
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our ability to seek and obtain regulatory approvals, including with respect to the indications we are seeking;
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the successful commercialization of our product candidates; and
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market acceptance of our products.
If we and/or our licensee do not successfully develop and commercialize at least one of our compounds, we will not achieve revenues or profitability in the foreseeable future, if at all. If we are unable to generate revenues or achieve profitability, we may be unable to continue our operations.
In our existing or any future potential collaborations or partnerships, we will likely not be able to control all aspects of the development and commercialization of our compounds. This lack of control could subject us to additional risks that could harm our business.
Collaborations or license agreements involving our compounds, including our current license agreement with Alfasigma S.p.A. and any future collaboration or partnering arrangement with other pharmaceutical companies, are subject to numerous risks, which may include:
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partners have significant discretion in determining the efforts and resources that they will apply to collaborations;
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partners may not pursue development and commercialization of our compounds or may elect not to continue or renew development or commercialization programs based on clinical study results, changes in their strategic focus due to the acquisition of competitive products, availability of funding, or other external factors, such as a business combination that diverts resources or creates competing priorities;
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partners may delay clinical studies, provide insufficient funding for a clinical study program, stop a clinical study, abandon a product candidate, repeat or conduct new clinical studies, or require a new formulation of a product candidate for clinical testing;
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partners could independently develop, or develop with third parties, products that compete directly or indirectly with our compounds;
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a partner with marketing, manufacturing, and distribution rights to one or more compounds may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities;
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we could grant exclusive rights to our partners that would prevent us from collaborating with others;
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partners may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;
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partners may not aggressively or adequately pursue litigation concerning our compounds or may settle such litigation on unfavorable terms, as they may have different economic interests than ours, and such decisions could negatively impact any royalties we may receive under our license agreements;
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disputes may arise between us and a partner that causes the delay or termination of the research, development, or commercialization of our current or future compounds or that results in costly litigation or arbitration that diverts management attention and resources;
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agreements may be terminated, possibly at-will, without penalty, and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable compounds;
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partners may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases, we would not have the exclusive right to commercialize such intellectual property; and
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a partner’s sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings.
We depend on license agreements for the development and commercialization of certain compounds.
On July 18, 2019, we entered into a license agreement with Alfasigma, under which we granted Alfasigma the worldwide right to develop, manufacture and commercialize locally-administered Brilacidin for the treatment of ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS). Pursuant to the terms of the license agreement, Alfasigma is obligated to use commercially reasonable efforts (as defined in the license agreement) to develop, manufacture and commercialize Brilacidin for UP/UPS, and to achieve specified developmental milestones.
Under the terms of the license agreement, Alfasigma will make payments of up to $24.0 million to the Company based upon the achievement of certain milestones. In addition, Alfasigma will pay a royalty to the Company equal to six percent of net sales of Brilacidin for UP/UPS, subject to adjustment as provided in the license agreement.
The right to potential future payments under the license agreement represents a significant portion of the value of the license agreement to us. We cannot be certain that we will receive any future payments under the license agreement, which would adversely affect the trading price of our common stock and our business prospects.
Additionally, if Alfasigma were to breach or terminate the license agreement, we may not be able to obtain, or may be delayed in obtaining, marketing approvals for Brilacidin for UP/UPS and will not be able to, or may be delayed in our efforts to, successfully commercialize Brilacidin for UP/UPS. We may not be able to seek and obtain a viable, alternative collaborator to partner for the development and commercialization of the licensed products on similar terms or at all.
In addition, on July 22, 2020, the Company granted to Fox Chase Chemical Diversity Center, Inc. (“FCCDC”) all discovery, intellectual property and commercialization rights related to its share of their joint antifungal drug program in exchange for a six percent fee tied to all potential future proceeds. Acquisitions of royalties from development-stage biopharmaceutical product candidates are subject to a number of uncertainties, and there can be no assurance that the FDA, the EMA or other regulatory authorities will approve such products or that such products will be brought to market timely or at all, or that the market will be receptive to such products.
We have limited experience in drug development and may not be able to successfully develop any drugs.
We have limited experience in drug development and may not be able to successfully develop any drugs. Our ability to achieve revenues and profitability in our business will depend, among other things, on our ability to:
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develop products internally or obtain rights to them from others on favorable terms;
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complete laboratory testing and human clinical studies;
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obtain and maintain necessary intellectual property rights to our products;
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successfully fulfill regulatory requirements to obtain requisite marketing approvals from governmental agencies;
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enter into arrangements with third parties to manufacture our products on our behalf; and
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enter into arrangements with third parties to provide sales and marketing functions.
We have limited experience conducting clinical trials and obtaining regulatory approvals, and we may not be successful in some or all of these activities. We have not previously conducted a Phase 3 or later stage clinical trial such as the Phase 3 clinical trials planned for our most advanced drug candidate. We expect to spend significant amounts to recruit and retain highly quality personnel with clinical development experience.
We have no experience as a company in the sales, marketing and distribution of pharmaceutical products and do not currently have a sales and marketing organization. To the extent we are unable to, or determine not to develop these resources internally, we may be forced to rely on third parties for these capabilities, which could subject us to costs and to delays that are outside our control. If we are unable to establish adequate capabilities independently or with others, we may be unable to generate product revenues for certain candidates. If we are unable to achieve revenues and profitability, then we will be forced to cease operations, which could cause you to lose all of your investment.
Development of pharmaceutical products is a risky and time-consuming process subject to a number of factors, many of which are outside of our control. We are subject to regulatory authority permissions and approvals, most importantly the FDA. Many of our drug candidates are at early and mid-stages of development. Consequently, we can provide no assurance of the successful and timely development of new drugs, and the failure to do so could cause us to cease operations.
The drug discovery and development process is highly uncertain and we have not developed, and may never develop, a drug candidate that ultimately leads to a commercially viable drug. Our drug candidates are in early and mid-stages of development, and our most advanced drug candidate has completed Phase 2 testing. Further development and extensive testing will be required to determine their technical feasibility and commercial viability.
Conducting clinical trials is a complex, time-consuming and expensive process that requires an appropriate number of trial sites and patients to support the product label claims being sought. The length of time, number of trial sites and number of patients required for clinical trials vary substantially according to their type, complexity, novelty and the drug candidate’s intended use, and we may spend several years completing certain trials. The time within which we can complete our clinical trials depends in large part on the ability to enroll eligible patients who meet the enrollment criteria and who are in proximity to the trial sites. We face competition with other clinical trials for eligible patients. As a result, there may be limited availability of eligible patients, which can result in increased development costs, delays in regulatory approvals and associated delays in drug candidates reaching the market. We experienced these issues in our psoriasis and oral mucositis clinical trials.
At any time, we, the FDA (or foreign regulatory authority) or an institutional review board (“IRB”), may temporarily or permanently stop a clinical trial, for a variety of reasons. We may experience numerous unforeseen events during, or as a result of, the clinical development process that could delay or prevent our drug candidates from being approved, including:
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failure to achieve clinical trial results that indicate a candidate is effective in treating a specified condition or illness in humans;
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presence of harmful side effects;
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determination by the FDA that the submitted data do not satisfy the criteria for approval;
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lack of commercial viability of the drug;
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failure to acquire, on reasonable terms, intellectual property rights necessary for commercialization; and
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existence of alternative therapeutics that are more effective.
As our product candidates advance to later stage clinical trials, it is customary that various aspects of the development program, such as manufacturing, formulation and other processes, and methods of administration, may be altered to optimize the candidates and processes for scale-up necessary for later stage clinical trials and potential approval and commercialization. These changes may not produce the intended optimization, including production of drug substance and drug product of a quality and in a quantity sufficient for Phase 3 clinical stage development or for commercialization, which may cause delays in the initiation or completion of clinical trials and greater costs. We may also need to conduct “bridging studies” to demonstrate comparability between newly manufactured drug substance and/or drug product for commercialization relative to previously manufactured drug substance and/or drug product for clinical trials. Demonstrating comparability may require us to incur additional costs or delay initiation or completion of clinical trials and, if unsuccessful, could require us to complete additional preclinical studies or clinical trials.
We learned during our completed Kevetrin Phase 1 study that, when administered IV, Kevetrin was almost completely cleared from the systemic circulation within 24 hours. Therefore, little drug remains for any substantial period of time afterwards. Having the patient receive multiple IV infusions per week is a difficult course of treatment. Therefore, an oral formulation for Kevetrin is needed. There is no assurance we will be successful in developing an oral formulation.
We used Brilacidin in a water base, administered by enema, in our Phase 2 UP/UPS study. However, a commercial product for IBD will need a different formulation (e.g. Brilacidin in capsule or tablet). Additional formulation development is needed. There is no assurance we will be successful in developing new formulations for possible commercialization.
If we fail to adequately manage the increasing number, size and complexity of clinical trials, the clinical trials and corresponding regulatory approvals may be delayed or we or our partners may fail to gain approval for our drug candidates altogether. Even if we successfully conduct clinical trials, we may not obtain favorable clinical trial results and may not be able to obtain regulatory approval on this basis. If we are unable to market and sell our drug candidates or are unable to obtain approvals in the time frame needed to execute our product strategies, our business and results of operations would be materially adversely affected.
Our success will depend on our ability to achieve scientific and technological advances and to translate such advances into reliable, commercially competitive drugs on a timely basis. The length of time required to complete clinical studies, submit an application for marketing approval, and obtain approval can vary considerably from one product to another, and may be difficult to predict or control. Drugs that we may develop are not likely to be commercially available for several years, if ever. The proposed development schedules for our drug candidates may be affected by a variety of factors, including technological difficulties, proprietary technology of others, and changes in government regulation, many of which will not be within our control.
Any delay in the development, introduction or marketing of our drug candidates could result either in such drugs being marketed at a time when their cost and performance characteristics would not be competitive in the marketplace or in the shortening of their commercial lives. In light of the long-term nature of our projects, the unproven technology involved and the other factors described elsewhere in “Risk Factors”, we may not be able to complete successfully the development or marketing of any of our drug candidates.
We may fail to successfully develop and commercialize our drug candidates for multiple reasons, including because they:
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are found to be unsafe or ineffective in clinical trials;
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do not receive necessary approval from the FDA or foreign regulatory agencies;
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have manufacturing production problems, costs, pricing or reimbursement issues, or other factors that make the product not economical;
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are hampered by the proprietary rights of others and their competing products and technologies;
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fail to conform to a changing standard of care for the diseases they seek to treat; or
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are less effective or more expensive than current or alternative treatment methods.
Drug development failure can occur at any stage of clinical trials and as a result of many factors and there can be no assurance that we will reach our anticipated clinical targets. Promising results in preclinical development or early clinical trials may not be predictive of results obtained in later clinical trials. Many pharmaceutical companies have experienced significant setbacks in advanced clinical trials, even after obtaining promising results in earlier preclinical studies and clinical trials. Clinical results are susceptible to varying interpretations that may delay, limit, or prevent regulatory approvals.
Even if we complete our clinical trials, we do not know what the long-term effects of exposure to our drug candidates will be. Furthermore, our drug candidates may be used in combination with other treatments and there can be no assurance that such use will not lead to unique safety issues. Failure to complete clinical trials or to prove that our drug candidates are safe and effective would have a material adverse effect on our ability to generate revenue and could require us to reduce the scope of or discontinue our operations, which could cause you to lose all of your investment.
At any time, we may decide to discontinue the development of, or to not commercialize, a drug candidate, such as our decision in December 2018 to discontinue the Prurisol psoriasis program. If we terminate a program in which we have invested significant resources, we will not receive any return on our investment and we will have missed the opportunity to allocate those resources to potentially more productive uses.
We have limited experience in conducting or supervising clinical trials and must outsource all clinical trials, which exposes us to risks which could have a materially adverse effect on our business.
We have limited experience in conducting and supervising clinical trials that must be performed to obtain data to submit in applications for approval by the FDA. Because we have limited experience in conducting or supervising clinical trials, we outsource a significant amount of the work relating to our clinical trials to third parties. We therefore have less control over the conduct of our clinical trials, the timing and completion of the trials, the required reporting of adverse events, and the management of data developed through the trials than would be the case if we were relying entirely upon our own staff. We also have more limited control over compliance with procedures and protocols used to complete clinical trials. If these contractors fail to meet applicable regulatory standards, the testing of our drugs would be adversely affected, causing a delay in our ability to engage in revenue-generating operations that could have a materially adverse effect on our business.
Communicating with outside parties can also be challenging, potentially leading to mistakes, as well as difficulties in coordinating activities. Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected cost increases that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay our trials and contractual restrictions may make such a change difficult or impossible. Additionally, it may be impossible to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.
Success in early clinical trials may not be predictive or indicative of results in current ongoing clinical trials or potential future clinical trials. Likewise, preliminary data from clinical trials should be considered carefully and with caution since the final data may be materially different from the preliminary data, particularly as more patient data become available.
A number of new drugs and biologics have shown promising results in preclinical studies and initial clinical trials, but subsequently have failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals to initiate commercial sale. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. Product candidates in later stages of clinical trials may fail to show the desired benefit-risk profile despite having progressed through preclinical studies and initial clinical trials. As a result, data from our preclinical studies and Phase 1 and Phase 2 clinical trials of our drug candidates Brilacidin and Kevetrin, as well as the results of the past or future internal data reviews, should not be relied upon as predictive or indicative of future clinical results. The results we have previously obtained, as well as any future results, may not predict the future therapeutic benefit of our drug candidates.
In addition, from time-to-time, preliminary or interim data from clinical trials or other research, such as relating to the Brilacidin Phase 2, open-label, UP/UPS Proof-of-Concept (PoC) clinical trial, the ongoing research relating to Brilacidin as a potential therapeutic for the treatment of the novel coronavirus (SARS-CoV-2), which is responsible for COVID-19, or potential future clinical trials, may be reported or announced by us or the clinical investigators and medical institutions with which we work. Such data are preliminary and the data from any final analysis may be materially different. Even if final safety and/or efficacy data are positive, significant additional clinical testing will be necessary to advance the future development of our drug candidates. Preliminary or interim results may also not be reproduced in any potential future clinical trials. Accordingly, preliminary or interim data should be considered carefully and with caution.
We are subject to risks inherent in conducting clinical trials. Non-compliance with the FDA’s good clinical practices by clinical investigators, clinical sites, or data management services could delay or prevent us from developing or commercializing our drug candidates, which could cause us to cease operations.
Agreements with clinical investigators and medical institutions for clinical testing and with other third parties for data management services place substantial responsibilities on these parties, which could result in delays in, or termination of, our clinical trials if these parties fail to perform as expected. For example, if any of our clinical trial sites fail to comply with FDA-approved good clinical practices, we may be unable to use the data gathered at those sites. If these clinical investigators, medical institutions or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for or successfully commercialize our drug candidates.
We or regulators may suspend or terminate our clinical trials for a number of reasons. We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to the patients enrolled in our clinical trials. In addition, regulatory agencies may order the temporary or permanent discontinuation of our clinical trials at any time if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements or that they present an unacceptable safety risk to the patients enrolled in our clinical trials. In addition, clinical trials may have independent monitoring boards composed of experts in the field. These boards may also have the authority to suspend or terminate clinical trials.
Our clinical trial operations are and will be subject to regulatory inspections at any time. If regulatory inspectors conclude that we or our clinical trial sites are not in compliance with applicable regulatory requirements for conducting clinical trials, we may receive reports of observations or warning letters detailing deficiencies, and we will be required to implement corrective actions. If regulatory agencies deem our responses to be inadequate, or are dissatisfied with the corrective actions that we or our clinical trial sites have implemented, our clinical trials may be temporarily or permanently discontinued, we may be fined, we or our investigators may be precluded from conducting any ongoing or any future clinical trials, the government may refuse to approve our marketing applications or allow us to manufacture or market our drug candidates or we may be criminally prosecuted. If we are unable to complete clinical trials and have our products approved due to our failure to comply with regulatory requirements, we will be unable to commence revenue-generating operations, which could force us to cease operations.
Delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to generate revenues.
Delays in the commencement or completion of clinical testing of our products or products could significantly affect our product development costs and our ability to generate revenue. We do not know whether the FDA will agree with the trial designs for ongoing and planned clinical trials or whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to our ability to do the following:
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provide sufficient safety, efficacy or other data regarding a drug candidate to support the commencement of a Phase 3 or other clinical trial;
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reach agreement on acceptable terms with prospective contract manufacturers, contract research organizations (CROs) and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different third parties;
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select CROs, trial sites and, where necessary, contract manufacturers that do not encounter any regulatory compliance problems;
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manufacture sufficient quantities of a product candidate for use in clinical trials;
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obtain IRB approval to conduct a clinical trial at a prospective site;
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recruit and enroll patients to participate in clinical trials, which can be impacted by many factors outside our or our contracted parties’ control, including competition from other clinical trial programs for the same or similar indications; and
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retain patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal issues.
Clinical trials may also be delayed as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us or our partner, the FDA, an IRB, a clinical trial site with respect to that site, or other regulatory authorities due to a number of factors, including:
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failure to conduct the clinical trial in accordance with regulatory requirements, including GCP, or our protocol;
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inspection of the clinical trial operations, trial sites or manufacturing facility by the FDA or other regulatory authorities resulting in findings of non-compliance and the imposition of a clinical hold;
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unforeseen safety issues or results that do not demonstrate efficacy; and
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lack of adequate funding to continue the clinical trial.
Additionally, we may need to amend clinical trial protocols for a variety of reasons, including changes in regulatory requirements and guidance. Such amendments may require us to, for example, resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. We may decide to terminate a clinical study for commercial reasons including increased market availability of generic treatments. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues will be delayed and/or reduced. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.
We must comply with significant and complex government regulations, compliance with which may delay or prevent the commercialization of our drug candidates, which could have a materially adverse effect on our business.
The Research and Development (R&D), manufacture and marketing of drug candidates are subject to regulation, primarily by the FDA in the United States, and by comparable authorities in other countries. These national agencies and other federal, state, local and foreign entities regulate, among other things, R&D activities (including testing in animals and in humans) and the testing, manufacturing, handling, labeling, storage, record keeping, approval, advertising and promotion of the products that we are developing. Noncompliance with applicable requirements can result in various adverse consequences, including approval delays or refusals to approve drug licenses or other applications, suspension or termination of clinical investigations, revocation of approvals previously granted, fines, criminal prosecution, recalls or seizures of products, injunctions against shipping drugs and total or partial suspension of production and/or refusal to allow a company to enter into governmental supply contracts.
The process of obtaining FDA approval for a drug has historically been costly and time consuming. Current FDA requirements for a new human drug or biological product to be marketed in the United States include: (i) the successful conclusion of pre-clinical laboratory and animal tests, if appropriate, to gain preliminary information on the product’s safety; (ii) filing with the FDA of an IND application to conduct human clinical trials for drugs or biologics; (iii) the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use; and (iv) filing by a company and acceptance and approval by the FDA of a New Drug Application (“NDA”), for a drug product or a biological license application (“BLA”), for a biological product to allow commercial distribution of the drug or biologic. A delay in one or more of the procedural steps outlined above could be harmful to the Company in terms of getting our drug candidates through clinical testing and to market.
The FDA reviews the results of the clinical trials and may order the temporary or permanent discontinuation of clinical trials at any time if it believes the drug candidate exposes clinical subjects to an unacceptable health risk. Investigational drugs used in clinical studies must be produced in compliance with cGMP rules pursuant to FDA regulations.
Sales outside the United States of products that we may develop will also be subject to additional regulatory requirements governing human clinical trials and marketing for drugs and biological products and devices. The requirements vary widely from country to country, but typically the registration and approval process takes several years and requires significant resources.
We also are subject to the following risks and obligations, related to the approval of our products:
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The FDA or foreign regulators may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them.
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If regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution. In addition, many foreign countries control pricing and coverage under their respective national social security systems.
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The FDA or foreign regulators may not approve our manufacturing processes or manufacturing facilities.
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The FDA or foreign regulators may change their approval policies or adopt new regulations.
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Even if regulatory approval for any of our product is obtained, the corresponding marketing license will be subject to continual review, and newly discovered or developed safety or effectiveness data may result in suspension or revocation of the marketing license.
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If regulatory approval of the product candidate is granted, the marketing of that product would be subject to adverse event reporting requirements and a general prohibition against promoting products for unapproved uses.
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In some foreign countries, we may be subject to official release requirements that require each batch of the product we produce to be officially released by regulatory authorities prior to its distribution by us.
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We will be subject to continual regulatory review and periodic inspection and approval of manufacturing modifications, including compliance with cGMP regulations.
If we do not have the requisite resources to comply with all applicable regulations, then we could be forced to cease operations, which could cause you to lose all of your investment.
We or third-party manufacturers we rely on may encounter failures or difficulties in manufacturing or formulating clinical development and commercial supplies of drugs, which could delay the clinical development or regulatory approval of our drug candidates, or their ultimate commercial production if approved.
Currently, third parties manufacture our drug candidates on our behalf. Third-party manufacturers may lack capacity to meet our needs, go out of business or fail to perform. In addition, supplies of raw materials needed for manufacturing or formulation of clinical supplies may not be available or in short supply. Furthermore, should we obtain FDA or EMA approval for any of our drug candidates, we expect to rely, at least to some extent, on third-party manufacturers for commercial production. Our dependence on others for the manufacture of our drug candidates may adversely affect our ability to develop and deliver such drug candidates on a timely and competitive basis.
Any performance failure on the part of a third-party manufacturer could delay clinical development, regulatory approval or, ultimately, sales of our drug candidates. Our third-party manufacturers may encounter difficulties involving production yields, regulatory compliance, lot release, quality control and quality assurance, as well as shortages of qualified personnel. Approval of our drug candidates could be delayed, limited or denied if the FDA does not approve our or a third-party manufacturer’s processes or facilities. Moreover, the ability to adequately and timely manufacture and supply drug candidates is dependent on the uninterrupted and efficient operation of the manufacturing facilities, which is impacted by many manufacturing variables including:
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availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;
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capacity of our facilities or those of our contract manufacturers;
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facility contamination by microorganisms or viruses or cross contamination;
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compliance with regulatory requirements, including Form 483 notices and Warning Letters;
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changes in forecasts of future demand;
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timing and actual number of production runs;
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production success rates and bulk drug yields; and
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timing and outcome of product quality testing.
In addition, our third-party manufacturers may encounter delays and problems in manufacturing our drug candidates or drugs for a variety of reasons, including accidents during operation, failure of equipment, delays in receiving materials, natural or other disasters, political or governmental changes, or other factors inherent in operating complex manufacturing facilities. Supply chain management is complex, and involves sourcing from a number of different companies and foreign countries. Commercially available starting materials, reagents and excipients may become scarce or more expensive to procure, and we may not be able to obtain favorable terms in agreements with contractors or subcontractors. Our third-party manufacturers may not be able to operate their respective manufacturing facilities in a cost-effective manner or in a time frame that is consistent with our expected future manufacturing needs. If we or our third-party manufacturers cease or interrupt production or if our third-party manufacturers and other service providers fail to supply materials, products or services to us for any reason, such interruption could delay progress on our programs, or interrupt the commercial supply, with the potential for additional costs and lost revenues. If this were to occur, we may also need to seek alternative means to fulfill our manufacturing needs.
We may not be able to enter into agreements for the manufacture of our drug candidates with manufacturers whose facilities and procedures comply with applicable law. Manufacturers are subject to ongoing periodic unannounced inspection by the FDA and corresponding state and foreign authorities to ensure strict compliance with cGMP and other applicable government regulations and corresponding foreign standards. We do not have control over a third-party manufacturer’s compliance with these regulations and standards. If one of our manufacturers fails to maintain compliance, we or they could be subject to enforcement, the production of our drug candidates could be interrupted or suspended, and/or our product could be recalled or withdrawn, among other consequences. Any of these events could result in delays, additional costs and potentially lost revenues.
We can provide no assurance that our drug candidates will obtain regulatory approval or that the results of clinical studies will be favorable, and if we fail to obtain such approval or if clinical studies are not favorable, we could be forced to cease operations.
Our drug candidates Brilacidin and Kevetrin will require lengthy and costly studies in humans to obtain approval from the FDA before they can be marketed. We cannot predict with any certainty that the study results will be satisfactory to the FDA for approval to ultimately be granted. Preclinical and clinical trials may reveal that one or more products are ineffective or unsafe, in which event further development of such products could be seriously delayed or terminated.
Approval of a drug candidate as safe and effective for use in humans is never certain and regulatory agencies may delay or deny approval of drug candidates for commercialization. For example, even though our product candidate Brilacidin has received QIDP designation, such designation may not result in a faster development process, review, or approval than drugs considered for approval under conventional FDA procedures; nor does such designation assure ultimate approval by the FDA or related exclusivity benefits. Regulatory agencies also may delay or deny approval based on additional government regulation or administrative action, changes in regulatory policy during the period of clinical trials in humans and regulatory review, or the availability of alternative treatments.
Delays in obtaining, or failure to obtain, FDA or any other necessary regulatory approvals of any proposed drugs would have an adverse effect on the drug’s potential commercial success and on our business, prospects, financial condition and results of operations. In addition, it is possible that a proposed drug may be found to be ineffective or unsafe due to conditions or facts that arise after development has been completed and regulatory approvals have been obtained. In this event, we may be required to withdraw such drug from the market. To the extent that our success will depend on any regulatory approvals from government authorities outside of the United States that perform roles similar to that of the FDA, uncertainties similar to those stated above will also exist.
Even if we obtain regulatory approvals, our marketed drug candidates will be subject to ongoing regulation. If we fail to comply with U.S. and foreign regulations, we could be subject to adverse consequences, including loss of our approvals to market these drugs, and our business would be seriously harmed.
Following any initial regulatory approval of any of our drug candidates, we will also be subject to continuing regulation of the manufacture, labeling, storage, recordkeeping, reporting, distribution, advertising, promotion, marketing, sale, import, and export of those drugs. Such regulation includes review of adverse experiences and the results of any clinical trials completed after our drug candidates are made commercially available, including any post marketing requirements that were required as a condition of approval. The contract manufacturers that make any of our drug candidates will also be subject to periodic review and inspection by the FDA. If our products, if approved, or the manufacturing facilities for our products fail to comply with applicable regulatory requirements, a regulatory agency may suspend any ongoing clinical trials; issue warning letters or untitled letters; suspend or withdraw regulatory approval; refuse to approve pending applications or supplements to applications; suspend or impose restrictions on operations; seize or detain products, prohibit the export or import of products, or require us to initiate a product recall; or seek other monetary or injunctive remedies, or impose civil or criminal penalties. We do not have, and currently do not intend to develop, the ability to manufacture material for our clinical trials or on a commercial scale. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured drugs ourselves, including reliance on the third-party manufacturer for regulatory compliance.
Our drug promotion and advertising also would be subject to regulatory requirements and continuing FDA review. Our marketing of these drugs also may be heavily scrutinized by the Department of Justice, the Department of Health and Human Services’ Office of Inspector General, state attorneys general, members of Congress and the public. Our promotional activities will be regulated not only by the FDCA and FDA regulations, but also by federal and state laws pertaining to health care “fraud and abuse,” such as:
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the federal anti-kickback law prohibiting bribes, kickbacks or other remuneration for the order, purchase or recommendation of items or services reimbursed by federal health care programs;
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the federal False Claims Act, imposing criminal and civil penalties for knowingly presenting or causing to be presented claims to the federal government that are false or fraudulent; and
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the federal Physician Payment Sunshine Act, requiring pharmaceutical manufacturers to engage in extensive tracking of physician and teaching hospital payments, maintenance of a payments database and public reporting of the payment data.
Many states have similar laws applicable to items or services reimbursed by commercial insurers. Violations of fraud and abuse laws can result in costly litigation, fines and/or imprisonment, exclusion from participation in federal health care programs, and burdensome reporting and compliance obligations.
Compliance with ongoing regulation consumes substantial financial and management resources and may expose us to the potential for other adverse circumstances. For example, approval for a drug may be conditioned on costly post-marketing follow-up studies. Based on these studies, if a regulatory authority does not believe that the drug demonstrates an appropriate benefit-risk profile to patients, it could limit the indications for which a drug may be sold or revoke the drug’s marketing approval. In addition, identification of certain side effects after a drug is on the market may result in the subsequent withdrawal of approval, reformulation of a drug, additional preclinical and clinical trials, changes in labeling or distribution. Alternatively, we may be required by the FDA to develop and implement a REMS to ensure the safe use of our products. REMS may include costly risk management measures such as enhanced safety surveillance, restricted distribution and use, patient education, enhanced labeling, special packaging or labeling, expedited reporting of certain adverse events, pre-approval of promotional materials and restrictions on direct-to-consumer advertising. Any of these events could delay or prevent us from generating revenue, or limit the revenue, from the commercialization of these drugs and/or cause us to incur significant additional costs.
Any of these events could prevent us from achieving or maintaining market acceptance of a particular product candidate, if approved, and could significantly harm our business, results of operations and prospects. If we are required to withdraw all or more of our drugs from the market as a result of actions or inactions on our part or that of a third party, we may be unable to continue revenue-generating operations, which could cause you to lose all of your investment.
All of our Polymedix drug product candidates are licensed from or based upon licenses from the University of Pennsylvania. Upon our purchase of the Polymedix Assets we assumed all contractual rights and obligations of the licenses. If any of these license agreements are terminated, our ability to advance our Polymedix product candidates or develop new product candidates will be materially adversely affected which could have a materially adverse effect on our business.
We now depend, and will continue to depend, on our Polymedix licenses and potentially on other licensing arrangements and/or strategic relationships with third parties for the research, development, manufacturing and commercialization of our Polymedix product candidates. If any of our licenses or relationships are terminated or breached, we may:
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lose our rights to develop and market our Polymedix product candidates;
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lose patent and/or trade secret protection for our Polymedix product candidates;
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experience significant delays in the development or commercialization of our Polymedix product candidates;
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not be able to obtain any other licenses on acceptable terms, if at all; and/or
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incur liability for damages.
If we experience any of the foregoing, it could have a materially adverse effect on our business and could force us to cease operations which could cause you to lose all of your investment.
We or our third-party manufacturers may fail to comply with manufacturing regulations.
All facilities and manufacturing processes used in the production of active pharmaceutical ingredient, or API, and drug products for clinical use in the U.S. must be operated in conformity with cGMP as established by the FDA. Similar requirements in other countries exist for manufacture of drug products for clinical use. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. Before we can commercialize a drug, we must obtain regulatory approval of our cGMP manufacturing facility and process, if any, or the cGMP manufacturing facility and process of the third party or parties with whom we may outsource our manufacturing activities.
In connection with any application for commercial approval, and if any drug candidate is approved by the FDA or other regulatory agencies for commercial sale, a significant scale-up in manufacturing may require additional validation studies. If we are unable to successfully increase the manufacturing capacity for a drug candidate, the regulatory approval or commercial launch of that drug candidate may be delayed, or there may be a shortage of supply, which could limit our ability to develop or commercialize the drug.
Our manufacturing facilities, if any in the future, and the manufacturing facilities of our third-party manufacturers will be subject to inspection by the FDA and other state, local and foreign regulatory authorities, before and after product approval. We cannot guarantee that we, or any potential third-party manufacturer of our products, will be able to comply with the cGMP regulations or other applicable manufacturing regulations.
Failure on our or our third party manufacturers’ part to comply with applicable regulations and specific requirements or specifications of other countries could result in the termination of ongoing research, disqualification of data for submission to regulatory authorities, delays or denials of new product approvals, warning letters, fines, consent decrees restricting or suspending manufacturing operations, injunctions, civil penalties, recall or seizure of products and criminal prosecution. Any of these consequences could have a materially adverse effect on our business.
Controls we or our third-party service providers have in place to ensure compliance with laws may not be effective to ensure compliance with all applicable laws and regulations.
The development of our investigational products and our general operations are subject to extensive regulation in the U.S. and in foreign countries. Although we have developed and instituted controls to comply with applicable regulatory requirements, we cannot assure you that we, our employees, our consultants or our contractors will operate at all times in full compliance with all potentially applicable U.S. federal and state regulations and/or laws or all potentially applicable foreign law and/or regulations. Further, we have a limited ability to monitor and control the activities of third-party service providers, suppliers and manufacturers to ensure compliance by such parties with all applicable regulations and/or laws. We may be subject to direct liabilities or be required to indemnify such parties against certain liabilities arising out of any failure by them to comply with such regulations and/or laws. If we or our employees, consultants or contractors fail to comply with any of these regulations and/or laws a range of consequences could result, including, but not limited to, the termination of clinical trials, the failure to obtain approval of a product candidate, restrictions on our products or manufacturing processes, withdrawal of our products from the market, significant fines, exclusion from government healthcare programs or other sanctions or litigation that could adversely affect our results of operations.
The Company is exposed to product liability, clinical and preclinical liability risks which could place a substantial financial burden upon the Company should it be sued.
The Company could be exposed to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. In addition, the use in the Company’s clinical trials of its investigational products and the potential subsequent sale of these products by the Company or its potential collaborators may cause the Company to bear some or all of the associated product liability risks. A successful liability claim or series of claims brought against the Company could have a material adverse effect on its business, financial condition and results of operations.
The Company has $5,000,000 per occurrence / $10,000,000 in aggregate in liability insurance for our clinical trials. The Company cannot assure that such insurance will provide adequate coverage against the Company’s potential liabilities. Claims or losses in excess of any product liability insurance coverage obtained by the Company could have a material adverse effect on our business, financial condition and results of operations.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. Disclosure of our trade secrets or proprietary information could compromise any competitive advantage that we have, which could have a materially adverse effect on our business.
We depend upon confidentiality and non-use agreements with our officers, employees, consultants, and subcontractors to maintain the proprietary nature of the technology. These measures may not afford us sufficient or complete protection, and may not afford an adequate remedy in the event of an unauthorized disclosure of confidential information. In addition, others may independently develop technology similar to ours, otherwise avoiding the confidentiality agreements, or produce patents that would materially and adversely affect our business, prospects, financial condition, and results of operations.
We may be unable to obtain or protect intellectual property rights relating to our products, and we may be liable for infringing upon the intellectual property rights of others, which could have a materially adverse effect on our business.
Our ability to compete effectively will depend on our ability to maintain the proprietary nature of our compounds and the proprietary compounds of others with which we have entered into licensing agreements. We have filed patent applications and expect to file a number of additional patent applications in the coming years. There can be no assurance that any of these patent applications will ultimately result in the issuance of a patent with respect to the proprietary compounds owned by us or licensed to us. The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards that the United States Patent and Trademark Office use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims that will be allowed in any patents issued to us or to others. Further, we rely on a combination of trade secrets, know-how, technology and nondisclosure, and other contractual agreements and technical measures to protect our rights in the proprietary compounds. If any trade secret, know-how or other proprietary information and/or compounds not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.
We do not believe that any of the drug candidates we are currently developing infringe upon the rights of any third parties nor are they infringed upon by third parties; however, there can be no assurance that our proprietary compounds will not be found in the future to infringe upon the rights of others or be infringed upon by others. In such a case, others may assert infringement claims against us, and should we be found to infringe upon their patents, or otherwise impermissibly utilize their intellectual property, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, we may be required to obtain licenses from the holders of this intellectual property, enter into royalty agreements, or redesign our drug candidates so as not to utilize this intellectual property, each of which may prove to be uneconomical or otherwise impossible. Conversely, we may not always be able to successfully pursue our claims against others that infringe upon our proprietary compounds. Thus, the proprietary nature of our technology or technology licensed by us may not provide adequate protection against competitors.
Moreover, the cost to us of any litigation or other proceeding relating to our patents and other intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.
Our potential collaborative relationships with third parties could cause us to expend significant resources and incur substantial business risk with no assurance of financial return, which could have a materially adverse effect on our business.
We may have to rely substantially upon strategic collaborations for marketing and the commercialization of our drug candidates, and we may rely even more on strategic collaborations for R&D of our other drug candidates. Our business will depend on our ability to sell drugs to both government agencies and to the general pharmaceutical market. We may have to sell our drugs through strategic partnerships with other pharmaceutical companies. If we are unable to establish or manage such strategic collaborations on terms favorable to us in the future, our revenue and drug development may be limited. To date, we have not yet marketed or sold any of our drug candidates.
If we determine to enter into R&D collaborations during the early phases of drug development, our success will in part depend on the performance of our research collaborators. We will not directly control the amount or timing of resources devoted by our research collaborators to activities related to our drug candidates. Our research collaborators may not commit sufficient resources to our programs. If any research collaborator fails to commit sufficient resources, our preclinical or clinical development programs related to this collaboration could be delayed or terminated. Also, our collaborators may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us. Finally, if we fail to make required milestone or royalty payments to our collaborators, or to observe other obligations in our agreements with them, our collaborators may have the right to terminate those agreements.
Management of our relationships with our collaborators will require:
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significant time and effort from our management team;
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coordination of our marketing and R&D programs with the marketing and R&D priorities of our collaborators; and
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effective allocation of our resources to multiple projects.
Establishing strategic collaborations is difficult and time-consuming. Our discussion with potential collaborators may not lead to the establishment of collaborations on favorable terms, if at all. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property position. Even if we successfully establish new collaborations, these relationships may never result in the successful development or commercialization of our drug candidates or the generation of sales revenue. To the extent that we enter into collaborative arrangements, our drug revenues are likely to be lower than if we directly marketed and sold any drugs that we may develop.
We may not be able to attract and retain highly skilled personnel or consultants, which could have a materially adverse effect on our business.
Our ability to attract and retain highly skilled personnel or consultants is critical to our operations and expansion. We face competition for these types of personnel from other pharmaceutical companies and more established organizations, many of which have significantly larger operations and greater financial, technical, human and other resources than us. We may not be successful in attracting and retaining qualified personnel or consultants on a timely basis, on competitive terms, or at all. If we are not successful in attracting and retaining these personnel or consultants, our business, prospects, financial condition and results of operations will be materially adversely affected.
We depend upon our senior management and their loss or unavailability could put us at a competitive disadvantage.
We depend upon the efforts and abilities of our senior management team. Leo Ehrlich, the Company’s Chief Executive and Financial Officer presently has no employment agreement with the Company. The loss of a member of the senior management team could have an adverse impact on our business. Competition for senior management is intense, and we may not be successful in attracting and retaining key personnel to replace such loss of a member of the senior management team, the inability of which could have an adverse effect on our business and results of operations.
The biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition. We may be unable to compete with enterprises equipped with more substantial resources than us, which could cause us to cease operations.
The biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition based primarily on scientific and technological factors. These factors include the availability of patent and other protection for technology and products, the ability to commercialize technological developments and the ability to obtain government approval for testing, manufacturing and marketing.
We compete with biopharmaceutical firms in the United States, Europe and elsewhere, as well as a growing number of large pharmaceutical companies that are applying biotechnology to their operations. Many biopharmaceutical companies have focused their development efforts in the human therapeutics area, including cancer. Many major pharmaceutical companies have developed or acquired internal biotechnology capabilities or made commercial arrangements with other biopharmaceutical companies. These companies, as well as academic institutions, government agencies and private research organizations, also compete with us in recruiting and retaining highly qualified scientific personnel and consultants. Our ability to compete successfully with other companies in the pharmaceutical field will also depend to a considerable degree on the continuing availability of capital on terms and conditions acceptable to us.
We are aware of numerous products under development or manufactured by competitors that are used for the prevention or treatment of certain diseases we have targeted for drug development. Various companies are developing biopharmaceutical products that potentially directly compete with our drug candidates even though their approach to such treatment is different.
For example, with respect to Kevetrin, our lead compound in development for treating cancers, there are many drugs approved to treat various cancers and many more in the publicly disclosed pipeline. Our success depends on our ability to identify tumor types where Kevetrin has an advantage over existing therapies and those in the publicly disclosed pipeline. The same is true for our compound, Brilacidin. Numerous drugs are already FDA approved for the treatment of IBD and ABSSSI, and currently, one effective therapy has FDA approval for treatment of COVID-19. Although there is presently no drug approved for the prevention and treatment of oral mucositis for head and neck cancers, there are numerous clinical trials in progress and Kepivance is approved for limited use in patients with hematologic malignancies.
Our competition will be determined in part by the potential indications for which our investigational drugs are developed and ultimately approved by regulatory authorities. Additionally, the timing of the market introduction of some of our potential drugs or of competitors’ products may be an important competitive factor. Accordingly, the relative speed with which we can develop drugs; complete pre-clinical testing, clinical trials, and approval processes; and supply commercial quantities to market are likely to be important competitive factors. We expect that competition among drugs approved for sale will be based on various factors, including product efficacy, safety, reliability, availability, price and patent protection.
The successful development of biopharmaceuticals is highly uncertain. A variety of factors, including, but not limited to, unfavorable pre-clinical study results or failure to obtain regulatory approvals, could cause us to abandon development of our drug candidates, which could also cause us to cease operations and you may lose your entire investment.
Risks Related to the Securities Markets and Investments in Our Class A Common Stock
The sale of our Class A Common Stock to Aspire Capital may cause substantial dilution to our existing stockholders and the sale of the shares of Class A Common Stock acquired by Aspire Capital could cause the price of our Class A Common Stock to decline, which could have a materially adverse effect on our business.
On July 31, 2020, the Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“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 Purchase Agreement. The Company also issued 6,250,000 shares of its Class A Common Stock to Aspire Capital as a commitment fee. The Company has filed a registration statement to register the resale of any shares that Aspire Capital may purchase under the Purchase Agreement. To the extent Aspire Capital purchases shares under the Purchase Agreement and subsequently sells those shares, the other holders 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 at a price that we might otherwise wish to effect sales.
In addition to potential dilution associated with future fundraising transactions, we currently have significant numbers of securities outstanding that are exercisable for our common stock, which will result in significant additional dilution and downward pressure on our stock price.
As of September 10, 2020, there were 343.6 million shares of our Class A common stock outstanding and 3.6 million shares of our Class B common stock outstanding. In addition, as of June 30, 2020, there were outstanding stock options, warrants and a convertible note representing the potential issuance of approximately an additional 36.3 million shares of our common stock. The issuance of these shares in the future would result in significant dilution to our current stockholders and could adversely affect the price of our common stock and the terms on which we could raise additional capital. In addition, the issuance and subsequent trading of shares could cause the supply of our common stock available for purchase in the market to exceed the purchase demand for our common stock. Such supply in excess of demand could cause the market price of our common stock to decline.
Because our common stock is quoted on the OTC your ability to sell your shares in the secondary trading market may be limited.
Our Class A Common Stock is currently quoted on the OTC. Consequently, the liquidity of our Class A Common Stock is impaired, not only in the number of shares that are bought and sold, but also through delays in the timing of transactions, and coverage by security analysts and the news media, if any, of our Company. As a result, prices for shares of our Class A Common Stock may be lower than might otherwise prevail if our Class A Common Stock were listed on a national securities exchange.
Because our Class A Common Stock is considered “penny stock” you may have difficulty selling them in the secondary trading market.
Federal regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) regulate the trading of so-called “penny stocks,” which are generally defined as any security not listed on a national securities exchange, priced at less than $5.00 per share and offered by an issuer with limited net tangible assets and revenues. Since our Class A Common Stock currently is quoted on the OTC at less than $5.00 per share, our shares are “penny stocks” and may not be traded unless a disclosure schedule explaining the penny stock market and the risks associated therewith is delivered to a potential purchaser prior to any trade.
In addition, because our Class A Common Stock is not listed on any national securities exchange and currently is quoted at and trades at less than $5.00 per share, trading in our Class A Common Stock is subject to Rule 15g-9 under the Exchange Act. Under this rule, broker-dealers must take certain steps prior to selling a “penny stock,” which steps include:
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obtaining financial and investment information from the investor;
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obtaining a written suitability questionnaire and purchase agreement signed by the investor; and
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providing the investor a written identification of the shares being offered and the quantity of the shares.
If these penny stock rules are not followed by the broker-dealer, the investor has no obligation to purchase the shares. The application of these comprehensive rules will make it more difficult for broker-dealers to sell our Class A Common Stock and our stockholders, therefore, may have difficulty in selling their shares in the secondary trading market.
Our stock price may be volatile and your investment in our Class A Common Stock could suffer a decline in value.
As of June 30, 2020, the last closing price of our Class A Common Stock, as quoted on the OTC, was $0.41 per share, and on September 9, 2020, the last closing price was $0.225 per share. The price may fluctuate significantly in response to a number of factors, many of which are beyond our control. These factors include:
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progress of our products through the regulatory process;
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results of preclinical studies and clinical trials;
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announcements of technological innovations or new products by us or our competitors;
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government regulatory action affecting our products or our competitors’ products in both the United States and foreign countries;
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developments or disputes concerning patent or proprietary rights;
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general market conditions for emerging growth and pharmaceutical companies;
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economic conditions in the United States or abroad;
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actual or anticipated fluctuations in our operating results;
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broad market fluctuations; and
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changes in financial estimates by securities analysts.
Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities, as the short seller expects to pay less in the covering purchase than it received in the sale. It is therefore in the short seller’s interest for the price of the stock to decline, and some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, often involving deliberate misrepresentations of the issuer’s business prospects and similar matters calculated to create negative market momentum. Penny stocks which do not trade on an exchange, such as our common stock, are particularly susceptible to short sales.
As a public entity in a highly digital world, we have been and in the future may be the subject of so-called “fake news,” a type of yellow journalism constructed to look legitimate while consisting of intentional misinformation and misrepresentations deliberately propagated by profiteering short sellers seeking to gain an illegal market advantage by spreading false information concerning the Company’s name, compounds, intellectual property, personnel, and affiliates. In the past, the publication of intentional misinformation concerning the Company by a disclosed short seller has been associated with the selling of shares of our common stock in the market on a large scale, resulting in a precipitous decline in the market price per share of our common stock. In addition, the publication of intentional misinformation may also result in lawsuits, the uncertainty and expense of which could adversely impact our business, financial condition and reputation. While we maintain directors’ and officers’ liability insurance, certain costs, such as those below a retention amount, are not covered by our insurance policies. In addition, our insurance carriers could refuse to cover some or all of these claims in whole or in part.
While utilizing all available tools to defend the Company and its assets against fake news, there is limited regulatory control, making fake news an ongoing concern for any public company. While we move forward in our business development strategies in good faith, there are no assurances that we will not face more fake news or similar tactics by bad actors in the future, and the market price of our common stock may decline as a result of their actions or the action of other short sellers.
Our directors and executive officers own or control a sufficient number of shares of our common stock to control our Company, which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.
At September 10, 2020, our directors and executive officers own or control approximately 12.7% of the outstanding voting power of our common stock, excluding common stock issuable upon the exercise of options or conversion of other instruments. On September 8, 2020, Mr. Ehrlich, the Company’s Chairman and CEO, purchased 1,787,762 shares of the Class B common stock, par value $0.0001 per share (see Note 17. Subsequent Event). Mr Ehrlich holds an option to purchase 13,981,820 shares of our Class B common stock after this exercise. If Mr. Ehrlich were to exercise this option, our directors and executive officers would own or control approximately 37.1% of the outstanding voting power of our common stock. Accordingly, our directors and executive officers, individually and as a group, may be able to influence the outcome of stockholder votes, involving votes concerning the election of directors, the adoption or amendment of provisions in our Articles of Incorporation and bylaws and the approval of certain mergers or other similar transactions, such as sales of substantially all of our assets. Such control by existing stockholders could have the effect of delaying, deferring or preventing a change in control of our Company.
We do not intend to pay any cash dividends in the foreseeable future and, therefore, any return on your investment in our Class A Common Stock must come from increases in the fair market value and trading price of the Class A Common Stock.
We have not paid any cash dividends on our Class A Common Stock and do not intend to pay cash dividends on our Class A Common Stock in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements, which we may enter into with institutional lenders, may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and any other factors that the board of directors decides is relevant. Therefore, any return on your investment in our Class A Common Stock must come from increases in the fair market value and trading price of the Class A Common Stock.
We may issue additional equity shares to fund the Company’s operational requirements which would dilute your share ownership.
The Company’s continued viability depends on its ability to raise capital. Changes in economic, regulatory or competitive conditions may lead to cost increases. Management may also determine that it is in the best interest of the Company to develop new services or products. In any such case additional financing is required for the Company to meet its operational requirements. There can be no assurances that the Company will be able to obtain such financing on terms acceptable to the Company and at times required by the Company, if at all. In such event, the Company may be required to materially alter its business plan or curtail all or a part of its operational plans.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
Our current Company headquarters is located at 301 Edgewater Place - Suite 100, Wakefield, MA 01880.
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 for 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. This action is in the preliminary stages and the Company is currently unable to determine the probability of the outcome or reasonably estimate the loss or gain, if any.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The information called for by this item is incorporated herein by reference to the information set forth in Note 8 “Commitment and contingencies” of the Notes to Financial Statements included in Item 8 of this Report.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s Class A Common Stock symbol is “IPIX” and is quoted on the OTCQB. Quotations on the OTCQB reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions.
Number of Shareholders
As of September 10, 2020, a total of approximately 343,579,992 shares of the Company’s common stock are outstanding and held by approximately 68 shareholders of record, including Cede & Co., the nominee for the Depository Trust & Clearing Corporation and consequently that number does not include beneficial owners of our common stock who hold their stock in “street name” through their brokers.
Dividends
The Company has not paid any cash dividends to our shareholders since its inception. The Company currently intends to retain any earnings for use in its business, and therefore does not anticipate paying dividends in the foreseeable future. The accrued dividend at the balance sheet represents portion of the unpaid accrued dividend to our Series B 5% convertible preferred stockholders. See Notes 14 and 15 to Financial Statements included in Item 8 of this Report.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about our expectations related to the progress, continuation, timing and success of drug discovery and development activities conducted by the Company, other statements regarding our future product development and regulatory strategies, including with respect to specific indications such as, among others, COVID-19; our ability to obtain additional capital to fund our operations, changes in our research and development spending, realizing new revenue streams and obtaining future out-licensing or collaboration agreements that include up-front, milestone and/or royalty payments, our ability to realize up-front milestone and royalty payments under current and future agreements, future research and development spending and projections relating to the level of cash we expect to use in operations, our working capital requirements and our future headcount requirements. In some cases, forward-looking statements can be identified by the use of terms such as “anticipates,” “believes,” “hopes,” “estimates,” “looks,” “expects,” “plans,” “intends,” “goal,” “potential,” “may,” “suggest,” “will,” or “continue,” or the negative thereof or other comparable terms. These statements are based on current expectations, projections and assumptions made by management and are not guarantees of future performance. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition, as well as any forward-looking statements are subject to significant risks and uncertainties including, but not limited to the factors set forth under the heading “Item 1A. Risk Factors” under Part I of this Annual Report on Form 10-K, and in other reports we file with the SEC. All forward-looking statements are made as of the date of this report and, unless required by law, we undertake no obligation to update any forward-looking statements.
The following discussion of our financial condition and results of operations should be read in conjunction with our accompanying audited financial statements and related notes to those statements included elsewhere in this Annual Report on Form 10-K.
Our fiscal year ends on June 30. When we refer to a fiscal year, we are referring to the year in which the fiscal year ends. Therefore, fiscal 2020 refers to the fiscal year ended June 30, 2020.
Management’s Plan of Operation
The Company devotes most of its efforts and resources on drug development, regulatory matters, and clinical trials. Presently, our efforts are primarily focused on evaluating our drug candidate Brilacidin; as a therapeutic for coronaviruses, particularly SARS-CoV-2, the novel coronavirus responsible for COVID-19; for decreasing the incidence of severe oral mucositis as a complication of chemoradiation; for treatment of IBD; and for treatment of skin infections. Our other drug candidate, Kevetrin, is for the treatment of cancer. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process, which include: (i) design and oversight of clinical trials; (ii) development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) interactions with regulatory authorities domestically and internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required for a promising compound to be identified and brought into clinical trials.
In the ordinary course of business, we engage in a continual review of opportunities to license our drug compounds and enter into partnering, joint development or similar arrangements with other companies. We currently, and generally at any time, have such opportunities in various stages of active review, including, for example, entry into indications of interest and term sheets and participation in preliminary discussions and negotiations. Any such transaction could be material to us.
In February 2020, the Company announced preliminary data indicating the Phase 1 trial of Brilacidin for Ulcerative Colitis (UC) met its primary endpoints, including safe, targeted delivery. Shortly thereafter, the COVID-19 pandemic intensified. As a result of the advent of the pandemic, we were approached by several organizations, including two academic institutions having Biosafety Level 3 Laboratories (BSL 3), interested in evaluating Brilacidin as an experimental new drug for COVID-19 and its underlying coronavirus (SARS-CoV-2). Early research indicated that Brilacidin was a promising therapeutic candidate and subsequent pre-clinical research involving Vero cells, a human lung epithelial cell line and a human kidney cell line have lent further evidence and support for continued research. The most recent experiments in a human lung epithelial cell line show Brilacidin to inhibit SARS-CoV-2 between 90 percent and 97 percent, depending on the Brilacidin concentration. In light of the ongoing pandemic and drug development environment, we have prioritized development of Brilacidin for COVID-19, including working with one of our academic partners to seek a federal grant for research work and preparing for a planned Phase 2 clinical trial of Brilacidin for COVID-19. We are targeting the fourth quarter of 2020 to initiate this clinical trial, while simultaneously planning for a Phase 2 clinical trial of oral Brilacidin for UC in the first half of 2021.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our accompanying financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, and which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Note 3. Significant Accounting Policies and Recent Accounting Pronouncements, to the financial statements included in Part II, Item 8 of this Annual Report on Form 10-K, describes the significant accounting policies and methods used in the preparation of the Company’s financial statements. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates are the basis for our judgments about the carrying values of assets and liabilities, which in turn may impact our reported revenue and expenses. Our actual results could differ significantly from these estimates under different assumptions or conditions.
Recently Issued Accounting Pronouncements
See Note 3. Significant Accounting Policies and Recent Accounting Pronouncements to the consolidated financial statements, included in Part II, Item 8 of this Annual Report on Form 10-K, for a discussion of recent accounting pronouncements and their effect, if any, on our financial statements.
Results of Operations
We expect to incur losses from operations for the next few years. We expect to incur increasing research and development expenses, including expenses related to additional clinical trials for our proprietary programs. Management have put in place an equity purchase agreement with Aspire Capital to fund our clinical trials and overhead expenses over the next 12 months. Based upon our expected rate of expenditures over the next 12 months, we expect to have sufficient cash reserves and financing available to us to meet all of our anticipated obligations for our current operations through our fiscal year end of June 30, 2021.
Revenue
We generated revenue of $0.4 million and $0 million for the fiscal years ended June 30, 2020 and 2019, respectively. Revenue during the year ended June 30, 2020 represented the initial non-refundable payment from the exclusive license agreement signed with Alfasigma S.p.A., a global pharmaceutical company (see Note 7. Exclusive License Agreement to the consolidated financial statements).
We incurred operating expenses of approximately $5.1 million and $6.5 million for the fiscal years ended June 30, 2020 and 2019, respectively.
Research and Development Expenses for Proprietary Programs
Below is a summary of our research and development expenses for our proprietary programs by categories of costs for the fiscal years presented (rounded to nearest thousand):
Fiscal 2020 compared to Fiscal 2019 - Research and development expenses for proprietary programs decreased during the year ended June 30, 2020 compared with the year ended June 30, 2019, primarily due to less spending on our programs due to our current lack of working capital. Clinical studies and development expenses will continue to decrease in future reporting periods if there is no increase in the Company’s financial liquidity.
Officers’ payroll decreased during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to the fact that the Company’s President and Chief Medical Officer resigned on December 19, 2019, which led to the decrease in officers’ payroll during the year ended June 30, 2020.
Employees payroll and payroll tax expenses decreased during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to fewer employees engaged in preclinical development after June 30, 2019, which led to the decrease in employees’ payroll during the year ended June 30, 2020.
Stock-based compensation - officers decreased during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to the fact that the Company’s President and Chief Medical Officer resigned on December 19, 2019 and the Company reversed the stock-based compensation expenses of approximately $251,000 based on the amount of those unvested options and stock awards we expensed in the current year and all prior periods.
Stock-based compensation - employees decreased during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to the decrease of vesting in the number of stock awards granted to employees in 2020.
Stock-based compensation - consultants decreased during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to less stock awards being granted to consultants during the year ended June 30, 2020.
Our research and development expenses include costs related to preclinical and clinical trials, outsourced services and consulting, officers’ payroll and related payroll tax expenses, other wages and related payroll tax expenses, stock-based compensation, depreciation and amortization expenses. We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects when possible; however, many activities occurring simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on an individual program basis.
General and Administrative Expenses
General and administrative expenses consist mainly of compensation and associated fringe benefits not included in cost of research and development expenses for proprietary programs and include other management, business development, accounting, information technology and administration costs, including patent filing and prosecution, recruiting, consulting and professional services, travel and meals, facilities, depreciation and other office expenses.
Below is a summary of our general and administrative expenses (rounded to nearest thousand):
Fiscal 2020 compared to Fiscal 2019 - General and administrative expenses increased during the fiscal 2020, primarily due to the increase in stock-based compensation - officers of $237,000 (see Note 13) and business development expense of $277,000, which offset by the decrease in patent write off expense of $155,000 and operating lease expense of $130,000.
Officers’ payroll and payroll tax expenses
Below is a summary of our Officers’ payroll and payroll tax expenses (rounded to nearest thousand):
Fiscal 2020 compared to Fiscal 2019 - There was a slightly decrease in officers’ payroll and payroll tax expenses for the Company during the fiscal 2020.
Professional fees
Below is a summary of our Professional fees (rounded to nearest thousand):
Fiscal 2020 compared to Fiscal 2019 - Professional fees decreased during fiscal 2020 primarily related to less audit and accounting fees and legal fees.
Other Income (Expense)
Below is a summary of our other income (expense) (rounded to nearest thousand):
Fiscal 2020 compared to Fiscal 2019
There was a decrease in change in fair value related to the Series B preferred stock during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to the valuation of the warrants to purchase Preferred stock performed in 2019 (see Note 15. Fair Value Measurement to the consolidated financial statements).
There was an increase in interest expense - debt during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to the increase in finance charge of paying insurance. This increase was offset by a decrease in the interest expense relating to a related party note payable (see Note 11. Convertible Note Payable - Related Party to the consolidated financial statements).
There was a decrease in interest expense - preferred stock liability of approximately $1,948,000 during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to the decrease in the issuance expenses of Series B preferred stock of approximately $1,958,000. This decrease was offset by an increase in 5% dividend accrued for the Series B preferred stock of approximately $10,000 during the year ended June 30, 2020 (see Note 15. Fair Value Measurement to the consolidated financial statements).
There was an increase in warrants modification expense of approximately $1,212,000 during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to an increase in modification expense in connection with the extension of the termination date for each warrant to December 31, 2021 (see Note 13. Equity Transactions to the consolidated financial statements).
There was an increase in impairment expense of operating lease of approximately $643,000 during the year ended June 30, 2020 compared with the year ended June 30, 2019, due to the increase in write off the operating lease right-of-use asset (see Note 8 - Operating Leases to the consolidated financial statements).
Net Losses
We incurred net losses of $6.6 million and $8.7 million for the years ended June 30, 2020 and 2019, respectively, because of the above-mentioned factors.
Liquidity and Capital Resources
Projected Future Working Capital Requirements - Next 12 Months
As of June 30, 2020, we had approximately $6.0 million in cash compared to $0.6 million of cash as of June 30, 2020, and as of the date of this filing, we have approximately $6.4 million in cash. We currently anticipate that future budget expenditures will be approximately $8.2 million for the fiscal year ending June 30, 2021, including approximately $6.2 million for clinical activities, supportive research, and drug product. Alternatively, if we decide to pursue a more aggressive plan with our clinical trials, we will require additional sources of capital during the fiscal year 2021 to meet our working capital requirements for our planned clinical trials. Potential sources for capital include grant funding for COVID-19 research and equity financings (see below). There can be no assurances that we will be successful in receiving any grant funding for our programs.
This assessment is based on current estimates and assumptions regarding our clinical development programs and business needs. Actual working capital requirements could differ materially from this above working capital projection.
On July 31, 2020, the Company entered into a new common stock purchase agreement (the “2020 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 24-month term of the 2020 Agreement. In consideration for entering into the 2020 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 Agreement.
Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading “Risk Factors” in Part I, Item 1A and elsewhere in this Annual Report on Form 10-K and in other reports we filed with the SEC.
If we are unable to generate enough working capital from our current or future financing agreements with Aspire Capital when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including more costly Phase 2 and Phase 3 clinical trials on our wholly-owned development programs as these programs progress into later stage development. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us and our stockholders than we would otherwise choose in order to obtain up-front license fees needed to fund operations. These events could prevent us from successfully executing our operating plan.
Shelf Registration Statement - Current Status
The Company has an effective shelf registration statement on Form S-3, registering the sale of up to $60 million of the Company’s securities. However, in the future, the Company may not satisfy the conditions for use of Form S-3 for primary offerings of securities, in which case the Company may utilize Form S-1 to register the sale of its securities, although Form S-1 offers less flexibility on the timing and types of offerings compared to Form S-3.
Cash Flows
The following table provides information regarding our cash position, cash flows and capital expenditures for the years ended June 30, 2020 and 2019 (rounded to nearest thousand):
The decrease in net cash used in operating activities of $2.2 million versus the prior-year was mainly due to decreases in our losses from operations of $2.1 million, largely attributable to a decrease in spending for research and development expenses and the initial non-refundable payment from the exclusive license agreement signed with Alfasigma S.p.A., a global pharmaceutical company (see Note 7. Exclusive License Agreement to the consolidated financial statements).
Our operating activities used cash of $4.2 million and $6.3 million for the year ended June 30, 2020 and 2019, respectively. The use of cash principally resulted from our losses from operations, mentioned above, as adjusted for non-cash charges for stock-based compensation, patent amortization change in fair value of preferred stock, interest expense on preferred stock, impairment expense of operating lease, and changes in our working capital accounts.
Investing activities
The increase in net cash used in investing activities versus the prior-year was due to decrease in sales proceeds of property, plant and equipment.
Financing activities
Our total net financing activities provided cash of $9.7 million and $4.5 million in 2020 and 2019, respectively.
In 2020, we raised approximately $9.7 million in net cash proceeds, from exercise of warrants of preferred stock and common stock, offset by purchase of treasury stock of $0.06 million.
In 2019, we raised approximately $4.6 million in net cash proceeds, from issuance of Series B preferred stock and warrants, offset by purchase of treasury stock of $0.1 million.
Requirement for Additional Working Capital
The Company, dependent on its future sale of its securities, plans to incur total expenses of approximately $8.2 million for the next 12 months, including approximately $6.2 million for clinical activities, supportive research, and drug product development. The Company has limited experience with pharmaceutical drug development. As such, the budget estimate may not be accurate. In addition, the actual work to be performed is not known at this time, other than a broad outline, as is normal with any scientific work. As further work is performed, additional work may become necessary or a change in plans or workload may occur. Such changes may have an adverse impact on our estimated budget and on our projected timeline of drug development.
The Company will be unable to proceed with its planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without accessing its financing available with Aspire Capital of approximately $30 million as of the date of this filing. Management has put in place a new equity purchase agreement (see Note 17 to the accompanying financial statements) with Aspire Capital to fund its future clinical trial expenses and overhead expenses over the next 12 months. This purchase agreement 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 2020 Agreement. Management believes, as of the date of this filing that the funding amount from Aspire Capital will be available as needed by the Company and that adverse market conditions in the Company’s common stock price and trading volume, will not prevent the Company from funding its working capital requirements for the next 12 months from the date of this filing.
In the event that we are unable to generate sufficient cash from our Aspire Capital purchase agreement or raise additional funds from others, we may be required to delay, reduce or severely curtail our operations or otherwise impede our on-going business efforts, which could have a material adverse effect on our future business, operating results, financial condition and long-term prospects. The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships) and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available to us.
Commitments and Contingencies
Please see Note 9 to the consolidated financial statements, Commitments and Contingencies, for a discussion of recent contractual commitments and contingent liability - disputed invoices.
Equity Transactions
From July 31, 2020 (date of agreement) to September 14, 2020, the Company has generated additional proceeds of approximately $1.8 million under the 2020 Agreement with Aspire Capital from the sale of approximately 8.5 million shares of its common stock.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, as defined in Item 304(a)(4)(ii) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INNOVATION PHARMACEUTICALS INC.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Innovation Pharmaceuticals Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Innovation Pharmaceuticals Inc. (the Company) as of June 30, 2020 and 2019, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for the years then ended (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Pinnacle Accountancy Group of Utah
We have served as the Company’s auditor since 2018.
Pinnacle Accountancy Group of Utah
(a dba of Heaton & Company, PLLC)
Farmington, Utah
September 14, 2020
INNOVATION PHARMACEUTICALS INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2020 AND 2019
(Rounded to nearest thousand except for share data)
The accompanying notes are an integral part of these consolidated financial statements
INNOVATION PHARMACEUTICALS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
(Rounded to nearest thousand except for shares and per share data)
INNOVATION PHARMACEUTICALS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
(Rounded to nearest thousand, except for shares data):
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATION PHARMACEUTICALS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
(Rounded to nearest thousand)
The accompanying notes are an integral part of these consolidated financial statements.
INNOVATION PHARMACEUTICALS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2020 AND 2019
1. Basis of Presentation and Nature of Operations
Innovation Pharmaceuticals Inc. (“Innovation” or the “Company”) was incorporated on August 1, 2005 in the State of Nevada. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. On February 15, 2019, the Company formed IPIX Pharma Limited (“IPIX Pharma”), a wholly-owned subsidiary incorporated under the Companies Act 2014 of Ireland. IPIX Pharma is a Private Company Limited by Shares. The subsidiary will serve as a key hub for strategic collaboration with European companies and medical communities in addition to providing cost-saving efficiencies and flexibility with respect to developing Brilacidin under European Medicines Agency standards.
The Company is a clinical stage biopharmaceutical company. The Company’s common stock is quoted on OTCQB, symbol “IPIX.”
Basis of Consolidation
These consolidated financial statements include the accounts of Innovation, a Nevada corporation, and our wholly-owned subsidiary, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. Translation gains and losses for the years ended June 30, 2020 and 2019 were not significant.
Nature of Operations - Overview
We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of inflammatory diseases, cancer, dermatology and anti-infectives. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Brilacidin and Kevetrin, and advancing them as quickly as possible along the regulatory pathway. We aim to develop the highest quality data and broadest intellectual property to support our compounds.
We currently own all development and marketing rights to our products, other than the rights granted to Alfasigma S.p.A. in July 2019 for the development, manufacturing and commercialization of locally-administered Brilacidin for UP/UPS. In order to successfully develop and market our products, we may have to partner with 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
As of June 30, 2020, the Company’s cash amounted to $6.0 million and current liabilities amounted to $7.2 million. The Company had expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. The Company’s net cash used in operating activities for the years ended June 30, 2020 was approximately $4.2 million, and current projections indicate that the Company will continue to have negative cash flows from operating activities for the foreseeable future. Our net losses incurred for the years ended June 30, 2020 and 2019, amounted to $6.6 million and $8.7 million, respectively, and we had a working capital deficit of approximately $1.2 million and $6.7 million, respectively, at June 30, 2020 and 2019.
We anticipate that future budget expenditures will be approximately $8.2 million for the fiscal year ending June 30, 2021, including approximately $6.2 million for clinical activities, supportive research, and drug product. Alternatively, if we decide to pursue a more aggressive plan with our clinical trials, we will require additional sources of capital during the fiscal year 2021 to meet our working capital requirements for our planned clinical trials. Potential sources for capital include grant funding for COVID-19 research and equity financings (see below). There can be no assurances that we will be successful in receiving any grant funding for our programs.
This assessment is based on current estimates and assumptions regarding our clinical development programs and business needs. Actual working capital requirements could differ materially from this above working capital projection.
On July 31, 2020, the Company entered into a new common stock purchase agreement (the “2020 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 24-month term of the Agreement. In consideration for entering into the 2020 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 Agreement.
Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders.
Management believes that the amounts available from Aspire Capital and under the Company’s effective shelf registration statement will be sufficient to fund the Company’s operations for the next 12 months.
If we are unable to generate enough working capital from our current or future financing agreements with Aspire Capital when needed or secure additional sources of funding, it may be necessary to significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including more costly Phase 2 and Phase 3 clinical trials on our wholly-owned development programs as these programs progress into later stage development. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us and our stockholders than we would otherwise choose in order to obtain up-front license fees needed to fund operations. These events could prevent us from successfully executing our operating plan.
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 consists of bank deposits. There were no cash equivalents at June 30, 2020 and 2019.
Equipment
Equipment is stated at cost, net of accumulated depreciation. Expenditures that extend the life, increase the capacity, or improve the efficiency of property and equipment are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation is recognized using the straight-line method over the following approximate useful lives:
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, 2020 and 2019, carrying value of patents was approximately $3,059,000 and $3,342,000, respectively. Amortization expense for the years ended June 30, 2020 and 2019, was approximately $372,000 and $370,000, respectively.
As of June 30, 2020, 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, 2020 and 2019, 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, 2020 and 2019, the Company has recorded patent write offs of approximately $0 and $154,000, respectively and included in general and administrative expenses.
Financial Instruments
The Company’s financial instruments include cash, accounts payable, accrued liabilities and the preferred stock liability. The carrying amounts of these financial instruments approximate their fair value, due to the short-term nature of these items. The fair value hierarchy has the following three levels:
Level 1 - quoted prices in active markets for identical assets and liabilities.
Level 2 - observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3 - unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
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, 2020 and 2019, the Company incurred approximately $2.8 million and $4.3 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 $5.8 million is subject to credit risk at June 30, 2020. 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 FASB 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.
Valuation of Equity Grants
The Company accounts for all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to measure the cost of employee services received in exchange for stock options and similar awards based on the grant-date fair value of the award and recognize this cost in the income statement over the period during which an employee is required to provide service in exchange for the award. The Company uses the Black-Scholes-Merton valuation model and has elected to use the ratable method to amortize compensation expense over the vesting period of the grant. The Company accounts for equity instruments issued to nonemployees by valuing them using the Black-Scholes-Merton valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest.
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.
The Company has identified its U.S. Federal income tax return and its State return in Massachusetts as its major tax jurisdictions. The fiscal 2017 and forward years are still open for examination.
Basic 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. Common share equivalents consist of stock options, restricted stock, warrants and convertible related party notes payable. Common share equivalents were excluded from the computation of diluted earnings per share for the years ended June 30, 2020 and 2019, 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:
Treasury Stock
The Company accounts for treasury stock using the cost method. There were 659,448 shares and 228,218 shares of treasury stock outstanding, purchased at a total cumulative cost of $146,000 and $91,000 at June 30, 2020 and 2019, respectively (see Note 13. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding).
Treasury stock, representing shares of the Company’s common stock that have been acquired for payroll tax withholding on vested stock grants, is recorded at its acquisition cost and these shares are not considered outstanding.
Revenue Recognition
On July 1, 2019, the Company adopted the new accounting standard ASC 606 (Topic 606), Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of July 1, 2019. The adoption of ASC Topic 606 did not have impact on the Company’s consolidated financial statements or cash flows, for the Company had no revenue and no contracts which were not completed as of July 1, 2019.
The Company has acquired and further developed license rights to Functional Intellectual Property (“functional IP”) that it licenses to customers for defined license periods. A functional IP license is a license to intellectual property that has significant standalone functionality that does not include supporting or maintaining the intellectual property during the license period. The Company’s patented drug formulas have significant standalone functionality in the form of their abilities to treat a disease or condition. Further, there is no expectation that the Company will undertake any activities to change the functionality of the drug formulas during the license periods (see Note 7. Exclusive License Agreement to the consolidated financial statements).
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 and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. tax regulations.”
On July 1, 2018, the Company adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Beginning with the adoption of ASU 2018-07 options granted to our consultants are accounted for in the same manner as options issued to employees.
Awards with service-based vesting conditions only - Expense 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 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. We recognize stock-based compensation using the straight-line method.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. This new pronouncement has been adopted in the first quarter of fiscal 2020 and did not have a material effect on the Company’s financial position, results of operations or cash flows.
Prior to July 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective July 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients,’ which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs; and all of the new standard’s available transition practical expedients. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on July 1, 2019 resulted in the recognition of operating lease right-of-use assets of approximately $670,000, lease liabilities for operating leases of approximately $670,000, and a zero cumulative-effect adjustment to accumulated deficit. The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (“short-term leases”). Lease expense is recognized on a straight-line basis over the lease term. The Company determined that the operating lease right-of-use asset is impaired as of September 30, 2019, and it recognized an impairment loss of approximately $643,000, after recording amortization of the right-of-use asset for July, August, and September 2019 totaling approximately $27,000, resulting in a carrying value of $0 since September 30, 2019 (see Note 8. Operating Lease to the consolidated financial statements).
In July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, 2019, did not have any impact on the financial statements and related disclosures.
4. Patents, net
Patents, net consisted of the following (rounded to nearest thousand):
The patents are amortized on a straight-line basis over the useful lives of the assets, determined to be 12-17 years from the date of acquisition.
Amortization expense was approximately $372,000 and $370,000 for the fiscal years ended June 30, 2020 and 2019, respectively.
During the fiscal year ended June 30, 2019, the Company wrote off the Prurisol patent and other patents of approximately $154,000, and included in general and administrative expenses.
At June 30, 2020, the future amortization period for all patents was approximately 5.18 years to 16.50 years. Future estimated annual amortization expenses are approximately $375,000 for each year from 2021 to 2025, and total of $1,560,000 for the year ending June 30, 2026 and thereafter.
5. Accrued Expenses - Related Parties and Other
Accrued expenses consisted of the following (rounded to nearest thousand):
6. Accrued Salaries and Payroll Taxes - Related Parties And Other
Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):
7. Exclusive License 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 ulcerative proctitis/ulcerative proctosigmoiditis (UP/UPS).
Under the terms of the License Agreement, Alfasigma made an initial upfront non-refundable payment of $0.4 million to the Company and will make additional payments of up to $24.0 million to the Company based upon the achievement of certain milestones, including a $1.0 million payment due following commencement of the first phase III clinical trial of Brilacidin for UP/UPS and an additional $1.0 million payment upon the filing of a marketing approval application with the U.S. Food and Drug Administration or the European Medicines Agency. At this time AlfaSigma has not commenced 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 generated revenue of $0.4 million and $0.0 million for the year ended June 30, 2020 and 2019, respectively. Revenue during the year ended June 30, 2020 represented the initial non-refundable payment of $0.4 million received from Alfasigma.
8. 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 is fully impaired on September 30, 2019 because of the Company’s current lack of working capital (see Note 2. Going Concern and Liquidity to the consolidated financial statements) resulting in its limited usage of the leased office. The Company has been unable to enter into a sub-lease agreement for this leased office on September 30, 2019. As such, the Company recognized an impairment loss of approximately $643,000, after recording amortization of the right-of-use asset for July, August, and September 2019 totaling approximately $27,000, resulting in a carrying value of $0 since September 30, 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 9. Commitments and Contingencies).
The components of lease expense and supplemental cash flow information related to leases for the period are as follows:
The supplemental balance sheet information related to leases for the period is as follows:
The following table provides maturities of the Company’s lease liabilities at June 30, 2020 as follows:
Operating lease cost for the year ended June 30, 2020 was approximately $117,000. Rent expense, net of lease income, under this operating lease agreement for the year ended June 30, 2019 was approximately $244,000.
9. 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 for 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. This action is in the preliminary stages and 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 $1.4 million to contract research organizations as of June 30, 2020. Expenses are recognized when services are performed by the contract research organizations.
Contingent Liability - Disputed Invoices
As described in Note 6. 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 10. Related Party Transactions, the Company has a payable to 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, 2020.
10. Related Party Transactions
Office Lease
The Company charged Kard Scientific (“KARD”) $1,800 for space for the two months of July and August, 2018. Dr. Menon, a significant shareholder of the Company and the former President of Research and former director of the Company, also serves as the Chief Operating Officer and Director of KARD. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon resigned from the Company’s Board of Directors on December 11, 2018. As of September 1, 2018, KARD no longer leases space from the Company.
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, 2020 and 2019, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable. 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.
Share Issuance
On February 23, 2020, the Company issued (i) options for the purchase of 500,000 shares of Class A 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. There was no share based payments to our directors during the fiscal year ended June 30, 2019.
Other related party transactions are disclosed in Note 11. Convertible Note Payable - Related Party below.
11. 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 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. Options are valid for ten years from the date of issuance.
On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s Chairman and CEO, for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).
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, the Company’s Chairman and CEO, for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).
As of June 30, 2020 and 2019, the principal balance of this convertible note payable to Mr. Ehrlich, the Company’s Chairman and CEO was approximately $1,822,000 and $1,922,000, respectively.
As of June 30, 2020 and 2019, the balance of accrued interest payable were $11,000 and $37,000, respectively (see Note 5. Accrued Expenses - Related Parties and Other).
As of June 30, 2020 and 2019, the total outstanding balances of principal and interest were approximately $1,833,000 and $1,959,000, respectively.
12. Loan payable
On May 10, 2020, the Company received loan proceeds in the amount of approximately $79,000 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.
The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. While the Company believes that its use of the loan proceeds satisfied the conditions for forgiveness of the loan, we cannot assure you that we have not or will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.
13. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding
Stock-based Compensation - Stock Options
2016 Equity Incentive Plan
On February 23, 2020, the Board of Directors approved an amendment to Section 4.1 of the Corporation’s 2016 Equity Incentive 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 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).
Stock Options
The fair value of options granted for the years ended June 30, 2020 and 2019 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.
The components of stock-based compensation expense included in the Company’s Statement of Operations for the years ended June 30, 2020 and 2019 are as follows (rounded to nearest thousand):
During the year ended June 30, 2020 and 2019
On February 23, 2020, the Company issued 500,000 options each to our Chairman and CEO and two other Board members, which are exercisable for 10 years at $0.10 per share of common stock. The total value of these options to purchase 1,500,000 shares was approximately $102,000 and we recognized approximately $102,000 of stock-based compensation costs and charged to additional paid-in capital as of June 30, 2020. The assumptions we used in the Black Scholes option-pricing model were disclosed above. The Company also issued 500,000 shares of Class A common stock each to our Chairman and CEO and two other Board members, which shares were vested on June 30, 2020 (See Note 14. Equity Transactions).
On March 30, 2020, the Company issued 250,000 options to a consultant for his one year contract and exercisable for 3 years at $0.086 per share of common stock. The total value of these 250,000 stock options was approximately $12,000 and we recognized approximately $12,000 of stock-based compensation costs and charged to additional paid-in capital as of June 30, 2020. The assumptions we used in the Black Scholes option-pricing model were disclosed above.
On September 1, 2019, the Company issued to Dr. Arthur Bertolino, then President and Chief Medical Officer of the Company, 1,066,667 shares of common stock. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $71,000, based on the closing bid price as quoted on the OTCQB on August 30, 2019 at $0.132 per share. Due to the fact that Dr. Bertolino resigned on December 19, 2019, the Company recorded the forfeiture of his options and shares after 60 days of his resignation. During the year ended June 30, 2020, the Company reversed the stock-based compensation expenses of approximately $35,000 based on the amount of those unvested options and stock awards we expensed in the current year.
On September 1, 2019, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 58,394 shares of the Company’s common stock. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $20,000, based on the closing bid price as quoted on the OTCQB on August 30, 2019 at $0.132 per share. During the year ended June 30, 2020, the Company recorded approximately $7,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $5,000 of stock option expense and $2,000 of stock awards.
On September 1, 2018, the Company issued to Dr. Bertolino 1,066,667 shares of common stock. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $225,000, based on the closing bid price as quoted on the OTCQB on August 31, 2018 at $0.40 per share. As above mentioned of Dr. Bertolino’s resignation on December 19, 2019, the Company recorded the forfeiture of his options and shares after 60 days of his resignation. During the year ended June 30, 2020, the Company reversed the stock-based compensation expenses of approximately $216,000 based on the amount of those unvested options and stock awards we expensed in the prior two quarters of the current year and prior years. During the year ended June 30, 2020, the Company recorded approximately $164,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $57,000 of stock option expense and $107,000 of stock awards. During the year ended June 30, 2019, the Company recorded approximately $269,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $93,000 of stock option expense and $176,000 of stock awards.
On September 1, 2018, the Company also 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, 2020, 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. During the year ended June 30, 2019, the Company recorded approximately $24,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $17,000 of stock option expense and $7,000 of stock awards.
On September 1, 2017, the Company agreed to grant to Dr. Bertolino 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. The 1,066,667 shares were valued at approximately $752,000 and the 617,839 stock options valued at approximately $399,000. Both shares and options were planned to be amortized over 2 years to September 1, 2019 unless the probability of the other above vesting requirements occurring were met at an earlier date. During the year ended June 30, 2020, the Company recorded approximately $99,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $34,000 of stock option expense and $65,000 of stock awards. During the year ended June 30, 2019, the Company recorded approximately $575,000 of stock-based compensation expense in connection with the foregoing equity awards, including approximately $199,000 of stock option expense and $376,000 of stock awards.
On September 1, 2017, the Company agreed to grant to Ms. Harness 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. The 58,394 shares were valued at approximately $41,000 and the 172,987 stock options valued at approximately $112,000. Both shares and options were planned to be amortized over 3 years to September 1, 2020 unless the other vesting requirements are met sooner. During the year ended June 30, 2020, the Company recorded approximately $51,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $37,000 of stock option expense and $14,000 of stock awards. During the year ended June 30, 2019, the Company recorded approximately $51,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $37,000 of stock option expense and $14,000 of stock awards.
On September 1, 2016, the Company and Ms. Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Project Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness under the Company 2016 Equity Incentive Plan 58,394 shares of restricted stock. 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. The 58,394 shares were valued at approximately $80,000, which were amortized over three years to September 1, 2019. The 172,987 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They were amortized over 3 years to September 1, 2019. During the year ended June 30, 2020, the Company recorded approximately $17,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $12,000 of stock option expense and $5,000 of stock awards. During the year ended June 30, 2019, the Company recorded approximately $100,000 of stock-based compensation expense in connection with the foregoing equity awards including approximately $73,000 of stock option expense and $27,000 of stock awards.
During the year ended June 30, 2020, the Company recorded approximately $26,000 of stock-based compensation expense to two consultants including approximately $21,000 of stock option expense and $5,000 of stock awards. During the year ended June 30, 2019, the Company recorded approximately $53,000 of stock-based compensation expense to consultants including approximately $42,000 of stock option expense and $11,000 of stock awards.
During the year ended June 30, 2019, there were 19,260,424 options granted to employees, consultants and officer expired, of which, 18,000,000 options held by Dr. Krishna Menon were expired in March 2019, i.e. three months after his departure from the board of directors and Company on December 11, 2018.
On February 1, 2019, the Company agreed to issue 400,000 stock options to purchase shares of the Company’s common stock to two consultants for specified services to be provided from February 1, 2019 to January 31, 2020 in accordance with agreements with the two consultants. These options were issued with an exercise price of $0.13 per share and vest 33 1/3% on February 1, 2019, 33 1/3% on August 1, 2019, and 33 1/3% on January 31, 2020. The value of the 400,000 options for two consultants was approximately $30,000. During the year ended June 30, 2019, the Company recorded approximately $18,000 of related stock-based compensation.
Exercise of options
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, the Company’s Chairman and CEO, for his partial exercise of his 909,090 options, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise (see Note 11. Convertible Note Payable - Related Party to the consolidated financial statements).
On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s Chairman and CEO, for his partial exercise of his 909,090 options, 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).
Forfeiture of options
Dr. Bertolino resigned as President and Chief Medical Officer and as a member of the Board of Directors of the Company on December 19, 2019. During the six months ended June 30, 2020, all his 2,858,521 options he held were forfeited, representing the options he was granted since June 27, 2016 to September 1, 2019. The Company reversed the $251,000 of unvested options and shares that were expensed in the current year and prior years.
Stock Options Issued and Outstanding
The following table summarizes all stock option activity under the Company’s equity incentive plans:
Restricted Stock Awards Outstanding
The following summarizes our restricted stock activity:
Scheduled vesting for outstanding restricted stock awards at June 30, 2020 is as follows:
As of June 30, 2020, there was approximately $17,000 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 $13,000 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 1.36 years
Stock Warrants Outstanding
Warrants to Purchase 5% convertible preferred stock (“Series B preferred stock”)
On October 5, 2018, the Company entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) with one multi-family office for the sale of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock (“Series B preferred stock”), for aggregate gross proceeds of approximately $2.0 million. Each share of preferred stock was initially sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance (later extended to 15 months following issuance), (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance. On May 9, 2019, the Company entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and warrants pursuant to which the Company issued an additional 100 shares of Series B preferred stock and Series 4 warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to $2.0 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. The Series 4 warrant entitles the holder thereof to purchase 2,500 shares of preferred stock at $982.50 per share for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance. In addition, the Company extended the termination date for the Series 1 warrants by six months, and agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock. On December 26, 2019, the Company extended the termination date for each series of warrants to December 31, 2021 (see Note 14. Equity Transactions to the consolidated financial statements).
The warrants issued in connection with the Series B preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B preferred stock fair value (without the warrants)) with an offsetting discount to the Series B preferred stock.
Exercise of Warrants to Purchase 5% convertible preferred stock
During the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019, the Company issued 2,780 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $2.73 million, upon exercise of 2,780 warrants issued by the Company in October 2018. As of June 30, 2019, Series 1-4 warrants to purchase 7,720 shares of Series B preferred stock were outstanding.
During the year ended June 30, 2020, the Company issued 7,720 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $6.7 million, upon exercise of 7,720 warrants. As of June 30, 2020, all Series 1-4 warrants to purchase shares of Series B preferred stock were exercised, no Series 1-4 warrants were outstanding.
The following table summarizes the outstanding Series B preferred stock warrants:
Warrants to Purchase Common Stock
On June 28, 2018, the Company entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent. The Company issued to Aspire Capital warrants to purchase 8,000,000 shares of its common stock exercisable for 5 years at an exercise price of $0.38 per share. The warrants were recorded within stockholders’ deficiency. The fair value of the warrants issued on June 28, 2018 was estimated on the date of issuance using the Black-Scholes-Merton Model. The value of the warrants issued was approximately $1.7 million. Assumptions used in the Black Scholes option-pricing model for these warrants were as follows:
The following table summarizes the outstanding common stock warrants:
As of June 30, 2020 and 2019, there was 0 and 8,000,000 warrants to purchase shares of the Company’s common stock exercisable for 5 years at an exercise price of $0.38 per share were outstanding, respectively.
14. Equity Transactions
Class B Common Stock
On January 29, 2019, the Company issued 909,090 shares of Class B common stock at the option exercise price of $0.11 per share to Mr. Ehrlich, the Company’s Chairman and CEO, for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (as permitted pursuant to the terms of the option agreement).
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, the Company’s Chairman and CEO, for his partial exercise of his option, paid by the cancellation of debt to Mr. Ehrlich of $100,000 to satisfy the exercise price (See Note 11. Convertible Note Payable to the consolidated financial statements).
As of June 30, 2020 and 2019, the total outstanding number of Class B common stock were 1,818,180 shares and 909,090 shares, respectively.
Class A Common Stock
On February 23, 2020, the Company issued 500,000 options each to our Chairman and CEO and two other Board members (see Note 13.) and the Company also issued 500,000 shares of Class A common stock each to our Chairman and CEO and two other Board members, which shares were vested on February 24, 2020. During the year ended June 30, 2020, the Company recorded approximately $237,000 of stock-based compensation expense to our Chairman and CEO and two other Board members including approximately $102,000 of stock option expense and $135,000 of stock awards.
Series B 5% convertible preferred stock purchase agreement
On October 5, 2018, as modified on May 9, 2019 (see Warrant Restructuring and Additional Issuance Agreement as described below), the Company entered into a Securities Purchase Agreement (“Securities Purchase Agreement”) with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock (“Series B preferred stock” or “preferred stock”), for aggregate gross proceeds of approximately $2.0 million. An initial closing for the sale of 1,250 shares of the Series B preferred stock closed on October 9, 2018, and a second closing for the sale of 750 shares of the Series B preferred stock closed on October 12, 2018. Under the Securities Purchase Agreement, the Company also issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock.
The Series B preferred stock is mandatorily redeemable under certain circumstances and, as such, is presented as a liability on the consolidated balance sheets. The Company has elected to measure the value of its preferred stock using the fair value method with offsetting discounts associated with the fair value allocated to the warrants and for the intrinsic value attributed to the beneficial conversion feature (“BCF”). The fair value of the Series B preferred stock (without the warrants) will be assessed at each subsequent reporting date with changes in fair value recorded in the profit and loss as a separate line item below the “loss from operations” section, in accordance with ASC 480-10-35-5.
The warrants issued in connection with the Series B preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B preferred stock fair value (without the warrants)) with an offsetting discount to the Series B preferred stock. Given that the Series B preferred stock is convertible at any time under these features, the underlying warrant discounts were accreted upon issuance and recorded as interest (resulting in no remaining discount to the Series B preferred stock liability after the issuance).
The Company recorded the October 9, 2018 issuance of 1,250 shares Series B Preferred Stock at approximately $0.7 million and the underlying Series 1, Series 2 and Series 3 warrants at approximately $0.5 million in total by allocating the gross proceeds to Series B preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.2 million associated with the issuance of the 1,250 shares of Series B preferred stock to additional paid-in capital. The Company then recorded interest of approximately $1.2 million for the BCF and warrant discounts as a first day interest given that the Series B preferred shares can be converted at any time to common stock and given no set term.
The Company recorded the October 12, 2018 issuance of 750 shares Series B Preferred Stock at approximately $0.4 million and the underlying Series 1, Series 2 and Series 3 warrants at approximately $0.3 million in total by allocating the gross proceeds to Series B preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $0.7 million associated with the issuance of the 750 shares of Series B preferred stock to additional paid-in capital. The Company then recorded interest of approximately $0.7 million for the BCF and warrant discounts as a first day interest given that Series B preferred shares can be converted at any time to common stock and given no set term.
The issuance costs associated with the Series B preferred stock transaction were attributed to the Series B preferred stock (without the warrants) and to the Series 1, Series 2 and Series 3 warrants based on their relative fair values. The issuance costs attributed to the warrants of approximately $32,000 were reflected as a reduction to additional paid-in capital. The issuances costs associated with the Series B preferred stock liability of approximately $41,000 was recorded immediately as an element of interest cost, which are reflected in interest expense - preferred stock. The Company recognized change in fair value of preferred stock liabilities of approximately $102,000 and $357,000 under Other (income) expense in the accompanying consolidated statements of operations for the year ended June 30, 2020 and 2019, respectively.
Underlying Series B preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B preferred stock) on a daily basis given fixed dividend terms under the Series B preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B preferred stock at June 30, 2020 and 2019.
The total dividends of approximately $52,000 and $52,000 are treated as interest expense - preferred stock during years ended June 30, 2020 and 2019, respectively. Balance of accrued dividends of $13,000 as of June 30, 2020 was included at Accrued dividend under current liabilities while balance of accrued dividends of $24,000 as of June 30, 2019 was included at Preferred stock liability under other liabilities.
Terms of the Preferred Stock
The rights and preferences of the preferred stock are set forth in a Certificate of Designation of Preferences, Rights and Limitations of Series B 5% Convertible Preferred Stock filed with the Nevada Secretary of State on October 5, 2018 (the “Certificate of Designation”). Each share of preferred stock has an initial stated value of $1,080 and may be converted at any time at the holder’s option into shares of the Company’s common stock at a conversion price equal of the lower of (i) $0.32 per share and (ii) 85% of the lowest volume weighted average price of the Company’s common stock on a trading day during the ten trading days prior to and ending on, and including, the conversion date. The conversion price may be adjusted following certain triggering events and subsequent equity sales and is subject to appropriate adjustment in the event of stock splits, stock dividends, recapitalization or similar events affecting the Company’s common stock.
The holders of the preferred stock are limited in the amount of stated value of the preferred stock they can convert on any trading day. The conversion cap limits conversions by the holders to the greater of $75,000 and an amount equal to 30% of the aggregate dollar trading volume of the Company’s common stock for the five trading days immediately preceding, and including, the conversion date. However, the conversion cap will be increased if the trading volume in the first 30 minutes of any trading session exceeds certain trailing average daily volume amounts. In addition, the holders of the preferred stock may not convert shares of preferred stock if, after giving effect to the conversion, a holder together with its affiliates would beneficially own in excess of 9.99% of the outstanding shares of the Company’s common stock.
Redemption Rights
Following 30 days after the initial closing, the Company may elect to redeem the preferred stock for 120% of the aggregate stated value then outstanding, plus all accrued but unpaid dividends and all liquidated damages and other amounts due in respect of the preferred stock. The Company’s right to redeem the preferred stock is contingent upon it having complied with a number of conditions, including compliance with its obligations under the Certificate of Designation. Shares of preferred stock generally have no voting rights, except as required by law and except that the Company shall not take certain actions without the consent of the holders of the preferred stock.
Warrants
Each share of preferred stock was initially sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up nine months following issuance (later extended to 15 months following issuance), (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance. On May 9, 2019, the Company entered into a warrant restructuring and additional issuance agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and warrants pursuant to which the Company issued an additional 100 shares of Series B preferred stock and Series 4 warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to $2.0 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. The Series 4 warrant entitles the holder thereof to purchase 2,500 shares of preferred stock at $982.50 per share for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance. In addition, the Company extended the termination date for the Series 1 warrants by six months, and agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock, all 400 shares of which had been issued as of June 30, 2020. On December 26, 2019, the Company extended the termination date for each series of warrants to December 31, 2021 (see below).
The Series B Preferred shareholders’ warrants held were modified on May 9, 2019 (see Warrant Restructuring and Additional Issuance Agreement described below). Pursuant to this warrant restructuring agreement, the Company had the option to compel these shareholders to exercise each month up to $400,000 of their Series 1 warrants. During the period May 9, 2019 to June 30, 2019, the Company issued 2,780 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $2.7 million, upon exercise of 2,780 warrants.
During the year ended June 30, 2020, the Company issued 7,720 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $6.7 million, upon exercise of 7,720 warrants. As of June 30, 2020, all Series 1-4 warrants to purchase shares of Series B preferred stock were exercised, no Series 1-4 warrants was outstanding.
In addition, subject to the satisfaction of certain circumstances, the Company may call for cancellation any or all of the warrants following 90 days after their issuance, for a payment in cash equal to 8% of the aggregate exercise price of the warrants being called. The warrants subject to any such call notice will be cancelled 30 days following the Company’s payment of the call fee, provided that the warrant holders have not exercised the warrants prior to cancellation.
Conversion of preferred stock to common stock
During the year ended June 30, 2020, the two preferred stockholders converted 9,190 shares of Series B preferred stock into 116.3 million shares of common stock. As of June 30, 2020, there was no Series B 5% convertible preferred stock was outstanding.
During the year ended June 30, 2019, the two preferred stockholders converted 5,087 shares of Series B preferred stock into 39.8 million shares of common stock. With regard to conversions, the Company reversed Series B preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately $3,068,000 based on the proportion of Series B preferred stock converted relative to the original total issued. As of June 30, 2019, 1,196 shares of Series B 5% convertible preferred stock were outstanding.
Warrant Amendment Agreement and Extension of Warrant Terms
On December 26, 2019, the Company entered into a Warrant Amendment Agreement with the holders of the warrants to purchase our Series B preferred stock, pursuant to which we have amended the warrants as follows: (i) to extend the termination date for each warrant to December 31, 2021, and (ii) to adjust the exercise price of each warrant from $982.50 to $850.00 per share of Series B preferred stock. The warrants modification expense of $1,212,000 was computed as the incremental value of the modified warrants over the unmodified warrants on the modification date using a per share price of $0.05 per share, which was the market price on December 26, 2019. Assumptions used in the Black Scholes option-pricing model for these warrants were as follows:
Warrant Restructuring and Additional Issuance Agreement
On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (“Issuance Agreement”) with the Series B investors of its Series B preferred stock and warrants to purchase Series B preferred stock. Pursuant to the Issuance Agreement, the Series B investors have agreed, subject to the conditions set forth therein, to exercise existing warrants to purchase 500 shares of preferred stock and to amend the existing warrants to permit the Company to compel the exercise of up to $400,000 of existing warrants each calendar month commencing June 3, 2019 and ending November 1, 2019, or, if earlier, until the aggregate amount of the forced exercises is $2,000,000. As consideration for the Series B investors entering into the Issuance Agreement, the Company has issued 100 shares of preferred stock and warrants to purchase 2,500 shares of preferred stock (“Series 4 warrants”) to the Series B investors. In addition, the Company extended the termination date for the Series 1 warrants issued in October 2018 by six months, and has agreed to issue one additional share of preferred stock to the Series B investors for each five shares issued upon the exercise of the existing warrants or Series 4 warrants through November 9, 2019, up to a maximum of 400 shares of preferred stock, all 400 shares of which had been issued as of June 30, 2020.
The warrants were modified in accordance with ASC 470-50 and, as a result, immediately prior to the modification, the Company recognized a loss of approximately $63,000 to change in fair value of preferred stock liabilities under Other (income) expense in the accompanying consolidated Statements of Operations.
Subsequent to the modification, the Company recognized an expense of approximately $390,000 due to the above modification of Series B preferred stock terms in the accompanying consolidated statements of operations
The fair value of the Series B convertible preferred stock is measured in accordance with ASC 820 “Fair Value Measurement,” using “Monte Carlo simulation” modeling, incorporating the following inputs:
Treasury Stock
On September 1, 2019, 58,394 restricted shares issued to Ms. Harness vested. The total taxable compensation to Ms. Harness for the 58,394 vested shares was approximately $1,222, based upon the closing stock price on August 31, 2019 of $0.13 a share. The Company issued 48,775 common shares (net share issuance amount), to Ms. Harness. The remaining 9,619 shares of common stock were withheld from Ms. Harness for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
On September 1, 2019, 1,066,667 restricted shares issued to Dr. Bertolino vested. The total taxable compensation to Dr. Bertolino for the 1,066,667 vested shares was approximately $53,545, based upon the closing stock price on August 30, 2019 of $0.13 a share. The Company issued 645,056 common shares (net share issuance amount), to Dr. Bertolino. The remaining 421,611 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
On September 1, 2018, 38,930 restricted shares issued to Ms. Harness vested. The total taxable compensation to Ms. Harness for the 38,930 vested shares was approximately $3,690, based upon the closing stock price on August 31, 2018 of $0.40 a share. The Company issued 29,658 common shares (net share issuance amount), to Ms. Harness. The remaining 9,272 shares of common stock were withheld from Ms. Harness for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
On September 1, 2018, 533,334 restricted shares issued to Dr. Bertolino vested. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was approximately $87,140, based upon the closing stock price on August 31, 2018 of $0.40 a share. The Company issued 314,387 common shares (net share issuance amount), to Dr. Bertolino. The remaining 218,946 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
There were 659,448 shares and 228,218 shares held in treasury, purchased at a total cumulative cost of $146,000 and $91,000 as of June 30, 2020 and 2019, respectively.
15. Fair Value Measurement
The Company has elected to measure its preferred stock using the fair value method. The fair value of the preferred stock is the estimated amount that would be paid to redeem the liability in an orderly transaction between market participants at the measurement date. The Company calculates the fair value of the Series B Preferred stock using a lattice model that takes into consideration the future redemption value on the instrument, which is tied to the Company’s stock price.
These valuations are considered to be Level 3 fair value measurements as the significant inputs are unobservable and require significant management judgment or estimation. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 preferred stock liability balance for the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2020 and 2019.
___________
(1)
The 5% accrued dividend is reported in interest expense-preferred stock.
The total dividends of approximately $52,000 and $42,000 are treated as interest expense - preferred stock during the years ended June 30, 2020 and 2019, respectively. The Series B preferred stock dividends of $64,000 was paid by issuance of Series B preferred stocks, and the remaining accrued dividends of $13,000 was included under current liability as of June 30, 2020.
16. 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 incurred operating losses since its inception and therefore no tax liabilities have been incurred for the periods presented. The amount of unused tax losses (“NOL”) available for carryforward and to be applied against taxable income in future years totaled approximately $84.77 million at June 30, 2020. The Tax Cuts and Jobs Act changes the rules on NOL carryforwards. The 20-year limitation was eliminated for losses incurred for the 2018 tax year, 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. Internal Revenue Code Sec. 382 places limitations on the utilization of net operating losses.
The income tax provision benefit differs from the amount of tax determined by applying the Federal and States statutory rates as follows:
There was no current or deferred provision or benefit for income taxes for the fiscal years ended June 30, 2020 and 2019. The components of deferred tax assets as of June 30, 2020 and 2019 are as follows (rounded to nearest thousand):
17. Subsequent Events
Aspire Capital Agreement
On July 31, 2020, the Company entered into a new common stock purchase agreement (the 2020 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 24-month term of the Agreement. In consideration for entering into the 2020 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 stock purchase agreement.
Equity Transactions
From July 31, 2020 (date of agreement) to September 14, 2020, the Company has generated additional proceeds of approximately $1.8 million under the 2020 Agreement with Aspire Capital from the sale of approximately 8.5 million shares of its common stock.
Exercise of Options
On September 8, 2020, Mr. Ehrlich, the Company’s Chairman and CEO, purchased 1,787,762 shares of the Class B common stock, par value $0.0001 per share (the “Shares”) of the Company under and pursuant to the Company’s 2010 Equity Incentive Plan and the Stock Option Award Agreement issued December 29, 2010 the “Option Agreement”). The purchase price for the shares was $0.11 per share, as set forth in the Option Agreement. The full purchase price for the Shares was paid by cancellation of $242,000 of indebtedness of the Company to the Mr. Ehrlich under the Demand Unsecured Note referred to as the “Ehrlich Promissory Note C”, first from accrued interest and the remainder from principal.
The Company has evaluated events subsequent to June 30, 2020 through the issuance of these financial statements and determined that there were no additional events requiring disclosure.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company’s accountants on accounting and financial disclosure.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
As of June 30, 2020, management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on such evaluation, as of June 30, 2020, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures are effective.
Management’s Report on Internal Control Over Financial Reporting
Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of external financial statements in accordance with generally accepted accounting principles.
Internal controls over financial reporting, no matter how well designed, have inherent limitations. Therefore, internal control over financial reporting, even if determined to be effective, can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2020. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework (2013).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting.
Based on the Company’s processes and assessment, as described above, management has concluded that, as of June 30, 2020, the Company’s internal control over financial reporting was effective.
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following provides information regarding current members of the Company’s Board of Directors (the “Board”), which consists of three members, and the Company’s executive officers. Each director is elected for a term ending at the next annual meeting of stockholders or until his or her successor is elected and qualified. Our executive officers are appointed by, and serve at the discretion of, the Board.
Leo Ehrlich, has served as the Company’s Chief Executive Officer and Chief Financial Officer since November 5, 2010. Previously, he served as Chief Financial Officer of Cellceutix Pharma since its inception in June 2007. Mr. Ehrlich previously practiced as a Certified Public Accountant and received his BBA from Bernard Baruch College of the City University of New York.
The Board has determined that Mr. Ehrlich’s extensive knowledge of the Company, financial and industry knowledge and executive management experience make him a suitable member of the Company’s Board of Directors.
Barry Schechter, M.D., F.A.A.O., joined the Board on October 1, 2014 as an independent member. Dr. Schechter has been the Director of Department of Cornea and External Disease at Florida Eye Microsurgical Institute since 2005. Dr. Schechter’s practice involves diseases of the ocular surface including dry eyes, allergies, infection, the latest in corneal, refractive, and cataract surgery, and glaucoma. In addition, Dr. Schechter is an expert consultant for Gerson Lehrman regarding the business and technology of eye care and consults for several ophthalmic pharmaceutical companies. He is also on the editorial board for Advanced Ocular Care, a journal that reaches the top 10% of ophthalmologists and select optometrists. Dr. Schechter has reviewed articles for Cornea, the British Journal of Ophthalmology, and the Journal of the American Academy of Ophthalmology. He has lectured internationally and published on the subjects of treatment of ocular tumors, lens implants and dry eyes. Dr. Schechter has also written a textbook chapter on surgical techniques. Dr. Schechter is involved in clinical research and consults for several ophthalmic pharmaceutical companies.
The Board has determined that Dr. Schechter’s extensive medical knowledge and consulting work make him a suitable member of the Company’s Board of Directors.
Zorik Spektor, M.D., F.A.A.P. was appointed as an independent member of the Board in April 2015. Dr. Spektor is a fellowship trained Pediatric Otolaryngologist and Head and Neck Surgeon and has been the Director of The Center for Pediatric ENT - Head and Neck Surgery in Boynton Beach, Florida since 1995. In addition, he is a Voluntary Assistant Professor of Surgery at the Department of Otolaryngology, University of Miami Leonard M. Miller School of Medicine, and an Affiliate Clinical Assistant Professor of Biomedical Science at Florida Atlantic University in Boca Raton, Florida. Dr. Spektor received his Bachelor’s Degree from Cornell University, and his Medical Doctorate at Albany Medical College of Union University in Albany, New York. Following Dr. Spektor’s completion of his residency training in Otolaryngology - Head and Neck Surgery at the University of Connecticut, he completed his fellowship in Pediatric Otolaryngology - Head and Neck Surgery at LeBonheur Children’s Medical Center in Memphis, Tennessee. Dr. Spektor is board certified in Otolaryngology - Head and Neck Surgery. He is a Fellow of the American Academy of Otolaryngology - Head and Neck Surgery and American Academy of Pediatrics. He is also a member of the American Society of Pediatric Otolaryngology and Society for Ear, Nose & Throat Advances in Children.
Prior to establishing the Center for Pediatric ENT - Head and Neck Surgery in 1995, Dr. Spektor was on the faculty of the University of Connecticut Health Science Center, Hartford Hospital and Newington Children’s Hospital, now known as Connecticut Children’s Hospital. He has lectured and presented extensively in the field of pediatric otolaryngology, and has authored numerous peer-reviewed publications. Dr. Spektor has been a presenter as well as an invited speaker at local, national and international conferences. He continually conducts clinical research studies, which have produced significant advances in the field of otolaryngology and pediatric otolaryngology. During the past decade he has been selected as one of the nation’s top doctors by several independent rating agencies for many consecutive years. Dr. Spektor has served on advisory boards for several medical device and pharmaceutical companies and has been involved in significant advances in the field of otolaryngology and Pediatric Otolaryngology.
The Board has determined that Dr. Spektor’s extensive medical knowledge, research experience and broad industry exposure make him a suitable member of the Company’s Board of Directors.
Jane Harness, MP, MS is Senior Vice President, Clinical Sciences and Portfolio Management and joined the Company on September 1, 2016. Ms. Harness has over 20 years in domestic and international clinical drug development experience. Before joining the Company, she served as Vice President, Clinical Operations, at Revance Therapeutics in 2015 and as Head of Clinical Sciences, Dermatology and ATI Translational Research, at Novartis Institutes for Biomedical Research from 2010 to 2014. Before joining Novartis, Ms. Harness held the following notable positions at Pfizer over the prior 15 years: Global Clinical Lead, Inflammation and Immunology, Early Clinical Lead, Dermatology, and Clinical Trial Head and Process Improvement Lead, Experimental Medicine. Ms. Harness received a BS and MP (Protein Biochemistry) degree from University of Leicester, and a MS (Clinical Pharmacology) from University of Aberdeen.
CORPORATE GOVERNANCE
Corporate Governance Guidelines
We and our Board are committed to high standards of corporate governance as an important component in building and maintaining stockholder value. To this end, we have adopted corporate governance policies and practices to promote the effective functioning of the Board and its committees and to set forth a common set of expectations as to how the Board should manage its affairs and perform its responsibilities. We also closely monitor guidance issued or proposed by the SEC and the provisions of the Sarbanes-Oxley Act, as well as the emerging best practices of other companies. The current corporate governance guidelines are available on the Company’s website at http://www.ipharminc.com. Printed copies of our corporate governance guidelines may be obtained, without charge, by contacting the Corporate Secretary, Innovation Pharmaceuticals Inc., 301 Edgewater Place - Suite 100, Wakefield, MA 01880.
The Board and Committees of the Board
The Company is governed by the Board, which currently consists of three members: Mr. Leo Ehrlich, Dr. Barry Schechter, and Dr. Zorik Spektor. The Board has established three committees: the Audit Committee, the Compensation Committee and the Nominating and Governance Committee. Each of the Audit Committee, Compensation Committee and Nominating and Governance Committee is comprised entirely of independent directors. The Board has adopted written charters for each of its committees which are available on the Company’s website at http://www.ipharminc.com. A copy of the Company’s corporate governance guidelines is also available on the Company’s website. Printed copies of these charters may be obtained, without charge, by contacting the Corporate Secretary, Innovation Pharmaceuticals Inc., 301 Edgewater Place - Suite 100, Wakefield, MA 01880. All directors are encouraged to attend meetings of stockholders, either in person or remotely, absent an unavoidable and irreconcilable conflict. Each director attended more than 75% of the aggregate number of Board meetings, except Dr. Zorik Spektor and the number of meetings held by all of the committees on which he served.
The Board’s Role in Risk Oversight
The Board has the responsibility to verify that the assets of the Company are properly safeguarded, that the appropriate financial and other controls are maintained, and that the Company’s business is conducted wisely and in compliance with applicable laws and regulations and proper governance. Included in these responsibilities is the Board’s oversight of the various risks facing the Company. In this regard, the Board seeks to understand and oversee critical business risks. The Board does not view risk in isolation. Risks are considered in virtually every business decision and as part of the Company’s business strategy. The Board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for the Company to be competitive and to achieve its objectives.
Audit Committee
The Audit Committee met four times in fiscal year 2019. The Audit Committee consists of Dr. Barry Schechter and Dr. Zorik Spektor, each of whom is “independent” as that term is defined under the Nasdaq Listing Rules. The Audit Committee oversees our accounting and financial reporting processes and the audits of our financial statements. The Audit Committee is responsible for, among other things:
·
selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent auditors;
·
reviewing with our independent auditors any audit problems or difficulties and management’s response;
·
reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S- K;
·
discussing the annual audited financial statements with management and our independent auditors;
·
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal control deficiencies;
·
annually reviewing and reassessing the adequacy of our Audit Committee charter;
·
meeting separately and periodically with management and our internal and independent auditors;
·
reporting regularly to the full Board; and
·
such other matters that are specifically delegated to our Audit Committee by our Board from time to time.
Compensation Committee
The Compensation Committee did not hold any meeting in fiscal 2020. The Compensation Committee consists of Dr. Barry Schechter and Dr. Zorik Spektor, each of whom is “independent” as that term is defined under the Nasdaq Listing Rules. The Compensation Committee assists the Board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Our Chief Executive Officer and Chief Financial Officer may not be present at any committee meeting during which his compensation is deliberated. The Compensation Committee is responsible for, among other things:
·
approving and overseeing the compensation package for our executive officers;
·
reviewing and making recommendations to the Board with respect to the compensation of our directors; and
·
reviewing periodically and making recommendations to the Board regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
Under its charter, the Compensation Committee has sole authority to retain and terminate outside counsel, compensation consultants for the purpose of assisting the Compensation Committee in determining the compensation of the Chief Executive Officer or senior executive officers, or other experts or consultants, in each case, as it deems appropriate and including sole authority to approve such parties’ fees and other retention terms. The Compensation Committee may also form and delegate authority to subcommittees and may delegate authority to one or more designated members of the Compensation Committee. The Compensation Committee may from time to time seek recommendations from the executive officers of the Company regarding matters under the purview of the Compensation Committee, though the authority to act on such recommendation rests solely with the Compensation Committee.
Nominating and Governance Committee
The Nominating and Governance Committee did not hold any meetings in fiscal 2020. Our Nominating and Governance Committee consists of Dr. Barry Schechter and Dr. Zorik Spektor, each of whom is “independent” as that term is defined under the Nasdaq Listing Rules. The Nominating and Governance Committee assists the Board of Directors in identifying individuals qualified to become our directors and in determining the composition of the Board and its committees. The Nominating and Governance Committee is responsible for, among other things:
·
identifying and recommending to the Board nominees for election or re-election to the Board, or for appointment to fill any vacancy;
·
reviewing annually with the Board the current composition of the Board in light of the characteristics of independence, age, skills, experience and availability of service to us;
·
identifying and recommending to the Board the directors to serve as members of the Board’s committees; and
·
monitoring compliance with our Code of Ethics.
The Nominating and Governance Committee also oversees all aspects of the Company’s corporate governance functions on behalf of the Board and make recommendations to the Board regarding corporate governance issues.
Qualifications for Directors
Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on the Board that are applicable to all directors and that there are other skills and experience that should be represented on the Board as a whole but not necessarily by each director. The Board and the Nominating and Governance Committee of the Board consider the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs.
In its assessment of each potential candidate, including those recommended by stockholders, the Nominating and Governance Committee considers the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries and such other factors the Nominating and Governance Committee determines are pertinent in light of the current needs of the Board. The Nominating and Governance Committee also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.
The Board and the Nominating and Governance Committee require that each director be a recognized person of high integrity with a proven record of success in his or her field. In addition to the qualifications required of all directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.
The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership.
Stockholder Nominations
The Nominating and Governance Committee does not have a specific policy with regard to the consideration of candidates recommended by stockholders; however any nominees proposed by our stockholders will be considered on the same basis as nominees proposed by the Board. If a stockholder wants to submit a candidate for consideration to the Board, that stockholder may submit his or her proposal to our Corporate Secretary:
·
by sending a written request by mail to:
Innovation Pharmaceuticals Inc.
301 Edgewater Place - Suite 100
Wakefield, MA 01880
Attention: Corporate Secretary
·
by calling our Corporate Secretary, at (978) 921-4125.
Code of Ethics
The Board has adopted a Code of Ethics that applies to the Company’s directors, officers and employees. A copy of this policy is available via our website at http://www.ipharminc.com. Printed copies of our Code of Ethics may be obtained, without charge, by contacting the Corporate Secretary, Innovation Pharmaceuticals Inc, 301 Edgewater Place - Suite 100, Wakefield, MA 01880. During the fiscal year ended June 30, 2020, there were no waivers of our Code of Ethics.
Stockholder Communication with the Board of Directors
Stockholders may communicate with the Board, including non-management directors, by sending a letter to our Board, c/o Corporate Secretary, Innovation Pharmaceuticals Inc, 301 Edgewater Place - Suite 100, Wakefield, MA 01880 for submission to the Board or committee or to any specific director to whom the correspondence is directed. Stockholders communicating through this means should include with the correspondence evidence, such as documentation from a brokerage firm, that the sender is a current record or beneficial stockholder of the Company. All communications received as set forth above will be opened by the Corporate Secretary or his designee for the sole purpose of determining whether the contents contain a message to one or more of our directors. Any contents that are not advertising materials, promotions of a product or service, patently offensive materials or matters deemed, using reasonable judgment, inappropriate for the Board will be forwarded promptly to the Chairman of the Board, the appropriate committee or the specific director, as applicable.
Delinquent Section 16(a) Reports
Under U.S. securities laws, directors, executive officers and persons beneficially owning more than 10% of our common stock must report their initial ownership of the common stock, and any changes in that ownership, to the SEC. The SEC has designated specific due dates for these reports. Based solely on our review of copies of such reports filed with the SEC and written representations of our directors and executive officers, we believe that all persons subject to reporting filed the required reports on time in fiscal 2020, other than (i) a Form 4 for each of Dr. Bertolino and Ms. Harness due on September 4, 2019 and filed on September 6, 2019, and (ii) a Form 4 for each of Mr. Ehrlich, Dr. Schechter and Dr. Spektor due on February 25, 2020 and filed on or about September 11, 2020.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our Chief Executive Officer and Chief Financial Officer, our former President and Chief Medical Officer, and our Senior Vice President, Clinical Sciences and Portfolio Management, whom we refer to collectively as our named executive officers, for services rendered in all capacities during the noted periods.
_____________
(1)
The June 30, 2020 bonus for Ms. Harness of $90,750 has been accrued but is unpaid.
(2)
Amounts shown reflect the total grant date fair value of restricted stock and option awards, determined in accordance with ASC 718, made during fiscal years 2018 and 2019. Amounts shown do not represent cash payments made to Dr. Bertolino or Ms. Harness, amounts realized or amounts that may be realized. Refer to Notes 12 to the accompanying financial statements for a discussion on the valuation of the restricted stock and option awards.
(3)
Dr. Bertolino resigned as a director and officer in December, 2019 and the June 30, 2017-19 bonus for Dr. Bertolino of $278,667 has been accrued but is unpaid.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table sets forth all outstanding equity awards held by our named executive officers as of June 30, 2020.
_____________
(1)
Market value is based on a stock price of $0.19, the closing price of the Company’s common stock on June 28, 2019, and the outstanding number of shares of restricted stock.
(2)
The unvested 2017 stock options vest in three equal annual installments on September 1, 2018, 2019 and 2020. Remaining unvested 2017 stock options continue to vest monthly in equal portions. Represents shares withheld for payment of tax liability arising as a result of the partial settlement of restricted stock awards that vested. The restricted stock vests in three equal annual installments beginning on September 1, 2018.
The unvested 2018 stock options vest in three equal annual installments on September 1, 2019, 2020 and 2021. Remaining unvested 2018 stock options continue to vest monthly in equal portions. Represents shares withheld for payment of tax liability arising as a result of the partial settlement of restricted stock awards that vested. The restricted stock vests in three equal annual installments beginning on September 1, 2019.
The unvested 2019 stock options vest in three equal annual installments on September 1, 2020, 2021 and 2022. Remaining unvested 2019 stock options continue to vest monthly in equal portions. Represents shares withheld for payment of tax liability arising as a result of the partial settlement of restricted stock awards that vested. The restricted stock vests in three equal annual installments beginning on September 1, 2020.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
Mr. Ehrlich does not have a current employment agreement with the Company, and all of the stock options held by Mr. Ehrlich are fully vested.
Pursuant to the employment agreement between Ms. Harness and the Company, the executive would be entitled to the following termination benefits:
·
For Cause or Without Good Reason. If the executive’s employment is terminated by the Company for “cause” or by the executive without “good reason” (each as defined in the employment agreements), the executive would be entitled to receive (i) all accrued but unpaid salary and accrued but unused vacation, (ii) reimbursement of unreimbursed business expenses, and (iii) any employee benefits which the executive may be entitled to under the Company’s employee benefits plans.
·
Without Cause or With Good Reason. If the executive’s employment is terminated by the Company without “cause” or by the executive with “good reason,” the executive would be entitled to receive (i) the payments outlined in the previous bullet, plus (ii) continued salary for six months. Such payments would be subject to the executive’s execution of a release in favor of the Company and the executive’s compliance with certain non-solicitation and non-disparagement covenants in the employment agreement.
·
Death or Disability. If the executive’s employment is terminated on account of the executive’s death or disability, the executive or her estate would be entitled to receive (i) the payments outlined in the first bullet above, plus (ii) an amount equal to her prorated target bonus for the fiscal year during which her employment is terminated.
·
Change in Control. If the executive’s employment is terminated by the Company without “cause” or by the executive with “good reason” within 12 months following a change of control, the executive would be entitled to receive (i) the payments outlined in the first bullet above, plus (ii) continued salary for nine months, plus (iii) the target bonus for the fiscal year during which her employment is terminated. Such payments would be subject to the executive’s execution of a release in favor of the Company and the executive’s compliance with certain non-solicitation and non-disparagement covenants in the employment agreement. The executive would also be entitled to reimbursement for certain health insurance expenses, and all of her outstanding equity awards would automatically vest, subject to certain equity awards other than stock options satisfying any applicable performance criteria.
For purposes of the employment agreement with Ms. Harness, a “change of control” means the occurrence of any of the following:
·
one person (or more than one person acting as a group) acquires ownership of stock of the Company that, together with the stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation;
·
one person (or more than one person acting as a group) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition) ownership of the Company’s stock possessing 50% or more of the total voting power of the stock of such corporation;
·
a majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of appointment or election; or
·
the sale of all or substantially all of the Company’s assets.
Notwithstanding the foregoing, a “change in control” shall not occur unless such transaction constitutes a change in the ownership of the Company, a change in effective control of the Company, or a change in the ownership of a substantial portion of the Company’s assets under Section 409A.
DIRECTOR COMPENSATION
The following table sets forth certain information concerning the compensation paid to our directors for services rendered to us during the fiscal year ended June 30, 2020.
On February 23, 2020, the Company issued (i) options for the purchase of 500,000 shares of Class A common stock at an exercise price of $0.10 per share, total value of $34,152, and (ii) 500,000 shares of Class A common stock at $0.09 to each member of the Company’s Board of Directors, consisting of Barry Schechter and Zorik Spektor, with value of $45,000.
As of June 30, 2020, each of Dr. Schechter and Dr. Spektor held options to purchase 519,655 shares of the Company’s Class A common stock.
Narrative to Director Compensation Table
Each of our independent directors has entered into agreements with the Company, pursuant to which each director received quarterly cash fees in the amount of $6,250 during fiscal 2020, in addition to 20,000 shares of restricted stock upon the successful listing of the Company’s common stock on the Nasdaq Capital Market and options with a five-year term and a Black-Scholes-Merton value of $20,000 on the date of issuance, which options were issued in June 2016. Commencing with the first quarter of fiscal 2021, the Company intends to increase the quarterly cash payment to $12,500 per quarter, which payments will be made to all directors serving on the Company’s Board of Directors, rather than only the independent directors. Directors are reimbursed for out-of-pocket expenses incurred as a result of their participation on our Board and committees.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of September 10, 2020, for: (i) each person known by us to beneficially own more than 5% of our voting securities, (ii) each named executive officer, (iii) each of our directors, and (iv) all of our current executive officers and directors as a group. The address of each of the persons set forth below is in care of Innovation Pharmaceuticals Inc., 301 Edgewater Place - Suite 100, Wakefield, MA 01880.
____________
*
Denotes less than 1%.
(1)
“Beneficial owner” means having or sharing, directly or indirectly (i) voting power, which includes the power to vote or to direct the voting, or (ii) investment power, which includes the power to dispose or to direct the disposition, of shares of the common stock of an issuer. The definition of beneficial ownership includes shares underlying options or warrants to purchase common stock, or other securities or convertible debt convertible into common stock, that are exercisable or convertible or that will become exercisable or convertible within 60 days. Unless otherwise indicated, the beneficial owner has sole voting and investment power. For each stockholder, the calculation of percentage of beneficial ownership is based upon 343,579,992 shares of Class A common stock and 3,605,942 shares of Class B common stock outstanding as of September 10, 2020, and shares of common stock subject to options, warrants and/or conversion rights held by the stockholder that are currently exercisable or are exercisable within 60 days of September 10, 2020, which are deemed to be outstanding and to be beneficially owned by the stockholder holding such options, warrants or conversion rights. The percentage ownership of any stockholder is determined by assuming that the stockholder has exercised all options, warrants and conversion rights to obtain additional securities and that no other stockholder has exercised such rights.
(2)
Percentage total voting power represents voting power with respect to all shares of our Class A common stock and Class B common stock, voting together as a single class. Each holder of Class B common stock is entitled to ten votes per share of Class B common stock, and each holder of Class A common stock is entitled to one vote per share of Class A common stock on all matters submitted to our stockholders for a vote. The Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of our stockholders, except as may otherwise be required by law. The Class B common stock is convertible at any time by the holder into shares of Class A common stock on a share-for-share basis.
(3)
Includes (i) 7,835,002 shares of Class A common stock held directly by Mr. Ehrlich, (ii) 2,752,310 shares of Class A common stock held by Mr. Ehrlich’s spouse, (iii) 3,666,190 shares of Class A common stock into which a convertible loan and accrued interest in the amount of $1.8 million may be converted at $0.50 per share, (iv) vested options to purchase 2,000,000 shares of Class A common stock granted to Mr. Ehrlich under the 2010 Equity Incentive Plan, (v) vested options to purchase 500,000 shares of Class A common stock granted to Mr. Ehrlich under the 2016 Equity Incentive Plan, (vi) 3,605,942 shares of Class B common stock held directly by Mr. Ehrlich, and (vii) vested options to purchase 13,981,820 shares of Class B common stock granted to Mr. Ehrlich under the 2010 Equity Incentive Plan. Each share of Class A common stock carries one vote and each share of Class B common stock carries ten votes on all matters before the Company’s stockholders. Class B common stock is convertible into shares of Class A common stock at the holder’s election.
(4)
For each of Messrs. Schechter and Spektor, includes 519,665 shares of Class A common stock issuable upon the exercise of stock options that are currently exercisable or are exercisable within 60 days of September 10, 2020.
(5)
Includes 345,974 shares of Class A common stock issuable upon the exercise of stock options that are currently exercisable or are exercisable within 60 days of September 10, 2020.
(6)
This reflects Dr.. Bertolino’s share ownership as of December 19, 2019, date of resignation.
(7)
Includes 25,139,256 shares of Class A common stock and 13,981,820 shares of Class B common stock issuable upon the exercise of stock options, warrants or other conversion rights, or in the case of Class A common stock, upon the conversion of Class B common stock, in each case that are currently exercisable or are exercisable within 60 days of September 10, 2020.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth certain information about the securities authorized for issuance under our equity incentive plans as of June 30, 2020.
__________________
(1)
Consists of the Company’s 2010 Equity Incentive Plan.
(2)
Consists of the Company’s 2016 Equity Incentive Plan.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions
The Audit Committee’s charter requires it to approve or ratify certain transactions involving the Company and “related persons,” as defined under the relevant SEC rules. Any transaction with a related person, other than transactions available to all employees generally or involving aggregate amounts of less than $120,000, must be approved or ratified by the Audit Committee. The policy applies to all executive officers, directors and their family members and entities in which any of these individuals has a substantial ownership interest or control. None of such related persons has been involved in any transactions with us since the beginning of fiscal 2019 which are required to be disclosed pursuant to Item 404 of SEC Regulation S-K. For information about transactions with related persons that were entered into before fiscal 2019, see Notes 9 and 10 in the accompanying notes to the financial statements.
Independent Directors
In considering and making decisions as to the independence of each of the directors of the Company, the Board considered transactions and relationships between the Company (and its subsidiaries) and each director (and each member of such director’s immediate family and any entity with which the director or family member has an affiliation such that the director or family member may have a material indirect interest in a transaction or relationship with such entity). The Board has determined that the following members of the Board are independent as defined in applicable SEC and Nasdaq rules and regulations, and that each constitutes an “Independent Director” as defined in Nasdaq Listing Rule 5605: Dr. Barry Schechter and Dr. Zorik Spektor.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The following table sets forth the aggregate fees for professional audit services rendered by Heaton & Company, PLLC (d/b/a Pinnacle Accountancy Group of Utah) (“Pinnacle”) for the audit of the Company’s annual financial statements for the fiscal year ended June 30, 2020 and 2019, and fees billed for other services provided by Pinnacle in the fiscal year ended June 30, 2020 and 2019. The Board of Directors has approved all of the following fees.
(1) Audit Fees consist of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided by Pinnacle in connection with our statutory and regulatory filings or engagements.
Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining auditor independence and determined that such services are appropriate. Before auditors are engaged to provide us audit or non-audit services, such engagement is (without exception, required to be) approved by the Audit Committee of our Board.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit service performed by Pinnacle for our financial statements as of and for the year ended June 30, 2020.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
(a)
Financial statements
See Index to financial statements and Supplemental Data under Part II, Item 8 of this Annual Report on Form 10-K.
(b)
Exhibits
____________
* Identifies a management contract or compensation plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Innovation Pharmaceuticals Inc.
(Registrant)
Date: September 14, 2020
By:
/s/ Leo Ehrlich
Name:
Leo Ehrlich
Title:
Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, and Secretary)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Leo Ehrlich, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Leo Ehrlich
Chief Executive Officer, Chief Financial Officer,
September 14, 2020
Leo Ehrlich
Principal Accounting Officer, Secretary and Director
/s/ Barry Schechter
Director
September 14, 2020
Barry Schechter
/s/ Zorik Spektor
Director
September 14, 2020
Zorik Spektor