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EX-32.2 - CERTIFICATION - Innovation Pharmaceuticals Inc.ipix_ex322.htm
EX-32.1 - CERTIFICATION - Innovation Pharmaceuticals Inc.ipix_ex321.htm
EX-31.2 - CERTIFICATION - Innovation Pharmaceuticals Inc.ipix_ex312.htm
EX-31.1 - CERTIFICATION - Innovation Pharmaceuticals Inc.ipix_ex311.htm
EX-23.1 - CONSENT - Innovation Pharmaceuticals Inc.ipix_ex231.htm
EX-10.16 - FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT - Innovation Pharmaceuticals Inc.ipix_ex1016.htm
EX-10.7 - REGISTRATION RIGHTS AGREEMENT - Innovation Pharmaceuticals Inc.ipix_ex107.htm
EX-10.6 - COMMON STOCK PURCHASE AGREEMENT - Innovation Pharmaceuticals Inc.ipix_ex106.htm
EX-5.1 - OPINION OF GARY R. HENRIE, ESQ. - Innovation Pharmaceuticals Inc.ipix_ex51.htm
EX-3.2 - AMENDED AND RESTATED BYLAWS - Innovation Pharmaceuticals Inc.ipix_ex32.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE FISCAL YEAR ENDED JUNE 30, 2017

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM _________ TO __________

 

INNOVATION PHARMACEUTICALS INC.

(Exact Name of Registrant as Specified in Charter)

 

Nevada

 

001-37357

 

30-0565645

(State or Other Jurisdiction

 

(Commission File Number)

 

(IRS Employer

of Incorporation)

 

Identification No.)

 

100 Cummings Center, Suite 151-B

Beverly, Massachusetts

 

01915

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (978) 921-4125

 

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE

 

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK, CLASS A, PAR VALUE $0.0001 PER SHARE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

¨

Accelerated Filer

x

Non-Accelerated Filer

¨

Smaller reporting company

¨

(Do not check if a smaller reporting company)

Emerging growth company

¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

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

 

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates on December 31, 2016 was $116,693,863 (100,598,158 shares), based on the closing price of the registrant’s common stock of $1.16.

 

There were 137,874,421 and -0- shares, respectively, of the registrant’s $0.0001 par value Class A and Class B common stock outstanding as of September 1, 2017.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

 
 

INNOVATION PHARMACEUTICALS INC.

FORM 10-K

For the Fiscal Year Ended June 30, 2017

TABLE OF CONTENTS

 

 

PAGE NO

 

PART I

 

ITEM 1

BUSINESS

 

4

 

ITEM 1A

RISK FACTORS

 

19

 

ITEM 1B

UNRESOLVED STAFF COMMENTS

 

40

 

ITEM 2

PROPERTIES

 

40

 

ITEM 3

LEGAL PROCEEDINGS

 

40

 

ITEM 4

MINE SAFETY DISCLOSURES

 

40

 

 

PART II

 

 

ITEM 5

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

41

 

ITEM 6

SELECTED FINANCIAL DATA

 

42

 

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

42

 

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

54

 

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

54

 

ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

54

 

ITEM 9A

CONTROLS AND PROCEDURES

 

54

 

ITEM 9B

OTHER INFORMATION

 

55

 

PART III

 

ITEM 10

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

56

 

ITEM 11

EXECUTIVE COMPENSATION

 

63

 

ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

69

 

ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

71

 

ITEM 14

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

71

 

PART IV

 

ITEM 15

EXHIBITS AND FINANCIAL STATEMENTS

 

72

 

ITEM 16

FORM 10-K SUMMARY

 

72

 

SIGNATURES

 

73

 

INDEX TO FINANCIAL STATEMENTS

 

F-1

 

 
2
 

 

PART I

 

References in this report to “Innovation Pharmaceuticals,” “Company,” “we,” “us,” and “our” refer to Innovation Pharmaceuticals Inc., unless the context requires otherwise. References herein to our common stock refer to our Class A common stock, par value $0.0001 per share, unless the context requires otherwise.

 

Our fiscal year ends on June 30. When we refer to a fiscal year or quarter, we are referring to the year in which the fiscal year ends and the quarters during that fiscal year. Therefore, fiscal 2017 refers to the fiscal year ended June 30, 2017.

 

FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Any statements contained in this report that are not statements of historical fact may be forward-looking statements. When we use the words “intends,” “estimates,” “predicts,” “potential,” “continues,” “anticipates,” “plans,” “expects,” “believes,” “should,” “could,” “may,” “will” or the negative of these terms or other comparable terminology, we are identifying forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning our future drug development plans and projected timelines for the initiation and completion of preclinical and clinical trials; the potential for the results of ongoing preclinical or clinical trials; other statements regarding our future product development and regulatory strategies, including with respect to specific indications; any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements; and any other statements which are other than statements of historical fact. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, but are not limited to, our ability to continue to fund and successfully progress internal research and development efforts and to create effective, commercially-viable drugs; our ability to effectively and timely conduct clinical trials; our ability to ultimately distribute our drug candidates; compliance with regulatory requirements; and our capital needs, as well as other factors described elsewhere in this report and our other reports filed with the Securities and Exchange Commission (the “SEC”). Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

 

Forward-looking statements speak only as of the date on which they are made. Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business. Readers are cautioned not to put undue reliance on forward-looking statements.

 

For further information about these and other risks, uncertainties and factors, please review the disclosure included in this report under “Part I, Item 1A, Risk Factors.”

 

 
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ITEM 1. BUSINESS

 

OVERVIEW OF OUR BUSINESS

 

Innovation Pharmaceuticals Inc. is a clinical stage biopharmaceutical company developing innovative therapies with dermatology, oncology, anti-inflammatory and antibiotic applications. The Company owns the rights to numerous drug compounds, including Prurisol (KM-133), which is in development for psoriasis; Brilacidin, our lead drug in a new class of compounds called defensin-mimetics; and Kevetrin (thioureidobutyronitrile), our lead anti-cancer compound.

 

Effective June 5, 2017, the Company changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc.

 

Clinical Development Programs

 

Compound

 

Target/Indication

 

Clinical Status

Prurisol

 

Psoriasis

 

Phase 2b

Brilacidin

 

*ABSSSI

 

Phase 2 (completed)

 

Oral Mucositis

 

Phase 2 (Fast Track)

 

Inflammatory Bowel Disease

 

Phase 2 (Proof of Concept) Study (completed)

Kevetrin

 

Ovarian Cancer

 

Phase 2

____________

 

*ABSSSI- Acute Bacterial Skin and Skin Structure Infection

 

The Company devotes most of its efforts and resources on its compounds in clinical trials: Prurisol for the treatment of psoriasis, Kevetrin for the treatment of ovarian cancer, and Brilacidin for treatments of skin infections, ulcerative proctitis (Inflammatory Bowel Disease) and prevention of oral mucositis complicating chemoradiation treatment for 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.

 

Research and development efforts are concentrated on Prurisol, Brilacidin, and Kevetrin:

 

 

·

Prurisol — Our lead anti-psoriasis drug candidate, is a small molecule compound acting on the principles of immune modulation and PRINS (Psoriasis susceptibility-related RNA Gene Induced by Stress) reduction that has been found to be effective against psoriasis in animal models, both in induced psoriasis as well as a xenograft model with human psoriatic tissue. It is currently in the Phase 2 clinical development study below:

 

 

 

 

Active Clinical Trials: A Randomized, Double Blind, Parallel Group, Placebo-controlled Trial to Study the Efficacy and Safety of Two Oral Doses of Prurisol Administered Twice Daily for Twelve Weeks to Subjects with Moderate to Severe Chronic Plaque Psoriasis

 

 
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·

Brilacidin — This lead drug candidate is in a new immunomodulatory class with anti-inflammatory and antibiotic properties called defensin-mimetics. Modeled after Host Defense Proteins (HDPs), the “front-line” of defense in the immune system, it is a small, non-peptidic, synthetic molecule that kills pathogens swiftly and thoroughly. Just as importantly, Brilacidin also functions in a robust immunomodulatory capacity, lessening inflammation and promoting healing. In June 2017, the Company completed an open-label Phase 2 Proof-of-Concept (PoC) trial of Brilacidin for the treatment by daily enema of ulcerative proctitis (UP)/ ulcerative proctosigmoiditis (UPS), two types of Inflammatory Bowel Diseases (IBD). Study results showed significant patient benefit and low systemic absorption. The Company is also studying Brilacidin’s effect on Oral Mucositis (under Fast Track designation) and, in August 2017, announced it had completed recruitment of subjects to the Phase 2 study below:

 

 

 

 

Active Clinical Trials: Phase 2, Multi-center, Randomized, Double-blind, Placebo controlled Study to Evaluate the Efficacy and Safety of Brilacidin Oral Rinse Administered Daily for 7 Weeks in Attenuating Oral Mucositis in Patients with Head and Neck Cancer Receiving Concurrent Chemotherapy and Radiotherapy

 

 

·

Kevetrin — Our lead anti-cancer compound, is a small molecule compound that modulates p53, a protein involved in controlling cell mutations. In the majority of all cancers, regardless of origin, the p53 pathway is mutated, compromising its anti-tumor functions. In particular, most epithelial ovarian cancer patients have high-grade serous cancer, characterized by near universal p53 gene abnormalities. Pre-clinical research has demonstrated Kevetrin’s unique mechanism of action to induce apoptosis, slow tumor progression and reduce tumor volume in many types of cancers, including lung, breast, colon, prostate, squamous cell carcinoma and a leukemia tumor model. The United States Food and Drug Administration (FDA) has awarded Orphan Drug designations for Kevetrin for ovarian cancer, retinoblastoma and pancreatic cancer as well as Rare Pediatric Disease designation for Retinoblastoma. It is currently in Phase 2 clinical development study below:

 

 

 

 

Active Clinical Trials: A Phase 2 study of Kevetrin (thioureidobutyronitrile) in Subjects with Platinum-Resistant/Refractory Ovarian Cancer

 

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

 

The Company’s common stock traded under the stock symbol “CTIX” on the OTCQB until the market close of June 8, 2017. As of June 9, 2017, trading on the OTCQB began under the new Innovation Pharmaceuticals name and ticker symbol “IPIX”.

 

Our Business Strategy

 

We are in the business of developing and/or acquiring innovative small molecule therapies to treat diseases with significant medical need. Our strategy is to use our business and scientific expertise to maximize the value of our diverse pipeline. We expect to develop the highest quality data and broadest intellectual property to support our compounds.

 

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

 

The work plan we have developed for the next twelve (12) months is expected to support our clinical trials. If we find that we have underestimated the time duration or cost of our studies or if we have to undertake additional studies, due to various reasons within or outside of our control, our development timelines and/or our financing needs may be significantly impacted.

 

As a mid-stage developmental pharmaceutical company, the Company has no customers, commercial products or revenues to date, and may never achieve revenues or profitable operations.

 

 
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Pipeline Summary

 

Compound: Prurisol (KM-133)

 

Disease: Psoriasis

 

Prurisol is our anti-psoriasis drug candidate. It is a small molecule compound with a molecular weight of less than 500. It is synthesized through a multi-step process using commercially available starting materials. Prurisol acts through immune modulation and PRINS reduction.

 

We are developing Prurisol under FDA guidance that a 505(b)(2) drug approval pathway is an acceptable pathway for its development, which will permit us to support the new drug application (NDA) with included data not developed by or for the Company. This offers the benefits of a faster development process. Prurisol is eligible because it is metabolized to abacavir, which is the active moiety in the marketed drug Ziagen (abacavir sulfate). Given that psoriasis is a chronic condition with limited effective therapies that the National Psoriasis Foundation lists as affecting 125 million people worldwide, we see a tremendous market opportunity for an effective new oral treatment.

 

In August 2015, we commenced a Phase 2a trial of oral Prurisol for the treatment of mild to moderate chronic plaque psoriasis; on May 24, 2016, the Company released top line data. The trial enrolled 115 patients with mild to moderate plaque psoriasis, graded at a score of 2 (“mild”) or 3 (“moderate”) on the Investigator’s Global Assessment (IGA) scale. The trial was structured with four arms, three receiving different dosing regimens of oral Prurisol (50mg, 100mg, 200mg per day) and one placebo arm for 12 weeks. The primary endpoint was a 2-point reduction in the IGA score at Day 84.

 

The trial achieved its primary endpoint in patients treated with 200mg of oral Prurisol. Among the most severe psoriasis patients participating in the study, those having a baseline IGA score of 3 (“moderate”), the primary endpoint was met in 46% of patients who received Prurisol 200mg as compared to 35% in the overall combined mild to moderate group. These data were derived from analyses of all patients randomized across all 9 participating study sites. Additional preliminary data analyses of secondary endpoints showed patients who received any dose of Prurisol, regardless of the treatment arm, had a 1-point improvement (using the IGA scoring system) at a higher rate than that of patients in the placebo arm. This was another indication of the drug’s efficacy. Increases in Prurisol’s therapeutic response, upon evaluating patients at Day 56 (Week 8) and Day 84 (Week 12) of treatment, also were apparent in the Prurisol 200mg arm, suggesting an improving response over time.

 

In light of Prurisol’s favorable responses and greater efficacy in treating moderate psoriasis, the Company engaged in a Phase 2b trial in patients with moderate to severe psoriasis. This study includes active treatment arms of 300mg and 400mg Prurisol per day and placebo and is anticipated to complete later this year.

 

Compound: Brilacidin

 

Brilacidin is in a new class of drugs modeled after defensin-peptides, which represent a front-line of defense in the human immune system. It is a fully synthetic non-peptide small molecule that has anti-bacterial, anti-inflammatory and immunomodulatory properties. Over this past year, the Company has generated anchoring clinical data that are very encouraging regarding use of Brilacidin as an anti-inflammatory/ immunomodulatory agent for localized treatment of relevant diseases.

 

 
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Disease: Oral Mucositis (OM)

 

In animal models of oral mucositis induced by chemoradiation, topically applied Brilacidin was shown to significantly reduce the occurrence of severe ulcerative oral mucositis by more than 90% compared to placebo. Brilacidin and related compounds have shown antibacterial, anti-biofilm and anti-inflammatory properties in various pre-clinical studies. We believe that the combination of these attributes contributed to the efficacy of Brilacidin in these animal studies.

 

The Company is engaged in a clinical trial titled, “Phase 2, Multi-center, Randomized, Double-blind, Placebo-controlled Study to Evaluate the Efficacy and Safety of Brilacidin Oral Rinse Administered Daily for 7 Weeks in Attenuating Oral Mucositis in Patients with Head and Neck Cancer Receiving Concurrent Chemotherapy and Radiotherapy”. Interim analysis has shown a marked reduction in incidence of Severe OM (WHO Grade ≥ 3) observed in patients treated with Brilacidin who received at least 55 Gy cumulative units of radiation: Active Arm (Brilacidin): 2 of 9 patients (22.2 percent); Control Arm (Placebo): 7 of 10 patients (70 percent). In addition to good safety and tolerability, plasma samples from 6 patients treated with Brilacidin were analyzed and all concentrations of Brilacidin were below the lower limit of quantification (i.e., < 10 ng/mL).

 

The clinical trial is a Phase 2 randomized, double-blind, placebo-controlled study evaluating the safety and efficacy of Brilacidin as an oral rinse in preventing and controlling OM in patients receiving chemoradiation therapy for head and neck cancer. The study recently completed full enrollment of 61 in the United States, approximately 30 each to Brilacidin treatment or to placebo (water). Brilacidin (45 mg/15 ml oral rinse—”swish and spit”) is administered 3 times daily across 7 weeks (49 days). Completion of the trial is anticipated later this year.

 

OM represents a great area of unmet medical need and its successful treatment is potentially very important to the Brilacidin development program. We believe that demonstration of efficacy with localized delivery and limited systemic absorption also serves to help anchor Brilacidin for potential use in multiple diseases.

 

Disease: Inflammatory bowel disease (IBD),[Ulcerative Proctitis /Proctosigmoiditis]

 

Given its unique immunomodulatory properties, we have also identified inflammatory bowel disease (IBD) as an indication for treatment with Brilacidin.

 

Brilacidin induced Clinical Remission in the majority of patients in our recently completed Phase 2, open-label, Proof-of-Concept (PoC) clinical trial evaluating Brilacidin for mild-to-moderate Ulcerative Proctitis / Ulcerative Proctosigmoiditis (UP/UPS), two types of Inflammatory Bowel Disease (IBD).

 

In this Phase 2 PoC trial, a total of 17 patients received treatment across three sequential, dose-escalated cohorts—Cohort A (6 patients); Cohort B (6 patients); and Cohort C (5 patients). Patients received Brilacidin, once daily, at 50 mg, 100 mg and 200 mg, respectively, administered per rectum as a retention enema for 42 days (6 weeks) of treatment. The Primary Efficacy Endpoint of the Brilacidin UP/UPS trial used Modified Mayo Disease Activity Index (MMDAI) scoring, a common measurement tool in managing Ulcerative Colitis preferred by many IBD specialists, to determine Clinical Remission at Day 42. Secondary Efficacy Endpoints included: change in MMDAI score, both Full and Partial, and change in patient Quality-of-Life as assessed by the Short Inflammatory Bowel Disease Questionnaire (SIBDQ).

 

Brilacidin was shown to be generally well-tolerated, with no Serious Adverse Events (SAEs) experienced by patients, which is consistent with the low levels of systemic absorption of Brilacidin observed in the trial. Improvement in Quality-of-Life was reported with more than 60 percent of patients in each cohort achieving a clinically important ≥10-point (out of 70 points) or more improvement after six weeks of treatment. At least half of patients in Cohorts B and C also showed ≥20-point or more improvement.

 

 
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This study also serves to anchor Brilacidin as a treatment that can be effective with localized delivery techniques.

 

Brilacidin is being developed as a novel, non-corticosteroid, non-biologic treatment, with formulation development plans including oral tablets for the treatment of Ulcerative Colitis and Crohn’s Disease and foam and/or gel for the treatment of UP/UPS.

 

 Disease: Acute Bacterial Skin and Skin Structure Infection (ABSSSI)

 

The intravenous formulation of our lead antibiotic candidate, Brilacidin, has the potential to treat a variety of infections, including ABSSSI, caused by drug-sensitive or drug-resistant strains of Staphylococcus aureus, including Methicillin-Resistant Staphylococcus aureus (MRSA), and by other Gram-positive bacteria.

 

The Phase 2b trial entitled “A Randomized, Double-Blind Study Comparing Three Dosing Regimens of Brilacidin to Daptomycin in the Treatment of Acute Bacterial Skin and Skin Structure Infections (ABSSSI)” completed enrollment in August 2014. On October 23, 2014, we announced positive top-line efficacy data from this Phase 2b ABSSSI trial.

 

In July 2015, at an End-of-Phase 2 Meeting, the Company and FDA discussed data supporting advancement of Brilacidin into Phase 3, as well as the basic elements of a Phase 3 program in ABSSSI. This was the first Host Defense Protein (HDP) mimic to advance through Phase 2. Because HDP mimics, such as Brilacidin, represent an entirely new class of antibiotics, there is no potential cross-resistance with currently marketed antibiotics, and due to its unique mechanism of action, resistance to Brilacidin is unlikely to develop. For this and other reasons, such as its high activity against methicillin-resistant Staphylococcus aureus (a leading cause of ABSSSI), Brilacidin received designation as a Qualified Infectious Disease Product (QIDP) in November 2014. The QIDP designation was established as part of the Generating Antibiotic Incentives Now (GAIN) Act, passed by the U.S. Congress in July 2012, for the purpose of encouraging pharmaceutical companies to develop new antimicrobial drugs to treat serious and life-threatening infections. Receiving QIDP designation means that Brilacidin is now eligible for additional FDA incentives in the approval and marketing path, including Fast Track designation and Priority Review for development and a potential five-year extension of market exclusivity.

 

The Phase 3 ABSSSI program would include two Phase 3 ABSSSI studies, as required by FDA Guidance (October 2013), of approximately 700 subjects in each study. The two studies may enroll subjects simultaneously. In addition, the first study would include an interim analysis after a portion of the patients has been enrolled. This would provide an early assessment of both safety and efficacy.

 

We submitted our Phase 3 protocol under a Special Protocol Assessment (“SPA”) request to the FDA. The Phase 3 protocol SPA request included specific questions from the Company to facilitate a meaningful dialogue with the FDA on the proposed study design. We have received from the FDA comments and considerations for incorporation into our study design. Contingent upon further discussion with the FDA, a Phase 3 program may be initiated.

 

Management estimates that the cost of an ABSSSI Phase 3 program would require significantly expanded capital beyond what is currently available and we, therefore, intend to be strategic in balancing progress in this portion of our portfolio.

 

 
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Compound: Kevetrin

 

Disease: Ovarian Cancer

 

Kevetrin, our anti-cancer drug candidate, has completed a Phase 1 study at Dana-Farber Cancer Institute and Beth Israel Deaconess Medical Center (“BIDMC”). The clinical trial evaluated the safety and potential efficacy of Kevetrin in patients with advanced-stage solid tumors of various types. The primary endpoints for the study were safety, determining the maximum tolerated dose, and establishing the dose for future Phase 2 clinical trials.

 

Clinical exposure to Kevetrin as measured by plasma concentrations have been achieved which are greater than concentrations shown to induce apoptosis in non-clinical studies. While the trial was primarily to evaluate safety of repeated cycles of Kevetrin, it is encouraging that some patients have had stabilization of tumor status during treatment. Further, Kevetrin appears to be having the expected effects on p53 in a number of the patients treated, as measured by increases in the levels of the downstream protein p21 biomarker.

 

Pharmacokinetic profiles found that Kevetrin has a relatively short biological half-life (less than 2 hours) in plasma. Plasma half-life (T1/2) clearance (CL) and volume of distribution (Vd) suggest that drug elimination predominantly involves hepatic mechanisms and Kevetrin undergoes rapid extensive distribution from systemic circulation into tissues. Pharmacokinetic (PK) data, as measured by area under the curve (AUC) and maximum plasma concentration (Cmax) levels, further revealed that Kevetrin exhibited a dose-dependent response, has as stated a relatively short half-life (approximately 2 hours) and clears the body within one day - on average between 8 and 10 hours - though the drug can remain in the body up to approximately 24 hours, depending upon individual patient variations. The Phase 1 trial of Kevetrin trial yielded data supporting the safety of Kevetrin.

 

The Company has commenced a Phase 2a trial of Kevetrin in treating late-stage ovarian cancer. The main objective of the trial focuses on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. Presently and concurrent with the Phase 2a trial is the development of an oral formulation of Kevetrin for treating cancer. Pharmacokinetic data collected on Kevetrin during the initial clinical trial demonstrates that the compound has a short half-life of approximately two hours. Kevetrin’s 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 began January 2017.

 

Resources allocated to these activities are, however, currently strategically measured in order to assure that adequate support is available for completion of critical clinical trial activities in the Brilacidin and Prurisol programs.

 

Kevetrin was granted FDA Orphan Drug Designation for the treatment of ovarian cancer, retinoblastoma, and pancreatic cancer and FDA Rare Pediatric Disease Designation for the treatment of retinoblastoma.

 

In further preclinical testing by independent researchers at the University of Bologna in Italy, recent data were found to be supportive of the potential for Kevetrin in treatment of Acute Myelogenous Leukemia (AML). We intend to further address this potential once we have available to us additional capital and resources.

 

Other Compounds Owned by the Company

 

The Company owns other compounds which have been identified as possible candidates for development for treating diseases including autism (KM 391), arthritis (KM277), asthma (KM 278), MS/ALS/Parkinson’s (KM 362), cancer (KM 3174), hypertensive emergency (KM 732), and bacterial and fungal infections. Development of these compounds are paused while the Company focuses its resources on its lead compounds.

 

 
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GLOSSARY OF TERMS

 

Set forth below are definitions of certain technical terms used in this report that are commonly used in the pharmaceutical and biotechnology industries.

 

ABSSSI: Acute Bacterial Skin and Skin Structure Infections.

 

Apoptosis: A type of cell death in which a series of molecular steps in a cell lead to its death. This is one method the body uses to get rid of unneeded or abnormal cells. The process of apoptosis may be blocked in cancer cells. Also called programmed cell death.

 

Cytotoxicity: The quality of being toxic to cells.

 

Defensin mimetics: Small compounds that mimic the structure and function of host defense proteins.

 

IND: Investigational new drug. A substance that has been tested in the laboratory and has been approved by the FDA for testing in people.

 

In-vitro: Refers to the technique of performing a given experiment in a test tube, or, generally, in a controlled environment outside a living organism.

 

In-vivo: Refers to that which takes place inside an organism. In science, in vivo refers to experimentation done in or on the living tissue of a whole, living organism as opposed to a partial or dead one. Animal testing and clinical trials are forms of in-vivo research.

 

NDA: A new drug application with the FDA.

 

P21 (also known as protein 21): The expression of this gene is tightly controlled by the tumor suppressor protein p53, through which this protein mediates the p53-dependent cell cycle G1 phase arrest in response to a variety of stress stimuli. Used as a biomarker to detect change in p53.

 

P53 (also known as protein 53): A tumor suppressor gene that is mutated in many human cancers and results in the loss of a cell’s ability to check for DNA damage.

 

Small Molecule Drug: A medicinal drug compound having a molecular weight of less than 1,000 Daltons, and typically between 300 and 700 Daltons.

 

Xenograft: The cells of one species transplanted to another species.

 

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

 

5.

Prurisol and related compounds

 

 
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Patent Title

 

Status

 

Description

 

 

 

 

 

Polycationic Compounds And Uses Thereof

 

United States: issued 07/31/12 and 08/13/13

 

Patents Expire: 2025

 

Category 2

 

Arylamide compounds, compositions, methods of inhibiting angiogenesis, and methods of antagonizing heparin; Salicylamide compounds, compositions, methods of antagonizing heparin, and methods of inhibiting anti-Factor Xa

 

Ophthalmic And Otic Compositions Of Facially Amphiphilic Polymers And Oligomers And Uses Thereof

 

United States: issued 11/24/15;

Europe: issued 03/04/15;

Japan: issued 05/15/15;

Australia: issued 11/28/13;

China: issued 10/01/14;

Canada: issued 8/9/16

 

Pending: India and United States (Other claims)

 

Patents Expire: 2027

 

Category 1

 

Brilacidin compound, compositions, and methods of treating bacterial ophthalmic infections

 

Synthetic Mimetics Of Host Defense And Uses Thereof

 

United States: issued 10/02/12 and 03/10/15;

Taiwan: issued 04/01/15;

Mexico: issued 09/28/12;

 

Pending: India

 

Patents Expire: 2029 and 2030

 

 

Category 1

 

Brilacidin enantiomer, compositions and formulations, and methods of preparation of enantiomer;

 

Methods of preparation of Brilacidin

 

Host Defense Protein (HDP) Mimetics For Prophylaxis And/Or Treatment Of Inflammatory Diseases of the Gastrointestinal Tract

 

Pending – United States, Patent Cooperation Treaty (PCT)

Japan – Granted

 

Category 1

Treatment Of Inflammatory Diseases of the Gastrointestinal Tract

 

 
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Compounds For Use In Treatment Of Mucositis

 

United States: issued 08/12/14, 10/13/15, and 10/4/16; allowed 06/14/17;

Japan: issued 11/06/15;

Taiwan: issued 2/11/16;

China: issued 04/20/16;

South Africa: issued 04/29/15

Australia: issued 10/6/16

 

Pending: Europe, Australia, Brazil, Canada, Israel, Russia, and South Korea

 

Patents Expire: 2032

 

Category 1

 

Methods of treating mucositis with Brilacidin and related compounds, and compositions of Brilacidin and palifermin

 

Compounds And Methods For Treating Candidiasis And Aspergillus Infections

 

United States: issued 11/25/14

 Patent Expires: 2033

 

Category 3

 

Methods of killing or inhibiting the growth of a Candida or Aspergillus species or preventing or treating a mammal having oral or disseminated candidiasis or an aspergillus infection

 

Cyclic Compounds And Methods Of Making And Using The Same

 

United States: issued 10/18/16

 Patent Expires: 2032

 

Category 3

 

Cyclic compounds, compositions, methods of inhibiting the growth of a bacteria, and method of treating a mammal having a bacterial infection

 

Methods of Preparing Arylamides

 

United States: provisional pending

 

Category 1

 

Methods of preparing Brilacidin

 

Methods Of Preparing Carbocyclic Nucleosides

 

United States: pending

PCT: pending

 

Category 5

 

Methods of preparing Prurisol

 

Facially Amphiphilic Polymers As Anti-infective Agents

 

United States: issued 02/06/07; 11/18/14

Australia: issued 04/05/07; 04/12/07

Canada: issued 07/16/13

China: issued 07/01/09; 07/02/14

Europe: issued 09/17/08; 05/25/11

Japan: issued 08/15/08

 

South Korea: issued 06/03/09; 06/16/09

 

Patents Expire: 2022

 

Category 1 & 3 - Brilacidin and related compounds; anti-microbial surfactants and related compounds

 

Facially Amphiphilic Polyaryl And Polyarylalkynyl Polymers And Oligomers And Uses Thereof

 

United States: issued 07/17/12; 05/06/14 

 

Latest Patent Expires:

United States (2028)

 

Category 1 & 3

 

 
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Facially Amphiphilic Polymers And Oligomers And Uses Thereof

 

United States: issued 08/07/12; 06/04/13; 01/26/16

Australia: issued 9/22/16

Canada: issued 05/20/14

India: issued 11/10/16

Japan: issued 03/11/16

South Korea: issued 03/04/13

Taiwan: issued 05/21/15

 

Latest Patent Expires: foreign (2024);

United States (2027)

 

Category 1 & 2

 

Nitrile Derivatives and their Pharmaceutical Use and Compositions

 

United States patent issued 12/25/2012

 

United States patent issued

5/17/16

 

United States patent issued

4/4/17

 

Patent Cooperation Treaty (PCT) - filed

National Phase entered

 

Other patents allowed or issued: Canada, China,

Eurasian Patent Convention granted for Russia, Indonesia, Israel, Japan,

Korea (2 divisional applications), Malaysia, Mexico

 

Other Applications filed arising from PCT: Australia, Brazil, Chile, Europe, India, South Korea, Singapore,

Thailand

 

Other applications filed independent of PCT: Argentina, Bangladesh, Hong Kong, Taiwan, Venezuela

 

Patents expire: 2030

 

Category 4 - Kevetrin and related compounds

 

Carbocyclic Nucleosides And Their Pharmaceutical Use And Compositions

 

United States patent issued

11/25/14

 

Patent Cooperation Treaty - filed

National Phase entered

 

Other Patent Applications filed arising from PCT: Australia (Granted), Canada (Allowed), China, Europe (Granted), Eurasian Patent Convention, India, Israel, Japan (Granted), South Korea, Malaysia, Mexico, Thailand

 

Other Patent Applications filed independent of PCT: Bangladesh, Hong Kong, Taiwan (Granted)

Patents expire: 2032

 

Category 5 - Prurisol and related compounds

 

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.

 

Impairment of Patents

 

In the latter part of April 2016, the Company wrote off its patent rights to Delparantag. Delparantag was acquired by the Company in the purchase of assets from the Polymedix estate. The Company believes the compound which had clinical activity but also safety concerns in a prior clinical trial by Polymedix, is now a low priority compound for further development among the compounds in the Company’s portfolio. The decision by management was made after factoring in today’s regulatory and litigious climate. The Company recorded impairment loss on the patent costs of Delparantag and for various patents totaling approximately $648,000 (i.e. the cost of $782,000 less $134,000 of accumulated amortization) in the fiscal year ended June 30, 2016.

 

Payments Related to Assignment of Compounds

 

The Company has been assigned all rights, title, and interest to the following eight pharmaceutical compounds: Kevetrin, KM 277, KM 278, KM 362, KM 3174, KM 732, and KM-391. The Company agreed to pay the assignors 5% of net sales of the compounds in countries where composition of matter patents have been issued and 3% of net sales in other countries. Kevetrin, KM 277, KM 278 and KM 362 were acquired by the Company from Dr. Krishna Menon, a Director, the Company’s President of Research and Chief Scientific Officer, and a principal shareholder. With regard only to Kevetrin, the allocation of the 5% of net sales would be as follows: 2% to Dr. Menon, 2% to an unaffiliated third party, and 1% to Leo Ehrlich, our CEO. With respect to KM 732, the Company has agreed to pay an individual a fixed payment if the compound is approved for sale in the U.S. The Company owns all rights to Prurisol. For more information about the Company’s approval process relating to related party transactions, see “Item 13 – Certain Relationships and Related Transactions, and Director Independence.

 

 
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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).

 

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 a number of compounds that are in preclinical testing.

 

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.

 

 
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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.

 

 
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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.

 

 
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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.

 

Hatch-Waxman Act

 

Drugs that are approved for commercial marketing in the U.S. under an NDA are subject to the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, known as the “Hatch-Waxman Act.” The Hatch-Waxman Act established two abbreviated approval pathways, including the 505(b)(2) pathway, for drug products that are in some way follow-on versions of already approved NDA products. We are utilizing advantages in this 505(b)(2) pathway for the development of Prurisol. In addition, the Hatch-Waxman Act provides companies with marketing exclusivity for new chemical entities, allows companies to apply to extend for up to five additional years of patent term lost during product development and FDA review of an NDA, and provides for a period of marketing exclusivity for products that are not new chemical entities if the NDA (or supplemental NDA) contains data from new clinical investigations that were necessary for approval. It also provides a means for approving generic versions of a drug product once the marketing exclusivity period has ended and all relevant patents have expired or have been successfully challenged and defeated. The laws of other key markets likewise create both opportunities for exclusivity periods and patent protections and the possibility of generic competition once such periods or protections have either expired or have been successfully challenged by generic entrants.

 

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. The FDA has granted orphan drug designation to Kevetrin for use in the treatment of ovarian cancer, retinoblastoma and pancreatic 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.

 

 
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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, may qualify for 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.

 

 
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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 compounds in clinical trials, Prurisol and Brilacidin. There are many drugs approved to treat various forms of psoriasis, inflammatory bowel diseases, and ABSSSI, and many more in the publicly disclosed development pipeline. However, there is no drug yet to be approved for preventing severe oral mucositis in head and neck cancer patients. 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, 2017, the Company had 15 employees. The Company also conducts its operations using contractors and consultants.

 

CORPORATE INFORMATION

 

The Company’s corporate headquarters are located at 100 Cummings Center, Suite 151-B, Beverly, MA 01915. 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. 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.

 

 
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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 and it may lead to future uncertainty about our ability to continue to operate as a going concern.

 

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 the sale of public 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 $4.1 million cash balance in the bank but that is insufficient to complete the development and commercialization of any of our proposed products. We expect to incur costs of approximately $15.9 million in the upcoming fiscal year ending June 30, 2018 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. In the event that we cannot obtain acceptable financing, we would be unable to complete preclinical development projects, and clinical trials for Kevetrin, Prurisol, and Brilacidin. This will delay:

 

 

·

research and development programs;

 

 

·

preclinical studies and clinical trials;

 

 

·

material characterization studies;

 

 

·

regulatory processes; and

 

 

·

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:

 

 

·

progress, timing and scope of our research and development programs;

 

 

·

progress, timing and scope of our preclinical studies and clinical trials;

 

 

·

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;

 

 

·

time and cost necessary to respond to technological and market developments;

 

 

·

changes made or new developments in our existing collaborative, licensing and other commercial relationships; and

 

 

·

new collaborative, licensing and other commercial relationships that we may establish.

 

Our fixed expenses, such as rent and other contractual commitments, may increase in the future, as we may:

 

 

·

enter into leases for new facilities and capital equipment; and

 

 

·

enter into additional licenses and collaborative agreements.

 

We have no products approved for commercial sale, have never generated any revenues, and may never achieve revenues or profitability.

 

We currently have no products approved for commercial sale and, to date, we have not generated any revenues. Our ability to generate revenue depends heavily on:

 

 

·

successful demonstration in clinical trials that our drug candidates, Kevetrin, Prurisol, and Brilacidin are safe and effective;

 

 

·

our ability to seek and obtain regulatory approvals, including with respect to the indications we are seeking;

 

 

·

the successful commercialization of our product candidates; and

 

 

·

market acceptance of our products.

 

If we 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.

 

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:

 

 

·

develop products internally or obtain rights to them from others on favorable terms;

 

 

·

complete laboratory testing and human clinical studies;

 

 

·

obtain and maintain necessary intellectual property rights to our products;

 

 

·

successfully fulfill regulatory requirements to obtain requisite marketing approvals from governmental agencies;

 

 

·

enter into arrangements with third parties to manufacture our products on our behalf; and

 

 

·

enter into arrangements with third parties to provide sales and marketing functions.

 

 
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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 high 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 experience these issues in our psoriasis and oral mucositis clinical trials.

 

At any time, we, the FDA or an 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:

 

 

·

failure to achieve clinical trial results that indicate a candidate is effective in treating a specified condition or illness in humans;

 

 

 

 

·

presence of harmful side effects;

 

 

 

 

·

determination by the FDA that the submitted data do not satisfy the criteria for approval;

 

 

 

 

·

lack of commercial viability of the drug;

 

 

 

 

·

failure to acquire, on reasonable terms, intellectual property rights necessary for commercialization; and

 

 

 

 

·

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.

 

 
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We are now engaged in the reformulation of Kevetrin based on PK data we learned during our completed Phase 1 study. PK results indicated that with the current dose regimen, Kevetrin is almost completely out of plasma within 24 hours. Therefore, little drug remains for any substantial period of time afterwards. Having the patient receive multiple IV infusions per week is difficult for the patient. Therefore, oral formulations for Kevetrin are being studied. There is no assurance we will be successful in developing a new formulation.

 

We are using Brilacidin in a water base, administered by enema, in our ulcerative proctitis study. However, a commercial product will need a different formulation (e.g. Brilacidin in capsule or foam). 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:

 

 

·

are found to be unsafe or ineffective in clinical trials;

 

 

 

 

·

do not receive necessary approval from the FDA or foreign regulatory agencies;

 

 

 

 

·

have manufacturing production problems, costs, pricing or reimbursement issues, or other factors that make the product not economical;

 

 

 

 

·

are hampered by the proprietary rights of others and their competing products and technologies;

 

 

 

 

·

fail to conform to a changing standard of care for the diseases they seek to treat; or

 

 

 

 

·

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.

 

 
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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. 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 Kevetrin, Prurisol and Brilacidin, 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.

 

 
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In addition, from time-to-time, preliminary or interim data from current clinical trials, such as relating to the Brilacidin Phase 2, open-label, Proof-of-Concept (PoC) clinical trial, 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 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.

 

 
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We have engaged FDA with a Special Protocol Assessment (SPA) request for our planned Phase 3 clinical study of Brilacidin for treating ABSSSI. Failure to achieve an SPA agreement with FDA increases the risk of conducting a Phase 3 study and obtaining FDA approval for the commercialization of Brilacidin, even if the study is successful by meeting the study endpoints at its conclusion.

 

We have completed an End-of-Phase 2 (“EOP2”) meeting with the FDA. We have submitted our Phase 3 protocol under an SPA request to the FDA. The request included specific questions to facilitate a meaningful dialogue with the FDA on the proposed study design. We have received from the FDA comments and considerations for incorporation into our study design. The FDA’s assessment of the SPA request, and all related feedback, are valuable in the development of Brilacidin for ABSSSI. Contingent upon further FDA discussion, a Phase 3 program may be initiated. The Company can offer no assurance that an SPA agreement will be ultimately reached with the FDA, and if this were not to occur, it would substantially increase the risk of Brilacidin for ABSSSI drug development. Management estimates that the cost of an ABSSSI Phase 3 program would require significantly expanded capital beyond what is currently available and therefore, have not yet submitted a revised SPA request.

 

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:

 

 

·

provide sufficient safety, efficacy or other data regarding a drug candidate to support the commencement of a Phase 3 or other clinical trial;

 

·

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;

 

·

select CROs, trial sites and, where necessary, contract manufacturers that do not encounter any regulatory compliance problems;

 

·

manufacture sufficient quantities of a product candidate for use in clinical trials;

 

·

obtain IRB approval to conduct a clinical trial at a prospective site;

 

·

recruit and enroll patients to participate in clinical trials, which can be impacted by many factors outside our or our partners’ control, including competition from other clinical trial programs for the same or similar indications; and

 

·

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.

 

 
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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:

 

 

·

failure to conduct the clinical trial in accordance with regulatory requirements, including GCP, or our protocols;

 

·

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;

 

·

unforeseen safety issues or results that do not demonstrate efficacy; and

 

·

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 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.

 

 
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We also are subject to the following risks and obligations, related to the approval of our products:

 

 

·

The FDA or foreign regulators may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them.

 

·

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.

 

·

The FDA or foreign regulators may not approve our manufacturing processes or manufacturing facilities.

 

·

The FDA or foreign regulators may change their approval policies or adopt new regulations.

 

·

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.

 

·

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.

 

·

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.

 

·

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 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.

 

 
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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:

 

 

·

availability or contamination of raw materials and components used in the manufacturing process, particularly those for which we have no other source or supplier;

 

·

capacity of our facilities or those of our contract manufacturers;

 

·

facility contamination by microorganisms or viruses or cross contamination;

 

·

compliance with regulatory requirements, including Form 483 notices and Warning Letters;

 

·

changes in forecasts of future demand;

 

·

timing and actual number of production runs;

 

·

production success rates and bulk drug yields; and

 

·

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 our 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.

 

 
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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 Kevetrin, Prurisol and Brilacidin 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 our product candidate Prurisol were to receive regulatory approval, commercialization may be adversely affected by regulatory actions requiring a boxed warning, which could have a materially adverse effect on our business.

 

Even if we were to receive regulatory approval for our psoriasis product candidate Prurisol, we expect an approval to include a boxed warning requiring screening for the HLA-B*5701 allele, which is a readily available test, to reduce the risk in patients of potential abacavir hypersensitivity reactions. Products with boxed warnings are subject to more restrictive regulations than products without such warnings. Boxed restrictions would make it more difficult to market Prurisol, and the added regulation could require us to expend resources that we may not have, which could delay or prevent commercialization of that product and in turn, could have a materially adverse effect on our business.

 

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.

 

 
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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:

 

 

·

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;

 

·

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

 

·

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.

 

In September 2013, we purchased substantially all of the assets of Polymedix Inc. and Polymedix Pharmaceuticals, Inc. from the bankrupt estate of these entities. 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:

 

 

·

lose our rights to develop and market our Polymedix product candidates;

 

·

lose patent and/or trade secret protection for our Polymedix product candidates;

 

·

experience significant delays in the development or commercialization of our Polymedix product candidates;

 

·

not be able to obtain any other licenses on acceptable terms, if at all; and/or

 

·

incur liability for damages.

 

 
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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 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.

 

 
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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 two 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 entered into any strategic collaboration with third parties capable of providing these services. In addition, we have not yet marketed or sold any of our drug candidates or entered into successful collaborations for these services in order to ultimately commercialize our drug candidates.

 

 
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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:

 

 

·

significant time and effort from our management team;

 

·

coordination of our marketing and R&D programs with the marketing and R&D priorities of our collaborators; and

 

·

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, Dr. Krishna Menon and Dr. Arthur Bertolino. Leo Ehrlich, the Company’s Chief Executive and Financial Officer, and Dr. Krishna Menon, Chief Scientific Officer, presently have 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.

 

 
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There are conflicts of interest among our officers, directors and stockholders.

 

Certain of our executive officers and directors and their affiliates are engaged in other activities and have interests in other entities on their own behalf or on behalf of other persons. Neither we nor any of our stockholders will have any rights in these ventures or their income or profits. In particular:

 

 

·

Our executive officers or directors or their affiliates may have an economic interest in, or other business relationship with, partner companies that invest in us or are engaged in competing drug development; and

 

·

Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, leases space from the Company and is engaged in research.

 

In either of these cases:

 

 

·

Our executive officers or directors may have a conflict between our current interests and their personal financial and other interests in another business venture; and

 

·

Our executive officers or directors may have conflicting fiduciary duties to us and the other entity.

 

While the Company is not aware of any conflict that has arisen to date, the Company does not have any policy in place to deal with such should such a conflict arise.

 

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 for cancer, 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 compounds Prurisol and Brilacidin. Numerous drugs are already FDA approved for the treatment of psoriasis and ABSSSI. 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 patients with hematologic malignancies.

 

 
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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.

 

We face certain litigation risks that could harm our business.

 

A complaint entitled O’Connell v. Cellceutix Corp. et al. (No. 1:15-cv-07194) was filed in the United States District Court for the Southern District of New York in September 2015 against the Company and its officers alleging that the defendants made materially false and misleading statements, and omitted materially adverse facts, about the Company’s business, operations and prospects. On June 9, 2016, the U.S. District Court for the Southern District of New York granted the Company’s motion to dismiss the lawsuit. The ruling dismissed all claims against the Company, denied the plaintiff’s request to file an amended complaint, and ordered that the case be closed.

 

Future lawsuits could have a material adverse effect on our financial position, liquidity or results of operations. The uncertainty and expense associated with a lawsuit could adversely impact our business, financial condition and reputation. Litigation is costly, time-consuming and disruptive to normal business operations. 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.

 

Risks Related to the Securities Markets and Investments in Our Class A Common Stock

 

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.

 

 
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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:

 

 

·

obtaining financial and investment information from the investor;

 

·

obtaining a written suitability questionnaire and purchase agreement signed by the investor; and

 

·

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, 2017, the closing price of our Class A common stock, as quoted on the OTC, was $0.96. The price may fluctuate significantly in response to a number of factors, many of which are beyond our control. These factors include:

 

 

·

progress of our products through the regulatory process;

 

·

results of preclinical studies and clinical trials;

 

·

announcements of technological innovations or new products by us or our competitors;

 

·

government regulatory action affecting our products or our competitors’ products in both the United States and foreign countries;

 

·

developments or disputes concerning patent or proprietary rights;

 

·

general market conditions for emerging growth and pharmaceutical companies;

 

·

economic conditions in the United States or abroad;

 

·

actual or anticipated fluctuations in our operating results;

 

·

broad market fluctuations; and

 

·

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.

 

 
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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.

 

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 Class A common stock to control our Company, which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders.

 

At June 30, 2017, our directors and executive officers own or control approximately 19% of our outstanding voting power of Class A common stock. Accordingly, these stockholders, 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.

 

The dual class structure of our common stock can have the effect of concentrating voting control with Dr. Menon and/ or Mr. Ehrlich, which will limit or preclude your ability to influence corporate matters.

 

Our Class B common stock entitles holders to ten (10) votes per share on all matters submitted to a vote of our stockholders and our Class A common stock entitles holders to one (1) vote per share on all matters submitted to a vote of our stockholders. Dr. Menon and Mr. Ehrlich each have vested options that they can exercise and convert into 18,000,000 shares of Class B common stock. That alone could result in the equivalent of 360,000,000 votes of Class A common stock. As of June 30, 2017 we had 135,274,421 shares of Class A common stock outstanding and no shares of Class B common stock outstanding. Because of the ten-to-one voting ratio between our Class B common stock and Class A common stock, upon exercise and conversion of such options into shares of Class B common stock, the Class B common stock holders can collectively control a majority of the combined voting power of our common stock (i.e., approximately 78%) and therefore be able to control all matters submitted to our stockholders for approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.

 

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.

 

 
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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.

 

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 September 6, 2017, 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 36-month term of the Purchase Agreement. The Company also issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The Company has registered 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.

 

Large amounts of our Class A common stock will be eligible for resale under Rule 144.

 

As of June 30, 2017, 37,184,614 shares of the 135,274,421 outstanding shares of our Class A common stock are restricted securities as defined under Rule 144 of the Securities Act and under certain circumstances may be resold without registration pursuant to Rule 144.

 

Approximately 11.8 million shares of our restricted shares of Class A common stock are held by non-affiliates who may avail themselves of the public information requirements and sell their shares in accordance with Rule 144. As a result, some or all of these shares may be sold in accordance with Rule 144 potentially causing the price of the Company’s shares to decline.

 

Under Rule 144, a person affiliated with the Company who has satisfied a six-month holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of Class A common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by a person who is not an affiliate of the Company and who has satisfied a one-year holding period. Any substantial sale of the Company’s Class A common stock pursuant to Rule 144 may have an adverse effect on the market price of the Class A common stock.

 

 
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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None

 

ITEM 2. PROPERTIES

 

Our principal offices are located at 100 Cummings Center, Suite 151-B, Beverly, MA 01915. The Company signed a lease extension agreement with Cummings Properties which began on October 1, 2013. The lease is for a term of five years ending on September 30, 2018, and requires monthly payments of approximately $18,000. Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease and subleases 200 square feet of space previously used by the Company and pays the Company $900 per month.

 

Management believes that the property arrangement satisfies the Company’s current needs.

 

ITEM 3. LEGAL PROCEEDINGS

 

The information called for by this item is incorporated herein by reference to the information set forth in Note 8 “Commitments and contingencies” of the Notes to Financial Statements included in Item 8 of this Report.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

 
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PART II

 

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. Before June 8, 2017, the Company’s Class A common stock traded under the symbol “CTIX”.

 

The table below sets forth the daily high and low prices for the Company’s Class A common stock. Quotations reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent actual transactions.

 

 

 

Fiscal 2017

 

 

Fiscal 2016

 

 

 

High

 

 

Low

 

 

High

 

 

Low

 

First Quarter

 

 

1.42

 

 

 

1.12

 

 

 

3.65

 

 

 

1.32

 

Second Quarter

 

 

1.50

 

 

 

0.91

 

 

 

1.96

 

 

 

0.94

 

Third Quarter

 

 

1.22

 

 

 

0.86

 

 

 

1.92

 

 

 

0.95

 

Fourth Quarter

 

 

1.08

 

 

 

0.63

 

 

 

1.87

 

 

 

1.30

 

 

Number of Shareholders

 

As of August 22, 2017, a total of approximately 138 million shares of the Company’s common stock are outstanding and held by approximately 71 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 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.

 

Purchases of Equity Securities by the Issuer

 

Repurchase activity during the three months ended June 30, 2017 was as follows:

 

Periods

 

Total number of shares purchased

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs

 

April 1 to April 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

May 1 to May 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

June 1 to June 30, 2017

 

 

262,080 (1)

 

$ 0.84

 

 

 

 

 

 

 

Total

 

 

262,080

 

 

$ 0.84

 

 

 

 

 

 

 

_______________

(1) Consists of shares withheld upon the vesting of a common stock grant on June 27, 2017.

 

 
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ITEM 6. SELECTED FINANCIAL DATA

 

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

 

 

 

 

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FIVE YEARS ENDED JUNE 30

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Revenues

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

Net loss

 

 

$ (15,536,000 )

 

$ (12,852,000 )

 

$ (13,145,000 )

 

$ (8,247,000 )

 

$ (3,224,000 )

Net loss attributable to common stockholders (a)

 

 

$ (15,536,000 )

 

$ (12,852,000 )

 

$ (13,145,000 )

 

$ (10,227,000 )

 

$ (3,436,000 )

Basic and diluted loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  -Basic

 

 

$ (0.12 )

 

$ (0.11 )

 

$ (0.11 )

 

$ (0.10 )

 

$ (0.04 )
  -Diluted

 

 

$ (0.12 )

 

$ (0.11 )

 

$ (0.11 )

 

$ (0.10 )

 

$ (0.04 )

Weighted average common shares outstanding

 

 

 

127,285,861

 

 

 

119,908,145

 

 

 

115,087,368

 

 

 

105,044,985

 

 

 

94,980,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET DATA AS OF JUNE 30

 

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Total assets

 

 

$ 9,112,000

 

 

$ 11,445,000

 

 

$ 14,319,000

 

 

$ 10,852,000

 

 

$ 2,970,000

 

Total debt

 

 

$ 10,576,000

 

 

$ 8,481,000

 

 

$ 7,295,000

 

 

$ 9,646,000

 

 

$ 8,140,000

 

Total stockholders’ equity (deficiency)

 

 

$ (1,464,000 )

 

$ 2,964,000

 

 

$ 7,024,000

 

 

$ 1,206,000

 

 

$ (5,170,000 )

______________

(a) Net loss attributable to common stockholders represents our net loss plus deemed dividends. Other than deemed dividends of $1,980,000 and $212,000 in fiscal year 2014 and 2013, respectively, the net loss attributable to common stockholders was equal to our net loss.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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, 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 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 “may,” “will,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “potential,” 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.

 

 
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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 2017 refers to the fiscal year ended June 30, 2017.

 

Management’s Plan of Operation

 

The Company devotes most of its efforts and resources on its clinical trials. These trials are evaluating our drug candidates: Prurisol for the treatment of psoriasis, Kevetrin for the treatment of cancer, and Brilacidin for treatments of skin infections, prevention of oral mucositis complicating chemoradiation treatment for cancer, and ulcerative proctitis. 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 our research and development efforts on Prurisol, Kevetrin, and Brilacidin during fiscal 2017 and through the date of this Annual Report on Form 10-K:

 

Prurisol

 

The Company has commenced a randomized, double-blind, parallel-group, placebo-controlled Phase 2b trial of Prurisol for subjects with moderate to severe plaque psoriasis. The treatment group arms are Prurisol 300mg, Placebo, Prurisol 400mg (Ratio 3:3:1) with a treatment duration of 12 weeks.

 

We have currently completed enrollment of all subjects (up to 199). Subject recruitment was slower than projected due to competitive trials. In response, we added additional investigator sites. We expect to complete the trial by calendar year end 2017. Expenditures on Prurisol were approximately $4.6 million during the year ended June 30, 2017. We expect expenditures on Prurisol to increase in future reporting periods, as we complete the study. We have entered into multiple non-disclosure agreements with large pharmaceutical companies that enable us to continue ongoing discussions regarding potential partnering should the trial results support such a relationship.

 

Kevetrin.

 

The company has commenced a Phase 2a trial of Kevetrin in treating late-stage ovarian cancer. The main objective of the trial focuses on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. Presently and concurrent with the Phase 2a trial is the development of an oral formulation of Kevetrin for treating cancer. Pharmacokinetic data collected on Kevetrin during the initial Phase 1 clinical trial demonstrates that the compound has a short half-life of approximately two hours. Kevetrin’s 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 began January 2017.

 

Company expenditures on Kevetrin were approximately $1.0 million during the year ended June 30, 2017.

 

 
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Brilacidin.

 

Topical Brilacidin Clinical Studies (trials)

 

One trial of Brilacidin is ongoing, a double-blind Phase 2 clinical trial of Brilacidin-OM for the treatment of oral mucositis (OM), and another was recently completed: an open-label Phase 2 Proof-of-Concept (PoC) trial of Brilacidin for the treatment of ulcerative proctitis /proctosigmoiditis (UP/UPS), two types of Inflammatory Bowel Diseases (IBD).

 

 

· Oral Mucositis (OM) study- In the ongoing randomized, double-blind Phase 2 study of Brilacidin for the prevention and control of Oral Mucositis (OM) in patients receiving chemoradiation for treatment of head and neck cancer, interim analysis of patients who received at least 55 Gy cumulative units of radiation showed that Brilacidin markedly reduced the rate of Severe OM (WHO Grade3): Active Arm (Brilacidin): 2 of 9 patients (22.2 percent); Control Arm (Placebo): 7 of 10 patients (70 percent). Completion of the trial is expected by late 2017.

 

 

 

 

· UP/UPS study- This recently completed Phase 2a trial comprises three sequential cohorts , with progressive dose escalation by cohort—Cohort A (6 patients) -50 mg, Cohort B (6 patients) -100 mg, and Cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The Primary Efficacy Endpoint of Clinical Remission (accounting for Stool Frequency, Rectal Bleeding and Endoscopy Findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient Quality of Life (as assessed by the Short Inflammatory Bowel Disease Questionnaire, SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. Further analyses of data are ongoing.

 

 

 

 

· We see significant opportunities in treating IBD with Brilacidin. Our development programs depending on available financial resources include new formulations (oral and foam type) with potential associated toxicology studies and clinical studies to be defined.

 

These data suggest that other inflammatory conditions may, likewise, be treated locally and efficaciously with Brilacidin without significant systemic absorption, better ensuring a safe and well-tolerated therapeutic profile. Given Brilacidin’s low level of systemic exposure, moderate-to-high dosing of the drug by topical application to the skin might also be supported in treating various dermatology disorders and conditions.

 

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 has decided to delay its response to FDA due to the low price per share of our common stock and the approximately $30 million costs required for this study which would result in significant dilution to our shareholders. Our strategy for now is to achieve success with other trials and attract partnering opportunities with significant down-payments and milestone payments which can fund these trials.

 

Company expenditures on Brilacidin were approximately $2.3 million during the year ended June 30, 2017.

 

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 to the financial statements, Significant Accounting Policies and Recent Accounting Pronouncements, in the accompanying Notes to financial statements 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.

 

 
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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 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 valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest.

 

Income Tax Valuation

 

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 adopted the provisions of FASB Accounting Standards Codification (“ASC”) “Uncertainty in Income Taxes” (ASC 740-10), on January 1, 2007. 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.

 

 
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Recently Issued Accounting Pronouncements

 

See Note 3 to the financial statements, Significant Accounting Policies and Recent Accounting Pronouncements, in the accompanying notes to financial statements 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. We expect that our general and administrative expenses will also increase in the future as we expand our business development, by adding employees, consultants, additional infrastructure and incurring other additional costs. 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, 2018.

 

Revenue

 

We generated no revenue and incurred operating expenses of approximately $15.3 million, $12.7 million and $13.0 million for the years ended June 30, 2017, 2016 and 2015, 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):

 

 

 

For the Years Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Change

 

 

Change

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

 

 

 

 

 $

 

 

$

 

 

$

 

 

%

 

 

$

 

 

%

 

Clinical studies and development research

 

 

8,501,000

 

 

 

6,671,000

 

 

 

7,897,000

 

 

 

1,830,000

 

 

 

27 %

 

 

(1,226,000 )

 

 

(16 )%

Officers’ payroll and payroll tax expenses related to R&D department

 

 

1,087,000

 

 

 

433,000

 

 

 

876,000

 

 

 

654,000

 

 

 

151 %

 

 

(443,000 )

 

 

(51 )%

Employees payroll and payroll tax expenses related to R&D department

 

 

1,428,000

 

 

 

1,208,000

 

 

 

969,000

 

 

 

220,000

 

 

 

18 %

 

 

239,000

 

 

 

25 %

Stock-based compensation - officers

 

 

1,147,000

 

 

 

33,000

 

 

 

230,000

 

 

 

1,114,000

 

 

 

3,376 %

 

 

(197,000 )

 

 

(86 )%

Stock-based compensation - employee

 

 

139,000

 

 

 

-

 

 

 

103,000

 

 

 

139,000

 

 

 

-

%

 

 

(103,000 )

 

 

(100 )%

Stock-based compensation - consultants

 

 

75,000

 

 

 

188,000

 

 

 

55,000

 

 

 

(113,000 )

 

 

(60 )%

 

 

133,000

 

 

 

242 %

Depreciation and amortization expenses

 

 

406,000

 

 

 

419,000

 

 

 

401,000

 

 

 

(13,000 )

 

 

(3 )%

 

 

18,000

 

 

 

4 %

Total

 

 

12,783,000

 

 

 

8,952,000

 

 

 

10,531,000

 

 

 

3,831,000

 

 

 

43 %

 

 

(1,579,000 )

 

 

(15 )%

 

Fiscal 2017 compared to Fiscal 2016 - Research and development expenses for clinical studies and development research increased during the year ended June 30, 2017 due to more spending on our Kevetrin program and Prurisol program for the fiscal year 2017.

 

 
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Officers’ payroll and payroll tax expenses related to R&D department increased during the year ended June 30, 2017 primarily related to the hiring of our new President and Chief Medical Officer who joined us on June 27, 2016.

 

Employees’ payroll and payroll tax expenses related to R&D department increased primarily related to the hiring of executives, including our current Senior VP of Clinical Sciences and Portfolio Management. 

Stock-based compensation – officers increased during the year ended June 30, 2017 primarily related to the stock-based compensation granted to our new President and Chief Medical Officer, who joined us on June 27, 2016.

 

Stock-based compensation- employee increased for the year ended June 30, 2017 primarily related to the stock-based compensation given to our new VP Regulatory Affairs and our new Associate Director, whom both joined us in September 2016 and February 2017, respectively.

 

Stock-based compensation-consultants decreased for the year ended June 30, 2017 due to the decrease in stock awards granted this year.

 

Depreciation and amortization expenses decreased for the year ended June 30, 2017 due to less amortization expenses on patent costs that were written off last fiscal year 2016.

 

Fiscal 2016 compared to Fiscal 2015 - Research and development expenses for proprietary programs decreased during the year ended June 30, 2016 primarily due to lower spending on our ABSSSI program, which the trial was completed in early 2015.

 

The Stock-based compensation - consultants increased during the year ended June 30, 2016 primarily related to the increase in stock-based compensation to consultants to incentivize them with stock awards rather than monetary compensation.

 

The Officers’ payroll and payroll tax expenses related to R&D department decreased during the year ended June 30, 2016 primarily related to the decrease in payroll paid to our Chief Operations Officer of approximately $211,000, who joined in 2014 and resigned on August 8, 2015 and a decrease in the year-end bonus of $225,000 paid to our executive officers in 2015.

 

The Employees payroll and payroll tax expenses increased primarily related to the increases in the number of employees in our research and development department.

 

The Stock-based compensation – officers decreased during the year ended June 30, 2016 primarily related to the decrease in stock-based compensation to our Chief Operations Officer and other executive officers in 2016.

 

The Stock-based compensation - Employee decreased during the year ended June 30, 2016 primarily related to the decrease in the year-end bonus paid to employees.

 

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 whenever 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.

 

See Note 3 of the notes to our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information about our research and development expenses.

 

 
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General and Administrative Expenses

 

General and administrative expenses consist mainly of compensation and associated fringe benefits not included in the cost of research and development expenses for proprietary programs and include other management, business development, accounting, information technology and administration costs, including patent filing and prosecution, recruiting, consulting and professional services, travel and meals, sales commissions, facilities, depreciation and other office expenses. Below is a summary of our general and administrative expenses (rounded to nearest thousand):

 

 

 

For the Years Ended

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

Change

Change

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

%

 

 

$

 

 

%

 

Insurance and health expense

 

$ 509,000

 

 

$ 499,000

 

 

$ 249,000

 

 

 

10,000

 

 

 

2 %

 

 

250,000

 

 

 

100 %

Patent expenses

 

 

4,000

 

 

 

37,000

 

 

 

102,000

 

 

 

(33,000 )

 

 

(89 )%

 

 

(65,000 )

 

 

(64 )%

Impairment loss - patents

 

 

-

 

 

 

648,000

 

 

 

-

 

 

 

(648,000 )

 

 

(100 )%

 

 

648,000

 

 

 

-

%

Rent and utility expense

 

 

272,000

 

 

 

262,000

 

 

 

273,000

 

 

 

10,000

 

 

 

4 %

 

 

(11,000 )

 

 

(4 )%

Other G&A

 

 

530,000

 

 

 

500,000

 

 

 

553,000

 

 

 

30,000

 

 

 

6 %

 

 

(53,000 )

 

 

(10 )%

Total

 

$ 1,315,000

 

 

$ 1,946,000

 

 

$ 1,177,000

 

 

 

(631,000 )

 

 

(32 )%

 

 

769,000

 

 

 

65 %

 

Fiscal 2017 compared to Fiscal 2016 - General and administrative expenses decreased in fiscal 2017 primarily related to decrease in impairment loss on the patent costs of Delparantag and various other patents.

 

Fiscal 2016 compared to Fiscal 2015 - General and administrative expenses increased in fiscal 2016 primarily related to increase in impairment loss on the patent costs of Delparantag and various other patents, D&O insurance and employee health insurance expenses and travel expenses for meetings for our clinical trials and to the FDA, to further develop our compounds.

 

Officers’ payroll and payroll tax expenses

 

Below is a summary of our Officers’ payroll and payroll tax expenses (rounded to nearest thousand):

 

 

 

For the Years Ended

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

Change

Change

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

%

 

 

$

 

 

%

 

Officers’ payroll and payroll tax expenses

 

$ 529,000

 

 

$ 528,000

 

 

$ 801,000

 

 

 

1,000

 

 

 

-%

 

 

 

(273,000 )

 

 

(34 )%

 

Fiscal 2017 compared to Fiscal 2016 - There was an increase of $1,000 in Officers’ payroll tax expenses for the Company during the years ended June 30, 2017 and 2016. There was no change with Officers’ payroll. The officers’ payroll and payroll tax expenses represented one officer’s annual payroll and payroll tax expenses and 10% of payroll and payroll tax expenses paid to Dr. Menon. The Company recorded 90% of annual payroll paid to Dr. Menon and the related payroll tax expenses under Research and Development Expense.

 

Fiscal 2016 compared to Fiscal 2015 - Officers’ payroll and payroll tax expenses decreased during fiscal 2016 primarily related to a decrease in bonus paid. The officers’ payroll and payroll tax expenses represented one officer’s annual payroll and payroll tax expenses and 10% of payroll and the related payroll tax expenses paid. The Company recorded 90% of annual payroll paid to Mr. Menon and the related payroll tax expenses under Research and Development Expense.

 

 
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Professional fees

 

Below is a summary of our Professional fees (rounded to nearest thousand):

 

 

 

For the Years Ended

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

Change

Change

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

%

 

 

$

 

 

%

 

Audit Fee, legal and professional fees

 

$ 709,000

 

 

$ 1,228,000

 

 

$ 447,000

 

 

 

(519,000 )

 

 

(42 )%

 

 

781,000

 

 

 

175 %

 

Fiscal 2017 compared to Fiscal 2016 - Professional fees decreased during fiscal 2017 primarily related to decrease in stock-based compensation paid to a law firm for services.

 

Fiscal 2016 compared to Fiscal 2015 - Professional fees increased during fiscal 2016 primarily related to increase in legal fees and the one million stock options issued to a law firm for services, valued at approximately $432,000 on November 5, 2015.

 

Other Income (Expense)

 

Below is a summary of our other income (expense) (rounded to nearest thousand):

 

 

 

For the Years Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Change

 

 

Change

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017 vs. 2016

 

 

2016 vs. 2015

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

%

 

 

$

 

 

%

 

Interest Income

 

$ 2,000

 

 

 

4,000

 

 

$ 4,000

 

 

 

(2,000 )

 

 

(50 )%

 

 

-

 

 

 

-

%

Sundry Income

 

 

-

 

 

 

-

 

 

 

9,000

 

 

 

-

 

 

 

-

%

 

 

(9,000 )

 

 

(100 )%

Interest Expenses

 

 

(202,000 )

 

 

(202,000 )

 

 

(202,000 )

 

 

-

 

 

 

-

%

 

 

-

 

 

 

-

%

Total

 

$ (200,000 )

 

 

(198,000 )

 

$ (189,000 )

 

 

(2,000 )

 

 

1 %

 

 

(9,000 )

 

 

5 %

 

Fiscal 2017 compared to Fiscal 2016 - Other expense, net increased during fiscal 2017 primarily related to the decrease in interest income of $2,000. There was no change in interest expenses paid to the note payable - related party (see Note 10 in the accompanying notes to the financial statements).

 

Fiscal 2016 compared to Fiscal 2015 - Other expense, net increased slightly during fiscal 2016 primarily related to the decrease in sundry income of $9,000. There was no change in interest expenses paid to the note payable - related party (see Note 10 in the accompanying notes to the financial statements).

 

Net Losses

 

We incurred net losses of $15.5 million, $12.9 million and $13.1 million for the years ended June 30, 2017, 2016 and 2015, respectively because of the above mentioned factors.

 

Liquidity and Capital Resources

 

Projected Future Working Capital Requirements - Next 12 Months

 

As of June 30, 2017, we had approximately $4.1 million in cash compared to $6.3 million of cash as of June 30, 2016. We anticipate that future budget expenditures will be approximately $15.9 million for the fiscal year ending June 30, 2018, including approximately $10.9 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 equity capital during the fiscal year 2018, to meet our working capital requirements for our planned clinical trials. 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.

 

 
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On September 6, 2017, the Company entered into a common stock purchase agreement with Aspire Capital which replaces the prior $30 million Aspire Capital stock purchase agreement and provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Purchase Agreement. The Company also issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee.

 

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.

 

$75 Million Shelf Registration Statement

 

The Company has an effective shelf registration statement on Form S-3, registering the sale of up to $75 million of the Company’s securities. The Company filed with the Securities and Exchange Commission (i) a prospectus supplement, dated March 31, 2015, registering up to $30 million of our common stock that have been or may be offered and sold to Aspire Capital from time to time, and (ii) a prospectus supplement, dated March 28, 2017, registering $2.2 million of our common stock in a registered direct offering, leaving approximately $42.8 million available under the Company’s effective shelf registration statement. Depending on the Company’s public float and the timing of the filing of Form S-3, the Company may not be eligible to utilize Form S-3 for future primary offerings of its securities following the expiration of its current effective shelf registration statement in November 2017. The Company anticipates that, if it were to no longer eligible to use Form S-3, that it may utilize Form S-1 to register the sale of its securities, including through future financing agreements with Aspire Capital.

 

Aspire Capital Stock Purchase Agreements and Other Equity Issuances

 

$30 million Class A Common Stock Purchase Agreement with Aspire Capital (See Part II, Item 9B of this Form 10-K)

 

On September 6, 2017, the Company entered into a common stock purchase agreement with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Purchase Agreement. The Company also issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee.

 

 
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$30 million Class A Common Stock Purchase Agreement with Aspire Capital - For the period from March 30, 2015 to August 2017

 

On March 30, 2015, the Company entered into a common stock purchase agreement (the “March 2015 Agreement”) with Aspire Capital which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the March 2015 Agreement. In consideration for entering into the March 2015 Agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 will be amortized as the funding is received. The amortized amount of $131,000, $136,000 and $5,000 were debited to additional paid-in capital during the year ended June 30, 2017, 2016 and 2015. The unamortized portion which was carried on the balance sheet as deferred offering costs was $227,000, $358,000 and $494,000 at June 30, 2017, 2016 and 2015, respectively. The unamortized portion will be fully expensed in the first quarter of 2018. On September 6, 2017, the March 2015 Agreement was replaced by a new common stock purchase agreement with Aspire Capital relating to $30 million of our Class A common stock (See Part II, Item 9B of this Form 10-K).

 

During the period from March 30, 2015 to June 30, 2017, the Company had completed sales to Aspire Capital totaling 14.7 million shares of common stock generating gross proceeds of approximately $16 million relating to this $30 million purchase agreement. The Company had approximately $14 million remaining available for stock sales under the terms of the purchase agreement with Aspire Capital at June 30, 2017. Other Equity Issuances are disclosed in Note 13 in the accompanying Notes to the Financial Statements.

 

$20 million Class A Common Stock Purchase Agreement with Aspire Capital - For the period from October 25, 2013 to March 31, 2015

 

On October 25, 2013, we terminated a previous agreement with Aspire Capital and entered into a new Class A Common Stock Purchase Agreement (the “October 2013 Agreement”) with Aspire Capital, which provides that upon meeting the terms of the agreement, Aspire Capital was committed to purchase up to an aggregate of $20,000,000 of our shares of Class A common stock over the approximately 36-month term of the October 2013 Agreement. In consideration for entering into the October 2013 Agreement, the Company issued to Aspire Capital 210,523 shares of our Class A common stock as a commitment fee. The commitment fee of $373,000 for these 210,523 shares was fully amortized as the aggregate of $20,000,000 of our shares of Class A common stock was completed in March 2015. The amortized amount of $295,000 and $77,000 were debited to additional paid-in capital during the year ended June 30, 2015 and 2014, respectively.

 

During the period from October 25, 2013 to March 5, 2015, the Company had completed sales to Aspire Capital totaling 8,890,379 shares of common stock generating gross proceeds of approximately $20 million.

 

Stock Purchase Agreement

 

On March 28, 2017, the Company entered into stock purchase agreements with certain investors, pursuant to which the Company agreed to sell 2,471,912 shares of its Class A common stock at $0.89 per share in a registered direct offering, without an underwriter or placement agent. The offering closed on March 31, 2017. The total proceeds to the Company from the offering were $2.2 million.

 

 
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Cash Flows

 

The following table provides information regarding our cash position, cash flows and capital expenditures for the years ended June 30, 2017, 2016 and 2015 (rounded to nearest thousand):

 

 

 

Years Ended June 30,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$ (11,711,000 )

 

$ (9,887,000 )

 

$ (13,071,000 )

Net cash used in investing activities

 

$ (336,000 )

 

$ (414,000 )

 

$ (459,000 )

Net cash provided by financing activities

 

$ 9,878,000

 

 

$ 8,201,000

 

 

$ 16,952,000

 

Net (decrease)increase in cash and cash equivalents

 

$ (2,169,000 )

 

$ (2,100,000 )

 

$ 3,422,000

 

 

Our total operating activities used cash of $11.7 million, $9.9 million and $13.1 million in 2017, 2016 and 2015, respectively. The use of cash in these periods principally resulted from our losses from operations, mentioned above, as adjusted for non-cash charges for stock-based compensation and depreciation, and changes in our working capital accounts.

 

In 2017, our total investing activities used cash of $0.3 million, including the purchases of patents of $0.3 million and the purchases of property and equipment of $0.1 million. In 2016, our investing activities used cash of $0.4 million, including the purchases of patents of $0.4 million and the purchases of equipment of $0.1 million. In 2015, our investing activities used cash of $0.5 million, including the purchase of patents of $0.5 million and the purchases of equipment of $0.01 million.

 

Our total net financing activities provided cash of $9.9 million, $8.2 million and $17.0 million in 2017, 2016 and 2015, respectively.

 

In 2017, we raised approximately $10.1 million in net cash proceeds from the sale of our stock, including $7.8 million in net proceeds from the sale of 8.9 million shares of our common stock and $2.2 million in net proceeds from the sale of 2.5 million shares of our common stock at $0.89 per share, in a registered direct offering without an underwriter or placement agent on March 28, 2017.

 

In 2016, we raised approximately $8.2 million in net cash proceeds from the sale of our stock, including $8.2 million in net proceeds from the sale of 5.7 million shares of our common stock and $0.03 million from the exercise of stock options and warrants.

 

In 2015, we raised approximately $17.0 million in net cash proceeds from the sale of our stock, including $16.1 million in net proceeds from the sale of 6.5 million shares of our common stock and $0.85 million from the exercise of stock options and warrants.

 

Requirement for Additional Working Capital

 

The Company plans to incur total expenses of approximately $15.9 million for the fiscal year ending June 30, 2018, including approximately $10.9 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.

 

 
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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 Part II, Item 9B of this Form 10-K) 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 36-month term of the Purchase 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.

 

Contractual Obligations

 

Below is a table that presents our contractual obligations and commercial commitments as of June 30, 2017 (rounded to the nearest thousand):

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than

One Year

 

 

2 Year

 

 

3-5 Years

 

 

More than

5 Years

 

CRO obligations

 

$ 6,000,000

 

 

$ 6,000,000

 

 

$ -

 

 

$ -

 

 

$ -

 

Lease obligations(1)

 

$ 271,000

 

 

$ 217,000

 

 

$ 54,000

 

 

$ -

 

 

$ -

 

Total

 

$ 6,271,000

 

 

$ 6,217,000

 

 

$ 54,000

 

 

$ -

 

 

$ -

 

_______________

(1)

The Company signed a lease extension agreement with Cummings Properties which began on October 1, 2013. The lease is for a term of five years ending on September 30, 2018, and requires monthly payments of approximately $18,000. The Company will receive $900 per month from the sublease of 200 square feet of space to Innovative Medical Research Inc., a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of our Company, which is not included in the table above.

 

(2)

The Company has contractual minimum commitments to Contract Research Organizations as of June 30, 2017.

 

Equity Transactions

 

From July 1, 2017 to September 1, 2017, the Company generated additional proceeds of approximately $2.1 million under the March 2015 common stock purchase agreement with Aspire Capital from the sale of approximately 2.6 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.

 

 
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company maintains an investment portfolio in accordance with our investment policy. The primary objectives of our investment policy is to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The Company holds investments that are subject to credit risk, but not interest rate risks. The Company does not own derivative financial instruments in our investment portfolio. Accordingly, the Company does not believe there is any material market risk exposure that would require disclosure under this item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

See Index to financial statements and supplemental data immediately following the signature page hereto.

 

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. 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, 2017, 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, 2017, 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 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, 2017. 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.

 

 
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Based on the Company’s processes and assessment, as described above, management has concluded that, as of June 30, 2017, the Company’s internal control over financial reporting was effective.

 

The effectiveness of the Company’s internal control over financial reporting as of June 30, 2017 has been audited by Baker Tilly Virchow Krause, LLP, an independent registered public accounting firm, as stated in their report, which appears herein.

 

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, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION.

 

On September 6, 2017, the Company entered into a new common stock purchase agreement (the “September 2017 Agreement”) with Aspire Capital which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the September 2017 Agreement. The Company also entered into a registration rights agreement with Aspire Capital (the “Registration Rights Agreement”), in which the Company agreed to file one or more registration statements, as permissible and necessary to register, under the Securities Act of 1933, as amended (the “Securities Act”), the sale of the shares of the Company’s common stock that have been and may be issued to Aspire Capital under the September 2017 Agreement. The Company has filed with the SEC a prospectus supplement, dated September 8, 2017, to the Company’s prospectus filed as part of the Company’s effective $75 million shelf registration statement on Form S-3, File No. 333-199725, registering all of the shares of common stock that have been or may be offered and sold to Aspire Capital from time to time. The September 2017 Agreement replaces the common stock purchase agreement between the parties dated March 30, 2015.

 

There are no trading volume requirements or restrictions under the September 2017 Agreement, and the Company will control the timing and amount of sales of the Company’s common stock to Aspire Capital. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases from the Company as directed by the Company in accordance with the September 2017 Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the September 2017 Agreement. The September 2017 Agreement may be terminated by the Company at any time, at its discretion, without any penalty or cost to the Company. Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of the Company’s common stock during any time prior to the termination of the September 2017 Agreement. Any proceeds the Company receives under the September 2017 Agreement are expected to be used for general working capital. The September 2017 Agreement also provides for customary events of default, upon the occurrence of which Aspire Capital may terminate the September 2017 Agreement.

 

The foregoing is a summary description of certain terms of the September 2017 Agreement and the Registration Rights Agreement. For a full description of all terms, please refer to copies of the September 2017 Agreement and the Registration Rights Agreement that are filed herewith as Exhibits 10.6 and 10.7, respectively. All readers are encouraged to read the entire text of the September 2017 Agreement and the Registration Rights Agreement.

 

The legal opinion, including the related consent, of Gary R. Henrie relating to the issuance of shares of the Company’s common stock pursuant to the September 2017 Agreement is filed as Exhibit 5.1 to this report.

 

 
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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

 

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

 

Directors of Innovation Pharmaceuticals Inc.

 

The following provides information regarding current members of the Company’s Board of Directors (the “Board”), which consists of five members. 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.

 

Name

 

Age

 

Position with the Company

 

Director Since

 

Leo Ehrlich

 

59

 

Chief Executive Officer, Chief Financial Officer and Director

 

November 2007

 

Krishna Menon

 

70

 

Chief Scientific Officer, President of Research and Director

 

June 2007

 

Barry Schechter

 

53

 

Director

 

October 2014

 

Zorik Spektor

 

60

 

Director

 

April 2015

 

Mark R. Tobin

 

43

 

Director

 

April 2015

 

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. Following the Company’s acquisition of Cellceutix Pharma in 2007, Mr. Ehrlich served as Chief Financial Officer and a director of Innovation Pharmaceuticals Inc. until November 5, 2010. 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.

 

Krishna Menon, RCM, PhD, VMD, served as President of Cellceutix Pharma since inception in June 2007. Following the Company’s acquisition of Cellceutix Pharma in 2007, Dr. Menon served as Chief Scientific Officer and President of the Company, becoming President of Research in June 2016. Dr. Menon also serves as the Chief Operating Officer at Kard Scientific, Inc. Dr. Menon has more than 35 years in drug development for academia and industry. Originally trained as a veterinary surgeon, Dr. Menon began his career as Chief Government Veterinarian for a large parish in Jamaica. He segued to a three-year stint as Director of Agriculture for the Cayman Islands, in the British Caribbean and, in 1982, moved to the Dana Farber Cancer Research Institute under the direction of the chief physician, Dr. Emil Tom Frye. From 1985 to 1990, Dr. Menon was a Research Scientist at Dana Farber Cancer Research Institute. He then worked as a Senior Research Scientist, In Vivo Research (Cancer), at Bayer Pharmaceuticals (Miles Laboratories) until 1993. Dr. Menon then operated his own veterinary oncology and drug development consultancy practice, and one year later, he was asked to be a Group Leader, Cancer In Vivo Research and Clinical Development, for Eli Lilly, where he played a key role in pre-clinical development of the blockbuster drugs Gemzar and Alimta. Dr. Menon served in such position at Eli Lilly until 2001. In 1999, Eli Lilly honored him with the “President’s Recognition Award.” Dr. Menon earned his PhD in Pharmacology from Kerala University, where his work focused on anti-folate therapy of various cancers.

 

The Board has determined that Dr. Menon’s decades of research in academia and industry and extensive knowledge of the Company make him a suitable member of the Company’s Board of Directors.

 

 
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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.

 

Mark R. Tobin, MBA, was appointed as an independent member of the Board in April 2015. Mark Tobin is currently the Senior Director, Corporate Strategy at Printronix, LLC, a leading manufacturer of industrial printers. From 2013 to 2017, Mr. Tobin served in various roles of increasing responsibility with NanoFlex Power Corporation, a publicly-listed advanced solar technology company, culminating as Executive Vice President and Chief Financial Officer. From 2013 to 2015, Mr. Tobin served as a Managing Director at Digital Offering, a merchant bank. Previously, from 2005 to 2013, he served as Director of Research and as a Senior Research Analyst at Roth Capital Partners, a leading boutique investment bank, where he oversaw equity research on hundreds of small-cap public companies across a variety of sectors. Prior to that, he was a Program Manager and Senior Systems Engineer at Science Applications International Corporation, a FORTUNE 500® scientific, engineering, and technology applications company. Mr. Tobin began his career as an officer in the United States Air Force, overseeing advanced technology development programs and representing the U.S. as a NATO delegate, and ultimately achieving the rank of Major. He graduated with honors from the U.S. Air Force Academy with a Bachelor’s of Science in Management and received an MBA from the University of Pittsburgh.

 

 
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The Board has determined that Mr. Tobin’s knowledge of capital markets and public companies and executive management experience make him a suitable member of the Company’s Board of Directors.

 

Executive Officers of Innovation Pharmaceuticals Inc.

 

The following provides information regarding the Company’s current executive officers. Our executive officers are appointed by, and serve at the discretion of, the Board. Set forth below is a brief description of the business experience of all executive officers other than Mr. Ehrlich and Dr. Menon, each of whom is also a director and whose business experience is set forth above in the section of this Form 10-K entitled “Directors of Innovation Pharmaceuticals Inc.”

 

Name

 

Age

 

Position with the Company

Leo Ehrlich

 

59

 

Chief Executive Officer, Chief Financial Officer and Director

Krishna Menon

 

70

 

Chief Science Officer, President of Research and Director

Arthur P. Bertolino

 

62

 

President and Chief Medical Officer

Jane Harness

 

49

 

Sr. Vice President, Clinical Sciences and Portfolio Management

 

Arthur P. Bertolino, MD, PhD, MBA, joined the Company as President and Chief Medical Officer in June 2016. Dr. Bertolino held several key positions at Novartis Institutes for Biomedical Research (“NIBR”) from 2008 to 2013, including Vice President of Dermatology and Vice President & Global Head of Translational Medicine for Dermatology. During his time at NIBR, Dr. Bertolino was integral to the marketing approval of Ilaris (canakinumab) in the United States, European Union and Switzerland. He also led the early clinical program of Cosentyx™ (secukinumab) and late stage supportive submission studies. In addition, Dr. Bertolino held positions as Senior Medical Director and Senior Director of Dermatology at Pfizer, Inc. from 2003 to 2007. Among other accomplishments at Pfizer, he led clinical programs for over a half-dozen new chemical entities involving Phase 1 and Phase 2 studies and contributed to planning for Phase 3 studies. Dr. Bertolino led FDA clinical interactions at entitlement meetings for Pfizer’s dermatology products and served as Pfizer’s dermatology spokesperson. Dr. Bertolino served as Chief Medical Officer and Vice President of Medical Affairs at Peplin, Inc. from 2007 to 2008, where he led Phase 2 programs and designed and drove initial Phase 3 programs that contributed to FDA approval of Picato (ingenol mebutate). Dr. Bertolino also held the position of Executive Vice President and Chief Medical Officer at Revance Therapeutics from 2014 to 2016, where he, among other responsibilities, supervised all aspects of clinical staff and programs and regulatory affairs. Dr. Bertolino earned a BS in Chemistry/Biochemistry from SUNY Stony Brook, an MD and PhD in Pharmacology from The Johns Hopkins University School of Medicine, and an MBA from the University of Michigan Stephen M. Ross School of Business.

 

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 2016 and as Head of Clinical Sciences, Dermatology and ATI Translational Research, at Novartis Institutes for Biomedical Research from 2014 to 2015. 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.

 

 
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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., 100 Cummings Center, Suite 151-B, Beverly, Massachusetts 01915.

 

The Board and Committees of the Board

 

The Company is governed by the Board, which currently consists of five members: Mr. Leo Ehrlich, Dr. Krishna Menon, Dr. Barry Schechter, Dr. Zorik Spektor and Mr. Mark R. Tobin. 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., 100 Cummings Center, Suite 151-B, Beverly, Massachusetts 01915. All directors are encouraged to attend the Company’s annual 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 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 on a global basis and to achieve its objectives.

 

While the Board oversees risk management, Company management is charged with managing risk. The Company has robust internal processes to identify and manage risks and to communicate with the Board. The Board and the Audit Committee monitor and evaluate the effectiveness of the internal controls and the risk management program at least annually. Management communicates routinely with the Board, Board committees and individual directors on the significant risks identified and how they are being managed. Directors are free to communicate directly with senior management.

 

The Board implements its risk oversight function both as a whole and through committees. Much of the work is delegated to various committees, which meet regularly and report back to the full Board. All committees play or are anticipated to play significant roles in carrying out the risk oversight function. In particular:

 

 

·

The Audit Committee oversees risks related to the Company’s financial statements, the financial reporting process, accounting and legal matters. The Audit Committee oversees the internal audit function and the Company’s ethics programs, including our Code of Ethics. The Audit Committee members meet separately with representatives of the independent auditing firm.

 

·

The Compensation Committee evaluates risks and rewards associated with the Company’s compensation philosophy and programs.

 

 
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Audit Committee

 

The Audit Committee met four times in fiscal year 2017. The Audit Committee consists of Dr. Barry Schechter, Dr. Zorik Spektor and Mr. Mark R. Tobin, 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. Mr. Tobin serves as Chairman of the Audit Committee and is an “audit committee financial expert” as that term is defined by the applicable SEC rules. 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 meetings in fiscal 2017. The Compensation Committee consists of Dr. Barry Schechter, Dr. Zorik Spektor and Mr. Mark R. Tobin, 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;

 

·

reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer, evaluating the performance of our Chief Executive Officer in light of those goals and objectives, and setting the compensation level of our Chief Executive Officer based on this evaluation; 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 recommendations rests solely with the Compensation Committee.

 

 
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Nominating and Governance Committee

 

The Nominating and Governance Committee did not hold any meetings in fiscal 2017. Our Nominating and Governance Committee consists of Dr. Barry Schechter, Dr. Zorik Spektor and Mr. Mark R. Tobin, 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. Diversity is important because a variety of points of view contribute to a more effective decision-making process.

 

 
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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.

100 Cummings Center, Suite 151-B

Beverly, Massachusetts 01915

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, 100 Cummings Center, Suite 151-B, Beverly, Massachusetts 01915. During the fiscal year ended June 30, 2017, 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, 100 Cummings Center, Suite 151-B, Beverly, Massachusetts 01915 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.

 

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

 

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 2017, other than (i) a Form 5 for Arthur Bertolino which was filed on August 8, 2017 relating to 262,080 shares withheld upon the vesting of a common stock grant on June 27, 2017, and (ii) a Form 3 relating to Jane Harness joining the Company on September 1, 2016 and Form 5 for Ms. Harness which was filed on August 8, 2017 relating to a 58,394 common share grant and 172,987 stock options granted on September 1, 2016.

 

 
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ITEM 11. EXECUTIVE COMPENSATION 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview of Compensation Program

 

Our Board of Directors is responsible for establishing and implementing our compensation programs. The Board of Directors has sought to ensure that the total compensation paid to our executive officers is fair, reasonable and competitive. This Compensation Discussion and Analysis (“CD&A”) provides information about our compensation objectives and policies for our named executive officers, who are identified in the Summary Compensation Table below, and is intended to place in perspective the information contained in the executive compensation tables that follow this discussion. This CD&A provides a general description of our compensation programs and specific information about its various components.

 

Compensation Philosophy and Objectives

 

We believe our success depends on the continued contributions of our named executive officers. While we have not historically maintained a formal compensation philosophy, our executive compensation programs are designed for the purpose of attracting, motivating and retaining experienced and qualified executive officers with compensation that recognizes individual merit and overall business results. Our compensation programs are also intended to support the attainment of our strategic objectives by tying the interests of our named executive officers to those of our stockholders, although the significant beneficial ownership of the Company’s securities by Mr. Leo Ehrlich, the Company’s Chief Executive Officer and Chief Financial Officer, and Dr. Krishna Menon, Chief Scientific Officer and President of Research, has generally served to align the interests of such officers with the interests of the Company’s stockholders.

 

Role of the Board of Directors; Employment Agreements

 

As the Compensation Committee of the Board was formed in October 2015, all compensation decisions before October 2015 discussed in this CD&A were made by the Board of Directors.

 

Employment Arrangements with Mr. Ehrlich and Dr. Menon. In establishing and implementing our compensation programs, the responsibility of the Board of Directors has historically consisted of reviewing or ratifying employment agreements with our named executive officers. On December 29, 2010, the Company entered into employment agreements with Mr. Ehrlich and Dr. Menon for a period of three years ending on December 31, 2013. On January 1, 2014, the Board approved an extension of the employment agreements with Mr. Ehrlich and Dr. Menon for a one-year period with a 10% increase in salary from the previous annual salary of $423,500 each, to an annual salary of $465,850, which expired on December 31, 2014. The Company has not extended the employment agreements with Mr. Ehrlich and Dr. Menon, and the Company anticipates any such extension or any new employment agreements with Mr. Ehrlich and Dr. Menon would be subject to prior approval by the Compensation Committee.

 

Employment Agreement with Dr. Bertolino. On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement providing for Dr. Bertolino to serve as Chief Medical Officer and President of the Company. The employment agreement provides for an annual salary of $440,000. In addition, the Company granted to Dr. Bertolino under the Innovation Pharmaceuticals Inc. 2016 Equity Incentive Plan (i) 1,066,667 shares of restricted stock and (ii) a ten-year option to purchase 617,839 shares of the Company’s Class A common stock at an exercise price of $1.39 per share. Both shares and options will vest upon the earliest to occur of the following: (1) 50% upon June 27, 2017, and the remaining 50% upon June 27, 2018; (2) completion of both a Phase 2b psoriasis study and a Phase 2 oral mucositis study; (3) the Company’s common stock closes above $3.00 per share (as may be adjusted for any stock splits or similar actions); (4) the commencement of trading of the Company’s common stock on a national securities exchange (e.g. Nasdaq or the NYSE); or (5) upon a “change in control” of the Company, as defined in Dr. Bertolino’s employment agreement. The Company also agreed that, with respect to each fiscal year of the Company ending during the term of Dr. Bertolino’s employment and commencing with the fiscal year ending June 30, 2017, Dr. Bertolino shall be eligible to receive annual equity awards under the Innovation Pharmaceuticals Inc. 2016 Equity Incentive Plan or any successor plan, with a target award of options to purchase 150,000 shares of the Company’s common stock with an exercise price equal to the last closing price of the Company’s common stock prior to the date of grant, which options shall vest ratably each month over the 24 months following the date of grant.

 

 
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Employment Agreement with Ms. Harness. On September 1, 2016, the Company and Jane Harness entered into an executive employment agreement pursuant to which Ms. Harness joined the Company as its VP, Clinical Sciences and Portfolio Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness, under the Innovation Pharmaceuticals Inc. 2016 Equity Incentive Plan (i) 58,394 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3%) upon the first anniversary of the effective date, one third (33 1/3%) upon the second anniversary of the effective date, and the remaining one third (33 1/3%) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 172,987 shares of the Company’s common stock were also granted at an exercise price of $1.37 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3%) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company.

 

Equity Incentive Plans

 

On June 30, 2016, the Board adopted the Innovation Pharmaceuticals Inc. 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan became effective upon adoption by the Board on June 30, 2016.

 

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

 

The Company previously awarded grants under its 2010 Equity Incentive Plan, which had been approved by the Company’s stockholders.

 

The Board historically selected the recipients of equity grants and determined the terms and type of such grants under the Company’s equity incentive plans. The Compensation Committee assumed the role of administrator of the Company’s equity incentive plans in October 2015.

 

Role of Compensation Consultants

 

During fiscal 2017, the Company did not retain the services of a compensation consultant or conduct benchmarking or specific market review of our compensation levels or practices. Instead, our compensation levels and practices were established by the Compensation Committee and Board of Directors.

 

Report of the Compensation Committee

 

The Compensation Committee of the Board of Directors has reviewed and discussed with management the foregoing Compensation Discussion and Analysis. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for fiscal 2017, and the Board of Directors has approved that recommendation.

 

This Report has been submitted by the following independent directors, who comprise the Compensation Committee of the Board of Directors:

 

Barry Schechter

Zorik Spektor

Mark R. Tobin

 
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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 Chief Scientific Officer and President of Research, our 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.

 

Name and Principal Position

 

Year

 

Salary

 

 

Bonus

 

 

Stock

Awards(1)

 

 

Option

Awards(1)

 

 

Total

 

Leo Ehrlich

 

2017

 

$ 465,850

 

 

$

 

 

$

 

 

$

 

 

$ 465,850

 

Chief Executive and Financial Officer

 

2016

 

$ 465,850

 

 

$

 

 

$

 

 

$

 

 

$ 465,850

 

 

 

2015

 

$ 465,850

 

 

$ 250,000

 

 

$

 

 

$

 

 

$ 715,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Krishna Menon

 

2017

 

$ 465,850

 

 

$

 

 

$

 

 

$

 

 

$ 465,850

 

Chief Scientific Officer and President of Research 

 

2016

 

$ 465,850

 

 

$

 

 

$

 

 

$

 

 

$ 465,850

 

 

 

2015

 

$ 465,850

 

 

$ 250,000

 

 

$

 

 

$

 

 

$ 715,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arthur P. Bertolino(2)

 

2017

 

$ 449,167

 

 

$ 176,000

 

 

$ -

 

 

$

 

 

$ 625,167

 

President and Chief Medical Officer

 

2016

 

$

 

 

$

 

 

$ 1,493,334

 

 

$ 800,000

 

 

$ 2,293,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jane Harness (3)

 

2017

 

$ 220,833

 

 

$ 76,313

 

 

$ 80,000

 

 

$ 220,000

 

 

$ 597,146

 

Sr. Vice President, Clinical Sciences and Portfolio Management

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

_______________

(1)

Amounts shown reflect the total grant date fair value of restricted stock and option awards, determined in accordance with ASC 718, made during fiscal year 2017. Amounts shown do not represent cash payments made to Dr. Bertolino, amounts realized or amounts that may be realized. Refer to Notes 12 and 13 to the accompanying financial statements for a discussion on the valuation of the restricted stock and option awards.

 

(2)

Dr. Bertolino joined the Company on June 27, 2016. See “—Role of the Board of Directors; Employment Agreements—Employment Agreement with Dr. Bertolino” above for a description of the employment agreement between the Company and Dr. Bertolino pursuant to which the restricted stock and option awards were made. The June 30, 2017 bonus has been accrued but is unpaid.

 

(3)

Ms. Jane Harness joined our Company as Vice President, Clinical Sciences and Portfolio Management on September 1, 2016 and was promoted as Senior Vice President, Clinical Sciences and Portfolio Management in July 2017. The June 30, 2017 bonus has been accrued but is unpaid.

 

GRANTS OF PLAN-BASED AWARDS

 

The following table sets forth stock-based awards granted to our named executive officers during fiscal year 2017.

 

Name

 

Grant Date

 

 

All Other Stock Awards: Number of Shares of Stock or Units(1)

 

 

All Other Option Awards: Number of Securities Underlying

Options(1)

 

 

Exercise or Base Prices of Option Awards(2)

 

 

Grant Date Fair Value of Stock and Option

Awards(3)

 

 

 

 

 

 

(#)

 

 

(#)

 

 

($/sh)

 

 

($)

 

Leo Ehrlich

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Krishna Menon

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arthur P. Bertolino

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jane Harness

 

9/1/2016

 

 

 

58,394

 

 

 

 

 

$

 

 

$ 80,000

 

 

 

9/1/2016

 

 

 

 

 

 

172,987

 

 

$ 1.37

 

 

$ 220,000

 

 

 
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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, 2017.

 

 

 

Option Awards

 

Stock Awards

 

Name

 

Number of Securities Underlying Unexercised

Options (#)

Exercisable

 

 

Number of Securities Underlying Unexercised

Options (#)

Unexercisable

 

 

Option Exercise Price

($)

 

 

Option

Expiration

Date

 

Number of Shares or Units That Have Not Vested

(#)

 

 

Market Value of Shares or Units of Stock That Have Not Vested(1)

($)

 

Leo Ehrlich

 

 

18,000,000

 

 

 

 

 

$ 0.11

 

 

12/29/2020

 

 

 

 

 

 

 

 

 

2,000,000

 

 

 

 

 

 

$ 0.51

 

 

5/8/2022

 

 

 

 

 

 

Krishna Menon

 

 

18,000,000

 

 

 

 

 

$ 0.11

 

 

12/29/2020

 

 

 

 

 

 

Arthur P. Bertolino(2)

 

 

308,920

 

 

 

308,919

 

 

$ 1.39

 

 

6/23/2026

 

 

533,333

 

 

$ 512,000

 

Jane Harness(3)

 

 

 

 

 

172,987

 

 

$ 1.37

 

 

9/1/2026

 

 

58,394

 

 

$ 56,058

 

_______________

(1)

Market value is based on a stock price of $0.96, the closing price of the Company’s common stock on June 30, 2017, and the outstanding number of shares of restricted stock.

 

(2)

See “—Role of the Board of Directors; Employment Agreements—Employment Agreement with Dr. Bertolino” above for a description of Dr. Bertolino’s restricted stock and option awards.

 

(3)

See “—Role of the Board of Directors; Employment Agreements—Employment Agreement with Ms. Harness” above for a description of Ms. Harness’s restricted stock and option awards.

 

OPTION EXERCISES AND STOCK VESTED IN FISCAL 2017

 

The following table sets forth information concerning the exercise of stock options and vesting of restricted stock during fiscal 2017 for each of our named executive officers.

 

 

 

Option Awards

 

 

Stock Awards

 

Name

 

Number of Shares Acquired on Exercise

 

 

Number of Shares Acquired on

Vesting (#)

 

 

Number of Shares Acquired on Vesting

(#)(1)

 

 

Value Realized on Vesting

($)

 

Leo Ehrlich

 

 

 

 

 

 

 

 

 

 

 

 

Krishna Menon

 

 

 

 

 

 

 

 

 

 

 

 

Arthur P. Bertolino(2)

 

 

 

 

 

 

 

 

533,334

 

 

$ 480,001

 

Jane Harness

 

 

 

 

 

 

 

 

 

 

 

 

_______________

(1)

Number of shares acquired on vesting of stock awards is the gross number of shares vested, including shares that were surrendered to us for the payment of withholding taxes pursuant to the terms of our 2016 Equity Incentive Plan.

 

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

 

Neither Mr. Ehrlich nor Dr. Menon has a current employment agreement with the Company, and all of the stock options held by Mr. Ehrlich and Dr. Menon are fully vested.

 

 
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Pursuant to the employment agreements between each of Dr. Bertolino and Ms. Harness and the Company, the executives 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 one year in the case of Dr. Bertolino and six months in the case of Ms. Harness. 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 his or her estate would be entitled to receive (i) the payments outlined in the first bullet above, plus (ii) an amount equal to his or her prorated target bonus for the fiscal year during which his or 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 18 months in the case of Dr. Bertolino and nine months in the case of Ms. Harness, plus (iii) the target bonus for the fiscal year during which his or 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 his or 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 agreements, 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.

 

 
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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, 2017. Neither Mr. Menon nor Mr. Ehrlich was compensated for their service as directors in 2017.

 

Name

 

Fees Earned or Paid in Cash

($)

 

 

Total

($)

 

Dr. Barry Schechter

 

$ 25,000

 

 

$ 25,000

 

Dr. Zorik Spektor

 

$ 25,000

 

 

$ 25,000

 

Mr. Mark R. Tobin

 

$ 25,000

 

 

$ 25,000

 

 

As of June 30, 2017, each of Dr. Schechter, Dr. Spektor and Mr. Tobin held an option to purchase 19,655 shares of the Company’s common stock.

 

Narrative to Director Compensation Table

 

Each of our independent directors has entered into agreements with the Company, pursuant to which each director will receive quarterly cash fees in the amount of $6,250, 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 value of $20,000 on the date of issuance, which options were issued in June 2016. Our inside directors do not receive any additional compensation for the services they provide to us as directors. Directors are reimbursed for out-of-pocket expenses incurred as a result of their participation on our Board and committees.

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

No member of the Compensation Committee is or has been an officer or employee of the Company. No interlocking relationship existed between our Board of Directors or our Compensation Committee and the Board of Directors or compensation committee of any other company during fiscal year 2017.

 

 
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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 Class A common stock as of June 30, 2017, 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. Unless otherwise specified, the address of each of the persons set forth below is in care of Innovation Pharmaceuticals Inc., 100 Cummings Center, Suite 151-B, Beverly, Massachusetts 01915.

 

Name and Address of Beneficial Owner(1)

 

Amount and Nature of Beneficial Ownership

(1) (2)

 

 

Percent of

Common Stock

(3)

 

Officers and Directors

 

 

 

 

 

 

Leo Ehrlich (3)

 

 

34,165,544

 

 

 

21.4 %

Krishna Menon (4)

 

 

33,048,286

 

 

 

21.6 %

Arthur P. Bertolino (5)

 

 

1,113,507

 

 

*

%

Barry Schechter (6)

 

 

269,665

 

 

*

%

Zorik Spektor (7)

 

 

44,665

 

 

*

%

Mark R. Tobin (8)

 

 

19,665

 

 

*

%

Jane Harness (9)

 

 

58,394

 

 

*

%

All current executive officers and directors as a group (7 persons) (10) 

 

 

68,719,726

 

 

 

38.7 %

5% Stockholders

 

 

 

 

 

 

 

 

Wayne & Mary Aruda (11)

 

 

7,501,224

 

 

 

5.5 %

_______________

*

Denotes less than 1% of the outstanding shares of common stock.

 

(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 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.

 

(2)

For each stockholder, the calculation of percentage of beneficial ownership is based upon 135,274,421 shares of common stock outstanding as of June 30, 2017, and shares of common stock subject to options, warrants and/or conversion rights held by the stockholder that are currently exercisable or were exercisable within 60 days of June 30, 2017, 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.

 

(3)

Includes (i) 7,335,002 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) 4,078,232 shares of Class A common stock into which a convertible loan in the amount of $2,022,264 and accrued interest $16,852 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 and (v) vested options to purchase 18,000,000 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)

Includes (i) 15,048,286 shares of Class A common stock held by the Menon Family Trust, for which Dr. Menon serves as trustee, and (ii) vested options to purchase 18,000,000 shares of Class B common stock granted to Dr. Menon under the 2010 Equity Inventive 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.

 

 
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(5)

Includes 804,587 shares of restricted stock. See “—Role of the Board of Directors; Employment Agreements—Employment Agreement with Dr. Bertolino” above for a description of the vesting conditions for the restricted stock and a vested option to purchase 308,920 shares of common stock.

 

(6)

Includes 250,000 shares of common stock held directly and a vested option to purchase 19,665 shares of common stock.

 

(7)

Includes 25,000 shares of common stock held directly and a vested option to purchase 19,665 shares of common stock.

 

(8)

Includes a vested option to purchase 19,665 shares of common stock.

 

(9)

Includes 58,394 shares of common stock held directly.

 

(10)

Includes 26,273,579 shares of common stock directly and indirectly owned by the current executive officers and directors as a group and 42,446,147 shares underlying options, warrants or convertible debt.

 

(11)

As reported by Wayne and Mary Aruda on a Form 13G/A filed with the SEC on April 28, 2017. As of June 30, 2016, Wayne and Mary Aruda reported joint dispositive and voting power over 7,501,224 shares of common stock. The address of Wayne and Mary Aruda is 81 Salem Street, Wilmington MA 01887

 

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, 2017.

 

Plan Category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

(a)

 

 

Weighted-average exercise price of outstanding options, warrants and rights

(b)

 

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

(c)

 

Equity compensation plans approved by stockholders (1)

 

 

38,826,889

 

 

$ 0.16

 

 

 

3,869,111

 

Equity compensation plans not approved by stockholders (2)

 

 

828,326

 

 

$ 1.37

 

 

 

16,864,052

 

Total

 

 

39,655,215

 

 

$ 0.19

 

 

 

20,733,163

 

__________________

(1)

Consists of the Company’s 2010 Equity Incentive Plan.

 

(2)

Consists of the Company’s 2016 Equity Incentive Plan.

 

 
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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 2017 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 2017, 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, and that such members constitute a majority of the entire Board: Dr. Barry Schechter, Dr. Zorik Spektor and Mr. Mark R. Tobin.

 

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

 

The following table sets forth the aggregate fees for professional audit services rendered by Baker Tilly Virchow Krause, LLP for the audit of the Company’s annual financial statements for the fiscal years ended June 30, 2017 and 2016, and fees billed for other services provided by Baker Tilly Virchow Krause, LLP in fiscal years ended June 30, 2017 and 2016. The Board of Directors has approved all of the following fees.

 

 

 

Fiscal Year Ended

 

(Rounded to nearest thousand)

 

2017

 

 

2016

 

 

 

 

 

 

 

 

Audit Fees

 

$ 134,000

 

 

$ 113,000

(1)

Audit related Fees

 

 

 

 

 

 

Tax Fees

 

 

 

 

 

 

All Other Fees

 

 

 

 

 

 

Total Fees

 

$ 134,000

 

 

$ 113,000

 

_______________

(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 Baker Tilly Virchow Krause, LLP 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 Baker Tilly Virchow Krause, LLP for our financial statements as of and for the year ended June 30, 2017.

 

 
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PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS

 

 

(a)

Financial statements

 

See Index to financial statements and Supplemental Data immediately following the signature page hereto.

 

(b)

Exhibits

 

The exhibits, listed on the accompanying exhibit index that is set forth after the financial statements, are filed or furnished herewith or incorporated herein by reference to the location indicated.

 

ITEM 16. FORM 10-K SUMMARY

 

None. 

 

 
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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 8, 2017

By:

/s/ Leo Ehrlich

 

(Leo Ehrlich,

 

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 8, 2017

Leo Ehrlich

 

Principal Accounting Officer, Secretary and Director

 

/s/ Krishna Menon

 

President of Research and Director

 

September 8, 2017

Krishna Menon

 

/s/ Barry Schechter

 

Director

 

September 8, 2017

Barry Schechter

 

/s/ Zorik Spektor

 

Director

 

September 8, 2017

Zorik Spektor

 

/s/ Mark R. Tobin

 

Director

 

September 8, 2017

Mark R. Tobin

 

 
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INNOVATION PHARMACEUTICALS INC.

(Formerly Cellceutix Corporation)

 

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

 

 

Page

 

Report of Independent Registered Public Accounting Firm 

 

F-2

 

Financial Statements of Innovation Pharmaceuticals Inc. 

Balance Sheets as of June 30, 2017 and June 30, 2016

 

F-3

Statements of Operations for each of the three years ended June 30, 2017

 

F-4

Statements of Stockholders’ Equity (Deficiency) for each of the three years ended June 30, 2017

 

F-5

Statements of Cash Flows for each of the three years ended June 30, 2017

 

F-7

Notes to financial statements

 

F-8

Quarterly Financial Summary (unaudited)

 

 

 

 
F-1
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors

Innovation Pharmaceuticals Inc.

Beverly, Massachusetts

 

We have audited the accompanying balance sheets of Innovation Pharmaceuticals Inc. (formerly Cellceutix Corporation) as of June 30, 2017 and 2016, and the related statements of operations, stockholders’ equity (deficiency) and cash flows for each of the years in the three-year period ended June 30, 2017. We also have audited Innovation Pharmaceuticals, Inc.’s internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). The company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Innovation Pharmaceuticals Inc. as of June 30, 2017 and 2016 and the results of its operations and cash flows for each of the years in the three-year period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Innovation Pharmaceuticals Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework).

 

/s/ Baker Tilly Virchow Krause, LLP

 

Minneapolis, Minnesota

September 8, 2017

 

 
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INNOVATION PHARMACEUTICALS INC.

(Formerly Cellceutix Corporation)

BALANCE SHEETS AS OF JUNE 30, 2017 AND JUNE 30, 2016

(Rounded to nearest thousand except for per share data)

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

ASSETS

Current Assets:

 

 

 

 

 

 

Cash

 

$ 4,141,000

 

 

$ 6,310,000

 

Prepaid expenses

 

 

308,000

 

 

 

272,000

 

Subscription receivable

 

 

26,000

 

 

 

26,000

 

Total Current Assets

 

 

4,475,000

 

 

 

6,608,000

 

Other Assets:

 

 

 

 

 

 

 

 

Patent costs - net

 

 

4,212,000

 

 

 

4,311,000

 

Equipment -net

 

 

120,000

 

 

 

90,000

 

Deferred offering costs - net

 

 

227,000

 

 

 

358,000

 

Security deposit

 

 

78,000

 

 

 

78,000

 

Total Other Assets

 

 

4,637,000

 

 

 

4,837,000

 

Total Assets

 

$ 9,112,000

 

 

$ 11,445,000

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable - (including related party payables of approx. $1,506,000 and 1,502,000, respectively)

 

$ 4,699,000

 

 

$ 3,528,000

 

Accrued expenses - (including related party accruals of approx. $38,000 and $72,000, respectively)

 

 

711,000

 

 

 

97,000

 

Accrued salaries and payroll taxes - (including related party accrued salaries of approx. $2,953,000 and $2,778,000, respectively)

 

 

3,144,000

 

 

 

2,834,000

 

Convertible note payable - related party

 

 

2,022,000

 

 

 

2,022,000

 

Total Current Liabilities

 

 

10,576,000

 

 

 

8,481,000

 

Total Liabilities

 

 

10,576,000

 

 

 

8,481,000

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficiency)

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 designated shares, no shares issued and outstanding

 

 

-

 

 

 

-

 

Common Stock - Class A, $0.0001 par value, 300,000,000 shares authorized, 135,536,501 and 123,589,536 issued as of June 30, 2017 and 2016, respectively, 135,274,421 and 123,589,536 outstanding as of June 30, 2017 and 2016, respectively

 

 

14,000

 

 

 

12,000

 

Common Stock - Class B, (10 votes per share); $0.0001 par value, 100,000,000 shares authorized, no shares issued and outstanding as of June 30, 2017 and 2016

 

 

-

 

 

 

-

 

Additional paid-in capital

 

 

68,295,000

 

 

 

56,969,000

 

Accumulated deficit

 

 

(69,553,000 )

 

 

(54,017,000 )

Treasury Stock, at cost (262,080 shares as of June 30, 2017)

 

 

(220,000 )

 

 

-

 

Total Stockholders’ Equity (Deficiency)

 

 

(1,464,000 )

 

 

2,964,000

 

Total Liabilities and Stockholders’ Equity (Deficiency)

 

$ 9,112,000

 

 

$ 11,445,000

 

 

The accompanying notes are an integral part of these financial statements

 

 
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INNOVATION PHARMACEUTICALS INC.

(Formerly Cellceutix Corporation)

STATEMENTS OF OPERATIONS

FOR EACH OF THE THREE YEARS ENDED JUNE 30, 2017

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

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$ -

 

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

12,783,000

 

 

 

8,952,000

 

 

 

10,531,000

 

General and administrative expenses

 

 

1,315,000

 

 

 

1,946,000

 

 

 

1,177,000

 

Officers’ payroll and payroll tax expenses

 

 

529,000

 

 

 

528,000

 

 

 

801,000

 

Professional fees

 

 

709,000

 

 

 

1,228,000

 

 

 

447,000

 

Total operating expenses

 

 

15,336,000

 

 

 

12,654,000

 

 

 

12,956,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(15,336,000 )

 

 

(12,654,000 )

 

 

(12,956,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2,000

 

 

 

4,000

 

 

 

4,000

 

Sundry income

 

 

-

 

 

 

-

 

 

 

9,000

 

Interest expense

 

 

(202,000 )

 

 

(202,000 )

 

 

(202,000 )

Total other income (expenses), net

 

 

(200,000 )

 

 

(198,000 )

 

 

(189,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(15,536,000 )

 

 

(12,852,000 )

 

 

(13,145,000 )

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ (15,536,000 )

 

 

(12,852,000 )

 

$ (13,145,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$ (0.12 )

 

 

(0.11 )

 

$ (0.11 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

127,285,861

 

 

 

119,908,145

 

 

 

115,087,368

 

 

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

 

 
F-4
 
Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

(Formerly Cellceutix Corporation)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

FOR EACH OF THE THREE YEARS ENDED JUNE 30, 2017

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

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

Par Value

 

 

 

 

 

Par Value

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

$ 0.001

 

 

Shares

 

 

$ 0.0001

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Total

 

Balance at June 30, 2014

 

 

-

 

 

$ -

 

 

 

109,787,129

 

 

$ 11,000

 

 

$ 29,215,000

 

 

$ (28,020,000 )

 

 

-

 

 

$ -

 

 

$ 1,206,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares sold to Aspire Capital under Oct 2014 Agreement at $1.62-4.21

 

 

-

 

 

 

-

 

 

 

6,390,379

 

 

 

1,000

 

 

 

15,845,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,846,000

 

Shares sold to Aspire Capital under March 2015 Agreement at $2.95, net of financing cost $44,000

 

 

-

 

 

 

-

 

 

 

100,000

 

 

 

-

 

 

 

251,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

251,000

 

Offering cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(299,000 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(299,000 )

Expiration from Redeemable Common Stock liability

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,400,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,400,000

 

Exercise of warrants

 

 

-

 

 

 

-

 

 

 

941,000

 

 

 

-

 

 

 

756,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

756,000

 

Exercise of options

 

 

-

 

 

 

-

 

 

 

320,000

 

 

 

-

 

 

 

111,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

111,000

 

Shares issued to officer for bonus at $2.93

 

 

-

 

 

 

-

 

 

 

50,000

 

 

 

-

 

 

 

146,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

146,000

 

Stock options issued to employees for bonus at $2.93-$4.71

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

198,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

198,000

 

Shares issued to consultant for services at $2.56

 

 

-

 

 

 

-

 

 

 

15,000

 

 

 

-

 

 

 

38,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

38,000

 

Stock options issued to consultant for services

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,000

 

Shares issued as commitment fee, 3/30/2015 at $3.12

 

 

-

 

 

 

-

 

 

 

160,000

 

 

 

-

 

 

 

499,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

499,000

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,145,000 )

 

 

-

 

 

 

-

 

 

 

(13,145,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Balance at June 30, 2015

 

 

-

 

 

$ -

 

 

 

117,763,508

 

 

$ 12,000

 

 

$ 48,177,000

 

 

$ (41,165,000 )

 

 

-

 

 

$ -

 

 

$ 7,024,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares sold to Aspire Capital under April 2015 Agreement at $1.01 - $2.53 range

 

 

-

 

 

 

-

 

 

 

5,700,000

 

 

 

-

 

 

 

8,174,000

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

8,174,000

 

Offering cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(135,000 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(135,000 )

Exercise of options

 

 

-

 

 

 

-

 

 

 

74,000

 

 

 

-

 

 

 

40,000

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

40,000

 

Shares issued to consultant for services at $1.12-$2.49

 

 

-

 

 

 

-

 

 

 

52,028

 

 

 

-

 

 

 

86,000

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

86,000

 

Shares issued to officer as equity awards at $1.40

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,000

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

8,000

 

Stock options issued to consultant for services

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

555,000

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

555,000

 

Stock options issued to directors as compensation at $1.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,000

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

60,000

 

Stock options issued to officer as equity awards at $1.39

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,000

 

 

 

-

 

 

 

 

 

 

 

-

 

 

 

4,000

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12,852,000 )

 

 

 

 

 

 

-

 

 

 

(12,852,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2016

 

 

-

 

 

$ -

 

 

 

123,589,536

 

 

$ 12,000

 

 

$ 56,969,000

 

 

$ (54,017,000 )

 

 

-

 

 

$ -

 

 

$ 2,964,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares sold to Aspire Capital under April 2015 Agreement at $0.66 - $1.32 range

 

 

-

 

 

 

-

 

 

 

8,900,000

 

 

 

1,000

 

 

 

7,897,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,898,000

 

Offering cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(131,000 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(131,000 )

 

 
F-5
 
Table of Contents

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

Par Value

 

 

 

 

 

Par Value

 

 

Paid-in

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

$ 0.001

 

 

Shares

 

 

$ 0.0001

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Total

 

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

 

 

-

 

 

 

-

 

 

 

41,720

 

 

 

-

 

 

 

44,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

44,000

 

Shares issued to officer as equity awards at $1.40

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

747,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

747,000

 

Stock options issued to consultant for services at $1.12 - $1.77

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

31,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

31,000

 

Stock options issued to officer as equity awards at $1.39

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

400,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

400,000

 

Stock purchases

 

 

-

 

 

 

-

 

 

 

2,471,912

 

 

 

1,000

 

 

 

2,199,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,200,000

 

Issuance of 533,333 vested shares to an Officer

 

 

-

 

 

 

-

 

 

 

533,333

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Withholding and Purchase of 262,080 Treasury shares from vested shares issued – at cost

 

 

-

 

 

 

-

 

 

 

(262,080 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

262,080

 

 

 

(220,000 )

 

 

(220,000 )

Shares issued to employees for services at $1.03 - $1.37

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

37,000

 

Stock options issued to employees for services at $1.03-$1.37

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

102,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

102,000

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15,536,000 )

 

 

-

 

 

 

-

 

 

 

(15,536,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2017

 

 

-

 

 

$ -

 

 

 

135,274,421

 

 

$ 14,000

 

 

$ 68,295,000

 

 

$ (69,553,000 )

 

 

262,080

 

 

$ (220,000 )

 

$ (1,464,000 )

 

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

 

 
F-6
 
Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

(Formerly Cellceutix Corporation)

STATEMENTS OF CASH FLOWS

FOR EACH OF THE THREE YEARS ENDED JUNE 30, 2017

(Rounded to nearest thousand)

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net loss

 

$ (15,536,000 )

 

$ (12,852,000 )

 

$ (13,145,000 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1,361,000

 

 

 

713,000

 

 

 

400,000

 

Amortization of patent costs

 

 

372,000

 

 

 

404,000

 

 

 

394,000

 

Impairment of patent costs

 

 

-

 

 

 

648,000

 

 

 

-

 

Depreciation of equipment

 

 

33,000

 

 

 

16,000

 

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

(36,000 )

 

 

(3,000 )

 

 

221,000

 

Accounts payable

 

 

1,171,000

 

 

 

1,690,000

 

 

 

(826,000 )

Accrued expenses

 

 

614,000

 

 

 

(495,000 )

 

 

257,000

 

Accrued officers’ salaries and payroll taxes

 

 

310,000

 

 

 

(8,000 )

 

 

(382,000 )

Net cash used in operating activities

 

 

(11,711,000

)

 

 

(9,887,000 )

 

 

(13,071,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Additions to equipment

 

 

(63,000 )

 

 

(68,000 )

 

 

(9,000 )

Additions to patent costs

 

 

(273,000 )

 

 

(346,000 )

 

 

(450,000 )

Net cash used in investing activities

 

 

(336,000 )

 

 

(414,000 )

 

 

(459,000 )

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Sale of common stock, net of offering costs

 

 

10,098,000

 

 

 

8,173,000

 

 

 

16,097,000

 

Purchase of treasury stock

 

 

(220,000 )

 

 

-

 

 

 

-

 

Exercise of stock options and warrants

 

 

-

 

 

 

28,000

 

 

 

855,000

 

Net cash provided by financing activities

 

 

9,878,000

 

 

 

8,201,000

 

 

 

16,952,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH

 

$ (2,169,000 )

 

$ (2,100,000 )

 

$ 3,422,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH - BEGINNING OF YEAR

 

 

6,310,000

 

 

 

8,410,000

 

 

 

4,988,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH - END OF YEAR

 

$ 4,141,000

 

 

$ 6,310,000

 

 

$ 8,410,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ 44,000

 

 

$ 235,000

 

 

$ 366,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued as deferred offering costs

 

$ -

 

 

$ -

 

 

$ 499,000

 

Redeemable common stock

 

$ -

 

 

$ -

 

 

$ (1,400,000 )

 

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

 

 
F-7
 
Table of Contents

 

INNOVATION PHARMACEUTICALS INC.

(Formerly Cellceutix Corporation)

NOTES TO FINANCIAL STATEMENTS

FOR EACH OF THE THREE YEARS ENDED JUNE 30, 2017

 

1. Basis of Presentation and Nature of Operations

 

Basis of Presentation and Name Change

 

Innovation Pharmaceuticals Inc. (the “Company”) was incorporated as Econoshare, Inc. on August 1, 2005, in the State of Nevada. On December 6, 2007, the Company acquired Cellceutix Pharma, Inc., a privately owned corporation formed under the laws of the State of Delaware on June 20, 2007. Following the acquisition, the Company changed its name to Cellceutix Corporation. The Company’s subsidiary Cellceutix Pharma, Inc. was dissolved in 2014. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the name change was not required.

 

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

 

Nature of Operations -Overview

 

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

 

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

 

2. Going Concern and Liquidity

 

As of June 30, 2017, the Company adopted Accounting Standards Codification 205-40. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern and explicitly requires management to assess an entity’s ability to continue as a going concern and to provide related disclosure in certain circumstances. This guidance was effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. The following information reflects the results of management’s assessment, plans and conclusion of the Company’s ability to continue as a going concern.

 

As of June 30, 2017, the Company has an accumulated deficit of $69.6 million, representative of recurring losses since inception. The Company have incurred recurring losses since inception due to the fact that it is a development stage pharmaceutical company that has no sales since inception since no products have obtained the necessary Federal Drug Administration approval in order to market products. The Company expects to continue to incur losses as a result of costs and expenses related to the Company’s clinical trials and corporate general and administrative expenses.

 

At June 30, 2017, the Company had $4.1 million in cash and had a working capital deficit of $6.1 million. The Company had expended substantial funds on its clinical trials and expects to increase this spending. The Company’s net cash used in operating activities during the year ended June 30, 2017 was approximately $11.7 million, and current projections indicate that the Company will have continued negative cash flows for the foreseeable future. Net losses incurred for the year ended June 30, 2017, 2016 and 2015, amounted to $(15.5) million, $(12.9) million and $(13.1) million, respectively, and working capital (deficits) was approximately $(6.1) million and $(1.9) million, respectively, at June 30, 2017 and 2016. At June 30, 2017, the Company’s cash amounted to $4.1 million and current liabilities amounted to $10.6 million, of which $6.3 million were with related parties with no immediate payment terms.

 

 
F-8
 
Table of Contents

 

Accordingly, the Company’s planned operations for the next 12 months raise doubt about its ability to continue as a going concern. The Company’s plans to alleviate the doubt of its ability to continue as a going concern, which are probable to be effectively implemented and alleviate these conditions, primarily include its ability to control the timing and spending on its research and development programs and raising additional funds through equity financings from its Common Stock Purchase Agreement with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”). The Company also may consider other plans to fund operations including: (1) raising additional capital through debt financings or from other sources; (2) additional funding through new relationships to help fund future clinical trial costs (i.e. licensing and partnerships); (3) reducing spending on one or more research and development programs by discontinuing development; and/or (4) restructuring operations to change its overhead structure. The Company may issue securities, including common stock, preferred stock and stock purchase contracts through private placement transactions or registered public offerings, pursuant to its registration statement on Form S-3 initially filed with the Securities and Exchange Commission (“SEC”) on October 30, 2014. The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of its product candidates and key development and regulatory events and its decisions in the future.

 

The Company believes that the actions discussed above are probable of occurring and alleviating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements.

 

As discussed in Note 15, subsequent to June 30, 2017, the Company entered into a new $30 million common stock purchase agreement with Aspire Capital to replace the prior $30 million Aspire Capital agreement and additional proceeds of approximately $2.1 million was generated from the April 2015 agreement with Aspire Capital from July 1, 2017 to September 1, 2017.

 

3. Significant Accounting Policies and Recent Accounting Pronouncements

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include contract research accruals, recoverability of long-lived assets, measurement of stock-based compensation, and the periods of performance under collaborative research and development agreements. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

 

Cash

 

Cash consist of bank deposits. There were no cash equivalents at June 30, 2017 and 2016.

 

 
F-9
 
Table of Contents

 

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:

 

Equipment

 5 Years

 

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, 2017 and 2016, carrying value of patent was approximately $4,212,000 and $4,311,000, respectively. Amortization expense for the fiscal years ended June 30, 2017, 2016 and 2015, was approximately $372,000, $404,000 and $394,000, respectively.

 

As of June 30, 2017, the Company expensed the costs associated with obtaining patents that have not yet developed products nor which have gained market acceptance and the Company has or will let these patents go abandoned. For the fiscal years ended June 30, 2017, 2016 and 2015, the Company has charged to operations approximately $4,000, $37,000 and $102,000, respectively as patent expenses included in general and administrative expenses.

 

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 fiscal years ended June 30, 2017, 2016 and 2015, the Company has recorded impairment on patent costs of Delparantag and various patents of approximately $0, $648,000 and $0, respectively and included in general and administrative expenses.

 

Financial Instruments

 

The Company’s financial instruments include cash, accounts payable and accrued liabilities. 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.

 

 
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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 fiscal years ended June 30, 2017, 2016 and 2015, the Company incurred approximately $12,783,000, $8,952,000 and $10,531,000 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. Approximately $4 million is subject to credit risk at June 30, 2017. 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.

 

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 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 valuation model. The measurement of stock-based compensation is subject to periodic adjustments as the underlying equity instruments vest.

 

 
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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 2014 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, 2017, 2016 and 2015, because their effect was anti-dilutive (See Note 11 - Weighted Average Shares Outstanding).

 

Treasury Stock

 

The Company accounts for treasury stock using the cost method. There were 262,080 shares of treasury stock purchased at a cost of $220,000 at June 30, 2017 (see Note 13). There were no treasury shares held at June 30, 2016.

 

Treasury stock, representing shares of the Company’s common stock that have been acquired after having been issued, is recorded at its acquisition cost and these shares are no longer considered outstanding.

 

 
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Accounting for Stock Based Compensation

 

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

 

ASC 505-50-30-11 (previously EITF 96-18) further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:

 

 

i.

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

 

ii.

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

 

We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock 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.

 

The components of stock-based compensation related to stock options and restricted stock grants in the Company’s Statement of Operations for the fiscal years ended June 30, 2017, 2016 and 2015 are as follows (rounded to nearest thousand):

 

 

 

June 30,

2017

 

 

June 30,

2016

 

 

June 30,

2015

 

Research and development expenses:

 

 

 

 

 

 

 

 

 

Consulting fees

 

$ 75,000

 

 

$ 188,000

 

 

$ 55,000

 

Employees’ compensation

 

 

139,000

 

 

 

-

 

 

 

103,000

 

Officers’ compensation

 

 

1,147,000

 

 

 

33,000

 

 

 

230,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional expenses

 

 

-

 

 

 

432,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Directors’ fees

 

 

-

 

 

 

60,000

 

 

 

-

 

Employees’ bonus

 

 

-

 

 

 

-

 

 

 

12,000

 

Consulting fees

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

$ 1,361,000

 

 

$ 713,000

 

 

$ 400,000

 

 

Recent Adopted Accounting Pronouncements

 

Going Concern — In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements-Going Concern-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). The ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual periods, and interim periods within those annual periods, starting after December 15, 2016. We have implemented this new accounting standard and updated our liquidity disclosures, as required.

 

 
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Deferred Taxes – During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified on a net basis as non-current in a statement of financial position. Early adoption of this ASU did not have an effect on our deferred tax assets and deferred tax liabilities on our accompanying balance sheets.

 

Debt Issuance Costs - In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. The new standard will more closely align the presentation of debt issuance costs under U.S. generally accepted accounting principles with the presentation under comparable IFRS standards. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. Under current U.S. generally accepted accounting principles, debt issuance costs are reported on the balance sheet as assets and amortized as interest expense. The costs will continue to be amortized to interest expense using the effective interest method. Subsequent to the issuance of ASU 2015-03 the Securities and Exchange Commission staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. This guidance, which clarifies the exclusion of line-of-credit arrangements from the scope of ASU 2015-03, is effective upon adoption of ASU 2015-03. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The implementation of this standard did not have a material impact on the Company’s accompanying financial statements.

 

Stock Compensation - In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which will simplify the income tax consequences, accounting for forfeitures and classification on the Statement of Cash Flows (i) excess tax benefits be classified as cash inflows provided by operating activities, and (ii) cash paid to taxing authorities arising from the withholding of shares from employees be classified as cash outflows used in financing activities. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. This new pronouncement has been adopted on July 1, 2016 and did not have a material effect on the Company’s financial position, results of operations, but had an effect of the classification of cash paid to taxing authorities arising from the withholding of shares from employees (treasury stock), classified as cash outflows used in financing activities.

 

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

 

 
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Standards Issued Not Yet Adopted

 

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

 

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. For finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments in Topic 842 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management has determined that based on current accounting and lease contract information the adoption of ASU No. 2016-02 is not expected to have a significant impact on the Company’s financial position, results of operations and disclosures. However, management is continually evaluating the future impact of ASU No. 2016-02 based on changes in the Company’s financial statements through the period of adoption. 

 

4. Patents, net

 

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

 

 

 

Useful life

 

 

June 30,

2017

 

 

June 30,

2016

 

 

 

 

 

 

 

 

 

 

 

Purchased Patent Rights- Brilacidin, and related compounds

 

14

 

 

$ 4,082,000

 

 

$ 4,082,000

 

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

 

12

 

 

 

144,000

 

 

 

144,000

 

Patents - Kevetrin and related compounds

 

17

 

 

 

1,308,000

 

 

 

1,035,000

 

 

 

 

 

 

 

5,534,000

 

 

 

5,261,000

 

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

 

 

 

 

 

(1,158,000 )

 

 

(855,000 )

Accumulated amortization for Patents-Kevetrin and related compounds

 

 

 

 

 

(164,000 )

 

 

(95,000 )

 Total

 

 

 

 

$ 4,212,000

 

 

$ 4,311,000

 

 

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

 

Amortization expense for the fiscal years ended June 30, 2017, 2016 and 2015, was approximately $372,000, $404,000 and $394,000, respectively. In fiscal year 2016, $134,000 of accumulated amortization on patents was written off related to the impairment of patents.

 

Based on managements’ assessment of certain business factors, it was determined that certain particular patents held by the Company would not be used in the future and were therefore impaired at June 30, 2016. The Company recorded a full impairment of its patent rights to Delparantag and other patents in the latter part of April 2016. Delparantag was acquired by the Company in the purchase of the patent assets from the Polymedix Estate. The Company believes that the Delparantag compound, which had clinical activity but also safety concerns in a prior clinical trial by Polymedix, is now a low priority compound for further development, among the compounds held in the Company’s patent portfolio and will not be placed into future clinical trials. The decision by management was also made after factoring in today’s potential regulatory and litigious climate in commercializing these compounds. During the fourth quarter of its fiscal year ended June 30, 2016, the Company recorded an impairment on the patent costs for Delparantag of approximately $377,000 (the patent cost of $480,000 less $103,000 of accumulated amortization) and recorded an impairment on the patent costs of various patents held (included in the above table under the heading Patents - Kevetrin and related compounds) of approximately $271,000 (the patent cost of $302,000 less $31,000 of accumulated amortization). As a result, a total impairment of $0, $648,000 and $0 was recorded on the accompanying statement of operations for the year ended June 30, 2017, 2016 and 2015, respectively.

 

At June 30, 2017, the future amortization period for all patents was approximately 8.18 years to 17 years. Future estimated annual amortization expenses are approximately $377,000 for each year from 2018 to 2025, $367,000 for the year ending June 30, 2026, $365,000 for the year ending June 30, 2027, $127,000 for the year ending June 30, 2028, $74,000 for the years ending June 30, 2029 through the years ended 2032, $34,000 for the year ending June 30, 2033 and $7,000 for the year ending June 30, 2034.

 

5. Property, plant and equipment, net

 

Property, plant and equipment, net consisted of the following (rounded to nearest thousand):

 

 

 

June 30,

2017

 

 

June 30,

2016

 

 

 

 

 

 

 

 

Testing equipment

 

$ 183,000

 

 

$ 120,000

 

Less: Accumulated depreciation

 

 

(63,000 )

 

 

(30,000 )

 

 

$ 120,000

 

 

$ 90,000

 

 

Depreciation expense for the fiscal years ended June 30, 2017, 2016 and 2015 was approximately $33,000, $16,000 and $10,000, respectively.

 

 
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6. Accrued Expenses – Related Parties and Other

 

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

 

 

 

June 30,

2017

 

 

June 30,

2016

 

 

 

 

 

 

 

 

Accrued research and development consulting fees

 

$ 673,000

 

 

$ 25,000

 

Accrued rent (Note 9) - related parties

 

 

21,000

 

 

 

32,000

 

Accrued interest - related parties

 

 

17,000

 

 

 

40,000

 

 

 

 

 

 

 

 

 

 

Total

 

$ 711,000

 

 

$ 97,000

 

 

7. Accrued Salaries and Payroll Taxes - Related Parties And Other

 

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

 

 

 

June 30,

2017

 

 

June 30,

2016

 

 

 

 

 

 

 

 

Accrued salaries - related parties

 

$ 2,823,000

 

 

$ 2,647,000

 

Accrued payroll taxes - related parties

 

 

130,000

 

 

 

130,000

 

Accrued salaries - employees

 

 

86,000

 

 

 

-

 

Withholding tax

 

 

105,000

 

 

 

57,000

 

 

 

 

 

 

 

 

 

 

Total

 

$ 3,144,000

 

 

$ 2,834,000

 

 

On December 29, 2010, the Company entered into employment agreements with its two executive officers, Leo Ehrlich, the Company’s Chief Executive Officer, and Krishna Menon, Chief Scientific Officer. Both agreements provide for a three year term with each executive receiving an annual base salary of $350,000 per year commencing January 1, 2011, with an annual increase of 10% for each year commencing January 2012. The Board, at its discretion, may increase the base salary based upon relevant circumstances. On January 1, 2014 the Board approved the extension of the employment agreements for a one year period with a 10% increase in salary from the calendar year 2013 annual salary of $423,500, to an annual salary of $465,850. Until new employment agreements are entered into, we will continue paying the officer’s salaries at this rate per annum.

 

As of June 30, 2017, the Company accrued bonus payments to (1) Ms. Jane Harness of approximately $76,000, (2) Ms. Anne Ponugoti of approximately $10,000, and (3) a deferred bonus payment to Dr. Bertolino, in accordance with his employment agreement target bonus amount of 40% of his base salary of $440,000. These bonus payments were approved by Compensation Committee of the Board on August 31, 2017.

 

 
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8. Commitments and Contingencies

 

Lease Commitments

 

Operating Leases – Rental Property

 

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

 

As of June 30, 2017, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):

 

Year ending June 30,

 

 

 

2018

 

$ 217,000

 

2019

 

 

54,000

 

Total minimum payments

 

$ 271,000

 

 

Rent expense, net of lease income, under this operating lease agreement was approximately $205,000, $203,000 and $207,000 for the years ended June 30, 2017, 2016 and 2015, respectively. Before September, 2013, the Company paid rent to KARD for share of office space and details are shown at Note 9. Related Party Transactions.

 

Operating Leases - Equipment

 

We lease equipment under a non-cancelable operating lease that expires in April, 2018. The future minimum rental commitment for our operating lease for the next 12 months is $34,000, as of June 30, 2017.

 

Contractual Commitments

 

The Company has total contractual minimum commitments of approximately $6 million to Contract Research Organizations as of June 30, 2017. Expenses are recognized when services are performed by the Contract Research Organizations.

 

Employment Agreement

 

On June 27, 2016, the Company and Dr. Bertolino entered into an executive employment agreement as the President and Chief Medical Officer of the Company, effective on June 27, 2016 (See Note 12).

 

Litigation

 

A complaint entitled O’Connell v. Cellceutix Corp. et al. (No. 1:15-cv-07194) was filed in the United States District Court for the Southern District of New York in September 2015 against the Company and its officers alleging that the defendants made materially false and misleading statements, and omitted materially adverse facts, about the Company’s business, operations and prospects. On June 9, 2016, the U.S. District Court for the Southern District of New York granted the Company’s motion to dismiss the lawsuit. The ruling dismissed all claims against Cellceutix, denied the plaintiff’s request to file an amended complaint, and ordered that the case be closed. The action was subject to a potential appeal which was withdrawn on September 2, 2016.

 

 
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9. Related Party Transactions

 

Office Lease

 

Dr. Menon, the Company’s principal shareholder, President of Research, and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007, the Company began renting office space from KARD, and since September 1, 2013, the Company no longer leases space from Kard. At June 30, 2017 and June 30, 2016, rent payable to KARD of approximately $21,000 and $32,000, respectively, were included in accrued expenses.

 

In September 2013, the Company signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $18,000. The Company had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., (“Innovative Medical”) a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of the Company, has co-signed the lease and rents approximately 200 square feet of office space, the space previously used by the Company and pays the Company $900 per month, the same amount the Company previously paid KARD. Innovative Medical paid rent of $11,000 for the years ended June 30, 2017 and 2016 and 2015. The rental payment was offset with the accrued rent owed to KARD.

 

Clinical Studies

 

The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company now has its own research study capabilities and no longer uses KARD. At June 30, 2017 and June 30, 2016, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable.

 

Other related party transactions are disclosed in Note 10 below.

 

10Convertible Note Payable - Related Party

 

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

 

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

 

At June 30, 2017 and June 30, 2016, approximately $17,000 and $40,000, respectively, is the accrued interest payable on this note.

 

At June 30, 2017 and June 30, 2016, principal balance of this demand note was approximately $2,022,000.

 

 
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11. Weighted Average Shares Outstanding

 

Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:

 

 

 

Years Ended June 30,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding-basic

 

 

127,285,861

 

 

 

119,908,145

 

 

 

115,087,368

 

Dilutive options and restricted stock

 

 

-

 

 

 

-

 

 

 

-

 

Weighted average shares outstanding-diluted

 

 

127,285,861

 

 

 

119,908,145

 

 

 

115,087,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive securities not included:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and convertible note shares

 

 

44,733,477

 

 

 

44,570,736

 

 

 

42,953,318

 

Restricted stock grants

 

 

601,728

 

 

 

1,066,667

 

 

 

-

 

Warrants

 

 

-

 

 

 

25,000

 

 

 

1,507,000

 

 Total

 

 

45,335,205

 

 

 

44,662,433

 

 

 

44,460,318

 

 

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

 

Equity Incentive Plans

 

2009 Stock Option Plan

 

On April 5, 2009 the Board of Directors of the Company adopted the 2009 Stock Option Plan (“the 2009 Plan”). The 2009 Plan permits the grant of 2,000,000 shares of both Incentive Stock Options (“ISOs”), intended to qualify under section 422 of the Code, and Non-Qualified Stock Options.

 

2010 Equity Incentive Plan

 

Under the 2010 Equity Incentive Plan (the “2010 Plan”) adopted by the Board of Directors in December 2010, the total number of shares of Class A or Class B common stock reserved and available for issuance under the 2010 Plan is 45,000,000 shares. Shares of common stock under the 2010 Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. The term of each stock option shall be fixed as provided, however, an ISO may be granted only within the ten-year period commencing from the effective date of the 2010 Plan and may only be exercised within ten years of the date of grant (or five years in the case of an ISO granted to an optionee who, at the time of grant, owns common stock possessing more than 10% of the total combined voting power of all classes of voting stock of the Company).

 

2016 Equity Incentive Plan

 

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

 

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

 

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

 

Stock Options Issued and Outstanding

 

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

 

 

 

 Number of Options

 

 

 Weighted Average Exercise Price

 

 

 Weighted Average Remaining Contractual Life (Years)

 

 

 Aggregate

Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2014

 

 

39,007,500

 

 

$ 0.14

 

 

 

6.50

 

 

$ 59,613,000

 

Granted

 

 

155,000

 

 

 

3.75

 

 

 

 

 

 

 

 

 

Exercised

 

 

(320,000 )

 

 

0.35

 

 

 

 

 

 

 

 

 

Forfeited/expired

 

 

(80,000 )

 

 

0.38

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2015

 

 

38,762,500

 

 

$ 0.15

 

 

 

5.54

 

 

$ 94,217,650

 

Granted

 

 

1,871,258

 

 

 

1.58

 

 

 

 

 

 

 

 

 

Exercised

 

 

(74,000 )

 

 

0.55

 

 

 

 

 

 

 

 

 

Forfeited/expired

 

 

(115,000 )

 

 

0.61

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2016

 

 

40,444,758

 

 

 

0.22

 

 

 

4.58

 

 

$ 48,185,911

 

Granted

 

 

398,749

 

 

 

1.29

 

 

 

9.09

 

 

 

 

 

Exercised

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Forfeited/expired

 

 

(188,262 )

 

 

1.26

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2017

 

 

40,655,245

 

 

 

0.22

 

 

 

3.61

 

 

$ 31,662,730

 

Exercisable at June 30, 2017

 

 

40,143,339

 

 

$ 0.21

 

 

 

3.54

 

 

$ 31,660,700

 

 

The fair value of options granted for the years ended June 30, 2017, 2016 and 2015 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.

 

 

 

Year Ended June 30

 

 

 

2017

 

2016

 

2015

 

Expected term (in years)

 

3 - 10

 

3 - 10

 

3

 

Expected stock price volatility

 

57.63% to 111.62%

 

56.52% to 112.71%

 

62.79% to 65.84%

 

Risk-free interest rate

 

0.71% to 2.49%

 

0.88% to 1.74%

 

0.76% to 1.19%

 

Expected dividend yield

 

0

 

0

 

0

 

 

Stock-Based Compensation

 

The Company recognized approximately $1,361,000, $713,000 and $400,000 of total stock-based compensation expense for the years ended June 30, 2017, 2016 and 2015 respectively. The $1,361,000 of stock- based compensation expense for the year ended June 30, 2017 included approximately $533,000 of stock options expense and $828,000 of stock awards (see Note 13).

 

For the fiscal year ended June 30, 2017

 

On July 18, 2016, the Company issued 7,500 stock options to purchase shares of the Company’s common stock to a consultant for services rendered, exercisable for 3 years at $1.38 per share of common stock. The value of these 7,500 options was approximately $4,000. During the year ended June 30, 2017, the Company recorded approximately $4,000 of stock option expense for this option grant.

 

 
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On September 1, 2016, the Company and Jane Harness entered into an executive employment agreement as the Company’s VP, Clinical Sciences and Portfolio Management, effective on September 1, 2016. Commencing on September 1, 2016, the Company agreed to pay Ms. Harness an annual salary of $250,000. In addition, the Company agreed to grant to Ms. Harness, under the 2016 Plan (i) 58,394 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 172,987 shares of the Company’s common stock were also granted at an exercise price of $1.37 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 58,394 shares were valued at approximately $80,000, which will be amortized over three years to September 1, 2019. The 172,987 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 1, 2019. During the year ended June 30, 2017, the Company recorded approximately $83,000 of stock-based compensation expense for these equity grants, including approximately $61,000 of stock option expense and $22,000 for the stock awards.

 

On September 15, 2016, the Company and LaVonne Lang entered into an employment agreement as the Company’s VP, Regulatory Affairs, effective on September 15, 2016. Commencing on September 15, 2016, the Company agreed to pay Dr. Lang an annual salary of $250,000. In addition, the Company agreed to grant to Dr. Lang under the 2016 Plan (i) 63,492 shares of restricted stock, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, one third (33 1/3 %) upon the second anniversary of the effective date, and the remaining one third (33 1/3 %) upon the third anniversary of the effective date; or (2) upon a Change in Control (as defined in the employment agreement) of the Company. Ten-year options to purchase 188,262 shares of the Company’s common stock were also granted at an exercise price of $1.26 per share, which shall vest upon the earliest to occur of the following: (1) one third (33 1/3 %) upon the first anniversary of the effective date, and the remaining balance vesting monthly in equal portions over the following 24 months; and (2) upon a Change in Control (as defined in the employment agreement) of the Company. The 63,492 shares were valued at approximately $80,000, which will be amortized over three years to September 15, 2019. The 188,262 stock options were valued at approximately $220,000 and will be exercisable for 10 years at an exercise price of $1.26 per share. They will be amortized over 3 years to September 15, 2019. During the year ended June 30, 2017, the Company recorded approximately $50,000 of stock-based compensation expense for these equity grants, including approximately $37,000 of stock option expense and $13,000 for the stock awards. Dr. Lang resigned on March 17, 2017 and the 63,492 restricted shares and the 188,262 stock options were forfeited.

 

On January 9, 2017, the Company and Anne Ponugoti entered into an employment agreement as the Company’s Associate Director, Clinical Sciences, effective on February 1, 2017. Pursuant to the employment agreement, the Company issued 10,000 shares of restricted stock and options to purchase 30,000 shares of common stock under the 2016 Plan. During the year ended June 30, 2017, the Company recorded approximately $6,000 of stock-based compensation expense for these equity grants, including approximately $4,000 of stock option expense and $2,000 for the stock awards.

 

For the fiscal year ended June 30, 2016

 

On July 10, 2015, the Company issued 7,028 shares and 50,000 stock options to purchase shares of the Company’s common stock to a consultant for services rendered. The stock options were valued at approximately $60,000, based on the closing bid price as quoted on the OTC on July 10, 2015 at $2.64 per share. These options were issued with an exercise price of $2.49 and vested immediately, with a three year option term. These options have piggyback registration rights. During the year ended June 30, 2016, the Company recorded approximately $60,000 of stock option expense for this equity grant.

 

 
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On September 30, 2015, the Company recorded approximately $20,000 of stock option expense regarding the 50,000 stock options to purchase shares of the Company’s common stock at $2.93 per share to Dr. William James Alexander.

 

On November 5, 2015, the Company issued one million stock options to purchase shares of the CompanyR