Innovation Pharmaceuticals Inc. - Quarter Report: 2019 March (Form 10-Q)

ipix_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2019

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

For the transition period from ____________to _____________

Commission File Number: 001-37357

INNOVATION PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

Nevada		30-0565645
(State or other jurisdiction of		(I.R.S. Empl. Ident. No.)
incorporation or organization)

100 Cummings Center, Suite 151-B

Beverly, MA 01915

(Address of principal executive offices, Zip Code)

(978) 921-4125

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “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	x
		Emerging growth company	¨

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

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

Securities registered under Section 12(b) of the Exchange Act: none

The number of shares outstanding of each of the issuer’s classes of common equity, as of April 30, 2019 is as follows:

Class of Securities		Shares Outstanding
Common Stock Class A, $0.0001 par value		192,132,420
Common Stock Class B, $0.0001 par value		909,090

INNOVATION PHARMACEUTICALS INC.

FORM 10-Q

For the Quarter Ended March 31, 2019

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018 (unaudited)	4
	Condensed Consolidated Statements of Operations for the three months and nine months ended March 31, 2019 and 2018 (unaudited)	5
	Condensed Consolidated Statements of Stockholders’ Equity (Deficiency) for the nine months ended March 31, 2019 and 2018 (unaudited)	6-7
	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2019 and 2018 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38

SIGNATURES		39

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; statements relating to potential licensing, partnering or similar arrangements concerning our drug compounds; the potential for the results of ongoing preclinical or clinical trials; other statements regarding our future product development and regulatory strategies, including with respect to specific indications; any statements regarding our future financial performance, results of operations or sufficiency of capital resources to fund our operating requirements; and any other statements which are other than statements of historical fact. Forward-looking statements involve risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by forward-looking statements. These factors include, but are not limited to, our ability to continue as a going concern and our capital needs; our ability to continue to fund and successfully progress internal research and development efforts and to create effective, commercially-viable drugs; our ability to effectively and timely conduct clinical trials; and our ability to ultimately distribute our drug candidates; compliance with regulatory requirements, as well as other factors described elsewhere in this report and our other reports filed with the Securities and Exchange Commission (the “SEC”). Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

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

For further information about these and other risks, uncertainties and factors, please review the disclosure included in our Annual Report on Form 10-K under “Part I, Item 1A, Risk Factors” and in this report under “Part II, Item 1A, Risk Factors.”

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Rounded to nearest thousand except for shares data)

	March 31,			June 30,
	2019			2018
ASSETS
Current Assets:
Cash	$	468,000		$	2,424,000
Prepaid expenses and other current assets		55,000			98,000
Security deposits		-			78,000
Total Current Assets		523,000			2,600,000
Other Assets:
Patents – net		3,406,000			3,780,000
Equipment – net		1,000			2,000
Deferred offering costs - net		-			159,000
Security deposits		78,000			-
Total Other Assets		3,485,000			3,941,000
Total Assets	$	4,008,000		$	6,541,000

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable - (including related party payables of approximately $1,498,000 and 1,504,000, respectively)	$	2,255,000		$	3,185,000
Accrued expenses - (including related party accruals of approximately $74,000 and $58,000, respectively)		241,000			266,000
Accrued salaries and payroll taxes - (including related party accrued salaries of approximately $3,129,000 and $2,953,000, respectively)		3,174,000			3,219,000
Convertible note payable - related party		1,922,000			2,022,000
Total Current Liabilities		7,592,000			8,692,000
Other Liabilities:
Series B convertible preferred stock liability at $1,080 stated value; 1,027 and 0 shares issued and outstanding at March 31, 2019 and June 30, 2018, respectively		701,000			-
Total Liabilities		8,293,000			8,692,000
Commitments and contingencies (Note 7)
Stockholders’ Deficiency
Preferred stock, $0.001 par value, 10,000,000 designated shares, no shares issued and outstanding		-			-
Common Stock - Class A, $0.0001 par value, 300,000,000 shares authorized, 187,803,536 shares and 163,103,927 shares issued as of March 31, 2019 and June 30, 2018, respectively, 187,575,318 shares and 163,103,927 shares outstanding as of March 31, 2019 and June 30, 2018, respectively		19,000			17,000
Common Stock - Class B, (10 votes per share); $0.0001 par value, 100,000,000 shares authorized, 909,090 shares and 0 shares issued and outstanding as of March 31, 2019 and June 30, 2018		-			-
Additional paid-in capital		88,868,000			83,747,000
Accumulated deficit		(93,081,000	)		(85,915,000	)
Treasury Stock, at cost (228,218 shares and 0 shares as of March 31, 2019 and June 30, 2018, respectively)		(91,000	)		-
Total Stockholders’ Deficiency		(4,285,000	)		(2,151,000	)
Total Liabilities and Stockholders’ Deficiency	$	4,008,000		$	6,541,000

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

Table of Contents

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

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

	For the Three Months Ended						For the Nine Months Ended
	March 31,						March 31,
	2019			2018			2019			2018

Revenues	$	-		$	-		$	-		$	-

Operating expenses:
Research and development expenses		707,000			1,776,000			3,463,000			9,544,000
General and administrative expenses		250,000			295,000			942,000			889,000
Officers' payroll and payroll tax expenses		126,000			132,000			367,000			392,000
Professional fees		45,000			195,000			349,000			525,000

Total operating expenses		1,128,000			2,398,000			5,121,000			11,350,000

Loss from operations		(1,128,000	)		(2,398,000	)		(5,121,000	)		(11,350,000	)

Other income (expense)
Interest income		-			-			-			1,000
Other income		-			-			40,000			-
Interest expense
Interest expense – debt		(44,000	)		(51,000	)		(145,000	)		(152,000	)
Interest expense – preferred stock liability		(15,000	)		-			(1,990,000	)		-
Change in fair value of preferred stock		50,000			-			50,000			-
Other expense, net		(9,000	)		(51,000	)		(2,045,000	)		(151,000	)

Loss before provision for income taxes		(1,137,000	)		(2,449,000	)		(7,166,000	)		(11,501,000	)
Provision for income taxes		-			-			-			-

Net loss	$	(1,137,000	)	$	(2,449,000	)	$	(7,166,000	)	$	(11,501,000	)

Basic and diluted loss per share
attributable to common stockholders	$	(0.01	)	$	(0.02	)	$	(0.04	)	$	(0.08	)

Weighted average number of common shares		182,556,203			146,071,627			172,051,124			141,296,395

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

Table of Contents

INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)

FOR THE NINE MONTHS ENDED MARCH 31, 2019

(Unaudited)

(Rounded to nearest thousand, except for shares data)

For the Nine Months Ended March 31, 2018

	Common Stock A					Common Stock B				Additional						Treasury Stock
				Par Value				Par Value		Paid-in			Accumulated
	Shares			$0.0001		Shares		$0.0001		Capital			Deficit			Shares			Amount			Total
Balance at June 30, 2017		135,274,421		$	14,000	-			-	$	68,295,000		$	(69,553,000	)		262,080		$	(220,000	)	$	(1,464,000	)

Shares sold to Aspire under 2015 Agreement at $0.74 - $0.94 range		2,600,000			-		-		-		2,089,000			-			-			-			2,089,000
Shares sold to Aspire under 2017 Agreement at $0.25 - $0.76 range		600,000			-		-		-		419,000			-			-			-			419,000
Shares issued as commitment fee, 9/6/2017 at $0.715		300,000			-		-		-		215,000			-			-			-			215,000
Offering cost		--			-		-		-		(230,000	)		-			-			-			(230,000	)
Shares issued to officer as equity awards at $0.705 - 1.40		-			-		-		-		219,000			-			-			-			219,000
Shares issued to employee for services at $0.705 - $1.37		-			-		-		-		9,000			-			-			-			9,000
Stock options issued to officer as equity awards at $1.39		-			-		-		-		118,000			-			-			-			118,000
Stock options issued to employee for services at $0.705-$1.37		-			-		-		-		23,000			-			-			-			23,000
Issuance of vested shares to Officer and employees		19,465			-		-		-		-			-			-			-			-
Withholding and Purchase of 67,056 treasury shares from vested shares issued – at cost		(67,056	)		-		-		-		-			-			67,056			(31,000	)		(31,000	)
Net loss for the three months ended September 30, 2017		-			-		-		-		-			(4,534,000	)		-			-			(4,534,000	)
Balance at September 30, 2017		138,726,830		$	14,000		-		-	$	71,157,000		$	(74,087,000	)		329,136		$	(251,000	)	$	(3,167,000	)

Shares sold to Aspire under 2017 Agreement at $0.25 - $0.76 range		5,966,666			1,000		-		-		3,969,000			-			-			-			3,970,000
Offering cost		--			-		-		-		(28,000	)		-			-			-			(28,000	)
Shares issued to officer as equity awards at $0.705 - 1.40		-			-		-		-		644,000			-			-			-			644,000
Shares issued to employee for services at $0.705 - $1.37		-			-		-		-		11,000			-			-			-			11,000
Stock options issued to officer as equity awards at $1.39		-			-		-		-		345,000			-			-			-			345,000
Stock options issued to employee for services at $0.705-$1.37		-			-		-		-		30,000			-			-			-			30,000
Issuance of vested shares to Officer and employees		533,334			-		-		-		-			-			-			-			-
Withholding and Purchase of 238,048 treasury shares from vested shares issued – at cost		(238,048	)		-		-		-		-			-			238,048			(166,000	)		(166,000	)
Net loss for the three months ended December 31, 2017		-			-		-		-		-			(4,518,000	)		-			-			(4,518,000	)
Balance at December 31, 2017		144,988,782		$	15,000		-		-	$	76,128,000		$	(78,605,000	)		567,184		$	(417,000	)	$	(2,879,000	)
							-		-
Shares sold to Aspire under 2017 Agreement at $0.25 - $0.76 range		2,100,000			-		-		-		1,359,000			-			-			-			1,359,000
Offering cost		-			-		-		-		(10,000	)		-			-			-			(10,000	)
Shares issued to officer as equity awards at $0.705 - 1.40		-			-		-		-		94,000			-			-			-			94,000
Shares issued to employee for services at $0.705 - $1.37		-			-		-		-		12,000			-			-			-			12,000
Stock options issued to officer as equity awards at $1.39		-			-		-		-		49,000			-			-			-			49,000
Stock options issued to employee for services at $0.705-$1.37		-			-		-		-		29,000			-			-			-			29,000
Stock options issued to consultant for services at $0.15 - 0.73		-			-		-		-		80,000			-			-			-			80,000
Issuance of vested shares to Officer and employees		3,333			-		-		-		-			-			-			-			-
Purchase of 305,792 Treasury shares		(688	)		-		-		-		-			-			688			-			-
Withholding and Purchase of 305,792 treasury shares from vested shares issued – at cost		-			-		-		-		(417,000	)		-			(567,872	)		417,000			-
Net loss for the three months ended March 31, 2018		-			-		-		-		-			(2,449,000	)		-			-			(2,449,000	)
Balance at March 31, 2018		147,091,427		$	15,000		-		-	$	77,324,000		$	(81,054,000	)		-		$	-		$	(3,715,000	)

Table of Contents

For the Nine Months Ended March 31, 2019

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

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

Shares issued to consultant for services at $0.84 - $1.38		-			-		-		-		2,000			-			-		-			2,000
Shares issued to officer as equity awards at $0.398 to $0.705		-			-		-		-		148,000			-			-		-			148,000
Stock options issued to consultant for services at $0.43 - $0.73		-			-		-		-		10,000			-			-		-			10,000
Stock options issued to officer as equity awards at $0.398 to $0.705		-			-		-		-		78,000			-			-		-			78,000
Issuance of 533,334 shares to Officer & 218,946 shares were withheld for tax purposes as Treasury shares, so net issuance was 314,387 shares		(218,946	)		-		-		-		-			-			218,946		(87,000	)		(87,000	)
Issuance of 38,930 shares to employee, 9,272 shares were withheld for tax purposes as Treasury shares, so net issuance was 29,658 shares		(9,272	)		-		-		-		-			-			9,272		(4,000	)		(4,000	)
Issuance of 12,500 shares to Consultant		12,500			-		-		-		-			-			-		-			-
Conversion of 1,310 preferred stocks to 12,808,388 common stock		12,808,388			1,000		-		-		(1,000	)		-			-		-			-
Offering cost for Q2-2019											(159,000	)										(159,000	)
To record underlying Series 1, Series 2 and Series 3 Warrants attached to 2000 shares Series B Preferred Stock		-			-		-		-		817,000			-			-		-			817,000
To record beneficial conversion feature of Series B preferred stock & warrants discounts		-			-		-		-		1,917,000			-			-		-			1,917,000
Transfer of the related preferred stock liability to APIC		-			-		-		-		963,000			-			-		-			963,000
Allocating warrants (proportion of value exercised) to Pref Stock Liability		-			-		-		-		(20,000	)		-			-		-			(20,000	)
Shares issued to employee for services at $0.398 - $1.37		-			-		-		-		15,000			-			-		-			15,000
Stock options issued to employee for services at $0.398 - $1.37		-			-		-		-		34,000			-			-		-			34,000
Net loss for the three months ended 12/31/2018		-			-		-		-					(3,979,000	)		-		-			(3,979,000	)
Balance at December 31, 2018		176,268,861		$	18,000		-	$	-	$	87,780,000		$	(91,944,000	)		228,218	$	(91,000	)	$	(4,237,000	)

Shares issued to consultant for services at $0.84 - $1.38		-			-		-		-		2,000			-			-		-			2,000
Shares issued to officer as equity awards at $0.398 to $0.705		-			-		-		-		145,000			-			-		-			145,000
Stock options issued to consultant for services at $0.43 - $0.73		-			-		-		-		17,000			-			-		-			17,000
Stock options issued to officer as equity awards at $0.398 to $0.705		-			-		-		-		77,000			-			-		-			77,000
Shares issued to employee for services at $0.398 - $1.37		-			-		-		-		12,000			-			-		-			12,000
Stock options issued to employee for services at $0.398 - $1.37		-			-		-		-		33,000			-			-		-			33,000
Cancellation of debt for the purchase of 909,090 shares of Common Stock Class B		-			-		909,090				100,000			-			-		-			100,000
5% dividend paid by issuance of preferred stock		-			-		-		-		17,000			-			-		-			17,000
Conversion of 954 preferred stocks to 11,306,457 common stock		11,306,457			1,000		-		-		(1,000	)		-			-		-			-
Transfer of the related preferred stock liability to APIC		-			-		-		-		735,000			-			-		-			735,000
Allocating warrants (proportion of value exercised) to Pref Stock Liability		-			-		-		-		(45,000	)		-			-		-			(45,000	)
Reversal of the stock based compensation related to unvested options and shares		-			-		-		-		(4,000	)		-			-		-			(4,000	)
Net loss for the three months ended 3/31/2019		-			-		-		-		-			(1,137,000	)		-		-			(1,137,000	)

Balance at March 31, 2019		187,575,318		$	19,000		909,090	$	-	$	88,868,000		$	(93,081,000	)		228,218	$	(91,000	)	$	(4,285,000	)

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

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INNOVATION PHARMACEUTICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

(Rounded to nearest thousand)

	For the Nine Months
	Ended March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(7,166,000	)	$	(11,501,000	)
*Adjustments to reconcile net loss to* *net cash used in operating activities:*
Common stock and stock options issued as employee compensation
and payment for services rendered and financing costs		798,000			1,665,000
Amortization of patent costs		277,000			289,000
Patent write off		155,000			-
Depreciation of equipment		1,000			28,000
(Gain) Loss on disposal of equipment		(40,000	)		-
Interest expense-preferred stock liability		1,990,000			-
Change in fair value of preferred stock		(50,000	)		-

*Changes in operating assets and liabilities:*
Prepaid expenses and security deposits		43,000			268,000
Accounts payable		(930,000	)		(578,000	)
Accrued expenses		(25,000	)		(406,000	)
Accrued officers' salaries and payroll taxes		(45,000	)		(127,000	)
Net cash used in operating activities		(4,992,000	)		(10,362,000	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Sales proceeds of property, plant and equipment		40,000			-
Patent costs		(58,000	)		(108,000	)
Net cash used in investing activities		(18,000	)		(108,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, net of offering costs		-			7,837,000
Purchase of treasury stock		(91,000	)		(172,000	)
Proceeds from issuance of preferred stock, net of offering costs		1,892,000			-
Proceeds from exercise of warrants		1,253,000			-
Net cash provided by financing activities		3,054,000			7,665,000

NET DECREASE IN CASH		(1,956,000	)		(2,805,000	)
CASH, BEGINNING OF PERIOD		2,424,000			4,141,000
CASH, END OF PERIOD	$	468,000		$	1,336,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid of income taxes	$	-			-
Cash paid for interest	$	128,000		$	156,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Commitment shares issued as deferred offering costs	$	-		$	215,000
Reversal of subscription receivable to treasury stock	$	-		$	26,000
Amortization of offering costs to additional paid in capital	$	(159,000	)	$	(268,000	)
Recording beneficial conversion feature of Series B preferred stock & warrants discounts	$	1,917,000		$	-
Recording 5% dividend of preferred stock paid by issuance of preferred stock	$	17,000		$	-
Transfer of preferred stock liability to additional paid in capital regarding conversion of Series B Convertible Preferred stock to Common stock	$	1,698,000		$	-
Cancellation of debt for the purchase of 909,090 shares of Common Stock Class B	$	100,000		$	-

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

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INNOVATION PHARMACEUTICALS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

(Unaudited)

Note 1. Basis of Presentation and Nature of Operations

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements of Innovation Pharmaceuticals Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2018, included in our Annual Report on Form 10-K for the year ended June 30, 2018.

In the opinion of the management of Innovation Pharmaceuticals Inc., all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month and nine-month periods have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms “Company,” “we,” “us” or “our” mean Innovation Pharmaceuticals Inc.

Basis of Presentation

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

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

Basis of Consolidation

These condensed consolidated financial statements include the accounts of Innovation, a Nevada corporation, and our wholly-owned subsidiaries, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. Translation gains and losses for the nine months ended March 31, 2019 and 2018 were not significant.

Nature of Operations - Overview

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

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.

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Note 2. Going Concern and Liquidity

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

We have incurred recurring losses since inception and expect to continue to incur losses as a result of costs and expenses related to our research and continued development of our compounds and our corporate general and administrative expenses. As of March 31, 2019, the Company has an accumulated deficit of approximately $93.0 million, representative of recurring losses since inception. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) and/ or other health authorities approval. As a result, the Company expects to continue to incur losses over the next 12 months from the date of this filing. Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $12.5 million for the next twelve months, raise substantial doubt about its ability to continue as a going concern.

At March 31, 2019, the Company’s cash amounted to $0.5 million and current liabilities amounted to $7.6 million, of which $6.7 million were payables to related parties with no immediate payment terms (See Note 8 - Related Party Transactions). The Company had expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. The Company’s net cash used in operating activities for the nine months ended March 31, 2019 was approximately $5.0 million, and current projections indicate that the Company will have continued negative cash flows from operating activities for the foreseeable future. Our net losses incurred for the nine months ended March 31, 2019 and 2018, amounted to $7.2 million and $11.5 million, respectively, and we had a working capital deficit of approximately $7.1 million and $6.1 million, respectively at March 31, 2019 and June 30, 2018.

The Company's primary sources of liquidity are cash and cash equivalents as well as issuances of its equity securities. The Company is party to a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) that provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company's common stock over the 36-month term of the Purchase Agreement. As of March 31, 2019, the available balance under the Purchase Agreement is approximately $22.3 million. However, as of the date of this report, the conditions for sales under the Purchase Agreement are not satisfied and no sales may occur thereunder. In particular, the Purchase Agreement provides that the Company and Aspire Capital will not affect any sales under the Purchase Agreement when the closing sales price of the Company’s common stock is less than $0.25 per share. Recently, the Company’s common stock has traded below $0.25 per share, and there is substantial uncertainty regarding the Company’s continued ability to sell shares under the Purchase Agreement in order to meet the Company's projected working capital requirements for the next 12 months from the date of the issuance of the financial statements (or available to be issued).

On October 5, 2018, the Company entered into a securities purchase agreement with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock for aggregate gross proceeds of approximately $2.0 million. Under this securities purchase agreement, the Company issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock. The Company received the proceeds from exercise of 1,275 Series 1-2 warrants of approximately $1.3 million from October 2018 to March 31, 2019. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds will be available when needed.

The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships) and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available. The Company will be unable to proceed with its planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without additional financing from Aspire Capital, the multi-family office or another source of capital. These financial statements do not include any adjustments related to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern.

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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, valuation of equity grants and income tax valuation. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Basic Loss per Share

Basic and diluted loss per share is computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of warrants, stock options, convertible notes payable underlying shares, unvested restricted stock and Series B Convertible Preferred Stock at a conversion price at approximately $0.10 per share. Common share equivalents of 66 million shares and 47 million shares of common stock were excluded from the computation of diluted loss per share for the three and nine months ended March 31, 2019 and 2018, because we incurred net losses for the nine months ended March 31, 2019 and 2018, and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive and are therefore not included in the calculations.

Treasury Stock

The Company accounts for treasury stock using the cost method. There were 228,218 shares and 0 shares of treasury stock outstanding, purchased at a total cumulative cost of $91,000 and $0, at March 31, 2019 and 2018, respectively (see Note 11 to the notes to the condensed consolidated financial statements).

Treasury stock, representing shares of the Company’s common stock that have been acquired for payroll tax withholding on vested stock grants, is recorded at its acquisition cost and these shares are not considered outstanding.

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 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.

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

	Three months ended March 31				Nine months ended March 31
	2019		2018		2019		2018
Stock-based compensation expense
Professional fees	$	19,000	$	80,000	$	44,000	$	80,000
Employees’ bonus		41,000		41,000		134,000		115,000
Officers’ bonus		222,000		144,000		620,000		1,470,000
Total stock-based compensation expense	$	282,000	$	265,000	$	798,000	$	1,665,000

Fair Value of Financial Instruments and Fair Value Measurements

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

Recently Adopted Accounting Pronouncements

In July 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, 2018, did not have any impact on the financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. This new pronouncement has been adopted in the fourth quarter of fiscal 2018 and did not have a material effect on the Company’s financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a five-step, principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until 2019. In addition, the FASB is allowing companies to early adopt this guidance for non-public entities beginning in fiscal year 2017. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. This new pronouncement has been adopted in the first quarter of fiscal 2019 and did not have a material effect on the Company’s financial position, results of operations or cash flows.

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In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the new standard effective July 1, 2018. The application of this standard did not have a material impact on the Company’s unaudited condensed statements of cash flows.

Recently Issued Accounting Guidance

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The adoption of ASU 2018-07 will not have a material impact on the financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using the modified retrospective approach. The Company will adopt this new pronouncement beginning July 1, 2019. Interpretations are on-going and could have a material impact on the Company's implementation. Currently, the Company expects that the adoption of the ASU 2016-02 (Topic 842) Leases will have a material impact on its consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases, and expects it to have a material impact on our results of operations.

4. Patents, net

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

	Useful life	March 31, 2019			June 30, 2018

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		1,090,000			1,219,000
			5,316,000			5,445,000
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds			(1,690,000	)		(1,462,000	)
Accumulated amortization for Patents-Kevetrin and related compounds			(220,000	)		(203,000	)
Total		$	3,406,000		$	3,780,000

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

Amortization expense for the three months ended March 31, 2019 and 2018 was approximately $92,000 and $96,000, respectively and was approximately $277,000, and $289,000 for the nine months ended March 31, 2019 and 2018, respectively.

During the nine months ended March 31, 2019 and 2018, the Company has written off the Prurisol patent and other patents of approximately $155,000 and $0, respectively, and included in general and administrative expenses.

At March 31, 2019, the future amortization period for all patents was approximately 6.43 years to 15.87 years. Future estimated annual amortization expenses are approximately $92,000 for the year ending June 30, 2019, $366,000 for each year from 2020 to 2022, and total of $2,216,000 for the year ending June 30, 2023 and thereafter.

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5. Accrued Expenses – Related Parties and Other

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

	March 31, 2019		June 30, 2018

Accrued research and development consulting fees	$	167,000	$	208,000
Accrued rent (Note 8) - related parties		8,000		10,000
Accrued interest (Note 9) - related parties		66,000		48,000

Total	$	241,000	$	266,000

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

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

	March 31, 2019		June 30, 2018

Accrued salaries - related parties	$	2,999,000	$	2,823,000
Accrued payroll taxes - related parties		130,000		130,000
Accrued employee bonuses		-		214,000
Withholding tax - payroll		45,000		52,000

Total	$	3,174,000	$	3,219,000

7. Commitments and Contingencies

Lease Commitments

Operating Leases – Rental Property

On October 1, 2018, the Company’s lease agreement with Cummings Properties automatically renewed. The lease is for a term of five years ending on September 30, 2023, and requires monthly payments of approximately $19,000.

As of March 31, 2019, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):

Year ending June 30,
2019	$	57,000
2020		228,000
2021		228,000
2022		228,000
2023		228,000
Thereafter		57,000
Total	$	1,026,000

Rent expense, net of lease income, under this operating lease agreement was approximately $58,000 and $53,000 for the three months ended March 31, 2019 and 2018, respectively and was approximately $168,000 and $157,000 for the nine months ended March 31, 2019 and 2018, respectively. As of September 1, 2018, Kard Scientific no longer leases space from the Company (See Note 8 to the notes to the condensed consolidated financial statements).

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Contractual Commitments

The Company has total non-cancelable contractual minimum commitments of approximately $1.8 million to contract research organizations as of March 31, 2019. Expenses are recognized when services are performed by the contract research organizations.

8. Related Party Transactions

Office Lease

The Company charged Kard Scientific (“KARD”) $1,800 for space for the two months of July and August, 2018. Dr. Menon, the Company’s principal shareholder, and former President of Research, also serves as the Chief Operating Officer and Director of Kard Scientific. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon resigned from the Company’s Board of Directors on December 11, 2018. As of September 1, 2018, KARD no longer leases space from the Company.

Pre-clinical Studies

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

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

9. Convertible Note Payable - Related Party

During the year ended June 30, 2010, Mr. Ehrlich, the Company’s Chairman and CEO, 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 approximately $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of this demand note to approximately $2,022,000.

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

As of March 31, 2019 and June 30, 2018, the balance of accrued interest payable were $66,000 and $12,000, respectively (see Note 5 to the notes to the condensed consolidated financial statements).

On January 29, 2019, Mr. Ehrlich cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 shares of Class B common stock at the option exercise price of $0.11 per share. As of March 31, 2019 and June 30, 2018, principal balance of this demand note was approximately $1,922,000 and $2,022,000, respectively. As of March 31, 2019 and June 30, 2018, the total outstanding balance of principal and interest were approximately $1,988,000 and $2,034,000, respectively.

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

Equity Incentive Plans

2016 Equity Incentive Plan

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

Up to 20,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that (1) no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and (2) no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of ISOs, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.

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

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, 2018		41,643,571			0.22		2.76	$	17,523,113

Granted		1,195,826			0.31		7.89
Exercised		-			-		-
Forfeited/expired		(1,235,424	)		1.65
Outstanding at March 31, 2019		41,603,973			0.18		2.24	$	-
Exercisable at March 31, 2019		40,068,405		$	0.17		2.01	$	-

The fair value of options granted for the nine months ended March 31, 2019 and 2018 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.

	Nine months ended March 31,
	2019	2018
Expected term (in years)	5 - 10	5 - 10
Expected stock price volatility	67.34% to 104.11%	52.80% to 106.01%
Risk-free interest rate	2.51% to 2.86%	2.15% to 2.56%
Expected dividend yield	0	0

Stock-Based Compensation

The Company recognized approximately $798,000 and $1,665,000 of total stock-based compensation costs related to equity grant awards for the nine months ended March 31, 2019 and 2018, respectively.

The $798,000 of stock-based compensation expense for the nine months ended March 31, 2019 included approximately $349,000 of stock options expense and $449,000 of restricted stock awards.

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The $1,665,000 of stock-based compensation expense for the nine months ended March 31, 2018 included approximately $677,000 of stock options expense and $988,000 of restricted stock awards (see Note 11 to the notes to the condensed consolidated financial statements).

During the nine months ended March 31, 2019

On February 1, 2019, the Company agreed to issue 400,000 stock options to purchase shares of the Company’s common stock to each of two consultants for specified services to be provided from February 1, 2019 to January 31, 2020 in accordance with agreements with the two consultants. These options were issued with an exercise price of $0.13 per share and vest 33 1/3% on February 1, 2019, 33 1/3% on August 1, 2019, and 33 1/3% on January 31, 2020. The value of the total 800,000 options for two consultants was approximately $60,000. During the nine months ended March 31, 2019, the Company recorded approximately $13,000 of related stock-based compensation.

On September 1, 2018, the Company issued to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, for his services rendered 1,066,667 shares of common stock, vesting 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $225,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.40 per share. These options were issued with an exercise price of $0.40 per share and vest 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration as defined in award agreement, with a ten year option term. These options have piggyback registration rights.

During the three months and nine months ended March 31, 2019, the Company recorded approximately $80,000 and $188,000 of stock-based compensation, respectively. The $80,000 of stock-based compensation expense for the three months ended March 31, 2019 included approximately $28,000 of stock option expense and $52,000 of stock awards. The $188,000 of stock-based compensation expense for the nine months ended March 31, 2019 included approximately $65,000 of stock option expense and $123,000 of stock awards.

On September 1, 2018, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 58,394 shares of the Company’s common stock, 33 1/3% vesting upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date and 33 1/3% upon the third anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $63,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.40 per share. These options were issued with an exercise price of $0.40 per share and vest 33 1/3% upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and 33 1/3% upon the third anniversary of the grant date, with acceleration of vesting upon certain events.

During the three months and nine months ended March 31, 2019, the Company recorded approximately $7,000 and $17,000 of total stock-based compensation, respectively. The $7,000 of stock-based compensation expense for the three months ended March 31, 2019 included approximately $5,000 of stock option expense and $2,000 of stock awards. The $17,000 of stock-based compensation expense for the nine months ended March 31, 2019 included approximately $12,000 of stock option expense and $5,000 of stock awards.

On September 1, 2018, the Company also issued to Ms. Anne Ponugoti, Associate Director, Clinical Sciences of the Company, 5,000 shares of the Company’s common stock and 5,000 options to purchase common stock with same vesting periods as the common stock and options issued to Ms. Ponugoti. The total value of the 5,000 shares and 5,000 options were approximately $2,000 each, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.40 per share. During the three months and nine months ended March 31, 2019, the stock-based compensation expense was not significant. She left the Company on January 15, 2019.

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Restricted Stock Awards Outstanding

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

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Total awards outstanding at June 30, 2018		1,208,157		$	0.72
Total shares granted		1,130,061		$	0.40
Total shares vested		(584,763	)	$	0.72
Total shares forfeited		(11,667	)	$	0.76
Total unvested shares outstanding at March 31, 2019		1,741,788		$	0.51

Scheduled vesting for outstanding restricted stock awards at March 31, 2019 is as follows:

	Year Ending June 30,
	2019		2020		2021		2022		Total

Scheduled vesting		12,500		1,137,562		572,262		19,464		1,741,788

As of March 31, 2019, there was approximately $0.5 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately $0.4 million of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 1.12 years.

Exercise of options

During the three months and nine months ended March 31, 2019 and 2018, there were no stock options exercised under the Company’s equity incentive plans.

Stock Warrants Outstanding

Warrants to Purchase Preferred Stock

On October 5, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock (the “Series B preferred stock”), for aggregate gross proceeds of approximately $2.0 million. Each share of preferred stock was sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance, (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance.

The warrants issued in connection with the Series B preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B preferred stock fair value (without the warrants)) with an offsetting discount to the Series B preferred stock. There were 1,275 Series 1-2 warrants exercised during the nine months ended March 31, 2019. As of March 31, 2019, 6,725 Series 1-3 warrants to purchase 6,725 preferred stock were outstanding (see Note 12 to the notes to the condensed consolidated financial statements).

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The following table summarizes the outstanding preferred stock warrants:
	Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value

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

Granted		8,000			982.50		1.37
Exercised		(1,275	)		982.50		1.00
Expired		-			-
Outstanding at March 31, 2019		6,725		$	985.50		1.00	$	-

Warrants to Purchase Common Stock

During the nine months ended March 31, 2019 and 2018, there were no warrants issued to purchase common stock.

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

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

The following table summarizes the outstanding common stock warrants:
	Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value

Outstanding at June 30, 2018		8,000,000	$	0.38		5.0	$	-

Granted		-		-		-
Exercised		-		-		-
Expired		-		-		-
Outstanding at March 31, 2019	8.000.000		$	0.38		4.25	$	-

11. Equity Transactions

On January 29, 2019, Leo Ehrlich, the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 shares of Common Stock Class B, $0.0001 par value at the option exercise price of $0.11. As of March 31, 2019, 909,090 shares of Common Stock Class B were outstanding.

Purchase of Treasury Stock

On September 1, 2018, 38,930 shares of the Company’s restricted stock vested to Ms. Harness according to Ms. Harness’s employment agreement. The total taxable compensation to Ms. Harness for the 38,930 vested shares was approximately $3,690, which is priced at the closing stock price on September 1, 2018 at $0.40 a share.

The Company issued 29,658 common shares (net share issuance amount), which was approximately 76% of the total vested common share amount of 38,930 common shares due to be issued to Ms. Harness. The remaining 9,272 shares of common stock were withheld from Ms. Harness for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

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On September 1, 2018, 533,334 shares of the Company’s restricted stock vested to Dr. Bertolino according to Dr. Bertolino’s employment agreement. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was approximately $87,140, which is priced at the closing stock price on September 1, 2018 at $0.40 a share.

The Company issued 314,387 common shares (net share issuance amount), which was approximately 59% of the total vested common share amount of 533,334 common shares due to be issued to Dr. Bertolino. The remaining 218,946 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.

There were 228,218 shares and 0 shares of treasury stock outstanding at March 31, 2019 and June 30, 2018, respectively, purchased at a total cumulative cost of $90,830 and $0 at March 31, 2019 and June 30, 2018, respectively.

Securities Purchase Agreement Dated June 28, 2018

On June 28, 2018, we entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company has agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent.

Pursuant to the Securities Purchase Agreement, and in connection with Aspire Capital’s commitment to purchase additional securities from the Company, on June 28, 2018, the Company agreed to (i) sell to Aspire Capital 5,263,158 shares for a purchase price of $2.0 million and (ii) issue to Aspire Capital 2,736,842 shares of common stock and warrants to purchase 8,000,000 shares of common stock, with such warrants having an exercise price equal to $0.38 per share (the “Commitment Fee”). The Securities Purchase Agreement provides for the sale of up to an additional $5.0 million of the Company’s common stock to Aspire Capital upon the achievement of certain milestones by September 30, 2018, which were not achieved by the Company.

The total commitment fee of $2.7 million was allocated to the $2 million offering first based on historical price discounts that Aspire Capital has received and the balance of the commitment fee was allocated to the $5 million of potential future milestone funding from Aspire Capital. The portion of the commitment fee allocated to the $2 million of initial proceeds was approximately $0.5 million and was effectively netted against the $2 million of initial proceeds, resulting in a discounted purchase price of $0.29 per share. The remaining $2.2 million of the commitment fee was allocated to the future milestone funding and was fully expensed under Other Expenses as of June, 30, 2018. As of March 31, 2019, the $5 million of milestone funding was not received and expired.

$30 million Class A Common Stock Purchase Agreement with Aspire Capital

On September 6, 2017, the Company entered into the Purchase Agreement with Aspire Capital, which replaced the prior 2015 $30 million Aspire Capital stock purchase agreement and provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Stock Purchase Agreement. The Company issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The commitment fee of approximately $215,000 is amortized pro-rata as the funding is received. The amortized amount of the commitment fee of $55,000 was recorded to additional paid-in capital for the year ended June 30, 2018. The remaining $159,000 of the unamortized portion of the commitment fee was carried on the balance sheet as deferred offering costs and was fully expensed in December, 2018. The Company registered the sale of all shares that Aspire Capital will purchase under this common stock purchase agreement. To the extent Aspire Capital purchases shares under this Purchase Agreement and subsequently sells those shares purchased, the other holders of shares of our Class A common stock may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A common stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we might otherwise wish to effect sales.

During the period from September 6, 2017 to June 30, 2018, the Company generated proceeds of approximately $7.7 million under the 2017 agreement with Aspire Capital from the sale of approximately 16.7 million shares of its common stock. During the nine months ended March 31, 2019, we did not have any financing from the 2017 agreement with Aspire Capital, the available balance under the new equity line agreement was approximately $22.3 million. However, as of date of this report, the conditions for sales under the Purchase Agreement are not satisfied and no sales may occur thereunder. See Note 2 to the notes to the condensed consolidated financial statements- Going Concern and Liquidity.

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On March 30, 2015, the Company entered into its prior common stock purchase agreement with Aspire Capital, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the 2015 purchase agreement. In consideration for entering into this stock purchase agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 was amortized as the funding was received. The unamortized portion of deferred offering costs from this stock purchase agreement of $227,000 was recorded to additional paid-in capital in September 2017, since the Company entered into a new $30 million common stock purchase agreement with Aspire Capital, to replace this prior $30 million 2015 Aspire Capital agreement, on September 6, 2017. During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under this 2015 agreement with Aspire Capital, from the sale of approximately 2.6 million shares of its common stock.

12. Series B 5% convertible preferred stock

The Series B preferred stock is mandatorily redeemable under certain circumstances and, as such, is presented as a liability on the consolidated balance sheets. The Company has elected to measure the value of its preferred stock using the fair value method with offsetting discounts associated with the fair value allocated to the warrants and for the intrinsic value attributed to the BCF. The fair value of the Series B preferred stock (without the warrants) will be assessed at each subsequent reporting date with changes in fair value recorded in the profit and loss as a separate line item below the “loss from operations” section (See ASC 480-10-35-5).

The warrants issued in connection with the Series B preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B preferred stock fair value (without the warrants)) with an offsetting discount to the Series B preferred stock. Given that the Series B preferred stock is convertible at any time under these features, the underlying warrant discounts were accreted upon issuance and recorded as interest (resulting in no remaining discount to the Series B preferred stock liability after the issuance).

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

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

The issuance costs associated with the Series B preferred stock transaction were attributed to the Series B preferred stock (without the warrants) and to the Series 1, Series 2 and Series 3 warrants based on their relative fair values. The issuance costs attributed to the warrants of $32,000 were reflected as a reduction to additional paid-in capital. The issuances costs associated with the Series B preferred stock liability of $41,000 was recorded immediately as an element of interest cost, which are reflected in interest expense - preferred stock. The change in fair value of the total Series B preferred stock was $50,000 during the quarter ended March 31, 2019, which is reflected in interest expense—preferred stock liability.

Underlying Series B preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B preferred stock) on a daily basis given fixed dividend terms under the Series B preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B preferred stock at March 31, 2019 and the total dividends of approximately $32,000 are treated as interest during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019.

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Terms of the Preferred Stock

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

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

Redemption Rights

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

Warrants

Each share of preferred stock was sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance, (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance.

Subject to the satisfaction of certain circumstances, the Company had the option to compel the holders to exercise up to $250,000 of the Series 1 warrants 30 days after the initial closing of the sale of the preferred stock. On November 2, 2018, the Company notified the holders of the warrants of the Company’s election to compel the exercise of $245,625 of warrants, which exercise closed on or about November 12, 2018. In addition, subject to the satisfaction of certain circumstances, the Company may call for cancellation any or all of the warrants following 90 days after their issuance, for a payment in cash equal to 8% of the aggregate exercise price of the warrants being called. The warrants subject to any such call notice will be cancelled 30 days following the Company’s payment of the call fee, provided that the warrant holders have not exercised the warrants prior to cancellation.

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Exercise of warrants

During the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019, the Company issued 1,275 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $1,252,688, upon exercise of 1,275 warrants issued by the Company in October 2018.

As of March 31, 2019, 6,725 Series 1-3 warrants to purchase 6,725 shares of Series B preferred stock were outstanding.

Conversion of preferred stock to common stock

In December, 2018, one preferred stockholder converted all of its 1,300 shares of Series B preferred stock into 12,734,258 shares of common stock; another preferred stockholder converted 10 shares of Series B preferred stock into 74,130 shares of common stock, with a total of 12,808,388 shares of common stock being issued upon conversion of the Series B preferred stock.

With regard to conversions, the Company reversed Series B preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately $963,000 based on the proportion of Series B preferred stock converted relative to the original total issued.

During the three months ended March 31, 2019, one preferred stockholder converted all of its 450 shares of Series B preferred stock into 5,730,883 shares of common stock; another preferred stockholder converted 504 shares of Series B preferred stock into 5,575,574 shares of common stock, with a total of 11,306,457 shares of common stock being issued upon conversion of the Series B preferred stock.

With regard to conversions, the Company reversed Series B preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately $761,000 based on the proportion of Series B preferred stock converted relative to the original total issued.

As of March 31, 2019, 1,027 shares of preferred stock were outstanding.

13. Fair Value Measurement

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

The three levels of valuation hierarchy are defined as follows:

	·	Level 1: Observable inputs such as quoted prices in active markets;
	·	Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
	·	Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company has elected to measure its preferred stock using the fair value method. The fair value of the preferred stock is the estimated amount that would be paid to redeem the liability in an orderly transaction between market participants at the measurement date. The Company calculates the fair value of the Series B Preferred stock using a lattice model that takes into consideration the future redemption value on the instrument, which is tied to the Company’s stock price.

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These valuations are considered to be Level 3 fair value measurements as the significant inputs are unobservable and require significant management judgment or estimation. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.

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

	2019
Balance, beginning of period	$	—
Issuance of preferred stock at fair value		1,116,000
Issuance of preferred stock by exercise of 1,275 warrants		1,253,000
Conversion of preferred stock to common stock		(1,698,000	)
Value of the warrants exercise		65,000
Change in fair value of preferred stock (1)		(50,000	)
5% dividend		15,000
Balance, end of period	$	701,000

(1)	Change in fair value of preferred stock is reported in interest expense—preferred stock.

14. Subsequent Events

From April 1, 2019 to May 10, 2019, the Company issued 550 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of approximately $540,000, upon exercise of 550 warrants issued by the Company in October 2018, including 500 warrants exercised pursuant to the Issuance Agreement (as defined below). In addition, there were 375 preferred stock shares converted to 4,557,103 common stock.

On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (the “Issuance Agreement”) with the holders of its Series B preferred stock and warrants to purchase Series B preferred stock (collectively, the “Series B holders”), pursuant to which the Series B holders agreed to exercise warrants to purchase up to $2.5 million of Series B preferred stock through November 2019, subject to the conditions described therein. Pursuant to the Issuance Agreement, the Company also issued the Series B holders 100 shares of additional Series B preferred stock following the execution of the Issuance Agreement and agreed to issue up to an additional 400 shares of additional Series B preferred stock upon exercise of warrants to purchase Series B preferred stock. The Company also issued Series 4 warrants to purchase up to 2,500 shares of Series B preferred stock to the Series B holders following execution of the Issuance Agreement.

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

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

Management’s Plan of Operation

Overview

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

Recent Developments

On January 7, 2019, Dr. Bertolino, the Company’s President and Chief Medical Officer, joined the Board of Directors. The Company is currently exploring options for further Board additions in preparation for late-stage clinical trials and ongoing portfolio development.

On January 29, 2019, Mr. Ehrlich, the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 Class B shares at the option exercise price of $0.11.

On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (the “Issuance Agreement”) with the holders of its Series B preferred stock and warrants to purchase Series B preferred stock (collectively, the “Series B holders”), pursuant to which the Series B holders agreed to exercise warrants to purchase up to $2.5 million of Series B preferred stock through November 2019, subject to the conditions described therein. Pursuant to the Issuance Agreement, the Company also issued the Series B holders 100 shares of additional Series B preferred stock following the execution of the Issuance Agreement and agreed to issue up to an additional 400 shares of additional Series B preferred upon exercise of warrants to purchase Series B preferred stock. The Company also issued Series 4 warrants to purchase up to 2,500 shares of Series B preferred stock to the Series B holders following execution of the Issuance Agreement.

Business Development and Licensing

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

Active Clinical Development Programs

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

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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 devotes most of its efforts and resources on its compounds Brilacidin and Kevetrin, which are in clinical development. We anticipate using our expertise to manage and perform what we believe are the most critical aspects of the product development process which include: (i) design and oversight of clinical trials; (ii) development and execution of strategies for the protection and maintenance of intellectual property rights; and (iii) interactions with regulatory authorities domestically and internationally. We expect to concentrate on product development and engage in a limited way in product discovery, avoiding the significant investment of time and financial resources that is generally required for a promising compound to be identified and brought into clinical trials.

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

Brilacidin

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

Topical Administration (Oral Mucositis/IBD)

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

IBD (UP/UPS) study — This Phase 2a trial comprises three sequential cohorts, with progressive dose escalation by cohort—cohort A (6 patients) - 50 mg, cohort B (6 patients) - 100 mg, and cohort C (5 patients) - 200 mg, respectively. Treatment with Brilacidin by daily enema administration was performed for 42 days. The primary efficacy endpoint of clinical remission (accounting for stool frequency, rectal bleeding and endoscopy findings subscores) was met by the majority of patients across the cohorts. Brilacidin was generally well-tolerated. Patient quality of life (as assessed by the short inflammatory bowel disease questionnaire, or SIBDQ) showed notable improvements. Limited systemic exposure to Brilacidin was demonstrated as measured by plasma Brilacidin concentrations. To obtain maximum value of the Brilacidin-IBD asset, the Company plans to develop the drug candidate as an oral dose (pill or tablet). The Company has completed early testing evaluating the stability of Brilacidin in simulated gastric fluid—a synthetic form of the fluid found in the stomach. Results showed very minimal degradation of Brilacidin across 4 hours, suggesting a simple formulation of Brilacidin likely would not be subject to rapid breakdown once in the stomach. This finding should enable initial clinical testing with a simple formulation of the drug candidate delivered to the gut while a more elegant, tailored oral dosage form of Brilacidin is developed and refined, in parallel. Planned next steps in the development of Brilacidin for oral delivery include clinical testing of Brilacidin in healthy volunteers to assess safety and toleration, the pharmacokinetic profile and effects on the gut’s microbiome. Clinical trials in IBD including Ulcerative Colitis and Crohn’s Disease, would then follow.

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

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ABSSSI

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

Expenditures on Brilacidin were approximately $1.2 million and $1.5 million during the nine months ended March 31, 2019 and 2018, respectively.

Kevetrin

The Company has completed a Phase 2a trial of Kevetrin in treating late-stage Ovarian Cancer. The main objective of the trial focused on confirming the modulation by Kevetrin of p53 pathways in tumors, as well as monitoring the response of tumors to the treatment. The study was successful in demonstrating modulation of p53 directly in ovarian cancer tumor tissue in patients. We are currently focused on development of an oral formulation of Kevetrin for treating cancer. Pharmacokinetic data collected on Kevetrin during the initial Phase 1 clinical trial demonstrates 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 are approximately half completed, with the remainder of this work now prioritized as the Company secures additional financial resources. Next steps in the development of Kevetrin include: completing toxicology work for an oral formulation; developing the oral formulation (pill or tablet); requesting an FDA meeting to discuss trial results to date and the design of future trials; and performing a dosing safety study in healthy volunteers once the oral formulation has been developed. Once completed, these steps would likely lead directly to Phase 2 testing of oral Kevetrin in both solid tumors and leukemias, with ovarian cancer likely continuing to be the lead indication.

Expenditures on Kevetrin were approximately $0.1 million and $0.3 million during the nine months ended March 31, 2019 and 2018, respectively.

Going Concern

We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern. At March 31, 2019, the Company’s cash amounted to $0.5 million and current liabilities amounted to $7.7 million, of which $6.7 million were payables to related parties with no immediate payment terms. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary FDA and/ or other health authorities approval. As a result, the Company expects to continue to incur losses over the next 12 months from the date of this filing. Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $12.5 million for the next twelve months, raise doubt about its ability to continue as a going concern. If we are not able to continue as a going concern, it is likely that holders of our common stock will lose all of their investment. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

To continue as a going concern, we must secure additional funding to support our current operating plan in the fiscal quarter ended June 30, 2019. 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.

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Critical Accounting Policies and Estimates

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

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

Recently Issued Accounting Pronouncements

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

Results of Operations

We expect to incur losses from operations for the next few years. We expect to incur increasing research and development expenses, including expenses related to additional clinical trials for our proprietary programs. We expect that our general and administrative expenses will also increase in the future as we expand our business development, by adding employees, consultants, additional infrastructure and incurring other additional costs. Based upon our expected rate of expenditures over the next twelve months and beyond, we will need additional working capital to meet our anticipated clinical trial obligations and other working capital requirements.

For the three months ended March 31, 2019 and 2018

Revenue

We generated no revenue and incurred operating expenses of approximately $1.1 million and $2.4 million for the three months ended March 31, 2019 and 2018, respectively.

Research and Development Expenses for Proprietary Programs

Below is a summary of our research and development expenses for our proprietary programs by categories of costs for the three months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

	For the three months ended				Change
	March 31,				2019 vs. 2018
	2019		2018		$			%

Clinical studies and development research	$	128,000	$	1,040,000	$	(912,000	)		-88	%
Officers’ payroll and payroll tax expenses related to R&D Department		120,000		174,000		(54,000	)		-31	%
Employees payroll and payroll tax expenses related to R&D Department		84,000		192,000		(108,000	)		-56	%
Stock-based compensation – officers		222,000		144,000		78,000			54	%
Stock-based compensation – employees		41,000		41,000		-			0	%
Stock-based compensation – consultants		19,000		80,000		(61,000	)		-76	%
Depreciation and amortization expenses		93,000		105,000		(12,000	)		-11	%
Total	$	707,000	$	1,776,000	$	(1,069,000	)		-60	%

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

Officers’ payroll decreased during the three months ended March 31, 2019 because the Company’s President of Research resigned in September 2018, which led to the decrease in officers’ payroll during the quarter ended March 31, 2019.

Employees payroll and payroll tax expenses decreased during the three months ended March 31, 2019 related to fewer employees engaged in preclinical development after March 31, 2018, which led to the decrease in employees’ payroll during the quarter ended March 31, 2019.

Stock-based compensation - officers increased during the three months ended March 31, 2019 primarily because of stock-based compensation given to our President and Chief Medical Officer on September 1, 2017 and September 1, 2018.

Stock-based compensation - employees was not changes during the three months ended March 31, 2019 due to the same vesting in the number of stock awards granted to employees during the quarter ended March 31, 2019 compared with the same period in 2018.

Stock-based compensation - consultants decreased during the three months ended March 31, 2019 due to only two stock awards being granted to two consultants during the quarter ended March 31, 2019.

Our research and development expenses include costs related to preclinical and clinical trials, outsourced services and consulting, officers’ payroll and related payroll tax expenses, other wages and related payroll tax expenses, stock-based compensation, depreciation and amortization expenses. We manage our proprietary programs based on scientific data and achievement of research plan goals. Our scientists record their time to specific projects when possible; however, many activities occurring simultaneously benefit multiple projects and cannot be readily attributed to a specific project. Accordingly, the accurate assignment of time and costs to a specific project is difficult and may not give a true indication of the actual costs of a particular project. As a result, we do not report costs on an individual program basis.

General and Administrative Expenses

General and administrative expenses consist mainly of compensation and associated fringe benefits not included in cost of research and development expenses for proprietary programs and include other management, business development, accounting, information technology and administration costs, including patent filing and prosecution, recruiting, consulting and professional services, travel and meals, facilities, depreciation and other office expenses.

Below is a summary of our general and administrative expenses for the three months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

	For the three months ended				Change
	March 31,				2019 vs. 2018
	2019		2018		$			%

Insurance and health expense	$	121,000	$	112,000	$	9,000			8	%
Rent and utility expense		59,000		64,000		(5,000	)		-8	%
Other G&A		70,000		119,000		(49,000	)		-41	%
Total	$	250,000	$	295,000	$	(45,000	)		-15	%

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General and administrative expenses decreased during the three months ended March 31, 2019 primarily related to the decreases in promotion, advertising and office expenses offset by increases in insurance expense.

Officers’ Payroll and Payroll Tax Expenses

Below is a summary of our Officers’ payroll and payroll tax expenses for the three months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

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

Officers’ payroll and payroll tax expenses	$	126,000	$	132,000	$	(6,000	)		(5	)%

Officers’ payroll and payroll tax expenses for the Company decreased during the three months ended March 31, 2019. The Company previously recorded 10% of payroll and payroll tax expenses paid for Dr. Menon under Officers’ Payroll and Payroll Tax Expenses and recorded 90% of payroll paid to Dr. Menon under Research and Development Expense. The decrease in officers’ payroll and payroll tax expenses for the Company during the three ended March 31, 2019 was mainly because of the decrease in the 10% of payroll and payroll tax expenses paid for Dr. Menon. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon resigned from the Company’s Board of Directors on December 11, 2018.

Professional Fees

Below is a summary of our Professional fees for the three months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

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

Audit, legal and professional fees	$	45,000	$	195,000	$	(150,000	)		(77	)%

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

Other Income (Expense)

Below is a summary of our other income (expense) for the three months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

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

Interest expense – debt	$	(44,000	)	$	(51,000	)	$	(7,000	)		(14	)%
Interest expense – preferred stock liability		(15,000	)		-			15,000			100	%
Change in fair value – Series B preferred stock		50,000			-			(50,000	)		100	%
*Other Income (Expense), net*	$	(9,000	)	$	(51,000	)	$	(42,000	)		(84	)%

There was a decrease in interest expenses paid on the note payable – related party, because the Company’s Chairman and CEO cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 Class B shares at the option exercise price of $0.11 on January 29, 2019 (see Note 9 to the notes to the condensed consolidated financial statements).

There was an increase in interest expense – preferred stock liability of approximately $15,000 relating to the accrued dividend payable to the Series B preferred stock that has been recorded as a liability on the accompanying balance sheets. There was an increase in change in value related to Series B preferred stock (see Note 12 to the notes to the condensed consolidated financial statements).

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Net Losses

We incurred net losses of $1.1 million and $2.4 million for the three months ended March 31, 2019 and 2018, respectively because of the above-mentioned factors.

For the nine months ended March 31, 2019 and 2018

Revenue

We generated no revenue and incurred operating expenses of approximately $5.1 million and $11.3 million for the nine months ended March 31, 2019 and 2018, respectively.

Research and Development Expenses for Proprietary Programs

Below is a summary of our research and development expenses for our proprietary programs by categories of costs for the nine months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

	For the nine months ended				Change
	March 31,				2019 vs. 2018
	2019		2018		$			%

Clinical studies and development research	$	1,542,000	$	6,164,000	$	(4,622,000	)		-75	%
Officers’ payroll and payroll tax expenses related to R&D Department		466,000		615,000		(149,000	)		-24	%
Employees payroll and payroll tax expenses related to R&D Department		379,000		784,000		(405,000	)		-52	%
Stock-based compensation – officers		620,000		1,470,000		(850,000	)		-58	%
Stock-based compensation – employees		134,000		115,000		19,000			17	%
Stock-based compensation – consultants		44,000		80,000		(36,000	)		-45	%
Depreciation and amortization expenses		278,000		316,000		(38,000	)		-12	%
Total	$	3,463,000	$	9,544,000	$	(6,081,000	)		-64	%

Research and development expenses for proprietary programs decreased during the nine months ended March 31, 2019 primarily due to less spending on our programs due to our current lack of working capital. Clinical studies and development expenses will continue to decrease in future reporting periods if there is no increase in the Company’s financial liquidity.

Officers’ payroll decreased during the nine months ended March 31, 2019 because the Company’s President of Research resigned in September 2018, which led to the decrease in officers’ payroll during the nine months ended March 31, 2019.

Employees payroll and payroll tax expenses decreased during the nine months ended March 31, 2019 related to fewer employees engaged in preclinical development after March 31, 2018, which led to the decrease in employees’ payroll during the nine months ended March 31, 2019.

Stock-based compensation - officers decreased during the nine months ended March 31, 2019 because stock-based compensation - officers expenses in 2018 primarily related to the stock-based compensation given to our President and Chief Medical Officer on September 1, 2017 and the stocks and options granted to our new President and Chief Medical Officer on June 27, 2017 that became fully vested and expensed due to the completed clinical trial milestones in December 2017.

Stock-based compensation - employees increased during the nine months ended March 31, 2019 due to the increase vesting in the number of stock awards granted to employees during the nine months ended March 31, 2019 compared with the same period in 2018.

Stock-based compensation - consultants decreased during the nine months ended March 31, 2019 due to less stock awards being granted to consultants during the nine months ended March 31, 2019.

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General and Administrative Expenses

Below is a summary of our general and administrative expenses for the nine months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

	For the nine months ended				Change
	March 31,				2019 vs. 2018
	2019		2018		$			%

Insurance and health expense	$	376,000	$	348,000	$	28,000			8	%
Rent and utility expense		181,000		191,000		(10,000	)		(5	)%
Patent write off expense		155,000		-		155,000			100	%
Other G&A		230,000		350,000		(120,000	)		(34	)%
Total	$	942,000	$	889,000	$	53,000			6	%

General and administrative expenses increased during the nine months ended March 31, 2019 primarily related to increases in insurance expense and patent write off expenses offset by the decreases in promotion, advertising and office expenses.

Officers’ Payroll and Payroll Tax Expenses

Below is a summary of our Officers’ payroll and payroll tax expenses for the nine months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

	For the nine months ended				Change
	March 31,				2019 vs. 2018
	2019		2018		$			%

Officers’ payroll and payroll tax expenses	$	367,000	$	392,000	$	(25,000	)		(6	)%

Officers’ payroll and payroll tax expenses for the Company was decreased during the nine months ended March 31, 2019 and 2018. The Company previously recorded 10% of payroll and payroll tax expenses paid for Dr. Menon under Officers’ Payroll and Payroll Tax Expenses and recorded 90% of payroll paid to Dr. Menon under Research and Development Expense. The decrease in officers’ payroll and payroll tax expenses for the Company during the nine ended March 31, 2019 and 2018 mainly because of the decrease in the 10% of payroll and payroll tax expenses paid for Dr. Menon. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon resigned from the Company’s Board of Directors on December 11, 2018.

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Professional Fees

Below is a summary of our Professional fees for the nine months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

	For the nine months ended				Change
	March 31,				2019 vs. 2018
	2019		2018		$			%

Audit, legal and professional fees	$	349,000	$	525,000	$	(176,000	)		(34	)%

Professional fees decreased during the nine months ended March 31, 2019 primarily related to decrease in legal fees for less legal review of various contracts in 2018.

Other Income (Expense)

Below is a summary of our other income (expense) for the nine months ended March 31, 2019 and 2018, respectively (rounded to nearest thousand):

	For the nine months ended						Change
	March 31,						2019 vs. 2018
	2019			2018			$			%

Interest Income	$	-		$	1,000		$	1,000			(100	)%
Other Income		40,000			-			(40,000	)		100	%
Interest expense – debt		(145,000	)		(152,000	)		(7,000	)		(5	)%
Interest expense – preferred stock liability		(1,990,000	)		-			1,990,000			100	%
Change in fair value – Series B preferred stock		50,000			-			(50,000	)		100	%
*Other Income (Expense), net*	$	(2,045,000	)	$	(151,000	)	$	1,894,000			1254	%

There was a decrease in interest income of approximately $1,000 relating to the decrease in bank deposits. There was an increase in other income of approximately $40,000 which represented the gain on disposal of lab equipment.

There was a decrease in interest expenses paid on the note payable – related party, because the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 Class B shares at the option exercise price of $0.11 on January 29, 2019 (see Note 9 to the notes to the condensed consolidated financial statements).

There was an increase in interest expense – preferred stock liability of approximately $1,990,000 relating to the issuance of Series B preferred stock that has been recorded as a liability on the accompanying balance sheets. There was an increase in change in value related to Series B preferred stock (see Note 12 to the notes to the condensed consolidated financial statements).

Net Losses

We incurred net losses of $7.2 million and $11.5 million for the nine months ended March 31, 2019 and 2018, respectively because of the above-mentioned factors.

Liquidity and Capital Resources

Projected Future Working Capital Requirements - Next 12 Months

As of March 31, 2019, we had approximately $0.5 million in cash compared to $2.4 million of cash as of June 30, 2018. On October 5, 2018, the Company entered into a securities purchase agreement with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock for aggregate gross proceeds of approximately $2.0 million. Under the securities purchase agreement, the Company also issued to the investors Series 1-2 warrants to purchase up to an additional 8,000 shares of preferred stock for an aggregate purchase price of approximately $7.9 million. The Company received the proceeds from exercise of 1,275 Series 1-2 warrants of approximately $1.3 million during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019. As of March 31, 2019, 1,227 shares of preferred stock were outstanding and 6,725 Series 1-3 warrants to purchase 6,725 shares of Series B preferred stock were outstanding. On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (the “Issuance Agreement”) with the holders of the Series B preferred stock and warrants pursuant to which the Company has agreed to issue up to an additional 500 shares of Series B preferred stock and warrants to purchase an additional 2,500 shares of preferred stock, and the holders of the Series B preferred stock and warrants agreed to exercise warrants to purchase up to $2.5 million of Series B preferred stock through November 2019 subject to the conditions set forth in the Issuance Agreement. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds or other funds will be available when needed.

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We anticipate that future budget expenditures will be approximately $12.5 million for the next twelve months, including approximately $7.5 million for clinical activities, supportive research, and drug product. This assessment is based on current estimates and assumptions regarding our clinical development programs and business needs. Actual working capital requirements could differ materially from this projection.

Our ability to successfully raise sufficient funds through the sale of equity securities, to meet our current and future operating expenditures is uncertain and subject to market conditions generally, the market for our common stock, and our ability to sell our common stock and other risks. These factors, among others, raise substantial doubt about our ability to continue as a going concern for the next 12 months. If we are unable to raise funds to meet our current and future obligations, we will be forced to cease all operations, in which event investors may lose their entire investment in the Company. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 2 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our liquidity and the conditions and events which raise substantial doubt regarding our ability to continue as a going concern.

One future potential source of cash available to us in the future is from the issuances of our equity securities, including through our common stock purchase agreement with Aspire Capital Fund, LLC (“Aspire Capital”) dated September 6, 2017, and the exercise of warrants issued under the October 2018 securities purchase agreement and May 2019 Issuance Agreement. As of date of this report, the conditions for sales under the Aspire Capital purchase agreement are not satisfied and no sales may occur thereunder. In particular, the common stock purchase agreement provides that the Company and Aspire Capital will not effect any sales under the agreement when the closing sales price of our common stock is less than $0.25 per share. In recent months, our common stock has traded below this threshold, and there is substantial uncertainty regarding our continued ability to sell shares under the common stock purchase agreement. In addition, the October 2018 securities purchase agreement prohibits sales under the Aspire Capital purchase agreement through January 10, 2019, with sales thereafter subject to the satisfaction of certain conditions.

Our current projected average monthly cash flow shortfall is anticipated to average approximately $700,000 per month for the next 12 months from the date of the filing of this report. We are working to reduce our projected monthly cash flow shortfall and we are currently seeking new sources of financing to fund our additional research and development work over the next 12 months from the date of this filing. We have the ability to delay incurring certain operating expenses in the next 12 months, which could reduce our cash flow shortfall, if needed.

Our ability to successfully raise sufficient funds through the sale of equity securities, when needed, is subject to many risks and uncertainties and even if we are successful, future equity issuances would result in dilution to our existing stockholders. Our risk factors are described under the heading "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K and in this report under “Part II, Item 1A, Risk Factors.” and in other reports we filed with the SEC.

If we are unable to generate enough working capital from our current or future financing agreements when needed or secure additional sources of funding, we will significantly reduce our current rate of spending through reductions in staff and delaying, scaling back or stopping certain research and development programs, including more costly Phase 2 and Phase 3 clinical trials on our wholly-owned development programs as these programs progress into later stage development. Insufficient liquidity may also require us to relinquish greater rights to product candidates at an earlier stage of development or on less favorable terms to us and our stockholders than we would otherwise choose in order to obtain up-front license fees needed to fund operations. These events could prevent us from successfully executing our operating plan.

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. The accompanying condensed consolidated financial statements do not include any adjustments related to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern.

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$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 November 13, 2017, registering up to $30 million of our common stock that have been or may be offered and sold to Aspire Capital from time to time, (ii) a prospectus supplement, dated June 28, 2018, registering $7.0 million of our common stock and warrants to purchase 8.0 million shares of our common stock in a registered direct offering, (iii) a prospectus supplement, dated October 5, 2018, registering $10.0 million of our preferred stock, warrants to purchase preferred stock, and underlying shares of our common stock in a registered direct offering, and (iv) a prospectus supplement, dated May 9, 2019, registering $2.5 million of our preferred stock, warrants to purchase preferred stock, and underlying shares of our common stock in a registered direct offering, leaving approximately $20.5 million available under the Company’s effective shelf registration statement. Depending on the Company’s public float, the Company may not be eligible to utilize Form S-3 for future primary offerings of its securities following the filing of its Annual Reports on Form 10-K in 2019 and 2020. The Company anticipates that in the future, if it were to no longer eligible to use Form S-3, that it may utilize Form S-1 to register the sale of its securities, including through future financing agreements with Aspire Capital.

Cash Flows

The following table provides information regarding our cash position, cash flows and capital expenditures for the nine months ended March 31, 2019 and 2018 (rounded to nearest thousand):

	Nine Months Ended						Change
	March 31,						Increase/
	2019			2018			(Decrease)
							%
Net cash used in operating activities	$	(4,992,000	)	$	(10,362,000	)		(52	)%
Net cash used in investing activities		(18,000	)		(108,000	)		(83	)%
Net cash provided by financing activities		3,054,000			7,665,000			(60	)%
Net decrease in cash	$	(1,956,000	)	$	(2,805,000	)		(30	)%

The decrease in net cash used in operating activities of $5.4 million versus the prior-year nine-month period was mainly due to decreases in our losses from operations of $4.3 million, largely attributable to our less spending for research and development expenses.

Our operating activities used cash of $5.0 million and $10.4 million for the nine months ended March 31, 2019 and 2018, respectively. The use of cash in these periods principally resulted from our losses from operations, as adjusted for non-cash charges for stock-based compensation, amortization and depreciation, and changes in our working capital accounts.

Investing activities

The decrease in net cash used in investing activities versus the prior-year nine-month period was due to a decrease in patents costs.

Financing activities

During the nine months ended March 31, 2019, we raised approximately $3.2 million in net cash proceeds, from issuance of preferred stock and warrants, offset by purchase of treasury stock of $0.1 million.

During the nine months ended March 31, 2018, we raised approximately $7.8 million in net cash proceeds from the sale of 11.3 million shares of our common stock to Aspire Capital offset by cash paid to taxing authorities arising from the withholding of shares from employees of $172,000.

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Off-Balance Sheet Arrangements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As of March 31, 2019, management, with the participation of our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on such evaluation, as of March 31, 2019, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K, as revised or supplemented by our most recent Quarterly Reports on Form 10-Q, each of which are on file with the SEC and are incorporated herein by reference, as well as any risks described in our other filings with the SEC. Our business, financial condition or results of operations could be materially adversely affected by any of these risks.

Our Series B preferred stock converts into shares of common stock at a discount to the market price of our common stock. As a result, our common stockholders will experience substantial additional dilution if shares of our Series B preferred stock are converted into common stock.

Our Series B preferred stock may be converted at any time at the holder’s option into shares of our common stock at a conversion price equal of the lower of (i) $0.31625 per share and (ii) 85% of the lowest volume weighted average sale prices of our Class A common stock as reported on Bloomberg L.P. on a trading day during the ten trading days prior to and ending on, and including, the conversion date. In addition, the conversion price may be decreased following certain triggering events. As a result, the number of shares of common stock that the holders of our Series B preferred stock will receive upon conversion will increase as our common stock price decreases, and there is no floor to the conversion price, and our common stockholders will experience substantial dilution as shares of our Series B Preferred Stock offered hereby are converted into our common stock. Any dilution or potential dilution may cause our stockholders to sell their shares, which may contribute to a downward movement in the stock price of our common stock.

Management will have broad discretion as to the use of the proceeds from the Series B preferred stock offering, and we may not use the proceeds effectively.

Our management will have broad discretion in the application of the proceeds from sales of our securities in the preferred stock offering, and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business and cause the price of our common stock to decline.

In addition to potential dilution associated with future fundraising transactions, we currently have significant numbers of securities outstanding that are exercisable for our common stock, which could result in significant additional dilution and downward pressure on our stock price.

As of April 30, 2019, there were 192,132,420 shares of our common stock outstanding. In addition, as of March 31, 2019 there were outstanding stock options, warrants and a convertible note representing the potential issuance of approximately an additional 66.0 million shares of our common stock. The issuance of these shares in the future would result in significant dilution to our current stockholders and could adversely affect the price of our common stock and the terms on which we could raise additional capital. In addition, the issuance and subsequent trading of shares could cause the supply of our common stock available for purchase in the market to exceed the purchase demand for our common stock. Such supply in excess of demand could cause the market price of our common stock to decline.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

(a) Exhibit index

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

EXHIBIT INDEX

Exhibit No.	Title	Method of Filing

5.1	Opinion of Gary R. Henrie, Esq.	Filed herewith

5.2	Opinion of Hogan Lovells US LLP	Filed herewith

23.1	Consent of Gary R. Henrie, Esq. (included in Exhibit 5.1)	Filed herewith

23.2	Consent of Hogan Lovells US LLP (included in Exhibit 5.2)	Filed herewith

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

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

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

32.2	Chief Executive Officer and Chief Financial Officer Certifications required under Section 906 of the Sarbanes Oxley Act of 2002	Furnished herewith

101	The following materials from the Company’s Quarterly Report on Form 10-Q for the nine months ended March 31, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes	Filed herewith

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SIGNATURES

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

	INNOVATION PHARMACEUTICALS INC.

Dated: May 10, 2019	By:	/s/ Leo Ehrlich
	Name:	Leo Ehrlich
	Title:	Chief Executive Officer and Chief Financial Officer (Principal Executive, Accounting and Financial Officer)

Dated: May 10, 2019	By:	/s/ Arthur P. Bertolino
	Name:	Arthur P. Bertolino
	Title:	President and Chief Medical Officer