Innovation Pharmaceuticals Inc. - 10-Q filing on 2020-02-13

Fair Value Measurement

6 Months Ended

Dec. 31, 2019

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

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

The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 preferred stock liability balance for the period from October 5, 2018 (date of issuance of preferred stock and warrants) to June 30, 2019 and December 31, 2019.

Series B 5% convertible preferred stock liability
Balance, July 1, 2018	$	—
Issuance of preferred stock at fair value		1,116,000
Issuance of preferred stock by exercise of warrants		2,895,000
Conversion of preferred stock to common stock		(3,068,000	)
Change in fair value of preferred stock due to modification of terms		(357,000	)
Issuance of 100 shares valued at $535.12 per share Series B Preferred Stock per May 2019 Modification		54,000
Contingent consideration of 400 extra shares		214,000
5% accrued dividend (1)		25,000
Balance, June 30, 2019	$	879,000

Issuance of preferred stock through accrued dividend, valued at fair value		12,000
Issuance of preferred stock by exercise of warrants		639,000
Conversion of preferred stock to common stock		(632,000	)
Change in fair value of preferred stock due to modification of terms		(102,000	)
5% accrued dividend (1)		40,000
Settlement of accrued dividend by issuance of PS		(24,000	)
Balance, December 31, 2019	$	812,000

(1)	The 5% accrued dividend is reported in interest expense—preferred stock.

	The total dividends of approximately $40,000 and $25,000 are treated as interest expense – preferred stock during the six months ended December 31, 2019 and during the year ended June 30, 2019, respectively. The Series B preferred stock dividends of $24,000 was paid by issuance of Series B preferred stocks, and the remaining accrued dividends of $41,000 was included at Preferred stock liability as of December 31, 2019.