Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking
Statements
Certain
statements, other than purely historical information, including estimates, projections, statements relating to our business plans,
objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally
are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions. We intend
such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking
statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and
future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory
changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties
should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We
undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future
events or otherwise. Further information concerning our business, including additional factors that could materially
affect our financial results, is included herein and in our other filings with the SEC.
Company
Overview
We,
through our wholly owned subsidiary Skinvisible Pharmaceuticals Inc., are a pharmaceutical research and development (“R&D”)
company that has developed and patented an innovative polymer delivery system, Invisicare® and formulated over forty topical
skin products, which we out-license globally. We were incorporated in 1998, and target an estimated $80 billion global skincare
and dermatology market and a $30 billion global over-the-counter market as well as other healthcare / medical and consumer goods
markets.
With
the research and development complete on forty products and numerous patents issued (technology and product patents), we are ready
to monetize our investment. Our business model will continue to be to out-license our patented prescription and over-the-counter
(“OTC”) products featuring Invisicare to established manufacturers and marketers of brands internationally and to
maximize profits from the products we have already out-licensed. We have also formed a commercial subsidiary, Kintari Int. Inc.
with subsidiaries Kintari USA Inc. and Kintari Canada Inc., in order to take our cosmeceutical and select OTC products with Invisicare
to market.
The
opportunity for us to license our products continues to be a viable model as the need for pharmaceutical companies to access external
R&D companies for new products due to their own down-sizing or elimination of internal R&D departments. The demand for
our products is enhanced due to the granting of key US and international patents and the completed development of a number of
unique products.
Our
Plan for the Next Twelve Months
Our
growth strategy is to:
1.
Generate revenue from direct sales of our cosmeceutical/OTC product line;
2.
Capitalize on the success of current licensees;
3.
Increase the value of our current pipeline; and
4.
Boost licensing revenues by securing additional licensees globally and develop a robust royalty revenue stream that will finance
our future growth.
Direct
Sales of our Cosmeceutical/OTC Product Line
Kintari
USA Inc.:
On
September 9, 2014, we formed Kintari USA Inc., a wholly-owned subsidiary of Kintari Int. Inc., which is a wholly-owned subsidiary
of Skinvisible, Inc., to market a premium line of scientifically formulated skincare products powered by our patented Invisicare®
technology. We launched Kintari USA Inc. on January 15, 2015. As part of our strategic focus on revenue generation and creating
shareholder value, we plan to sell our products using a number of sales efforts, including our website, network marketing and
distribution agreements. Our sales efforts are focused in the US, Canada and China.
Recent
Sales Efforts
On
September 15, 2016, we licensed the exclusive world rights to our topical and transdermal cannabis products formulated with Invisicare
to CannaSkin, LLC, a cannabis product licensing company with international contacts in the medical marijuana industry.
CannaSkin
has the exclusive license to manufacture, market and sub-license our new cannabis products. Their targets will initially include
facilities in the 25 US jurisdictions currently approved for medical marijuana as well as Canada and Israel where there is a great
demand for cannabis products supported by science.
Skinvisible
has successfully formulated high-quality topical and transdermal cannabinoid products containing CBD and in the near future will
add THC. CBD has proven to have many therapeutic effects and it does not produce the "high" associated with THC. Cannabinoids
have been used for pain management and to treat many skin conditions, from acne, eczema, psoriasis, skin cancer, to anti-aging,
due to their anti-oxidant and anti-inflammatory properties. Our Invisicare technology allows for the superior binding of these
products to the skin, a controlled release of the cannabinoids both topically and transdermally, as well as providing patent protection.
Cannabis is being touted as a groundbreaking health solution and Skinvisible plans to bring science-based, patent protected products
into this emerging market.
On
September 8, 2016, Kintari Int. Inc. signed an exclusive distribution agreement with EDFA Morgan Capital Co. Ltd. (“EMC”),
located in Shenzhen, China, for Kintari® branded products for the territory of Greater China, which includes China, Hong Kong,
Macau, Taiwan, Singapore, Malaysia and Thailand.
According
to the agreement, EMC will sell Kintari products to Chinese consumers through a network of online shopping malls and other channels.
Additionally, EMC has presented an opportunity to provide Skinvisible’s DermSafe® hand sanitizer to a chain of 3,000
hospitals in China through their electronic appointment app and
website.
We believe there is significant value in making DermSafe accessible to 100 million Chinese patients through this service, as it
currently supports over 3,000 hospitals, 46,000 doctors and was used to make over 257 million appointments. The potential market
for DermSafe alone is vast as there are over 26,000 hospitals in China servicing a population of 1.6 billion people.
In
addition to DermSafe, Skinvisible will supply its Kintari –branded portfolio of globally patented skincare products made
with its Invisicare® delivery technology.
Product
Line
The
Kintari product portfolio consists of two anti-aging products to help fight the signs of aging, a broad spectrum sunscreen along
with our latest products: Kintari’s Hand & Body lotion; and our topical and transdermal cannabis products. All products
are made with our patented Invisicare technology.
Our
anti-aging products have been developed using proven anti-aging ingredients with scientific evidence of their effectiveness at
reducing the look of fine lines and wrinkles resulting in youthful looking skin. These potent ingredients will be powered by patented
Invisicare technology, providing consumers with unique, effective products which we believe cannot be duplicated.
Our
sunscreen is a broad spectrum SPF 30 known as Skinbrella®. We completed independent testing in early 2014 to validate our
broad spectrum sunscreen claims according to the labeling guidelines of the FDA, which are designed to help reduce the incidents
of skin cancer in the U.S. Our claims are as follows:
-
Claim # 1 –
Broad-Spectrum: According to the FDA, in order for a sunscreen to be labeled “broad spectrum” it must prove it protects
against both UVA and UVB rays by having an SPF (Sun Protection Factor) of at least 15 and a critical wave length of at least 370
nm. Our sunscreen has surpassed both of these criteria, allowing our broad spectrum sunscreen label to also state “prevents
sunburn, skin cancer and aging due to the sun.”
-
Claim # 2 –
Water-Resistant 80 Minutes: The FDA sunscreen water resistant claim requires that a sunscreen must have the same SPF after being
in water or sweating for 40 or 80 minutes. Our testing was conducted at an independent laboratory specializing in sunscreen testing.
The test involved human subjects that applied sunscreen to their arm, followed by the immersion of the arm into a Jacuzzi for
80 minutes (10 minutes in / 10 minutes out). Our sunscreen successfully completed this testing and is allowed to use “Water-resistant
for 80 Minutes” on its sunscreen label, the longest length of time allowed by the FDA.
-
Claim # 3 –
Unique Patented Technology / Eight-Hour Photostability: As previously announced, we were granted a patent from the United States
Patent and Trademark Office entitled “Sunscreen Composition with Enhanced UVA Absorber Stability and Methods”, which
provides protection until November 2029. Skinvisible successfully formulated a unique Invisicare® delivery system specifically
for stabilizing avobenzone; the key sunscreen used in the USA. Data submitted to the US patent office proved that our sunscreen
provides a minimum of eight hours of photostability.
Our
Hand & Body Lotion is formulated with five moisturizers including aloe, shea butter, glycerin, coconut oil and jojoba oil,
and to help smooth your skin the powerful antioxidant Vitamin E. These ingredients restore and nourish your skin from head to
toe.
Kintari
Canada Inc.
Our
hand sanitizer formulated with Invisicare® and chlorhexidine gluconate has been launched in Canada by subsidiary Kintari Canada
Inc. where it has Health Canada approval. DermSafe is an alcohol free hand sanitizer that products against 99% of all germs. We
are currently seeking licensees and/or distributors to begin the sale of DermSafe in South America and in the EU. We launched
DermSafe in August, 2016 in Canada through our Kintari Canadian website for retail customers only.
In
July, 2016, we announced that Kintari Canada made a donation of DermSafe to the Canadian Olympic Foundation offering protection
for Canada’s athletes during the upcoming Olympic Games in Rio. Kintari Canada supplied the product to all Canadian Olympic
athletes, trainers and support staff.
Capitalize
On Current Licensees
We
have: Avon Products globally and Women’s Choice Pharmaceuticals in the United States.
We
continue to work diligently with our licensees to ensure they have a smooth manufacturing process, ongoing R&D support and
marketing feedback.
Avon
Products, Inc.
Product
:
We have a long-term contract with Avon globally for over ten years to provide Invisicare polymer for their long-lasting lipsticks.
Sales:
Invisicare polymers are purchased directly from Skinvisible.
Women’s
Choice Pharmaceuticals
Product
:
ProCort®, long lasting prescription hemorrhoid cream launched in the United States August 2011.
Sales
and Royalties
: Skinvisible receives a royalty based on net sales of ProCort. This past year Women's Choice Pharmaceuticals
LLC partnered with Advanced Medical Enterprises, LLC to market ProCort® in Puerto Rico. With over thirty pharmaceutical sales
reps calling on OBGYNs in the US, Women’s Choice has been successfully growing their sales of ProCort® and we look forward
to increased growth in 2016. Women’s Choice is seeking to form other strategic alliances in order to increase its sales
efforts by targeting new territories and targeting medical specialists which previously were not called upon
Additional
Skinvisible Products
Sunless
Tanning Products
We
have developed a new sunless tanning mousse / foam which uses a unique foam with Invisicare®, developed specifically for its
foaming properties. This adds to Skinvisible’s line of sunless tanning products which includes sunless tanning lotions (light,
medium and dark), pre-sun moisturizer and after-sun moisturizer along with sunless tanning spray products for commercial use.
The addition of a sunless tanning mousse enhances this line of products.
Sunscreen
Products
We
have developed 3 broad spectrum sunscreens, with SPF 15, 30 and 50 (the highest SPF allowed by the FDA). All are formulated with
Avobenzone, the only UVA sun filter allowed under the US FDA monograph. This UVA/UVB sunscreen was granted a patent from the United
States patent office in 2013. Avobenzone is known for breaking down in the sun after only two hours – thus the requirement
to reapply every 2 hours. Skinvisible’s patent was granted based on Invisicare's® minimum 8 hour photo stability. For
countries outside the United States, Skinvisible has additionally patented UVA/UVB sunscreens formulated with Tinosorb S.
Increasing
The Value of Skinvisible’s Pipeline
We
have a pipeline of over forty products which are available for licensing. Testing is conducted in-house generating proof of concept
including release of the active ingredient as well as long term shelf life (stability). Additional studies conducted on specific
products including skin sensitivity, toxicity and product efficacy are outsourced to FDA compliant laboratories. These studies
are critical in attracting potential licensees. Our clinical strategy is to:
-
Our clinical
strategy is to find a partner for our prescription product portfolio. This would allow for a partner to seek FDA approval using
the 505b2 pathway for one or more of our products.
-
Launch of our
DermSafe® hand sanitizer in Canada under Kintari. In 2013, we commissioned an independent laboratory to further analyze the
long-term effectiveness of DermSafe® when put in contact with two bacteria; the “super bug” MRSA and E. coli,
the “restaurant bug” since it is often transmitted by food and food handlers. The long-term effectiveness of two bacteria;
Methicillin-resistant Staphylococcus aureus or MRSA (ATCC #33591) and Escherichia coli or E. coli (ATCC #43888") were tested
up to four hours after application. The results showed that the individual arms of subjects which had DermSafe® applied and
were even rinsed prior to each bacteria challenge, showed a 95.83% reduction at the 4 hour time point for MRSA and 99.38% for
E. coli. In 2013, we obtained the registration rights for DermSafe® in Belgium. This designation allows for the sale and/
or registration of DermSafe in most EU countries. A strategy is being developed along with a larger global strategy to bring DermSafe
to the EU and. Skinvisible has also commissioned further testing of DermSafe against the (Middle East Respiratory Syndrome Coronavirus
(MERS-CoV); a SARS-like virus and the avian influenza A virus, H7N9.
-
We continue to
enhance our product developed for Netherton syndrome. Netherton syndrome is a disease caused by a genetic defect which causes
the skin to continually exfoliate, never forming a skin bond. This leaves the patient highly susceptible to infection and dealing
with a life-long condition that has no cure. Our product has shown excellent results in lab studies blocking the enzyme that breaks
down the skin and we are seeking “Orphan Drug” designation in both the US (FDA) and Europe (EMA). We continue to investigate
means to reformulate our product to better meet the demands of this very debilitating disease and are undergoing preliminary proof-of-concept
investigations on Netherton syndrome.
-
The
advantages of obtaining Orphan Drug designation is that it provides various incentives
including a reduction or elimination of registration and market authorization fees, protocol
assistance, and seven years of market exclusivity for the product in the US and ten years
in Europe. There can be no assurances that our project will be successful. Research and
development for this project is currently on hold as we determine additional options
for our formulation.
Secure
Additional Licensees
We
are in discussions and undergoing internal discussions with various pharmaceutical companies for licenses.
To
facilitate further expansion, we are seeking an exclusive license with a proven US or global based Pharmaceutical Company for
our existing Rx product formulations. The licensee would be expected to pay all costs in getting FDA approval. The licensee would
pay Skinvisible for the license in milestone payments as Clinical Phases are proven.
Results
of Operations for the Three and Nine Months Ended September 30, 2016 and 2015
Revenues
Our
revenue from product sales, royalties on patent licenses and license fees for the three months ended September 30, 2016 was $16,807,
a decrease from $30,377 for the same period ended September 30, 2015. Our revenue from product sales, royalties on patent licenses
and license fees for the nine months ended September 30, 2016 was $83,258, a decrease from $158,428 for the same period ended
September 30, 2015.
The
decrease in revenue for the three and nine months ended September 30, 2016 was mainly due to a reduction in product sales. Our
initial foray into network marketing was the main reasons for the decrease in sales. Several distributors were not successful
in selling product and much of the product actually sold by these individuals was returned. Moreover, we ultimately terminated
several of these distributorships, which resulted in repurchasing product. We are currently in the process of revamping our network
marketing program, which we hope to establish for the last part of the year. We have also signed new distributors in the current
quarter.
Cost
of Revenues
Our
cost of revenues for the three months ended September 30, 2016 increased to $32,583 from the prior year period when cost of revenues
was $9,859. Our cost of revenues for the nine months ended September 30, 2016 decreased to $46,595 from the prior year period
when cost of revenues was $56,047. Our cost of revenues increased for the three months ended September 30, 2016 over the prior
year period as a result of spoilage of expired product. Our cost of revenues decreased for the nine months ended September 30,
2016 over the prior year periods as a result of decreased product sales. We expect our cost of revenues to increase as we continue
to push sales from Kintari USA and Canada.
Gross
Profit
Gross
profit for the three months ended September 30, 2016 was ($15,776), or approximately -94% of sales. Gross profit for the three
months ended September 30, 2015 was $20,518, or approximately 67% of sales. Gross profit for the nine months ended September 30,
2016 was $36,663, or approximately 44% of sales. Gross profit for the nine months ended September 30, 2015 was $102,381, or approximately
65% of sales. Our gross profit margin decreased in 2016 as compared with 2015, largely as a result of spoilage of product. If
we do not experience increased sales going forward, we will have a similar trend in product spoilage. Although there can be no
assurance, we are hopeful that our current licensing and marketing efforts will result in increased sales.
Operating
Expenses
Operating
expenses decreased to $185,952 for the three months ended September 30, 2016 from $270,067 for the same period ended September
30, 2015. Operating expenses decreased to $725,251 for the nine months ended September 30, 2016 from $943,982 for the same period
ended September 30, 2015.
Our
operating expenses for the nine months ended September 30, 2016 consisted mainly of accrued salaries and wages of $275,558, consulting
fees of $212,501, depreciation and amortization expenses of $43,334, rent of $32,359, accounting and audit expenses of $27,046
and salaries and wages of $20,333. In comparison, our operating expenses for the nine months ended September 30, 2015 consisted
mainly of accrued salaries and wages of $238,950, salaries and wages of $153,828, commissions of $115,483, consulting fees of
$105,234, travel expenses of $64,875, depreciation and amortization expenses of $43,377, rent of $32,619, accounting and audit
expenses of $28,092, license and permit fees of $20,232 and payroll tax expense of $19,320.
Other
Expenses
We
had other expenses of $282,262 for the three months ended September 30, 2016, compared with other expenses of $231,707 for the
three months ended September 30, 2015. Other expenses was the result of interest expenses for the three months ended September
30, 2016 from $232,107 in interest expenses from prior period ended September 30, 2015.
We
had other expenses of $888,688 for the nine months ended September 30, 2016, compared with other expenses of $648,213 for the
nine months ended September 30, 2015. This was largely the result of $891,282 in interest expenses for the nine months ended September
30, 2016 from $650,079 in the prior period ended September 30, 2015.
We
expect to continue to experience high interest payments in the future as a result of our outstanding liabilities. Moreover, as
of the date of this report, there are a number of secured promissory notes with an aggregate principal amount of approximately
$2,539,900 that have matured. In addition, we also have a number of unsecured promissory notes with an aggregate principal amount
of $61,476 that have matured. If we are unable to generate sufficient revenues and/or additional financing to service this debt,
there is a risk the lenders will call the notes, secure our assets, as to those applicable secured notes, and demand payment.
If this happens, we could go out of business.
Net
Loss
We
recorded a net loss of $483,990 for the three months ended September 30, 2016, as compared with a net loss of $481,256 for the
three months ended September 30, 2015. We recorded a net loss of $1,577,273 for the nine months ended September 30, 2016, as compared
with a net loss of $1,489,814 for the nine months ended September 30, 2015.
Liquidity
and Capital Resources
As
of September 30, 2016, we had total current assets of $90,620 and total assets in the amount of $350,702. Our total current liabilities
as of September 30, 2016 were $7,275,387. We had a working capital deficit of $7,184,767 as of September 30, 2016.
Operating
activities used $135,600 in cash for the nine months ended September 30, 2016, as compared with $612,376 for the nine months ended
September 30, 2015. Our net loss of $1,577,273 was the main component of our negative operating cash flow for the nine months
ended September 30, 2016, offset mainly by an increase in accounts payable and accrued liabilities of $644,025, amortization of
debt discount of $428,347, an increase in accrued interest of $187,074 and stock based compensation of $133,445. Our net loss
of $1,489,814 was the main component of our negative operating cash flow for the nine months ended September 30, 2015, offset
mainly by amortization of debt discount of $327,478, an increase in accounts payable and accrued liabilities of $321,020 and an
increase of accrued interest of $149,788.
Cash
flows provided by financing activities during the nine months ended September 30, 2016 amounted to $135,600, as compared with
$421,500 for the nine months ended September 30, 2016. Our cash flows for the nine months ended September 30, 2016 consisted of
$98,000 in proceeds from convertible notes payable, $67,000 in proceeds from notes payable, $25,000 in proceeds from the sale
of our common stock and $18,700 in related party debt, offset by $47,500 in payments on convertible debt and $25,600 in payments
on notes payable. Our cash flows for the nine months ended September 30, 2015 consisted of $431,000 in proceeds from notes payable
and $80,000 in proceeds from the sale of common stock, offset by $89,500 in payments on notes payable.
On
August 11, 2016, we entered into a convertible promissory note pursuant to which we borrowed $15,000. Interest under the convertible
promissory note is 9% per annum, and the principal and all accrued but unpaid interest is due on August 11, 2018. The note is
convertible into shares of our common stock at a variable conversion price of 90% of the average market price of our common stock
during the 5 trading days prior to the notice of conversion, subject to adjustment as described in the note.
On
August 31, 2016, we entered into a convertible promissory note pursuant to which we settled $50,000 in convertible notes and accrued
interest of $3,404. Interest under the convertible promissory note is 10% per annum, and the principal and all accrued but unpaid
interest is due on December 31, 2016. The note is convertible into 5,340,283 shares of our common stock at a price of $0.01 per
share and warrants to purchase 2,670,142 shares of common stock exercisable at $0.02 per share.
On
October 11, 2016, we entered into a 10% unsecured note payable to an employee and received total proceeds of $5,070. The note
is due on December 31, 2016.
On
October 31, 2016, 3,333,350 shares of our common stock and 1,666,675 warrants exercisable at $0.025 were issued for a cash investment
of $50,000.
Based
upon our current financial condition, we do not have sufficient cash to operate our business at the current level for the next
twelve months. We intend to fund operations through increased sales and debt and/or equity financing arrangements, which may be
insufficient to fund expenditures or other cash requirements. We plan to seek additional financing in a private equity offering
to secure funding for operations. There can be no assurance that we will be successful in raising additional funding. If we are
not able to secure additional funding, the implementation of our business plan will be impaired. There can be no assurance that
such additional financing will be available to us on acceptable terms or at all.
Off
Balance Sheet Arrangements
As
of September 30, 2016, there were no off balance sheet arrangements.
Critical
Accounting Policies
In
December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management
Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the
portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Going
concern
– The accompanying financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred cumulative net losses
of $29,408,625 since our inception and require capital for our contemplated operational and marketing activities to take place.
Our ability to raise additional capital through the future issuances of common stock is unknown. The obtainment of additional
financing, the successful development of our contemplated plan of operations, and our transition, ultimately, to the attainment
of profitable operations are necessary for us to continue operations. The ability to successfully resolve these factors raise
substantial doubt about our ability to continue as a going concern. These consolidated financial statements do not include any
adjustments that may result from the outcome of these aforementioned uncertainties.
Product
sales
– Revenues from the sale of products (Invisicare® polymers) are recognized when title to the products are
transferred to the customer and only when no further contingencies or material performance obligations are warranted, and thereby
have earned the right to receive reasonably assured payments for products sold and delivered.
Royalty
sales
– We also recognize royalty revenue from licensing our patented product formulations only when earned, with no
further contingencies or material performance obligations are warranted, and thereby have earned the right to receive and retain
reasonably assured payments.
Distribution
and license rights sales
– We also recognize revenue from distribution and license rights only when earned (and are
amortized over a five year period), with no further contingencies or material performance obligations are warranted, and thereby
have earned the right to receive and retain reasonably assured payments.
Costs
of Revenue
– Cost of revenue includes raw materials, component parts, and shipping supplies. Shipping and handling costs
is not a significant portion of the cost of revenue.
Accounts
Receivable
– Accounts receivable is comprised of uncollateralized customer obligations due under normal trade terms
requiring payment within 30 days from the invoice date. The carrying amount of accounts receivable is reviewed periodically for
collectability. If management determines that collection is unlikely, an allowance that reflects management’s best estimate
of the amounts that will not be collected is recorded. Management reviews each accounts receivable balance that exceeds 30 days
from the invoice date and, based on an assessment of creditworthiness, estimates the portion, if any, of the balance that will
not be collected. As of September 30, 2016, the Company had not recorded a reserve for doubtful accounts. The Company has $1,000,000
in convertible notes payable which are secured by the accounts receivable of a license agreement the Company has with Women's
Choice Pharmaceuticals, LLC on its proprietary prescription product, ProCort®.
Recently
Issued Accounting Pronouncements
We
do not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations,
financial position or cash flow.