N
otes to Condensed Consolidated
Financial Statements
June 30, 2017
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Innovus
Pharmaceuticals, Inc., together with its subsidiaries (collectively
referred to as “Innovus”, “we”,
“our”, “us” or the “Company”)
is a Nevada formed, San Diego, California-based emerging commercial
stage pharmaceutical company delivering over-the-counter medicines
and consumer care products for men’s and women’s health
and respiratory diseases.
We
generate revenue from 21 commercial products in the United States,
including six of these commercial products in multiple countries
around the world through our commercial partners. Our commercial
product portfolio includes (a) Beyond Human® Testosterone
Booster, (b) Beyond Human® Growth Agent, (c) Zestra® to
increase female arousal and desire, (d) EjectDelay® for
premature ejaculation, (e) Sensum+® for reduced penile
sensitivity, (f) Zestra Glide®, (g) Vesele® for promoting
sexual health, (h) Androferti® to support overall male
reproductive health and sperm quality, (i) RecalMax™ for
cognitive brain health, (j) Beyond Human® Green Coffee
Extract, (k) Beyond Human® Vision Formula, (l) Beyond
Human® Blood Sugar, (m) Beyond Human® Colon Cleanse, (n)
Beyond Human® Ketones, (o) Beyond Human® Krill Oil, (p)
Beyond Human® Omega 3 Fish Oil, (q) UriVarx™ for bladder
health, (r) ProstaGorx™ for prostate health, (s)
AllerVarx
™
for
management of allergy symptoms, (t) Apeaz™ indicated for
arthritis pain relief, and (u) ArthriVarx™ for joint health.
While we generate revenue from the sale of our commercial products,
most revenue is currently generated by Vesele®, Zestra®,
Zestra® Glide, RecalMax™, Sensum+®, UriVarx™,
ProstaGorx™, AllerVarx
™,
Apeaz™,
ArthriVarx™ and Beyond Human® Testosterone
Booster.
Pipeline Products
FlutiCare™
(fluticasone propionate nasal spray)
.
FlutiCare™ is
our nationally branded
Over-the-Counter
(“OTC”)
fluticasone
propionate nasal spray, United States Pharmacopeia
(“USP”) 50 mcg per spray, which is indicated to treat
individuals with allergic rhinitis, or more commonly referred to as
“allergies”. Allergic rhinitis is one of the most
common ailments in the western world and is continuing to grow as
there are approximately 50 million suffers in the U.S. alone
according to GlobalData.
We expect to launch our
FlutiCare™ OTC product in the U.S. in the fourth quarter of
2017 (see Note 3).
PEVarx™
.
This
product is designed and tested in over 600 men to extend the length
of sexual intercourse and enhance male sexual performance and
stamina. We expect to launch this product in the second half of
2017.
Xyralid
™
.
Xyralid™ is an OTC FDA
monograph compliant drug containing the active drug ingredient
lidocaine and indicated for the relief of the pain and symptoms
caused by hemorrhoids. We expect to launch this product in the
second half of 2017.
Urocis
™
XR
.
Urocis™ XR is a proprietary extended release of
Vaccinium Marcocarpon (cranberry) shown to provide 24-hour coverage
in the body in connection with urinary tract infections in women.
We expect to launch this product in the second half of
2017.
AndroVit
™
. AndroVit™ is a
proprietary supplement to support overall prostate and male sexual
health. AndroVit™ was specifically formulated with
ingredients known to support normal prostate health and vitality
and male sexual health. We expect to launch this product in the
second half of 2017.
Basis of Presentation and Principles of Consolidation
The
condensed consolidated balance sheet as of December 31, 2016, which
has been derived from audited consolidated financial statements,
and these unaudited condensed consolidated financial statements
have been prepared by management in accordance with accounting
principles generally accepted in the United States (“U.S.
GAAP”), and include all assets, liabilities, revenues and
expenses of the Company and its wholly owned subsidiaries: FasTrack
Pharmaceuticals, Inc., Semprae Laboratories, Inc.
(“Semprae”) and Novalere, Inc.
(“Novalere”). All material intercompany transactions
and balances have been eliminated. These interim unaudited
condensed consolidated financial statements and notes thereto
should be read in conjunction with Management’s Discussion
and Analysis of Financial Condition and Results of Operations and
the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2016. Certain information required by U.S.
GAAP has been condensed or omitted in accordance with the rules and
regulations of the U.S. Securities and Exchange Commission
(“SEC”). The results for the period ended June 30,
2017, are not necessarily indicative of the results to be expected
for the entire fiscal year ending December 31, 2017 or for any
future period. Certain items have been reclassified to
conform to the current year presentation.
Use of Estimates
The
preparation of these condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Such management estimates include the
allowance for doubtful accounts, sales returns and chargebacks,
realizability of inventories, valuation of deferred tax assets,
goodwill and intangible assets, valuation of contingent acquisition
consideration, recoverability of long-lived assets and goodwill,
fair value of derivative liabilities and the valuation of
equity-based instruments and beneficial conversion
features. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under
the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
Liquidity
Our
operations have been financed primarily through proceeds from
convertible debentures and notes payable, sales of our common stock
and revenue generated from our products domestically and
internationally by our partners. These funds have provided us
with the resources to operate our business, sell and support our
products, attract and retain key personnel and add new products to
our portfolio. We have experienced net losses and negative
cash flows from operations each year since our inception. As
of June 30, 2017, we had an accumulated deficit of $32,815,586 and
a working capital deficit of $1,022,779.
In
March 2017, we raised net cash proceeds of $3,307,773 from the sale
of common stock and warrants in a registered public offering (see
Note 7) and, in January 2017 and December 2016, we raised $650,000
in gross proceeds from the issuance of notes payable to three
investors (see Note 5). We have also issued equity instruments in
certain circumstances to pay for services from vendors and
consultants.
As of
June 30, 2017, we had $1,824,633 in cash. During the six months
ended June 30, 2017, we had net cash used in operating activities
of $969,292. We expect that our existing capital resources, revenue
from sales of our products and upcoming sales milestone payments
from the commercial partners signed for our products will be
sufficient to allow us to continue our operations, commence the
product development process and launch selected products
through at least the next 12 months. In addition, our CEO, who is
also a significant shareholder, has deferred the remaining payment
of his salary earned thru June 30, 2016 totaling $1,036,315 for at
least the next 12 months. Our actual needs will depend on numerous
factors, including timing of introducing our products to the
marketplace, our ability to attract additional international
distributors for our products and our ability to in-license in
non-partnered territories and/or develop new product candidates.
Although no assurances can be given, we may raise additional
capital through the sale of debt or equity securities to provide
additional working capital, pay for further expansion and
development of our business, and to meet current obligations. Such
capital may not be available to us when we need it or on terms
acceptable to us, if at all.
Fair Value Measurement
Our
financial instruments are cash, accounts receivable, accounts
payable, accrued liabilities, derivative liabilities, contingent
consideration and debt. The recorded values of cash, accounts
receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The fair values
of the warrant derivative liabilities and embedded conversion
feature derivative liabilities are based upon the Black Scholes
Option Pricing Model (“Black-Scholes”) and the
Path-Dependent Monte Carlo Simulation Model calculations,
respectively, and are a Level 3 measurement (see Note 8). The fair
value of the contingent acquisition consideration is based upon the
present value of expected future payments under the terms of the
agreements and is a Level 3 measurement (see Note
3). Based on borrowing rates currently available to us,
the carrying values of the notes payable approximate their
respective fair values.
We
follow a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1) and
the lowest priority to measurements involving significant
unobservable inputs (Level 3). The three levels of the fair
value hierarchy are as follows:
●
Level
1 measurements are quoted prices (unadjusted) in active markets for
identical assets or liabilities that we have the ability to access
at the measurement date.
●
Level
2 measurements are inputs other than quoted prices included in
Level 1 that are observable either directly or
indirectly.
●
Level
3 measurements are unobservable inputs.
Concentration of Credit Risk, Major Customers and Segment
Information
Financial
instruments that potentially subject us to significant
concentrations of credit risk consist primarily of cash and
accounts receivable. Cash held with financial institutions may
exceed the amount of insurance provided by the Federal Deposit
Insurance Corporation on such deposits. Accounts receivable
consist primarily of sales of Zestra® to U.S. based retailers
and Ex-U.S. partners. We also require a percentage of payment in
advance for product orders with our larger partners. We perform
ongoing credit evaluations of our customers and generally do not
require collateral.
Revenues
consist primarily of product sales and licensing rights to market
and commercialize our products. We have no customers
that accounted for 10% or more of our total net revenue during the
three and six months ended June 30, 2017 and 2016 and two customers
accounted for 60% of total net accounts receivable as of June 30,
2017. We had three customers that accounted for 62% of total net
accounts receivable as of December 31, 2016.
Over
95% of our sales are currently within the United States and Canada.
The balance of the sales are to various other countries, none of
which is 10% or greater.
We
operate our business on the basis of a single reportable segment,
which is the business of delivering over-the-counter medicines and
consumer care products for men’s and women’s health and
respiratory diseases. Our chief operating decision-maker is the
Chief Executive Officer, who evaluates us as a single operating
segment.
Revenue Recognition and Deferred Revenue
We
generate revenue from product sales and the licensing of the rights
to market and commercialize our products.
We
recognize revenue in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification
(“ASC”) 605,
Revenue
Recognition
. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales
: We ship products directly to consumers
pursuant to phone or online orders and to our wholesale and retail
customers pursuant to purchase agreements or sales
orders. Revenue from sales transactions where the buyer has
the right to return the product is recognized at the time of sale
only if (1) the seller’s price to the buyer is
substantially fixed or determinable at the date of sale,
(2) the buyer has paid the seller, or the buyer is obligated
to pay the seller and the obligation is not contingent on resale of
the product, (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction
or damage of the product, (4) the buyer acquiring the product
for resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant obligations
for future performance to directly bring about resale of the
product by the buyer and (6) the amount of future returns can
be reasonably estimated.
License Revenue
: The license agreements we enter into
normally generate three separate components of revenue: 1) an
initial payment due on signing or when certain specific conditions
are met; 2) royalties that are earned on an ongoing basis as
sales are made or a pre-agreed transfer price and 3) sales-based
milestone payments that are earned when cumulative sales reach
certain levels. Revenue from the initial payments or licensing fee
is recognized when all required conditions are met. Royalties are
recognized as earned based on the licensee’s sales. Revenue
from the sales-based milestone payments is recognized when the
cumulative revenue levels are reached. The achievement of the
sales-based milestone underlying the payment to be received
predominantly relates to the licensee’s performance of future
commercial activities. FASB ASC 605-28,
Milestone Method
, (“ASC
605-28”) is not used by us as these milestones do not meet
the definition of a milestone under ASC 605-28 as they are
sales-based and similar to a royalty and the achievement of the
sales levels is neither based, in whole or in part, on our
performance, a specific outcome resulting from our performance, nor
is it a research or development deliverable.
Sales Allowances
We
accrue for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
Our
product returns accrual is primarily based on estimates of future
product returns over the period customers have a right of return,
which is in turn based in part on estimates of the remaining
shelf-life of products when sold to customers. Future product
returns are estimated primarily based on historical sales and
return rates. We estimate our volume rebates and promotional
discounts accrual based on its estimates of the level of inventory
of our products in the distribution channel that remain subject to
these discounts. The estimate of the level of products in the
distribution channel is based primarily on data provided by our
customers.
In all
cases, judgment is required in estimating these reserves. Actual
claims for rebates and returns and promotional discounts could be
materially different from the estimates.
We
provide a customer satisfaction warranty on all of our products to
customers for a specified amount of time after product
delivery. Estimated return costs are based on historical
experience and estimated and recorded when the related sales are
recognized. Any additional costs are recorded when incurred or
when they can reasonably be estimated.
The
estimated reserve for sales returns and allowances, which is
included in accounts payable and accrued expense, was approximately
$51,000 and $61,000 at June 30, 2017 and December 31, 2016,
respectively.
Advertising Expense
Advertising costs, which primarily includes print and online media
advertisements, are expensed as incurred and are included in sales
and marketing expense in the accompanying condensed consolidated
statements of operations. Advertising costs were approximately
$1,253,000 and $169,000 and $2,611,000 and $180,000 for the three
and six months ended June 30, 2017 and 2016,
respectively.
Debt Extinguishment
Any
gain or loss associated with debt extinguishment is recorded in the
period in which the debt is considered extinguished. Third party
fees incurred in connection with a debt restructuring accounted for
as an extinguishment are capitalized. Fees paid to third parties
associated with a term debt restructuring accounted for as a
modification are expensed as incurred. Third party and creditor
fees incurred in connection with a modification to a line of credit
or revolving debt arrangements are considered to be associated with
the new arrangement and are capitalized.
Net Loss per Share
Basic
net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding and vested but deferred
RSUs during the period presented. Diluted net loss per share
is computed using the weighted average number of common shares
outstanding and vested but deferred RSUs during the periods plus
the effect of dilutive securities outstanding during the
periods. For the three and six months ended June 30, 2017 and
2016, basic net loss per share is the same as diluted net loss per
share as a result of our common stock equivalents being
anti-dilutive. See Note 7 for more details.
Recent Accounting Pronouncements
In July
2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features.
The amendments in Part I of this ASU
change the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entity’s
own stock. As a result, a freestanding equity-linked financial
instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result
of the existence of a down round feature. For freestanding equity
classified financial instruments, the amendments require entities
that present earnings per share to recognize the effect of the down
round feature when it is triggered. That effect is treated as a
dividend and as a reduction of income available to common
shareholders in basic earnings per share. For public business
entities, the amendments are effective for fiscal years beginning
after December 15, 2018, including interim periods within those
fiscal years.
Early adoption is permitted
in any interim or annual period, with any adjustments reflected as
of the beginning of the fiscal year of adoption.
The
amendments should be applied retrospectively to outstanding
financial instruments with down round features by means of either a
cumulative-effect adjustment to the consolidated statement of
financial position as of the beginning of the first fiscal year and
interim period of adoption or retrospectively to each prior
reporting period presented in accordance with the guidance on
accounting changes. We are currently in the process of evaluating
the effect this standard will have on our derivative liabilities
and the impact on our condensed consolidated financial position and
results of operation.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230) –
Classification of Certain Cash Receipts and Cash Payments
.
This ASU provides clarification regarding how certain cash receipts
and cash payments are presented and classified in the statement of
cash flows. This ASU addresses eight specific cash flow issues with
the objective of reducing the existing diversity in practice. The
issues addressed in this ASU that will affect us is classifying
debt prepayments or debt extinguishment costs and contingent
consideration payments made after a business combination. This
update is effective for annual and interim periods beginning after
December 15, 2017, and interim periods within that reporting period
and is to be applied using a retrospective transition method to
each period presented. Early adoption is permitted. We have elected
to early adopt ASU 2016-15 as of January 1, 2017 and, as a result,
the prepayment penalty of $127,247 in connection with the
extinguishment of the 2016 Notes (see Note 5) in March 2017 is
classified as a financing cash outflow in the accompanying
condensed consolidated statement of cash flows for the six months
ended June 30, 2017. The adoption of this ASU did not have a
material impact on our condensed consolidated financial position,
results of operations and related disclosures and had no other
impact to the accompanying condensed consolidated statement of cash
flows for the six months ended June 30, 2017 and 2016.
In March 2016, the FASB issued ASU No.
2016-09,
Improvements
to Employee Share-Based Payment Accounting
, which amends ASC Topic
718,
Compensation
- Stock Compensation
.
The ASU involves
several aspects of the accounting for share-based payment
transactions, including the income tax consequences, forfeitures,
classification of awards as either equity or liabilities and
classification on the statement of cash flows. Certain of these
changes are required to be applied retrospectively, while other
changes are required to be applied prospectively.
ASU 2016-09 is effective
for public business entities for annual reporting periods beginning
after December 15, 2016, and interim periods within that reporting
period. Early adoption will be permitted in any interim or annual
period, with any adjustments reflected as of the beginning of the
fiscal year of adoption. As a result of the adoption of this ASU as
of January 1, 2017, we have made an entity-wide accounting policy
election to account for forfeitures when they occur. There is no
cumulative-effect adjustment as a result of the adoption of this
ASU as our estimated forfeiture rate prior to adoption of this ASU
was 0%. The adoption of this ASU did not have a material impact on
our condensed consolidated financial statements and related
disclosures.
NOTE 2 – LICENSE AGREEMENTS
CRI In-License Agreement
On
April 19, 2013, the Company and Centric Research Institute
(“CRI”) entered into an asset purchase agreement (the
“CRI Asset Purchase Agreement”) pursuant to which we
acquired:
●
All of
CRI’s rights in past, present and future Sensum+®
product formulations and presentations, and
●
An
exclusive, perpetual license to commercialize Sensum+®
products in all territories except for the United
States.
On June
9, 2016, the Company and CRI amended the CRI Asset Purchase
Agreement (“Amended CRI Asset Purchase Agreement”) to
provide us commercialization rights for Sensum+® in the U.S.
through our Beyond Human® marketing platform through December
31, 2016. On January 1, 2017, the Company and CRI agreed to extend
the term of the Amended CRI Asset Purchase Agreement to December
31, 2017. In connection with the extension, we issued restricted
shares of common stock totaling 225,000 to CRI as a prepayment of
royalties due on net profit of Sensum+® in the U.S. in 2017.
The royalty prepayment amount is $44,662 as the number of shares of
common stock issued was based on the closing price of our common
stock on December 30, 2016. If CRI does not earn royalties larger
than the prepaid amount of $44,662 in 2017, the term of the Amended
CRI Asset Purchase Agreement is automatically extended one
additional year to December 31, 2018.
The CRI
Asset Purchase Agreement also requires us to pay to CRI up to $7.0
million in cash milestone payments based on first achievement of
annual Ex-U.S. net sales targets plus a royalty based on annual
Ex-U.S. net sales. The obligation for these payments expires
on April 19, 2023 or the expiration of the last of CRI’s
patent claims covering the product or its use outside the U.S.,
whichever is sooner. No sales milestone obligations have been
met and no royalties are owed to CRI under this agreement during
the three and six months ended June 30, 2017 and 2016.
In
consideration for the Amended CRI Asset Purchase Agreement, we are
required to pay CRI a percentage of the monthly net profit, as
defined in the agreement, from our sales of Sensum+® in the
U.S. through our Beyond Human® marketing platform. During the
three and six months ended June 30, 2017 and 2016, no amounts have
been earned by CRI under the Amended CRI Asset Purchase
Agreement.
Densmore Pharmaceutical International Agreement
On
April 24, 2017, we entered into an exclusive ten-year license
agreement with Densmore Pharmaceutical International, a Monaco
company (“Densmore”), under which we granted to
Densmore an exclusive license to market and sell our topical
treatment for Female Sexual Interest/Arousal Disorder
(“FSI/AD”) Zestra® in France and Belgium. Under
the agreement, we received a non-refundable upfront payment of
$7,500 which was recognized as revenue in the accompanying
condensed consolidated statement of operations for the three and
six months ended June 30, 2017. We believe the amount of the
upfront payment received is reasonable compared to the amounts to
be received upon obtainment of future minimum order quantities.
Densmore is obligated to order certain minimum annual quantities of
Zestra® at a pre-negotiated transfer price per unit during the
term of the agreement. During the three and six months ended June
30, 2017, we did not recognize any revenue for the sale of products
related to this agreement but we did receive a deposit of $46,769
for Densmore’s initial order of approximately $95,000 which
is included in deferred revenue and customer deposits in the
accompanying condensed consolidated balance sheet as of June 30,
2017.
In July
2017, we entered into an amendment to the agreement with Densmore
to expand the product territory to Singapore and
Vietnam.
Luminarie Pty Ltd. Agreement
On May
16, 2017, we entered into an exclusive ten-year license agreement
with Luminarie Pty Ltd., a Australia company
(“Luminarie”), under which we granted to Luminarie an
exclusive license to market and sell our topical treatment for
FSI/AD Zestra® and Zestra Glide® in Australia, New
Zealand and the Philippines. Luminarie received approval for
Zestra® as a Class I Medical Device in Australia in July 2017.
Luminarie is obligated to order certain minimum annual quantities
of Zestra® and Zestra Glide® at a pre-negotiated transfer
price per unit during the term of the agreement. During the three
and six months ended June 30, 2017, we did not recognize any
revenue for the sale of products related to this
agreement.
J&H Co. LTD Agreement
On
November 9, 2016, we entered into an exclusive ten-year license
agreement with J&H Co. LTD, a South Korea company
(“J&H”), under which we granted to J&H an
exclusive license to market and sell our topical treatment for
Female Sexual Interest/Arousal Disorder (“FSI/AD”)
Zestra® and Zestra Glide® in South Korea. Under the
agreement, J&H is obligated to order minimum annual quantities
of Zestra® and Zestra Glide® totaling $2.0 million at a
pre-negotiated transfer price per unit. The minimum annual order
quantities by J&H are to be made over a 12-month period
following the approval of the product by local authorities and
beginning upon the completion of the first shipment of product. Our
partner recently received the approval to import the product and
placed its first order in March 2017. During the three and six
months ended June 30, 2017, we recognized $0 and $60,000 in revenue
for the sale of products related to this agreement.
Sothema Laboratories Agreement
On
September 23, 2014, we entered into an exclusive license agreement
with Sothema Laboratories, SARL, a Moroccan publicly traded company
(“Sothema”), under which we granted to Sothema an
exclusive license to market and sell Zestra® (based on the
latest Canadian approval of the indication) and Zestra Glide®
in several Middle Eastern and African countries (collectively the
“Territory”).
Under
the agreement, we received an upfront payment of $200,000 and are
eligible to receive additional consideration upon and subject to
the achievement of sales milestones based on cumulative supplied
units of the licensed products in the Territory, plus a
pre-negotiated transfer price per unit. We believe the amount of
the upfront payment received is reasonable compared to the amounts
to be received upon obtainment of future sales-based
milestones.
As the
sales-based milestones do not meet the definition of a milestone
under ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative supplied units’ volume is met.
During the three and six months ended June 30, 2017 and 2016, we
recognized $0 and $2,563 and $0 and $11,563, respectively, in net
revenue for the sales of products related to this agreement, and no
revenue was recognized for the sales-based milestones of the
agreement.
Orimed Pharma Agreement
On
September 18, 2014, we entered into a twenty-year exclusive license
agreement with Orimed Pharma (“Orimed”), an affiliate
of JAMP Pharma, under which we granted to Orimed an exclusive
license to market and sell in Canada Zestra®, Zestra
Glide®, our topical treatment for premature ejaculation
EjectDelay® and our product Sensum+® to increase penile
sensitivity.
Under
the agreement, we received an upfront payment of $100,000 and are
eligible to receive additional consideration upon and subject to
the achievement of sales milestones based on cumulative gross sales
in Canada by Orimed plus double-digit tiered royalties based on
Orimed’s cumulative net sales in Canada. We believe the
amount of the upfront payment received is reasonable compared to
the amounts to be received upon obtainment of future sales-based
milestones.
As the
sales-based milestones do not meet the definition of a milestone
under ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative gross sales volume is met. We will
recognize the revenue from the royalty payments on a quarterly
basis when the cumulative net sales have been
met. During the three and six months ended June 30, 2017
and 2016, under this agreement we recognized $20,942 and $7,483 and
$20,942 and $63,586, respectively, in net revenue for the sales of
products and no revenue was recognized for the sales-based
milestones.
NOTE 3 – BUSINESS AND ASSET ACQUISITIONS
Acquisition of Assets of Beyond Human in 2016
On
February 8, 2016, we entered into an Asset Purchase Agreement
(“APA”), pursuant to which we agreed to purchase
substantially all of the assets of Beyond Human® (the
“Acquisition”) for a total cash payment of up to
$662,500 (the “Purchase Price”). The Purchase Price was
payable in the following manner: (1) $300,000 in cash at
the closing of the Acquisition (the “Initial Payment”),
(2) $100,000 in cash four months from the closing upon the
occurrence of certain milestones as described in the APA, (3)
$100,000 in cash eight months from the closing upon the occurrence
of certain milestones as described in the APA, and (4) $130,000 in
cash in twelve months from the closing upon the occurrence of
certain milestones as described in the APA. An
additional $32,500 in cash is due if certain milestones occur
twelve months from closing. The transaction closed on
March 1, 2016. On September 6, 2016, the Company and the sellers
entered into an agreement in which we agreed to pay the sellers
$150,000 to settle the contingent consideration payments totaling
up to $362,500 under the APA. The settlement agreement was not
contemplated at the time of the acquisition and the fair value of
the contingent consideration on the date of settlement was
$330,000. As a result, we recorded a non-cash gain on contingent
consideration of $180,000 during the year ended December 31,
2016.
Acquisition of Novalere in 2015
On
February 5, 2015 (the “Closing Date”), Innovus, Innovus
Pharma Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Innovus (“Merger Subsidiary
I”), Innovus Pharma Acquisition Corporation II, a Delaware
corporation and a wholly-owned subsidiary of Innovus (“Merger
Subsidiary II”), Novalere FP, Inc., a Delaware corporation
(“Novalere FP”) and Novalere Holdings, LLC, a Delaware
limited liability company (“Novalere Holdings”), as
representative of the shareholders of Novalere (the “Novalere
Stockholders”), entered into an Agreement and Plan of Merger
(the “Merger Agreement”), pursuant to which Merger
Subsidiary I merged into Novalere and then Novalere merged with and
into Merger Subsidiary II (the “Merger”), with Merger
Subsidiary II surviving as a wholly-owned subsidiary of Innovus.
Pursuant to the articles of merger effectuating the Merger, Merger
Subsidiary II changed its name to Novalere, Inc.
With
the Merger, we acquired the worldwide rights to market and
sell the FlutiCare™ brand (fluticasone propionate nasal
spray) and the related third-party manufacturing agreement for the
manufacturing of FlutiCare™ (“Acquisition
Manufacturer”) from Novalere FP. The OTC Abbreviated New Drug
Application (“ANDA”) for fluticasone propionate nasal
spray was filed at the end of 2014 by our third-party manufacturer
and partner, who is currently selling the prescription version of
the drug, with the FDA and the OTC ANDA is still subject to
FDA approval. An ANDA is an application for a U.S. generic drug
approval for an existing licensed medication or approved drug. A
prescription ANDA (“RX ANDA”) is for a generic version
of a prescription pharmaceutical and an OTC ANDA is for a generic
version of an OTC pharmaceutical.
Due to
the delay in approval of the Acquisition Manufacturer’s OTC
ANDA by the FDA, in May 2017, we announced a commercial
relationship with a different third-party manufacturer (West-Ward
Pharmaceuticals International Limited or “WWPIL”) who
has an FDA approved OTC ANDA for fluticasone propionate nasal spray
under which they have agreed to manufacture our FlutiCare™
OTC product for sale in the U.S. (see Note 9). We currently still
anticipate that the OTC ANDA filed in November 2014 by the
Acquisition Manufacturer with the FDA may be approved in 2017.
As we hold the worldwide rights to market and sell FlutiCare™
under the manufacturing agreement with the Acquisition
Manufacturer, we believe the agreement with the Acquisition
Manufacturer will still provide us with the opportunity to market
and sell FlutiCare™ ex-U.S. and, if the OTC ANDA is approved
by the FDA, a second source of supply within the U.S., if ever
needed.
The
Novalere Stockholders are entitled to receive, if and when earned,
earn-out payments (the “Earn-Out Payments”). For every
$5.0 million in Net Revenue (as defined in the Merger Agreement)
realized from the sales of FlutiCare™ through the
manufacturing agreement with the Acquisition Manufacturer, the
Novalere Stockholders will be entitled to receive, on a pro rata
basis, $500,000, subject to cumulative maximum Earn-Out Payments of
$2.5 million. The Novalere Stockholders are only entitled to the
Earn-Out Payments from the Acquisition Manufacturer’s OTC
ANDA under review by the FDA and have no earn-out rights to the
sales of FlutiCare™ supplied by WWPIL under the commercial
agreement entered into in May 2017.
During
the three and six months ended June 30, 2017, there was an increase
(decrease) in the estimated fair value of the remaining 138,859
ANDA consideration shares totaling $400 and ($19,707) which is
included in fair value adjustment for contingent consideration in
the accompanying condensed consolidated statement of operations.
The remaining 138,859 ANDA consideration shares not issuable yet
will be issued upon FDA approval of the ANDA filed by the
Acquisition Manufacturer and the estimated fair value of such
remaining shares of $12,509 is included in contingent consideration
in the accompanying condensed consolidated balance sheet at June
30, 2017. There was no change to the estimated fair value of the
future earn-out payments of $1,248,124 during the three and six
months ended June 30, 2017 and there was no change to the estimated
fair value of the contingent consideration during the three and six
months ended June 30, 2016.
Purchase of Semprae Laboratories, Inc. in 2013
On
December 24, 2013 (the “Semprae Closing Date”), we,
through Merger Sub, obtained 100% of the outstanding shares of
Semprae in exchange for the issuance of 3,201,776 shares of our
common stock, which shares represented 15% of our total issued and
outstanding shares as of the close of business on the Closing Date,
whereupon Merger Sub was renamed Semprae Laboratories, Inc. We
agreed to pay the former shareholders an annual royalty
(“Royalty”) equal to 5% of the net sales from
Zestra® and Zestra Glide® and any second generation
products derived primarily therefrom (“Target
Products”) up until the time that a generic version of such
Target Product is introduced worldwide by a third
party.
The
agreement to pay the annual Royalty resulted in the recognition of
a contingent consideration, which is recognized at the inception of
the transaction, and subsequent changes to estimate of the amounts
of contingent consideration to be paid will be recognized as
charges or credits in the consolidated statement of operations. The
fair value of the contingent consideration is based on preliminary
cash flow projections, growth in expected product sales and other
assumptions. During the three and six months ended June 30, 2017
and 2016, no amounts have been paid under this
arrangement. The fair value of the expected royalties to
be paid was decreased by $99,379 and $0 and $106,447 and $0 during
the three and six months ended June 30, 2017 and 2016,
respectively, which is included in the fair value adjustment for
contingent consideration in the accompanying condensed consolidated
statements of operations. The fair value of the contingent
consideration was $299,130 and $405,577 at June 30, 2017 and
December 31, 2016, respectively, based on the new estimated fair
value of the consideration.
NOTE 4 – ASSETS AND LIABILITIES
Inventories
Inventories
consist of the following:
|
|
|
|
|
|
Raw materials and
supplies
|
$
107,973
|
$
85,816
|
Work in
process
|
135,834
|
48,530
|
Finished
goods
|
342,648
|
465,510
|
Total
|
$
586,455
|
$
599,856
|
Intangible Assets
Amortizable
intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Patent &
Trademarks
|
$
417,597
|
$
(108,005
)
|
$
309,592
|
7 – 15
|
Customer
Contracts
|
611,119
|
(218,984
)
|
392,135
|
10
|
Sensum+®
License (from CRI)
|
234,545
|
(95,736
)
|
138,809
|
10
|
Vesele®
Trademark
|
25,287
|
(8,627
)
|
16,660
|
8
|
Beyond Human®
Website and Trade Name
|
222,062
|
(52,514
)
|
169,548
|
5 – 10
|
Novalere
Manufacturing Contract
|
4,681,000
|
(1,121,490
)
|
3,559,510
|
10
|
Other Beyond
Human® Intangible Assets
|
4,730
|
(2,935
)
|
1,795
|
1 – 3
|
Total
|
$
6,196,340
|
$
(1,608,291
)
|
$
4,588,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent &
Trademarks
|
$
417,597
|
$
(91,201
)
|
$
326,396
|
7 – 15
|
Customer
Contracts
|
611,119
|
(188,428
)
|
422,691
|
10
|
Sensum+®
License (from CRI)
|
234,545
|
(84,009
)
|
150,536
|
10
|
Vesele®
Trademark
|
25,287
|
(7,047
)
|
18,240
|
8
|
Beyond Human®
Website and Trade Name
|
222,062
|
(32,821
)
|
189,241
|
5 – 10
|
Novalere
Manufacturing Contract
|
4,681,000
|
(887,440
)
|
3,793,560
|
10
|
Other Beyond
Human® Intangible Assets
|
4,730
|
(2,147
)
|
2,583
|
1 – 3
|
Total
|
$
6,196,340
|
$
(1,293,093
)
|
$
4,903,247
|
|
Amortization
expense for the three and six months ended June 30, 2017 and 2016
was $157,473 and $178,083 and $315,198 and $335,685, respectively.
The following table summarizes the approximate expected future
amortization expense as of June 30, 2017 for intangible
assets:
Remainder of
2017
|
$
314,000
|
2018
|
630,000
|
2019
|
629,000
|
2020
|
629,000
|
2021
|
600,000
|
2022
|
592,000
|
Thereafter
|
1,194,000
|
|
$
4,588,000
|
Prepaid Expense and Other Current Assets
Prepaid
expense and other current assets consist of the
following:
|
|
|
|
|
|
Prepaid
insurance
|
$
16,391
|
$
69,976
|
Prepaid
inventory
|
133,937
|
20,750
|
Merchant net
settlement reserve receivable
|
-
|
221,243 -
|
Prepaid consulting
and other expense
|
94,283
|
21,094
|
Prepaid CRI
royalties (see Note 2)
|
44,662
|
-
|
Prepaid consulting
and other service stock-based compensation expense (see Note
7)
|
105,000
|
530,601
|
Total
|
$
394,273
|
$
863,664
|
Accounts Payable and Accrued Expense
Accounts
payable and accrued expense consist of the following:
|
|
|
|
|
|
Accounts
payable
|
$
989,040
|
$
647,083
|
Accrued credit card
balances
|
36,348
|
31,654
|
Accrued
royalties
|
115,802
|
73,675
|
Sales returns and
allowances
|
50,632
|
60,853
|
Accrual for stock
to be issued to consultants (see Note 7)
|
-
|
360,000
|
Accrued
other
|
64,729
|
36,785
|
Total
|
$
1,256,551
|
$
1,210,050
|
NOTE 5 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Notes Payable
The
following table summarizes the outstanding notes payable at June
30, 2017 and December 31, 2016:
|
|
|
Notes
payable:
|
|
|
February 2016 Note
Payable
|
$
209,040
|
$
347,998
|
December 2016 and
January 2017 Notes Payable
|
715,000
|
550,000
|
Total
notes payable
|
924,040
|
897,998
|
Less: Debt
discount
|
(104,788
)
|
(216,871
)
|
Carrying value
|
819,252
|
681,127
|
Less: Current
portion
|
(819,252
)
|
(626,610
)
|
Notes
payable, net of current portion
|
$
-
|
$
54,517
|
The
following table summarizes the future minimum payments as of June
30, 2017 for the notes payable:
Remainder of
2017
|
$
869,005
|
2018
|
54,985
|
|
$
924,040
|
February 2016 Note Payable
On
February 24, 2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered into an agreement in which SBI loaned
us gross proceeds of $550,000 pursuant to a purchase agreement, 20%
secured promissory note and security agreement (“February
2016 Note Payable”), all dated February 19, 2016
(collectively, the “Finance Agreements”), to purchase
substantially all of the assets of Beyond Human® (see Note
3). Of the $550,000 gross proceeds, $300,000 was paid
into an escrow account held by a third party bank and was released
to Beyond Human® upon closing of the transaction, $242,500 was
provided directly to us for use in building the Beyond Human®
business and $7,500 was provided for attorneys’
fees. The attorneys’ fees were recorded as a
discount to the carrying value of the February 2016 Note
Payable.
Pursuant
to the Finance Agreements, the principal amount of the February
2016 Note Payable is $550,000 and the interest rate thereon is 20%
per annum. We began to pay principal and interest on the
February 2016 Note Payable on a monthly basis beginning on March
19, 2016 for a period of 24 months and the monthly mandatory
principal and interest payment amount thereunder is $28,209. The
monthly amount shall be paid by us through a deposit account
control agreement with a third-party bank in which SBI shall be
permitted to take the monthly mandatory payment amount from all
revenue received by us from the Beyond Human® assets in the
transaction. The maturity date for the February 2016
Note Payable is February 19, 2018.
The
February 2016 Note Payable is secured by SBI through a first
priority secured interest in all of the Beyond Human® assets
acquired by us in the transaction including all revenue received by
us from these assets
December 2016 and January 2017 Notes Payable
On
December 5, 2016 and January 19, 2017, we entered into a securities
purchase agreement with three unrelated third-party investors in
which the investors loaned us gross proceeds of $500,000 in
December 2016 and $150,000 in January 2017 pursuant to a 5%
promissory note (“December 2016 & January 2017 Notes
Payable”). The notes have an Original Issue
Discount (“OID”) of $65,000 and require payment of
$715,000 in principal upon maturity. The December 2016 &
January 2017 Notes Payable bear interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on October 4, 2017 and November 18, 2017 for those received in
December 2016 and January 2017, respectively.
In
connection with the December 2016 & January 2017 Notes Payable,
we issued the investors restricted shares of common stock totaling
1,111,111 in December 2016 and 330,000 in January
2017. The fair value of the restricted shares of common
stock issued was based on the market price of our common stock on
the date of issuance of the December 2016 & January 2017 Notes
Payable. The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value and the OID resulted in us recording a debt discount of
$182,203 in December 2016 and $44,217 in January 2017. The discount
is being amortized to interest expense using the effective interest
method over the term of the December 2016 & January 2017 Notes
Payable.
Interest Expense
We
recognized interest expense on notes payable of $21,656 and $77,550
and $46,713 and $88,915 for the three and six months ended June 30,
2017 and 2016, respectively. Amortization of the debt
discount to interest expense during the three and six months ended
June 30, 2017 and 2016 totaled $88,474 and $94,902 and $171,300 and
$95,371, respectively.
Convertible Debentures
2016 Financing
The
following table summarizes the outstanding 2016 convertible
debentures at June 30, 2017 and December 31, 2016:
|
|
|
|
|
|
Convertible
debentures
|
$
-
|
$
1,559,922
|
Less: Debt
discount
|
-
|
(845,730
)
|
Carrying value
|
-
|
714,192
|
Less: Current
portion
|
-
|
(714,192
)
|
Convertible debentures, net of current portion
|
$
-
|
$
-
|
In the
second and third quarter of 2016, we entered into Securities
Purchase Agreements with eight accredited investors (the
“Investors”), pursuant to which we received aggregate
gross proceeds of $3.0 million (net of OID) pursuant to which we
sold:
Nine
convertible promissory notes of the Company totaling $3,303,889
(each a “2016 Note” and collectively the “2016
Notes”) (the 2016 Notes were sold at a 10% OID and we
received an aggregate total of $2,657,500 in funds thereunder after
debt issuance costs of $342,500). The 2016 Notes and accrued
interest were convertible into shares of our common stock at a
conversion price of $0.25 per share, with certain adjustment
provisions. The maturity date of the 2016 Notes issued on June 30,
2016 and July 15, 2016 was July 30, 2017 and the maturity date of
the 2016 Notes issued on July 25, 2016 was August 25, 2017. The
2016 Notes bore interest on the unpaid principal amount at the rate
of 5% per annum from the date of issuance until the same became due
and payable, whether at maturity or upon acceleration or by
prepayment or otherwise. We had the ability to prepay the 2016
Notes at any time on the terms set forth in the 2016 Notes at the
rate of 110% of the then outstanding balance of the 2016
Notes.
The
fair value of the restricted shares of common stock issued to
Investors in 2016 was based on the market price of our common stock
on the date of issuance of the 2016 Notes. The
allocation of the proceeds to the warrants and restricted shares of
common stock based on their relative fair values resulted in us
recording a debt discount. We also determined that the embedded
conversion features in the 2016 Notes were a derivative instrument
which was required to be bifurcated from the debt host contract and
recorded at fair value as a derivative liability. The
fair value of the embedded conversion features was determined using
a Path-Dependent Monte Carlo Simulation Model (see Note 8 for
assumptions used to calculate fair value). The initial fair value
of the embedded conversion features was recorded as a debt discount
with the amount in excess of the proceeds allocated to the debt,
after the allocation of debt proceeds to the debt issuance costs,
being immediately expensed and recorded as interest expense in
2016.
During
the six months ended June 30, 2017, certain of the 2016 Notes
holders elected to convert principal and interest outstanding of
$350,610 into 1,402,440 shares of common stock at a conversion
price of $0.25 per share (see Note 7). As a result of
the conversion of the principal and interest balance into shares of
common stock, the fair value of the embedded conversion feature
derivative liabilities of $203,630 on the date of conversion was
reclassified to additional paid-in capital (see Note 8) and the
amortization of the debt discount was accelerated for the amount
converted and recorded to interest expense during the six months
ended June 30, 2017.
As a
result of the completion of a public equity offering in March 2017
(see Note 7), we were required to prepay the outstanding principal
and accrued interest balance of the 2016 Notes with the cash
proceeds received from such offering. The outstanding principal and
accrued interest balance of $1,272,469 was repaid in March 2017, as
well as, a 10% prepayment penalty of $127,247. Due to the
acceleration of repayment of the 2016 Notes as a result of the
public equity offering, the transaction was recorded as a debt
extinguishment and the 10% prepayment penalty of $127,247 and the
remaining unamortized debt discount as of the date of repayment of
$415,682 were recorded as a loss on debt extinguishment in the
accompanying condensed consolidated statement of operations for the
six months ended June 30, 2017. The repayment of the outstanding
principal and accrued interest balance of the 2016 Notes resulted
in the extinguishment of the embedded conversion feature derivative
liability and thus the fair value as of the date of repayment of
$238,101 was recorded as a reduction to the loss on debt
extinguishment in the accompanying condensed consolidated statement
of operations for the six months ended June 30, 2017.
Interest Expense
We
recognized interest expense on the 2016 Notes for the six months
ended June 30, 2017 of $19,544. The debt discount recorded for the
2016 Notes were being amortized as interest expense over the term
of the 2016 Notes using the effective interest
method. Total amortization of the debt discount on the
2016 Notes to interest expense for the six months ended June 30,
2017 was $430,048.
NOTE 6 – RELATED PARTY TRANSACTIONS
Accrued Compensation – Related Party
Accrued
compensation includes accruals for employee wages, vacation pay and
target-based bonuses. The components of accrued compensation
as of June 30, 2017 and December 31, 2016 are as
follows:
|
|
|
Wages
|
$
1,431,686
|
$
1,455,886
|
Vacation
|
302,663
|
261,325
|
Bonus
|
693,431
|
449,038
|
Payroll taxes on
the above
|
148,759
|
133,344
|
Total
|
2,576,539
|
2,299,593
|
Classified as
long-term
|
(1,036,315
)
|
(1,531,904
)
|
Accrued
compensation
|
$
1,540,224
|
$
767,689
|
Accrued
employee wages at June 30, 2017 and December 31, 2016 are entirely
related to wages owed to our President and Chief Executive
Officer. Under the terms of his employment agreement, wages
are to be accrued but no payment made for so long as payment of
such salary would jeopardize our ability to continue as a going
concern. The President and Chief Executive Officer started to
receive payment of salary in July 2016. In the second quarter of
2017, it was determined by our Board of Directors that deferred
salary of $463,167 would be paid to our current President and Chief
Executive Officer to assist in paying the statutory personal tax
withholding on the shares of common stock he received in 2016 for
his vested restricted stock units. As a result, the deferred salary
amount and related employer taxes totaling $495,589 has been
classified as current. The payment of such deferred salary would
not jeopardize our ability to continue as a going concern, and the
payment has not been made as of the date of filing of this
quarterly report. Our President and Chief Executive Officer has
agreed to not receive payment on the remaining accrued wages and
related payroll tax amounts within the next 12 months and thus the
remaining balance is classified as a long-term liability. In April
2017, our Board of Directors approved for payment the accrued
fiscal year 2016 bonus of $33,442 to our former Executive Vice
President and Chief Financial Officer in accordance with his
employment agreement and the bonus amount was paid upon his
departure. The fiscal year 2016 bonus for our President and Chief
Executive Officer has not yet been approved by our Board of
Directors but is included in accrued compensation in the
accompanying condensed consolidated balance sheets as of June 30,
2017 and December 31, 2016.
NOTE 7 – STOCKHOLDERS’ EQUITY
Issuances of Common Stock
Public Equity Offering
On
March 21, 2017, we completed a sale of common stock and warrants
under a registered public offering. The gross proceeds to us from
the offering were $3,850,000, before underwriting discounts and
commissions and other offering expenses ($3,307,773 after
underwriting discounts, commissions and expenses).
The
public offering price per share of common stock sold was $0.15.
Each investor who purchased a share of common stock in the offering
received a five-year warrant to purchase one share of common stock
at an exercise price of $0.15 per share (“Series A
Warrants”) and a one-year warrant to purchase one share of
common stock at an exercise price of $0.15 per share (“Series
B Warrants”). Under the terms of the offering, we issued
25,666,669 shares of common stock, Series A Warrants to purchase up
to an aggregate of 25,666,669 shares of common stock and Series B
Warrants to purchase up to an aggregate of 25,666,669 shares of
common stock. The Series A Warrants and Series B Warrants are
exercisable immediately. We allocated the net proceeds received of
$3,307,773 to the shares of common stock, Series A Warrants and
Series B Warrants sold in the offering based on their relative fair
values. The fair value of the Series A Warrants and Series B
Warrants was determined using Black-Scholes. Based on their
relative fair values, we allocated net of proceeds of $1,593,233 to
the shares of common stock, $1,075,995 to the Series A Warrants and
$638,545 to the Series B Warrants.
In
connection with this offering, we issued to H.C. Wainwright &
Co. (“HCW”), the underwriter in the offering, a warrant
to purchase up to 1,283,333 shares of common stock and HCW received
total cash consideration, including the reimbursement of public
offering-related expenses, of $443,000. If such warrant is
exercised, each share of common stock may be purchased at $0.1875
per share (125% of the price of the common stock sold in the
offering), commencing on March 21, 2017 and expiring March 21,
2022. The fair value of the warrants issued to HCW totaled $129,755
and was determined using Black-Scholes. The fair value of the
warrants was recorded as an offering cost but has no net impact to
additional paid-in capital in stockholders’ equity in the
accompanying condensed consolidated balance sheet.
In
connection with this offering, the Company incurred $99,227 in
other offering costs that have been offset against the proceeds
from this offering.
Other Stock Issuances and Related Stock-Based
Compensation
On August 23, 2016, we entered into a consulting agreement with a
third party pursuant to which we agreed to issue 1,600,000
restricted shares of common stock, payable in four equal
installments, in exchange for services to be rendered over the
agreement which ends on August 23, 2017. The shares were
considered fully-vested and non-refundable at the execution of the
agreement. In 2016, we issued 800,000 shares of common stock and
during the six months ended June 30, 2017, we issued a total of
800,000 shares of common stock under the agreement. The fair value
of the shares issued during 2017 of $360,000 was based on the
market price of our common stock on the date of agreement. There
are no more shares of common stock to be issued under this service
agreement as of June 30, 2017. During the three and six months
ended June 30, 2017, we recognized $180,000 and $360,000,
respectively, in general and administrative expense in the
accompanying condensed consolidated statements of operations and
the remaining unamortized expense of $105,000 is included in
prepaid expense and other current assets in the accompanying
condensed consolidated balance sheet at June 30,
2017.
On
September 1, 2016, we entered into a service agreement with a third
party pursuant to which we agreed to issue, over the term of the
agreement, 2,000,000 shares of common stock in exchange for
services to be rendered. During the six months ended June 30,
2017, we issued 670,000 shares under the agreement related to
services provided and recognized the fair value of the shares
issued of $123,615 in general and administrative expense in the
accompanying condensed consolidated statement of operations. The
670,000 shares of common stock vested on the date of issuance and
the fair value of the shares of common stock was based on the
market price of our common stock on the date of vesting. There are
no more shares of common stock to be issued under this service
agreement as of June 30, 2017.
On November 17, 2016, we entered into a service agreement with a
third party and in connection with the agreement issued 275,000
fully-vested shares for services to be provided over the term of
the service agreement through May 17, 2017. The fair value of the
shares issued of $69,575 was based on the market price of our
common stock on the date of vesting. During the three and six
months ended June 30, 2017, we recognized $17,394 and $52,181,
respectively, in general and administrative expense in the
accompanying condensed consolidated statements of
operations.
On
December 16, 2016, we amended a consulting agreement with a third
party to extend the term of the agreement to June 16, 2017 and in
connection with the amendment issued 80,000 fully-vested shares for
services to be provided over the remaining term of the amended
agreement. The fair value of the shares issued of $14,640 was based
on the market price of our common stock on the date of vesting. On
January 19, 2017, we further amended the agreement to expand the
scope of service performed by the consultant and as a result issued
an additional 78,947 shares of fully vested common stock for
services to be provided through June 16, 2017. The fair value of
the shares issued of $15,000 was based on the market price of our
common stock on the date of vesting. During the three and six
months ended June 30, 2017, we recognized $13,600 and $28,420,
respectively, in general and administrative expense in the
accompanying condensed consolidated statements of
operations.
In January 2017 and April 2017, we issued a total of 28,425 shares
of common stock for services and recorded an expense of $2,000 and
$4,000 for the three and six months ended June 30, 2017,
respectively, which is included in general and administrative
expense in the accompanying condensed consolidated statements of
operations. The 28,425 shares of common stock vested on the date of
issuance and the fair value of the shares of common stock was based
on the market price of our common stock on the date of
vesting.
In
January 2017, we issued 225,000 shares of common stock to CRI
pursuant to the Amended CRI Asset Purchase Agreement (see Note 2)
for the prepayment of future royalties due on net profit of
Sensum+® in the U.S. in 2017. The fair value of the
restricted shares of common stock of $44,662 was based on the
market price of our common stock on the date of issuance and is
included in prepaid expense and other current assets in the
accompanying condensed consolidated balance sheet at June 30,
2017.
In
January 2017, we issued 330,000 shares of restricted common stock
to a note holder in connection with their note
payable. The relative fair value of the shares of
restricted common stock issued was determined to be $44,217 and was
recorded as a debt discount (see Note 5).
In
March 2017, certain 2016 Notes holders elected to convert $350,610
in principal and interest into 1,402,440 shares of common stock
(see Note 5). Upon conversion, the fair value of the embedded
conversion feature derivative liability on the date of conversion
was reclassified to additional paid-in capital (see Note
8).
In
March 2017, we issued shares of common stock totaling 40,000 upon
the exercise of stock options for total cash proceeds of
$2,894.
In June
2017,
we issued
92,000 shares of common stock in exchange for vested restricted
stock units.
2013 Equity Incentive Plan
We have issued common stock, restricted stock units and stock
option awards to employees, non-executive directors and outside
consultants under the 2013 Equity Incentive Plan (“2013
Plan”), which was approved by our Board of Directors in
February of 2013. The 2013 Plan allows for the issuance of up
to 10,000,000 shares of our common stock to be issued in the form
of stock options, stock awards, stock unit awards, stock
appreciation rights, performance shares and other share-based
awards. As of June 30, 2017, 31,000 shares were available
under the 2013 Plan.
2014 Equity Incentive Plan
We have issued common stock, restricted stock units and stock
options to employees, non-executive directors and outside
consultants under the 2014 Equity Incentive Plan (“2014
Plan”), which was approved by our Board of Directors in
November 2014. The 2014 Plan allows for the issuance of up to
20,000,000 shares of our common stock to be issued in the form of
stock options, stock awards, stock unit awards, stock appreciation
rights, performance shares and other share-based awards. As of
June 30, 2017, 58,367 shares were available under the 2014
Plan.
2016 Equity Incentive Plan
On March 21, 2016, our Board of Directors approved the adoption of
the 2016 Equity Incentive Plan and on October 20, 2016 adopted the
Amended and Restated 2016 Equity Incentive Plan (“2016
Plan”). The 2016 Plan was then approved by our
stockholders in November 2016. The 2016 Plan allows for the
issuance of up to 20,000,000 shares of our common stock to be
issued in the form of stock options, stock awards, stock unit
awards, stock appreciation rights, performance shares and other
share-based awards. The 2016 Plan includes an evergreen
provision in which the
number of
shares of common stock authorized for issuance and available for
future grants under the 2016 Plan will be increased each January 1
after the effective date of the 2016 Plan by a number of shares of
common stock equal to the lesser of: (a) 4% of the number of shares
of common stock issued and outstanding on a fully-diluted basis as
of the close of business on the immediately preceding December 31,
or (b) a number of shares of common stock set by our Board of
Directors.
In March 2017, our Board of Directors approved an
increase of 5,663,199 shares of common stock to the shares
authorized under the 2016 Plan in accordance with the evergreen
provision in the 2016 Plan. As of June 30, 2017, 21,291,727 shares
were available under the 2016 Plan.
Stock Options
For
the six months ended June 30, 2017 and 2016, the following weighted
average assumptions were utilized for the calculation of the fair
value of the stock options granted during the period using
Black-Scholes:
|
|
|
Expected life (in
years)
|
8.6
|
10.0
|
Expected
volatility
|
217.0
%
|
227.9
%
|
Average risk-free
interest rate
|
2.28
%
|
1.77
%
|
Dividend
yield
|
0
%
|
0
%
|
Grant date fair
value
|
$
0.19
|
$
0.16
|
The
dividend yield of zero is based on the fact that we have never paid
cash dividends and has no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of our common stock over the period commensurate with
the expected life of the stock options. Expected life in years
is based on the “simplified” method as permitted by ASC
Topic 718. We believe that all stock options issued under its
stock option plans meet the criteria of “plain vanilla”
stock options. We use a term equal to the term of the stock
options for all non-employee stock options. The risk-free
interest rate is based on average rates for treasury notes as
published by the Federal Reserve in which the term of the rates
correspond to the expected term of the stock options.
The
following table summarizes the number of stock options outstanding
and the weighted average exercise price:
|
|
Weighted
average exercise price
|
Weighted
remaining contractual life (years)
|
Aggregate
intrinsic value
|
Outstanding at
December 31, 2016
|
237,500
|
$
0.22
|
8.6
|
$
14,293
|
Granted
|
28,000
|
0.19
|
-
|
-
|
Exercised
|
(40,000
)
|
0.07
|
-
|
-
|
Cancelled
|
(40,000
)
|
0.24
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
-
|
Outstanding at June
30, 2017
|
185,500
|
$
0.24
|
8.2
|
$
2,466
|
|
|
|
|
|
Vested at June 30,
2017
|
185,500
|
$
0.24
|
8.2
|
$
2,466
|
The
aggregate intrinsic value is calculated as the difference between
the exercise price of all outstanding stock options and the quoted
price of our common stock at June 30, 2017. During the
three and six months ended June 30, 2017 and 2016, the Company
recognized stock-based compensation from stock options of $1,028
and $5,406 and $4,000 and $9,500, respectively. The intrinsic value
of the stock options exercised during the six months ended June 30,
2017 on the date of exercise was $5,306.
Restricted Stock Units
The
following table summarizes the restricted stock unit activity
for the six months ended June 30, 2017:
|
|
Outstanding at
December 31, 2016
|
12,874,848
|
Granted
|
2,670,547
|
Exchanged
|
(92,000
)
|
Cancelled
|
(2,500,000
)
|
Outstanding at June
30, 2017
|
12,953,395
|
|
|
Vested at June 30,
2017
|
9,203,395
|
The
vested restricted stock units at June 30, 2017 have not settled and
are not showing as issued and outstanding shares of ours but are
considered outstanding for earnings per share
calculations. Settlement of these vested restricted stock
units will occur on the earliest of (i) the date of termination of
service of the employee or consultant, (ii) change of control of
us, or (iii) 10 years from date of issuance. Settlement of
vested restricted stock units may be made in the form of (i) cash,
(ii) shares, or (iii) any combination of both, as determined by the
board of directors and is subject to certain criteria having been
fulfilled by the recipient.
We calculate the fair value of the restricted stock units based
upon the quoted market value of the common stock at the date of
grant. The grant date fair value of restricted stock units issued
during the six months ended June 30, 2017 was $491,500. For the
three and six months ended June 30, 2017 and 2016, we recognized
$(52,115) and $168,679 and $107,885 and $627,018, respectively, of
stock-based compensation expense for the vested units. The credit
for the three months ended June 30, 2017 was a result of the
reversal of the expense previously recognized on the RSUs granted
to our former Chief Financial Officer that were cancelled prior to
their initial vesting date upon his departure in April 2017. As of
June 30, 2017, compensation expense related to unvested shares not
yet recognized in the condensed consolidated statement of
operations was approximately $655,000 and will be recognized over a
remaining weighted-average term of 2.4
years.
Warrants
During
the year ended December 31, 2014, we issued warrants in connection
with notes payable (which were repaid in 2013). The remaining
warrants of 135,816 have an exercise price of $0.10 and expire
December 6, 2018.
In
January 2015, we issued 250,000 warrants with an exercise price of
$0.30 per share to a former executive in connection with the
January 2015 debenture. The warrants expire on January 21, 2020.
The warrants contain anti-dilution protection, including protection
upon dilutive issuances. In connection with the convertible
debentures issued in 2015, the exercise price of these warrants was
reduced to $0.0896 per share and an additional 586,705 warrants
were issued per the anti-dilution protection afforded in the
warrant agreement during the year ended December 31,
2015.
In
connection with the convertible debentures in 2015, we issued
warrants with an exercise price of $0.30 per share and expire in
2020 to investors and placement agents. Warrants to purchase
774,533 shares of common stock remain outstanding as of June 30,
2017.
In
connection with the 2016 Notes, we issued warrants to the Investors
and placement agents with an exercise price of $0.40 per share and
expire in 2021. Warrants to purchase 4,220,000 shares of common
stock remain outstanding as of June 30, 2017.
In
connection with the public equity offering in March 2017, we issued
Series A Warrants to purchase 25,666,669 shares of common stock at
$0.15 per share and Series B Warrants to purchase 25,666,669 shares
of common stock at $0.15 per share. The Series A Warrants expire in
2022 and the Series B Warrants expire in 2018. We also issued
warrants to purchase 1,283,333 shares of common stock to our
placement agent with an exercise price of $0.1875 per share and
expire in 2022.
For
the six months ended June 30, 2017, the following weighted average
assumptions were utilized for the calculation of the fair value of
the warrants issued during the period using
Black-Scholes:
|
|
Expected life (in
years)
|
3.1
|
Expected
volatility
|
203.3
%
|
Average risk-free
interest rate
|
1.49
%
|
Dividend
yield
|
0
%
|
At June
30, 2017, there are 58,583,725 fully vested warrants outstanding.
The weighted average exercise price of outstanding warrants at June
30, 2017 is $0.17 per share, the weighted average remaining
contractual term is 2.9 years and the aggregate intrinsic value of
the outstanding warrants is $20,621.
Net Loss per Share
Restricted
stock units that are vested but the issuance and delivery of the
shares are deferred until the employee or director resigns are
included in the basic and diluted net loss per share
calculations.
The
weighted average shares of common stock outstanding used in the
basic and diluted net loss per share calculation for the three and
six months ended June 30, 2017 and 2016 was 150,713,121 and
138,587,767 and 77,455,497 and 62,335,408,
respectively.
The
weighted average restricted stock units vested but issuance of the
common stock is deferred until there is a change in control, a
specified date in the agreement or the employee or director resigns
used in the basic and diluted net loss per share calculation for
the three and six months ended June 30, 2017 and 2016 was 9,284,274
and 9,029,297 and 7,940,349 and 7,935,925,
respectively.
The
total weighted average shares outstanding used in the basic and
diluted net loss per share calculation for the three and six months
ended June 30, 2017 and 2016 was 159,997,395 and 147,617,064 and
85,395,846 and 70,271,333, respectively.
The
following table shows the anti-dilutive shares excluded from the
calculation of basic and diluted net loss per common share as of
June 30, 2017 and 2016:
|
|
|
|
|
Gross
number of shares excluded:
|
|
|
Restricted stock
units – unvested
|
3,750,000
|
1,893,753
|
Stock
options
|
185,500
|
254,500
|
Convertible
debentures and accrued interest
|
-
|
6,600,000
|
Warrants
|
58,583,725
|
5,206,011
|
Total
|
62,519,225
|
13,954,264
|
The
above table does not include the ANDA Consideration Shares related
to the Novalere acquisition totaling 138,859 and 12,947,655 at June
30, 2017 and 2016, respectively, as they are considered
contingently issuable (see Note 3).
NOTE 8 – DERIVATIVE LIABILITIES
The
warrants issued in connection with the January 2015 Non-Convertible
Debenture to a former executive are measured at fair value and
classified as a liability because these warrants contain
anti-dilution protection and therefore, cannot be considered
indexed to our own stock which is a requirement for the scope
exception as outlined under FASB ASC 815. The estimated fair value
of the warrants was determined using the Probability Weighted
Black-Scholes Model. The fair value will be affected by changes in
inputs to that model including our stock price, expected stock
price volatility, the contractual term and the risk-free interest
rate. We will continue to classify the fair value of the warrants
as a liability until the warrants are exercised, expire or are
amended in a way that would no longer require these warrants to be
classified as a liability, whichever comes first. The anti-dilution
protection for the warrants survives for the life of the warrants
which ends in January 2020.
The
derivative liabilities are a Level 3 fair value measure in the fair
value hierarchy and the assumptions for the Probability Weighted
Black-Scholes Option-Pricing Model for the six months ended June
30, 2017 are represented in the table below:
|
|
June 30, 2017
|
Expected life (in years)
|
|
2.56 – 2.97
|
Expected volatility
|
|
179% – 187%
|
Average risk-free interest rate
|
|
1.44% – 1.50%
|
Dividend yield
|
|
0%
|
We have
determined the embedded conversion features of the 2016 Notes (see
Note 5) to be derivative liabilities because the terms of the
embedded conversion features contained anti-dilution protection and
therefore, could not be considered indexed to our own stock which
was a requirement for the scope exception as outlined under FASB
ASC 815. The embedded conversion features were to be
measured at fair value and classified as a liability with
subsequent changes in fair value recorded in earnings at the end of
each reporting period. We have determined the fair value
of the derivative liabilities using a Path-Dependent Monte Carlo
Simulation Model. The fair value of the derivative
liabilities using such model was affected by changes in inputs to
that model and was based on the individual characteristics of the
embedded conversion features on the valuation date as well as
assumptions for volatility, remaining expected life, risk-free
interest rate, credit spread, probability of default by us and
acquisition of us. During the six months ended June 30,
2017, the 2016 Notes were either converted into shares of common
stock or repaid in full. The conversion of the 2016 Notes during
the six months ended June 30, 2017 resulted in the fair value of
the embedded conversion feature derivative liability on the dates
of conversion of $203,630 to be reclassified to additional paid-in
capital (see Note 7). Upon repayment of the remaining
2016 Notes in March 2017 (see Note 5), the fair value of the
embedded conversion features on date of repayment of $238,101 was
extinguished and included in loss on debt extinguishment in the
accompanying condensed consolidated statement of
operations.
The
derivative liabilities are a Level 3 fair value measurement in the
fair value hierarchy and a summary of quantitative information with
respect to valuation methodology and significant unobservable
inputs used for our embedded conversion feature derivative
liabilities that are categorized within Level 3 of the fair value
hierarchy during the six months ended June 30, 2017 is as
follows:
|
|
June 30, 2017
|
Stock
price
|
|
$0.103
– $0.305
|
Strike
price
|
|
$0.25
|
Expected
life (in years)
|
|
0.36
– 0.43
|
Expected
volatility
|
|
130%
– 168%
|
Average
risk-free interest rate
|
|
0.78%
– 0.87%
|
Dividend
yield
|
|
–
|
At
June 30, 2017, the estimated Level 3 fair value of the warrant
derivative liabilities measured on a recurring basis is as
follows:
|
|
|
|
|
|
Warrant derivative
liabilities
|
$
90,206
|
$
-
|
$
-
|
$
90,206
|
$
90,206
|
The
following table presents the activity for the Level 3 embedded
conversion feature and warrant derivative liabilities measured at
fair value on a recurring basis for the six months ended June 30,
2017:
Fair
Value Measurements Using Level 3 Inputs
Warrant
derivative liabilities:
|
|
Beginning balance
December 31, 2016
|
$
164,070
|
Change in fair
value
|
(73,864
)
|
Ending balance June
30, 2017
|
$
90,206
|
|
|
Embedded
conversion feature derivative liabilities:
|
|
Beginning balance
December 31, 2016
|
$
319,674
|
Reclassification of
fair value of embedded conversion feature derivative liability
to
additional paid-in
capital upon conversions of 2016 Notes
|
(203,630
)
|
Extinguishment of
embedded conversion feature upon repayment of 2016
Notes
|
(238,101
)
|
Change in fair
value
|
122,057
|
Ending balance June
30, 2017
|
$
-
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
In May 2017, we entered into a
commercial agreement with West-Ward Pharmaceuticals International
Limited (“WWPIL”), a wholly-owned subsidiary of Hikma
Pharmaceuticals PLC (“Hikma”) (LSE: HIK) (NASDAQ Dubai:
HIK) (OTC: HKMPY). Pursuant to the commercial agreement, WWPIL will
provide us with the rights to launch our branded, fluticasone
propionate nasal spray USP, 50 mcg per spray
(FlutiC
are™), under WWPIL’s FDA approved ANDA
No. 207957 in the U.S. in the fourth quarter of 2017. The initial
term of the commercial agreement is for two years, and upon
expiration of the initial term, the agreement will automatically
renew for subsequent one-year terms unless either party notifies
the other party in writing of its desire not to renew at least 90
days prior to the end of the then current term. The agreement
requires us to meet certain minimum product batch purchase
requirements in order for the agreement to continue to be in
effect.
NOTE 10 – SUBSEQUENT EVENTS
In July
2017, we issued 44,405 shares of common stock to a consultant for
services rendered. The fair value of the common stock issued was
$5,000.
On July
20, 2017, we entered into a service agreement with a third party
pursuant to which we agreed to issue, over the term of the
agreement through December 31, 2017, 1,200,000 shares of common
stock in exchange for services to be rendered. Upon execution
of the agreement, we issued 200,000 shares to the third party with
a fair value of the shares issued of $24,200.
In July
2017, we issued shares of common stock totaling 31,500 upon the
exercise of stock options for total cash proceeds of
$1,985.
We
have evaluated subsequent events through the filing date of this
Form 10-Q and determined that no additional subsequent events have
occurred that would require recognition in the condensed
consolidated financial statements or disclosures in the notes
thereto other than as disclosed in the accompanying notes to the
condensed consolidated financial statements.