Notes
to the Consolidated Financial Statements
December
31, 2015 and 2014
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Innovus
Pharmaceuticals, Inc., together with its subsidiaries (collectively
referred to as “Innovus”, “we”,
“our” or the “Company”) is a San Diego,
California-based pharmaceutical company that delivers safe and
effective non-prescription medicine and consumer care products to
improve men’s and women’s health and vitality and
respiratory diseases.
We currently market five products in the United
States and six in multiple countries around the world through our
commercial partners: (1)
Zestra
®
,
a non-medicated, patented consumer care product that has been
clinically proven to increase desire, arousal and satisfaction in
women; (2)
EjectDelay
®
,
an
over-the-counter monograph-compliant benzocaine-based topical gel
for treating premature ejaculation; (3)
Sensum+
®
,
a non-medicated consumer care cream that increases penile
sensitivity (ex-US); (4)
Zestra
Glide
®
,
a clinically-tested, high viscosity and low osmolality water-based
lubricant, (5)
Vesele
®
,
a proprietary and novel oral dietary supplement to maximize nitric
oxide beneficial effects on sexual functions and brain health.
Vesele
®
contains a patented formulation of
L-Arginine and L-Citrulline in combination with the natural
absorption enhancer Bioperine
®
and (6) Androferti
®
(in the US and Canada) to support
overall male reproductive health and sperm
quality. While we generate revenue from the sale
of our six products, most revenue is currently generated by
Zestra
®
,
Zestra
®
Glide, EjectDelay
®
and Sensum +
®
.
Pipeline Products
Fluticare
™
(Fluticasone
propionate nasal spray).
Innovus acquired the worldwide rights to market
and sell the Fluticare
™
brand (Fluticasone propionate nasal
spray) and the related manufacturing agreement from Novalere FP in
February 2015, the Over The Counter (OTC) Abbreviated New Drug
Application (“ANDA”) filed at the end of 2014 by the
manufacturer with the U.S. Food and Drug Administration
(“FDA”) which, subject to FDA approval, may allow the
Company to market and sell Fluticare
™
over-the-counter. An ANDA is an
application for a U.S. generic drug approval for an existing
licensed medication or approved drug.
Urocis
®
XR.
On October 27, 2015, the Company
entered into an exclusive distribution agreement with Laboratorios
Q Pharma (Spain) to distribute and commercialize
Urocis
®
XR in the US and Canada.
Urocis
®
XR is a proprietary
extended release of Vaccinium Marcocarpon (cranberry) shown to
provide 24 hour coverage in the body to increase compliance of the
use of the product to get full benefit.
AndroVit
®
.
On October 27, 2015, the Company
entered into an exclusive distribution agreement with Laboratorios
Q Pharma (Spain) to distribute and commercialize
AndroVit
®
in the US and Canada.
AndroVit
®
is a proprietary supplement to support
overall prostate and male sexual health currently marketed in
Europe. AndroVit
®
was specifically formulated with
ingredients known to support the normal prostate health and
vitality and male sexual health.
Basis of Presentation and Principles of Consolidation
These
consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and include
all assets, liabilities, revenues and expenses of the Company and
its wholly-owned subsidiaries: FasTrack Pharmaceuticals, Inc. and
Semprae Laboratories, Inc. (“Semprae”). Additionally,
the revenues and expenses of Novalere, Inc.
(“Novalere”) were included from February 5, 2015 (date
of acquisition) to December 31, 2015. All material intercompany
transactions and balances have been eliminated. Certain items
have been reclassified to conform to the current year
presentation.
Use of Estimates
The
preparation of these 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 consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting periods. Such management estimates include the allowance
for doubtful accounts and sales return adjustments, 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. The Company bases its estimates on historical
experience and various other assumptions that the Company believes
to be reasonable under the circumstances. Actual results could
differ from these estimates under different assumptions or
conditions.
Liquidity
The
Company’s operations have been financed primarily through
advances from officers, directors and related parties, outside
capital, revenues generated from the launch of its products and
commercial partnerships signed for the sale and distribution of its
products domestically and internationally. These funds have
provided the Company with the resources to operate its business,
sell and support its products, attract and retain key personnel and
add new products to its portfolio. The Company has experienced
net losses and negative cash flows from operations each year since
its inception. As of December 31, 2015, the Company had an
accumulated deficit of $15,434,595 and a working capital deficit of
$2,184,892.
The
Company has raised funds through the issuance of debt and the sale
of common stock. The Company has also issued equity instruments in
certain circumstances to pay for services from vendors and
consultants. For the year ended December 31, 2015, the Company
raised $1,505,000 in funds, which included $1,325,000 from the
issuance of convertible debentures to three unrelated parties,
$130,000 from the issuance of notes payable to two unrelated third
parties and $50,000 in proceeds from the issuance of a note payable
to a related party. The funds raised through the issuance of the
convertible debentures were used to pay off other debt instruments
and accounts payable, to increase inventory and buy raw materials
and packaging and for operations.
As
of December 31, 2015, we had $55,901 in cash and cash equivalents,
approximately $1.6 million in cash available for use under the line
of credit convertible debenture with our Chief Executive Officer
(‘CEO”) and $83,097 in net accounts receivable. The
Company expects that its existing capital resources, revenues from
sales of its products and upcoming sales milestone payments from
the commercial partners signed for its products, along with the
funds currently available for use under the line of credit
convertible debenture with our CEO and equity instruments available
to pay certain vendors and consultants will be sufficient to allow
the Company to continue its operations, commence the product
development process and launch selected products through at least
the next 12 months. In addition, the Company’s President and
Chief Executive Officer, who is also a major shareholder, has
deferred the payment of his salary earned thru December 31, 2014
and plans to continue to do so for 2016, if needed. He is also able
to extend the maturity date of the line of credit, if
needed.
In
the event the Company does not pay the convertible debentures upon
their maturity, or after the remedy period, the principal amount
and accrued interest on the convertible debentures is automatically
converted to common stock at 60% of the volume weighted average
price (“VWAP”) during the ten consecutive trading day
period preceding the later of the event of default or applicable
cure period.
Acquisition of Assets of Beyond Human™
On
February 8, 2016, we entered into an Asset Purchase Agreement
(“APA”), pursuant to which Innovus agreed to purchase
substantially all of the assets of Beyond Human™ (the
“Acquisition”) for a total cash payment of $630,000
(the “Purchase Price”). The Purchase Price was paid 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.
Signing of Secured Loan Agreements and Closing of
Financing
On
February 24, 2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered into a Closing Statement in which SBI
loaned the Company gross proceeds of $550,000 pursuant to a
Purchase Agreement, 20% Secured Promissory Note and Security
Agreement (“Note”), all dated February 19, 2016
(collectively, the “Finance Agreements”), to purchase
substantially all of the assets of Beyond Human™, LLC, a
Texas limited liability company (“Beyond
Human”). Of the $550,000 gross proceeds, $300,000
was paid into an escrow account held by a third party bank to be
released to Beyond Human™ upon closing of the transaction,
$242,500 was provided directly to the Company for use in building
the Beyond Human™ business and $7,500 was provided for
attorneys’ fees.
Pursuant
to the Finance Agreements, the principal amount of the Note is
$550,000 and the interest rate thereon is 20% per
year. The Company shall begin to pay principal and
interest on the Note on a monthly basis beginning on March 19, 2016
for a period of 24 months and the monthly mandatory payment amount
thereunder is $28,209. The monthly amount shall be paid by the
Company through a deposit amount control agreement with a third
party bank in which SBI shall be permitted to take the monthly
mandatory payment amount from all revenues received by the Company
from the Beyond Human™ assets in the
transaction. The maturity date for the Note is February
19, 2018.
The
Note is secured by SBI through a first priority secured interest in
all of the Beyond Human™ assets acquired by the Company in
the transaction including all revenue received by the Company from
these assets.
The
Company’s actual needs will depend on numerous factors,
including timing of introducing its products to the marketplace,
its ability to attract additional ex-US distributors for its
products and its ability to in-lic
ense
in non-partnered territories and/or develop new product candidates.
The Company may also seek to raise capital, debt or equity from
outside sources to pay for further expansion and development of its
business and to meet current obligations. Such capital may not be
available to the Company when it needs it on terms acceptable to
the Company, if at all.
Fair Value Measurement
The
Company’s financial instruments are cash, accounts
receivable, accounts payable, accrued liabilities, derivative
liabilities 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
recorded fair value of the convertible debentures, net of debt
discount, is based upon the relative fair value calculation of the
common stock and warrants issued in connection with the convertible
debentures and the fair value of the embedded conversion feature.
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 and are a
level 3 measurement (see Note 9). 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 the Company, the carrying values of
the notes payable and convertible debentures approximate their
respective fair values. The difference between the fair
value and recorded values of the related-party notes payable and
convertible debentures is not significant.
The
Company follows 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 the Company has 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.
|
Cash and Cash Equivalents
Cash
and cash equivalents consist of cash and highly liquid investments
with remaining maturities of three months or less when
purchased.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the
Company 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 amounts
receivable from Sothema Laboratories under the Company's licensing
agreements and from sales of Zestra
®
.
The Company also requires a percentage of payment in advance for
product orders with its larger partners. The Company performs
ongoing credit evaluations of its customers and generally does not
require collateral.
Revenues
consist primarily of product sales and licensing rights to market
and commercialize our products. The following table
identifies customers with revenues that individually exceed 10% of
the Company’s net revenues for the years ended December 31,
2015 and 2014:
|
|
|
Retailer
1
|
$
131,900
|
18
%
|
$
171,600
|
16
%
|
Partner
1
|
$
102,300
|
14
%
|
$
-
|
-
%
|
Partner
2
|
$
84,500
|
11
%
|
$
-
|
-
%
|
Partner
3
|
$
-
|
-
%
|
$
175,000
|
17
%
|
Partner
4
|
$
50,000
|
|
$
245,380
|
23
%
|
The
first three customers listed accounted for 19%, 54% (payment
received in January 2016) and 0%, respectively, of gross accounts
receivable as of December 31, 2015. The first, fourth and fifth
customers listed accounted for 11%, 44% and 27%, respectively, of
accounts receivable as of December 31, 2014.
Over
90% 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 percent or greater.
Concentration of Suppliers
The Company has manufacturing relationships with a
number of vendors or manufacturers for its products including:
Sensum+
®
,
EjectDelay
®
,
Vesele
®
,
Androferti
®
and the Zestra
®
line of products. Pursuant to
these relationships, the Company purchases products through
purchase orders with its manufacturers.
Inventories
Inventory
is valued at the lower of cost or market using the first-in,
first-out method. Inventory is shown net of obsolescence,
determined based on shelf life or potential product
replacement.
Property and Equipment
Property
and equipment, including software, are recorded at historical cost
less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets which range from three to ten years. The initial cost of
property and equipment and software consists of its purchase price
and any directly attributable costs of bringing the asset to its
working condition and location for its intended use.
Intangible Assets
Intangible
assets with finite lives are amortized on a straight-line basis
over their estimated useful lives, which range from 7 to 15 years.
The useful life of the intangible asset is evaluated each reporting
period to determine whether events and circumstances warrant a
revision to the remaining useful life.
Business Combinations
We
account for business combinations by recognizing the assets
acquired, liabilities assumed, contractual contingencies, and
contingent consideration at their fair values on the acquisition
date. The final purchase price may be adjusted up to one year from
the date of the acquisition. Identifying the fair value of the
tangible and intangible assets and liabilities acquired requires
the use of estimates by management and was based upon
currently available data.
The
Company allocated the excess of purchase price over the
identifiable intangible and net tangible assets to goodwill. Such
goodwill is not deductible for tax purposes and represents the
value placed on entering new markets and expanding market share
(see Note 3).
Unanticipated
events and circumstances may occur that may affect the accuracy or
validity of such assumptions, estimates or actual results.
Additionally, any change in the fair value of the
acquisition-related contingent consideration subsequent to the
acquisition date, including changes from events after the
acquisition date, such as changes in our estimate of relevant
revenue or other targets, will be recognized in earnings in the
period of the estimated fair value change. A change in fair value
of the acquisition-related contingent consideration or the
occurrence of events that cause results to differ from our
estimates or assumptions could have a material effect on the
consolidated statements of operations, financial position and cash
flows in the period of the change in the estimate.
Goodwill
The
Company tests its goodwill for impairment annually, or whenever
events or changes in circumstances indicates an impairment may have
occurred, by comparing its reporting unit's carrying value to its
implied fair value. Impairment may result from, among other things,
deterioration in the performance of the acquired business, adverse
market conditions, adverse changes in applicable laws or
regulations and a variety of other circumstances. If the Company
determines that an impairment has occurred, it is required to
record a write-down of the carrying value and charge the impairment
as an operating expense in the period the determination is made. In
evaluating the recoverability of the carrying value of goodwill,
the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the acquired
assets. Changes in strategy or market conditions could
significantly impact those judgments in the future and require an
adjustment to the recorded balances. The goodwill was recorded as
part of the acquisition of Semprae that occurred on December 24,
2013, and the acquisition of Novalere that occurred on February 5,
2015. The Company recorded $759,428 of goodwill related to the
acquisition of Novalere as an income tax benefit and also recorded
an impairment of $759,428 against this benefit. There was no
impairment of goodwill for the year ended December 31,
2014.
Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. The Company
evaluates assets for potential impairment by comparing estimated
future undiscounted net cash flows to the carrying amount of the
assets. If the carrying amount of the assets exceeds the estimated
future undiscounted cash flows, impairment is measured based on the
difference between the carrying amount of the assets and fair
value.
Deferred Financing Costs
Deferred
financing costs represent costs incurred in connection with the
issuance of the convertible debentures during the third quarter of
the year ended December 31, 2015. Deferred financing
costs related to the issuance of the convertible debentures are
being amortized over the term of the financing instrument using the
effective interest method and are recorded in interest expense in
the accompanying consolidated statements of
operations.
Beneficial Conversion Feature
If
a conversion feature of convertible debt is not accounted for
separately as a derivative instrument and provides for a rate of
conversion that is below market value, this feature is
characterized as a Beneficial Conversion Feature
(“BCF”). A BCF is recorded by the Company as a debt
discount. The Company amortizes the discount to interest expense
over the life of the debt using the effective interest rate
method.
Derivative Liabilities
Certain
of the Company’s embedded conversion features on debt and
issued and outstanding common stock purchase warrants, which have
exercise price reset features and other anti-dilution protection
clauses, are treated as derivatives for accounting purposes. The
common stock purchase warrants were not issued with the intent of
effectively hedging any future cash flow, fair value of any asset,
liability or any net investment in a foreign operation. The
warrants do not qualify for hedge accounting, and as such, all
future changes in the fair value of these warrants are recognized
currently in earnings until such time as the warrants are
exercised, expire or the related rights have been waived. These
common stock purchase warrants do not trade in an active securities
market, and as such, the Company estimates the fair value of these
warrants and embedded conversion features using a Probability
Weighted Black-Scholes Option-Pricing Model and the embedded
conversion features using a Path-Dependent Monte Carlo Simulation
Model (see Note 9).
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.
Income Taxes
Income
taxes are provided for using the asset and liability method whereby
deferred tax assets and liabilities are recognized using current
tax rates on the difference between the financial statement
carrying amounts and the respective tax basis of the assets and
liabilities. The Company provides a valuation allowance on
deferred tax assets when it is more likely than not that such
assets will not be realized.
The
Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an
audit. For tax positions meeting this standard, the amount
recognized in the financial statements is the largest benefit that
has a greater than fifty percent (50%) likelihood of being
realized upon ultimate settlement with the relevant tax
authority. There were no uncertain tax positions at December
31, 2015 and 2014.
Revenue Recognition and Deferred Revenue
The
Company generates revenues from product sales and the licensing of
the rights to market and commercialize its products.
The Company recognizes 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:
The Company ships product to its
wholesale and retail customers pursuant to purchase agreements or
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 Revenues:
The license agreements the Company
enters 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)
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 milestone payments is recognized when the cumulative
revenue levels are reached. FASB ASC 605-28,
Milestone
Method
, is not used by the
Company as these milestones are sales-based and similar to a
royalty and the achievement of the sales levels is neither based,
in whole or in part, on the vendor’s performance nor is a
research or development deliverable.
Sales Allowances
The
Company accrues for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
The
Company’s 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. The Company estimates its volume rebates and
promotional discounts accrual based on its estimates of the level
of inventory of its 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 the Company’s 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.
The
Company provides a customer satisfaction warranty on all of its
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 receivable, was approximately $5,000 and
$24,000 at December 31, 2015 and 2014, respectively.
Cost of Product Sales
Cost of product sales includes the cost of
inventory, royalties and inventory reserves. The Company is
required to make royalty payments based upon the net sales of three
of its marketed products, Zestra
®
,
Sensum+
®
and Vesele
®
.
Research and Development Costs
Research
and development (“R&D”) costs, including research
performed under contract by third parties, are expensed as
incurred. Major components of R&D expenses consist of
testing, post marketing clinical trials, material purchases and
regulatory affairs.
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with FASB ASC 718,
Stock Based
Compensation
, which requires
the recognition of the fair value of stock-based compensation as an
expense in the calculation of net income. FASB ASC 718
requires that stock-based compensation expense be based on awards
that are ultimately expected to vest. Stock-based compensation
for the year ended December 31, 2015 and 2014 have been reduced for
estimated forfeitures. When estimating forfeitures, voluntary
termination behaviors, as well as trends of actual option
forfeitures, are considered. To the extent actual forfeitures
differ from the Company’s current estimates, cumulative
adjustments to stock-based compensation expense are
recorded.
Except
for transactions with employees and directors that are within the
scope of FASB ASC 718, all transactions in which goods or services
are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Equity Instruments Issued to Non-Employees for
Services
Issuances
of the Company’s equity for services are measured at the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. The
measurement date for the fair value of the equity instruments
issued to consultants is determined at the earlier of (a) the date
at which a commitment for performance to earn the equity
instruments is reached (a “performance commitment”
which would include a penalty considered to be of a magnitude that
is a sufficiently large disincentive for nonperformance) or (b) the
date at which performance is complete, and is based upon the quoted
market price of the common stock at the date of issuance (See Note
8).
Net Loss per Share
Basic
net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period
presented. Diluted net loss per share is computed using the
weighted average number of common shares outstanding during the
periods plus the effect of dilutive securities outstanding during
the periods. For the years ended December 31, 2015 and 2014,
basic net loss per share are the same as diluted net loss per share
as a result of the Company’s common stock equivalents being
anti-dilutive. See Note 8 for more details.
Recent Accounting Pronouncements
In February 2016, the FASB issued its new lease
accounting guidance in Accounting Standards Update
(“ASU”) No. 2016-02,
Leases (Topic
842)
. Under the new guidance,
lessees will be required to recognize the following for all leases
(with the exception of short-term leases) at the commencement date:
A lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to
align, where necessary, lessor accounting with the lessee
accounting model and ASC 606,
Revenue from Contracts with
Customers
. The new lease
guidance simplified the accounting for sale and leaseback
transactions primarily because lessees must recognize lease assets
and lease liabilities. Lessees will no longer be provided with a
source of off-balance sheet financing. Public business entities
should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted. Lessees (for
capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the
consolidated financial statements. The modified retrospective
approach would not require any transition accounting for leases
that expired before the earliest comparative period presented.
Lessees may not apply a full retrospective transition
approach. Management is currently assessing the impact
the adoption of ASU 2016-02 will have on our consolidated financial
statements.
In November 2015, the FASB issued Accounting
Standards Update (ASU) No. 2015-17,
Balance Sheet Classification
of Deferred Taxes
. Current U.S.
GAAP requires an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts in a classified
statement of financial position. To simplify the presentation of
deferred income taxes, the amendments in this update require that
deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. The amendments in
this update apply to all entities that present a classified
statement of financial position. The current requirement that
deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected
by the amendments in this update. The amendments in this update
will align the presentation of deferred income tax assets and
liabilities with International Financial Reporting Standards (IFRS)
and are effective for fiscal years after December 15, 2016,
including interim periods within those annual periods. Management
is currently assessing the impact the adoption of ASU 2015-17 will
have on our consolidated financial statements.
In September 2015, the FASB issued ASU
2015-16,
Simplifying the Accounting for
Measurement-Period Adjustments,
which eliminates the requirement to
retrospectively adjust the consolidated financial statements for
measurement-period adjustments that occur in periods after a
business combination is consummated. Measurement period adjustments
are calculated as if they were known at the acquisition date, but
are recognized in the reporting period in which they are
determined. Additional disclosures are required about the impact on
current-period income statement line items of adjustments that
would have been recognized in prior periods if prior-period
information had been revised. The guidance is effective for annual
periods beginning after December 15, 2015 and is to be applied
prospectively to adjustments of provisional amounts that occur
after the effective date. Early application is permitted. The
Company is evaluating the impact of adoption of this guidance on
its consolidated financial position and results of
operations.
In July 2015, the FASB issued ASU No.
2015-11
,
Inventory (Topic 330): Simplifying the Measurement of Inventory.
Topic 330
. Inventory, currently
requires an entity to measure inventory at the lower of cost or
market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The amendments apply to all other inventory, which includes
inventory that is measured using first-in, first-out (FIFO) or
average cost. An entity should measure in scope inventory at the
lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. The amendments in this Update more closely align
the measurement of inventory in U.S. GAAP with the measurement of
inventory in IFRS. For public business entities, the amendments are
effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The amendments
should be applied prospectively with earlier application permitted
as of the beginning of an interim or annual reporting period. The
Company does not believe this update will have a material effect on
its consolidated financial statements and related
disclosures.
In April 2015, the FASB has issued ASU No.
2015-03
,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs
. The amendments in this ASU 2015-03 require that
debt issuance costs related to a recognized debt liability be
presented in the balance sheet as a direct deduction from the
carrying amount of that debt liability, consistent with debt
discounts. The recognition and measurement guidance for debt
issuance costs are not affected by the amendments in this ASU
2015-03. For public business entities, the amendments are effective
for financial statements issued for fiscal years beginning after
December 15, 2015, and interim periods within those fiscal years.
Early adoption of the amendments is permitted for financial
statements that have not been previously issued. The amendments
should be applied on a retrospective basis, wherein the balance
sheet of each individual period presented should be adjusted to
reflect the period-specific effects of applying the new guidance.
Upon transition, an entity is required to comply with the
applicable disclosures for a change in an accounting principle.
These disclosures include the nature of and reason for the change
in accounting principle, the transition method, a description of
the prior-period information that has been retrospectively
adjusted, and the effect of the change on the financial statement
line items (i.e., debt issuance cost asset and the debt liability).
The Company is currently presenting $97,577 of deferred financing
costs as a current asset and this will show up as a reduction of
current liabilities when this new pronouncement is adopted next
year.
In August 2014, the FASB issued ASU
2014-15,
Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern.
This ASU 2014-15
describes how an entity should assess its ability to meet
obligations and sets rules for how this information should be
disclosed in the consolidated financial statements. The standard
provides accounting guidance that will be used along with existing
auditing standards. The ASU 2014-15 is effective for interim and
annual periods beginning after December 15, 2016. Early application
is permitted. The Company is in the process of evaluating the
impact of this standard but does not expect this standard to have a
material impact on the Company’s consolidated financial
position or results of operation.
In May 2014, the FASB issued ASU 2014-09,
Revenue from
Contracts with Customers.
This
updated guidance supersedes the current revenue recognition
guidance, including industry-specific guidance. The updated
guidance introduces a five-step model to achieve its core principal
of the entity recognizing revenue to depict the transfer of goods
or services to customers at an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. The updated guidance is
effective for interim and annual periods beginning after December
15, 2016, and early adoption is not permitted. In August 2015, the
FASB issued ASU No. 2015-14 which deferred the effective date by
one year for public entities and others. The amendments in this ASU
are effective for interim and annual periods beginning after
December 15, 2017 for public business entities, certain
not-for-profit entities, and certain employee benefit plans.
Earlier application is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. Management has not
selected a transition method and is currently assessing the impact
the adoption of ASU 2014-09 will have on our consolidated financial
statements.
NOTE 2 – LICENSE AGREEMENTS
CRI In-License Agreement
On
April 19, 2013, the Company and CRI entered into an asset purchase
agreement (the “CRI Asset Purchase Agreement”) pursuant
to which the Company 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.
|
CRI has retained commercialization rights for
Sensum+
®
in the United
States.
In
consideration for such assets and license, the Company issued
631,313 shares to CRI IN 2013. The Company will be required to
issue to CRI shares of the Company’s common stock valued at
an aggregate of $200,000 for milestones relating to additional
clinical data received, which milestone has not yet been
met. The number of shares to be issued was or will be
determined based on the average of the closing price for the 10
trading days immediately preceding the issue date. CRI will
have certain “piggyback” registration rights with
respect to the shares described above, which rights provide that,
if the Company registers shares of its common stock under the
Securities Act in connection with a public offering, CRI will have
the right to include such shares in that registration, subject to
certain exceptions. The Company recorded an asset totaling
$250,000 related to the CRI Asset Purchase Agreement and will
amortize this amount over its estimated useful life of 10
years. The accumulated amortization at December 31, 2014 was
$58,300.
The
CRI Asset Purchase Agreement also requires the Company to pay to
CRI up to $7 million in cash milestone payments based on first
achievement of annual net sales targets plus a royalty based on
annual 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 United States,
whichever is sooner. No sales milestones have been met under
this agreement in 2015 or 2014, and royalties owed to CRI were
immaterial and included in net revenues.
Sothema Laboratories Agreement
On September 23, 2014, the Company entered into an
exclusive license agreement with Sothema Laboratories, SARL, a
Moroccan publicly traded company (“Sothema”), under
which Innovus granted to Sothema an exclusive license to market and
sell Innovus’ topical treatment for Female Sexual
Interest/Arousal Disorder (“FSI/AD”) (based on the
latest Canadian approval of the indication),
Zestra
®
and its high viscosity low osmolality
water-based lubricant Zestra Glide
®
in the North African countries of
Egypt, Morocco, Algeria, Tunisia and Libya, the Middle Eastern
countries of Iraq, Jordan, Saudi Arabia and the United Arab
Emirates and the West African countries of Benin, Burkina Faso,
Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast,
Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo
(collectively the “Territory”).
Under
the agreement, Innovus received an upfront payment and is eligible
to receive up to approximately $171 million dollars 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.
Pursuant to the guidance in ASC 605-28,
Milestone
Method
, the milestones are
considered substantive. The milestones enhance the value of the
products and are the result of the Company’s past efforts.
The milestones are reasonable relative to all of the deliverables.
The Company will recognize the revenue from the milestone payments
when the cumulative supplied units volume is met. During the years
ended December 31, 2015 and 2014, the Company recognized $0 and
$200,000, respectively, in license fees related to this agreement,
and no revenue was recognized for the sales milestones of the
agreement. We believe the amount of the upfront payment
received is reasonable compared to the amounts to be received upon
obtainment of future milestones.
Orimed Pharma Agreement
On September 18, 2014, the Company entered into an
exclusive license agreement with Orimed Pharma
(“Orimed”), an affiliate of JAMP Pharma, under which
Innovus granted to Orimed an exclusive license to market and sell
in Canada, Innovus’ (a) topical treatment for FSI/AD,
Zestra
®
,
(b) topical treatment for premature ejaculation,
EjectDelay
®
,
(c) product Sensum+
™
to increase penile sensitivity and (d)
high viscosity low osmolality water-based lubricant, Zestra
Glide
®
.
Under
the agreement, Innovus received an upfront payment and is eligible
to receive up to approximately CN $94.5 million ($68.2 million USD
based on December 31, 2015 exchange rate) upon and subject to the
achievement of sales milestones based on cumulative gross sales in
Canada by Orimed plus certain double-digit tiered royalties based
on Orimed’s cumulative net sales in Canada.
Pursuant to the guidance in ASC 605-28,
Milestone
Method
, the milestones and
quarterly royalty payments are considered substantive. The
milestones enhance the value of the products and are the result of
the Company’s past efforts. The milestones are reasonable
relative to all of the deliverables. The Company will recognize the
revenue from the milestone payments when the cumulative gross sales
volume is met. The Company will recognize the revenue
from the royalty payments on a quarterly basis when the cumulative
net sales have been met. During the years ended December
31, 2015 and 2014, the Company recognized $0 and $100,000,
respectively in license fees related to this agreement and $2,000
and $0 in royalty payments, respectively, and no revenue was
recognized for the sales milestones of the agreement. We believe
the amount of the upfront payment received is reasonable compared
to the amounts to be received upon obtainment of future
milestones.
Tramorgan Agreement
On September 18, 2014, the Company entered into an
exclusive license and distribution agreement with Tramorgan Limited
(“Tramorgan”), pursuant to which Tramorgan will market
the Company’s topical consumer care product to increase
penile sensitivity, Sensum+
®
in the United Kingdom
(“UK”).
The
agreement has an initial term through December 31, 2016 and can be
extended thereafter for a twenty-four month period if Tramorgan has
reached certain aggregate sales milestones. Pursuant to the
agreement, Innovus is eligible to receive (a) up to $44 million
dollars in sales milestone payments based on Tramorgan’s
attainment of certain levels of cumulative gross sales amounts plus
(b) fifty percent (50%) royalties based on Tramorgan’s net
sales after applicable distribution costs in the UK. During the
years ended December 31, 2015 and 2014, no revenue was recognized
for the sales milestones and royalty payments of the
agreement.
Ovation Pharma Agreements
On September 9, 2013, the Company entered into a
license and distribution agreement with Ovation Pharma SARL
(“Ovation”) under which it granted to Ovation an
exclusive license to market and sell the Company’s topical
treatment for reduced penile sensitivity,
Sensum+
®
,
in Morocco. Ovation may pay the Company up to approximately $11.25
million upon achievement of commercial milestones. In addition,
Ovation has agreed to certain upfront minimum purchases of
Sensum+
™
based upon an agreed upon transfer
price and yearly minimum purchases. During the years ended December
31, 2015 and 2014, the Company recognized $0 and $100,000,
respectively, in revenue related to product sales from
Ovation.
On September 9, 2013 the Company entered into a
second license and distribution agreement with Ovation under which
it granted to Ovation an exclusive license to market and sell the
Company’s topical premature ejaculation treatment,
EjectDelay
®
,
in Morocco. Ovation may pay the Company up to approximately $18.6
million allocated among a fixed upfront license fee and the
achievement of regulatory and commercial milestones. In addition,
Ovation has agreed to certain upfront minimum purchases of
EjectDelay
®
based
upon an agreed upon transfer price and minimum yearly
purchases.
The Company determined that the fixed upfront
license fee payment was a separate deliverable under the
EjectDelay
®
license and distribution agreement and
therefore recorded a receivable on its balance sheet. There were no
additional obligations or deliverables associated with the license.
During the years ended December 31, 2015 and 2014, the Company
recognized $0 and $75,000, respectively, in revenue related to the
upfront license fee from Ovation.
Elis Pharmaceuticals Agreement
On July 4, 2015, the Company announced that it had
entered into an exclusive license agreement with Elis
Pharmaceuticals, an emirates company (“Elis”), under
which Innovus Pharma granted to Elis an exclusive license to market
and sell to market and sell Innovus Pharma’s topical product
Zestra
®
EjectDelay
®
,
Sensum+
®
and Zestra
Glide
®
in Turkey and select African and gulf
countries. Under the agreement, Innovus Pharma is eligible
to receive up to $35.5 million in sales milestone payments plus an
agreed-upon transfer price upon sale of products. The Company had
preliminary listed Syria, Yemen and Somalia as countries in the
definition of licensed territories, but these countries were
removed by the agreement of both parties from the
agreement effective the date of signing of the
agreement. The Company did not recognize any revenues
from this agreement during the year ended December 31,
2015.
Khandelwal Laboratories Agreement
On September 9, 2015, the Company entered into an
exclusive license and distribution agreement with Khandelwal
Laboratories, an Indian company (“KLabs”) under which
the Company has granted to KLabs an exclusive ten-year distribution
right to market and sell in the Indian Subcontinent, which is
defined as India, Nepal, Bhutan, Bangladesh and Sri Lanka the
Company’s products including Zestra
®
,
EjectDelay
®
,
Sensum +
®
and Zestra Glide
®
. If
KLabs exceeds its minimum yearly orders, the agreement has two
five-year term extensions. Under the agreement the minimum orders
for the first ten-year term of the agreement are approximately $2.6
million. The Company did not recognize any revenues from
this agreement during the year ended December 31,
2015.
Bio Task Agreement
On December 3, 2015, the Company entered into an
exclusive license and distribution agreement with Bio Task based in
Malaysia (“Bio Task”) under which the Company has
granted to Bio Task an exclusive ten-year distribution right to
market and sell in Malaysia the Company’s products including
Zestra
®
increase Female Sexual Arousal and
Desire and Satisfaction, EjectDelay
®
for treating premature ejaculation,
Sensum +
®
to increase penile sensitivity,
Vesele
®
for sexual functions and cognitive
responses and Zestra Glide
®
the high viscosity water based
lubricant. Under the agreement, the Company will receive an upfront
payment and is eligible to receive up to $34 million in sales
milestone payments plus an agreed-upon transfer price. The Company
did not recognize any revenues from this agreement during the year
ended December 31, 2015.
NOTE 3 – BUSINESS ACQUISITIONS
Acquisition of Novalere
On
February 5, 2015 (the “Closing Date”), the Company,
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 the Company
(“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 the Company. Pursuant to the articles of
merger effectuating the Merger, Merger Subsidiary II changed its
name to Novalere, Inc.
With the Merger, the Company acquired the
worldwide rights to market and sell the
Fluticare
™
brand (Fluticasone propionate nasal
spray) and the related manufacturing agreement from Novalere FP.
The Company currently anticipates that the Abbreviated New Drug
Application (“ANDA”) filed in November 2014 by the
manufacturer with the U.S. Food and Drug Administration
(“FDA”) may be approved in the first half of 2016,
which, when and if approved, may allow the Company to market and
sell Fluticare
™
over the counter. An ANDA is an
application for a U.S. generic drug approval for an existing
licensed medication or approved drug.
Under
the terms of the Merger Agreement, at the Closing Date, the
Novalere Stockholders received 50% of the Consideration Shares (the
“Closing Consideration Shares”) and the remaining 50%
of the Consideration Shares (the “ANDA Consideration
Shares”) will be delivered only if an ANDA of Fluticasone
Propionate Nasal Spray of Novalere Manufacturing Partners (the
“Target Product”) is approved by the Food and Drug
Administration (the “ANDA Approval”). A portion of
the Closing Consideration Shares and, if ANDA Approval is obtained
prior to the 18 month anniversary of the Closing Date, a
portion of the ANDA Consideration Shares, will be held in
escrow for a period of 18 months from the Closing Date to be
applied towards any indemnification claims by the Company pursuant
to the Merger Agreement.
In addition, the Novalere Stockholders are
entitled to receive, if and when earned, earn-out payments (the
“Earn-Out Payments”). For every $5 million in Net
Revenue (as defined in the Merger Agreement) realized from the
sales of Fluticare
™
,
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
closing price of the Company’s common stock on the Closing
Date was $0.20 per share. The Company issued 12,947,657 Closing
Consideration Shares of its common stock at the Closing Date, the
Fair Market Value, (‘FMV”) of the Closing Consideration
Shares was $2,071,625 as of the Closing Date. 12,280,796 shares
were placed in escrow to cover any potential claims that the
Company might have with respect to disclosures made by
Novalere.
The
fair value of the contingent consideration is based on preliminary
cash flow projections and other assumptions for the ANDA
Consideration shares and the Earn-Out Payments and future changes
in the estimate of such contingent consideration will be recognized
as a charge to operations expense.
Issuance
of the 12,947,655 ANDA Consideration Shares is subject to
milestones, achievement of which is uncertain. The FMV of the ANDA
Consideration Shares was established to account for the uncertainty
in the future value of the shares. The value of the shares as
derived using the options pricing model was then weighted based on
the probability of achieving the milestones to determine the FMV of
the ANDA Consideration Shares and estimated potential share prices
at such dates. Due to certain restrictions on the shares of common
stock be issued, the Company applied a 20% discount for lack of
marketability to the FMV of the ANDA Consideration
Shares. Based on the aforementioned calculation the fair
market value of the ANDA Consideration shares was determined to be
$1,657,300.
The
total fair market value of the considerations issued and to be
issued for the transaction are as follows:
|
|
|
Closing
Consideration Shares
|
12,947,657
|
$
2,071,625
|
ANDA
Consideration Shares
|
12,947,655
|
1,657,300
|
Total
|
25,895,312
|
$
3,728,925
|
Based
on the assumptions, the fair market value of the Earn-Out Payments
was determined to be $1,205,000. The preliminary fair values of
the future earn out payments was determined by applying
the income approach, using several significant unobservable inputs
for projected cash flows and a disco
unt rate. These inputs are considered
Level 3 inputs under the fair value measurements and disclosure
guidance.
The total purchase
price is summarized as follows:
|
Cash
consideration
|
$
43,124
|
Fair
value of common stock issued at closing
|
2,071,625
|
Fair
value of ANDA consideration shares
|
1,657,300
|
Fair
value of future earn out payments
|
1,205,000
|
Total
|
$
4,977,049
|
The
fair values of acquired assets and liabilities are based on
preliminary cash flow projections and other assumptions. The
preliminary fair values of acquired intangible assets were
determined using several significant unobservable inputs for
projected cash flows and a discount rate. These inputs are
considered Level 3 inputs under the fair value measurements and
disclosure guidance. The transaction has been accounted for as a
business combination under the acquisition method of accounting.
Accordingly, the tangible assets and identifiable intangible assets
acquired and liabilities assumed have been recorded at fair value,
with the remaining purchase price recorded as
goodwill.
The
fair values of assets acquired and liabilities assumed at the
transaction date are summarized below:
Cash
|
$
43,124
|
Prepaid
expenses
|
25,907
|
Total
tangible assets
|
69,031
|
|
|
Product
rights and related manufacturing agreement
|
4,681,000
|
Trademarks
|
150,000
|
Total
identifiable intangible assets
|
4,831,000
|
|
|
Goodwill
|
120,143
|
Total
acquired assets
|
5,020,174
|
|
|
Other
current liabilities
|
(43,125
)
|
Total
assumed liabilities
|
(43,125
)
|
|
|
Acquired
assets net of assumed liabilities
|
$
4,977,049
|
The
Company recorded $759,428 of goodwill related to the acquisition of
Novalere as an income tax benefit and also recorded an impairment
of $759,428 against this benefit.
The
carrying value of current assets and liabilities in
Novalere’s financial statements are considered to be a proxy
for the fair value of those assets and liabilities. Novalere is a
pre-commercial organization specializing in selling and marketing
nasal steroid products; most of the value in Novalere is applicable
to the product rights and related manufacturing agreement.
Novalere holds a non-exclusive, worldwide, royalty-free license to
market, promote, sell, offer for sale, import and distribute the
product. This business relationship is contractual in nature and
meets the separability criterion and as a result is considered an
identifiable intangible asset recognized separately from goodwill.
The value of the business relationship is included in goodwill
under US GAAP. Goodwill is calculated as the difference between the
fair value of the consideration transferred and the values assigned
to the identifiable tangible assets acquired and liabilities
assumed. The acquired goodwill presented in the above table
reflects the estimated goodwill from the preliminary purchase price
allocation. The cash acquired was used to pay amounts due to
shareholders, thus was received by the Company.
The
establishment of the fair value of the consideration for a Merger,
and the allocation to identifiable tangible and intangible assets
and liabilities, requires the extensive use of accounting estimates
and management judgment. The fair values assigned to the assets
acquired and liabilities assumed were based on estimates and
assumptions. There has been no change to the estimated fair value
of the contingent consideration of $2,905,425 through December 31,
2015.
Supplemental Pro Forma Information for Acquisition of Novalere
(unaudited)
The
following unaudited supplemental pro forma information for the
years ended December 31 2015 and 2014, assumes the acquisition of
Novalere had occurred as of January 1, 2015 and 2014, giving
effect to purchase accounting adjustments such as amortization of
intangible assets. The pro forma data is for informational purposes
only and may not necessarily reflect the actual results of
operations had Novalere been operated as part of the Company since
January 1, 2015 and 2014.
|
Year Ended
December 31, 2015
|
Year Ended
December 31, 2014
|
|
|
|
|
|
Net
revenues
|
$
735,717
|
$
735,717
|
$
1,030,113
|
$
1,030,113
|
Net
loss
|
$
(4,202,628
)
|
$
(4,578,521
)
|
$
(4,826,967
)
|
$
(8,350,196
)
|
Net
loss per share of common stock – basic and
diluted
|
$
(0.08
)
|
$
(0.09
)
|
$
(0.20
)
|
$
(0.22
)
|
Weighted
average number of shares outstanding – basic and
diluted
|
52,517,530
|
53,794,559
|
24,384,037
|
37,331,694
|
Purchase of Semprae Laboratories, Inc. in 2013
On December 24, 2013 (the “Semprae Closing
Date”), the Company, through Merger Sub obtained 100% of the
outstanding shares of Semprae in exchange for the issuance of
3,201,776 shares of the Company’s common stock, which shares
represented fifteen percent (15%) of the total issued and
outstanding shares of the Company as of the close of business on
the Closing Date, whereupon Merger Sub was renamed Semprae
Laboratories, Inc. Also, the Company agreed to pay $343,500 to the
New Jersey Economic Development Authority (“NJEDA”) as
settlement-in full for an outstanding loan of approximately
$640,000 owed by the former stockholder’s of Semprae, in full
satisfaction of the obligation to the NJEDA. In addition, the
Company agreed to pay the former shareholders an annual royalty
(“Royalty”) equal to five percent (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
fair market value of the Company’s common stock issued on the
Closing Date was $0.30 per share, which resulted in a fair market
value of $960,530 for the common stock issued to the shareholders
of Semprae. The fair value of the shares of common stock issued
were determined by quoted market prices that are considered to be
Level 1 inputs under the fair value measurements and disclosure
guidance. A portion of the shares issued were held in escrow
pending reconciliation of assets received and liabilities assumed
at the acquisition date and were released on September 10,
2015. 386,075 shares of common stock were canceled based
on the terms of the agreement, reducing the total number of shares
issued to 2,815,701. The Company recorded income on the
cancellation of shares of $115,822, which is included in fair value
adjustment for contingent consideration in the accompanying
consolidated statement of operations for the year ended December
31, 2015.
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. Based on the assumptions, the fair value of the
Royalty was determined to be $308,273 at the date of acquisition.
The fair value of the Royalty was determined by applying the income
approach, using several significant unobservable inputs for
projected cash flows and a discount rate of 40% commensurate with
the Company’s cost of capital and expectation of the revenue
growth for products at their life cycle stage. These inputs are
considered Level 3 inputs under the fair value measurements and
disclosure guidance. During 2015 and 2014, approximately $0 and
$87,000, respectively, was paid under this
arrangement. The fair value of the expected royalties to
be paid was increased by $0 and $103,274 during the years ended
December 31, 2015 and 2014, respectively, which resulted in a loss
on change in fair value of contingent consideration and is included
in other income and expense in the accompanying consolidated
statements of operations. The fair value of contingent
consideration was $324,379 at December 31, 2015 and 2014, based on
the new estimated fair value of the consideration, net of the
amounts to be returned to the Company as discussed
above.
NOTE 4 – ASSETS
Inventories
Inventories
consist of the following:
|
|
|
|
|
Raw
materials and supplies
|
$
77,649
|
$
191,186
|
Work
in process
|
90,540
|
-
|
Finished
goods
|
86,254
|
74,773
|
Total
|
$
254,443
|
$
265,959
|
Property and Equipment
Property
and equipment consists of the following:
|
|
|
|
|
Computer
equipment
|
$
5,254
|
$
5,254
|
Office
furniture and fixtures
|
33,376
|
33,376
|
Production
equipment
|
276,479
|
266,939
|
Software
|
338,976
|
338,976
|
Total
cost
|
654,085
|
644,545
|
Less
accumulated depreciation
|
618,984
|
590,034
|
Property
and equipment, net
|
$
35,101
|
$
54,511
|
Depreciation
expense for the years ended December 31, 2015 and 2014 was $28,950
and $63,450, respectively.
Intangible Assets
Amortizable
intangible assets consist of the following:
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
417,597
|
$
57,593
|
$
360,004
|
7 - 15
|
Customer
Contracts
|
611,119
|
127,316
|
483,803
|
10
|
Sensum+
®
License (from CRI)
|
234,545
|
60,554
|
173,991
|
10
|
Vesele
®
trademark
|
25,287
|
3,886
|
21,401
|
8
|
Novalere
Mfg. Contract
|
4,681,000
|
419,340
|
4,261,660
|
10
|
Total
|
$
5,969,548
|
$
(668,689
)
|
$
5,300,859
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
264,321
|
$
(23,671
)
|
$
240,650
|
7 - 14
|
Customer
Contracts
|
611,119
|
(62,262
)
|
548,857
|
10
|
Sensum+
®
license (from CRI)
|
272,545
|
(31,250
)
|
241,295
|
10
|
Vesele
®
trademark
|
25,287
|
(717
)
|
24,570
|
8
|
Total
|
$
1,173,272
|
$
(117,900
)
|
$
1,055,372
|
|
Amortization
expense for the years ended December 31, 2015 and 2014 was $550,789
and $114,006, respectively. Expected future amortization expense at
December 31 2015 is approximately $589,400 for each of the next
five years and $2,354,000 thereafter.
Goodwill
The
changes in the carrying value of the Company’s goodwill for
the years ended December 31, 2015 and 2014 is as
follows:
|
|
Beginning
balance December 31, 2013
|
$
421,372
|
Purchase
price adjustment for acquisition of Semprae Laboratories, Inc. in
2013
|
7,853
|
Ending
Balance December 31, 2014
|
429,225
|
Acquisition
of Novalere (see Note 3)
|
120,143
|
Release
of valuation allowance in connection with acquisition of Novalere
(see Note 10)
|
759,428
|
Impairment
of valuation allowance in connection with acquisition of Novalere
(see Note 10)
|
(759,428
)
|
Ending
Balance December 31, 2015
|
$
549,368
|
NOTE 5 – NOTES PAYABLE AND CONVERTIBLE DEBENTURES –
NON-RELATED PARTIES
Short-Term Loans Payable
Included
in this amount is $218,218 of short-term non-convertible financings
and $12,133 to finance our business insurance premiums. The
short-term non-convertible financings are from three funding
sources and all balances are guaranteed by the Company’s
CEO.
Notes Payable and Convertible Debentures
The
following table summarizes the outstanding unsecured notes payable
and convertible debentures, excluding the third quarter 2015
convertible debentures financing, at December 31:
|
|
|
Current
notes payable and convertible debentures:
|
|
|
February
2014 Convertible Debenture
|
$
-
|
$
330,000
|
July
2015 Debenture (Amended August 2014 Debenture)
|
73,200
|
40,000
|
Total
current notes payable and convertible debentures
|
73,200
|
370,000
|
Less:
Debt discount
|
-
|
(55,982
)
|
|
$
73,200
|
$
314,018
|
|
|
|
Long-term
notes-payable and convertible debentures
|
|
|
September
2014 Convertible Debenture
|
$
-
|
$
92,000
|
Less:
Debt discount
|
-
|
(67,726
)
|
|
$
-
|
$
24,274
|
December 2013 Debenture
On
December 23, 2013, the Company issued an 8% debenture to an
unrelated third party accredited investor in the principal amount
of $350,000 (the “December 2013 Debenture”). The
December 2013 Debenture bore interest at the rate of 8% per annum.
The principal amount and interest was payable on August 31, 2014.
On August 31, 2014, the maturity date of the December 2013
Debenture was extended to September 15, 2014.
On
September 15, 2014, a third party investor (“Investor”)
purchased the December 2013 Debenture and subsequently on September
15, 2014 the Company entered into a debt exchange agreement with
the Investor, pursuant to which the Company issued 1,900,000 shares
of the Company’s common stock with a fair value of $779,000
based upon the quoted market price at issuance, in exchange for the
retirement of the December 2013 Debenture. During the year ended
December 31, 2014 the Company recorded a $406,833 loss on the
extinguishment of debt.
July 2015 Debenture (Amended August 2014 Debenture)
On
August 30, 2014, the Company issued an 8% debenture to an unrelated
third party investor in the principal amount of $40,000 (the
“August 2014 Debenture”). The August 2014 Debenture
bears interest at the rate of 8% per annum. The principal amount
and interest were payable on August 29, 2015. On July 21, 2015, the
Company received an additional $30,000 from the investor and
amended and restated this agreement to a new principal balance of
$73,200 (including accrued interest of $3,200 added to principal)
and a new maturity date of July 21, 2016.
September 2014 Convertible Debenture
On
September 29, 2014, the Company issued a convertible promissory
note (the “Note”) to an unrelated third party
accredited investor for $50,000. The Note had a principal face
amount of $92,000, did not accrue interest and was due on March 28,
2016 (the “Maturity Date”). The Note bore the right to
convert any part of the principal amount under the Note into shares
of the Company’s common stock at a conversion price of $0.40
per share (the “Conversion Price”). On the Maturity
Date, any outstanding principal due under the Note would have been
automatically converted into shares of common stock at the
Conversion Price. The Note prohibited the holder from converting
the Note to the extent that, as a result of such conversion, the
holder would have beneficially own more than 9.99%, in the
aggregate, of the issued and outstanding shares of common stock
calculated immediately after giving effect to the issuance of
shares of common stock upon the conversion of the Note. The Note
contains a BCF. The intrinsic value of the BCF at the date of
issuance was determined by measuring the difference between the
accounting conversion price and the intrinsic value of the stock at
the commitment date. The Company recorded a debt discount for the
intrinsic value of the BCF, which was limited to the proceeds with
an offsetting increase to additional paid-in-capital. The BCF of
$37,400 along with the OID of $42,000 had been included in the
consolidated balance sheet at December 31, 2014 as a discount to
the related debt security, and was being accreted as non-cash
interest expense over the expected term of the Note using the
effective interest method. The Note was converted into 230,000
shares common stock according to the terms of the note, by the
investor on March 30, 2015. As such, the Company recorded the
conversion of the note and the remaining debt discount was charged
to interest expense during the year ended December 31,
2015.
January 2015 Non-Convertible Debenture
On
January 21, 2015, the Company entered into securities purchase
agreements with Vista Capital Investments, LLC
(“Vista”) whereby the Company issued and sold to the
Vista promissory notes (“January 2015 Non-Convertible
Debenture”) and warrants (the “Vista Warrants”)
to purchase up to 500,000 shares of the Company’s Common
Stock for gross proceeds of $100,000. The note has an Original
Issue Discount (“OID”) of $10,000 and requires payment
of $110,000 in principal upon maturity. On July 30, 2015, the
Company and Vista entered into an amendment to the $110,000
Promissory Note dated January 21, 2015 (“Vista Note
Amendment”). In consideration for the Vista Note Amendment,
the Company issued 100,000 restricted shares of common stock to
Vista. The fair value of such shares totaling $15,500 was
recognized as interest expense during the year ended December 31,
2015. The principal note balance totaling $110,000 was paid off on
November 2, 2015.
The
Vista Warrants are exercisable for five years from the closing date
at an exercise price of $0.30 (See Note 8) per share of common
stock. The warrants contain anti-dilution protection, including
protection upon dilutive issuances.
The
Vista Warrants are measured at fair value and classified as a
liability because these warrants contain anti-dilution protection
and therefore cannot be considered indexed to the Company’s
own stock which is a requirement for the scope exception as
outlined under FASB ASC 815. The estimated fair value of the Vista
Warrants was determined using the Probability Weighted
Black-Scholes Option-Pricing Model, resulting in a fair value of
$99,999 on the date they were issued. The allocation of the
proceeds of the debt was initially recorded using the residual
method, at $1, net of a debt discount of $109,999 for the fair
value of the Vista Warrants and the OID. The discount was being
accreted as non-cash interest expense over the expected term of the
January 2015 Non-Convertible Debenture using the effective interest
method. During the year ended December 31, 2015, the full amount of
debt discount has been accreted to interest expense. The fair value
of the Vista Warrants 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. The Company
will continue to classify the fair value of the Vista 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 Vista Warrants survives for the life of the
warrants which ends in January 2020 and has been classified as a
liability (see Note 9).
February 2014 Convertible Debenture
On
February 13, 2014, the Company entered into a securities purchase
agreement with an unrelated third party accredited investor
pursuant to which the Company issued a convertible debenture in the
aggregate principal amount of $330,000 (issued at an OID of 10%)
(the “February 2014 Convertible Debenture”) and a
warrant to purchase 250,000 shares of the Company’s common
stock (“Warrant Agreement”).
The
February 2014 Convertible Debenture bore interest at the rate of
10% per annum and the principal amount and interest were payable on
March 13, 2015. The effective interest rate was calculated
considering the OID, the BCF and the Warrant Agreement. The
February 2014 Convertible Debenture could have been converted in
whole or in part at any time prior to the maturity date by the
holder at a conversion price of $0.40 per share, subject to
adjustment. The Company had the option to redeem the February 2014
Convertible Debenture before its maturity by payment in cash of
125% of the then outstanding principal amount plus accrued interest
and other amounts due.
The
February 2014 Convertible Debenture was issued with an OID of
$30,000. The OID was included in the consolidated balance sheet as
a debt discount to the related debt security and was being accreted
as non-cash interest expense over the expected term of the
debt.
The
Warrant Agreement provides the holder with the right to acquire up
to 250,000 shares of common stock at an exercise price of $0.50 per
share, subject to standard certain adjustments as described in the
Warrant Agreement, at any time through the fifth anniversary of its
issuance date. The allocated relative fair value of the Warrant
Agreement of $96,533 had been included in the consolidated balance
sheet as a debt discount to the related debt security and was being
accreted as non-cash interest expense over the expected term of the
debt.
The
February 2014 Convertible Debenture contains a BCF. The intrinsic
value of the BCF at the date of issuance was determined by
measuring the difference between the accounting conversion price
and the intrinsic value of the stock at the commitment date. The
Company recorded a debt discount for the intrinsic value of the
BCF, which was limited to the proceeds with an offsetting increase
to additional paid-in-capital. The BCF of $179,032 along with the
original issue discount of $30,000 had been included in the
consolidated balance sheet at December 31, 2014 as a debt discount
to the related debt security and was being accreted as non-cash
interest expense over the expected term of the February 2014
Convertible Debenture using the effective interest
method.
On
March 12, 2015, the Company issued 250,000 shares of the
Company’s common stock and 250,000 warrants to the
holder of the February 2014 Convertible Debenture to extend the
maturity date to September 13, 2015 which resulted in a debt
extinguishment. The fair value of the 250,000 shares of common
stock issued totaled $32,500 computed based on the stock price on
the date of issuance. The terms of the warrants issued
to the holder were amended to reduce the exercise price of the
total warrants outstanding to $0.30 per share (See Note 8) and
include certain anti-dilution protection, including protection upon
dilutive issuances. The warrants are measured at fair value and
classified as a liability because these warrants contain
anti-dilution protection and therefore cannot be considered indexed
to the Company’s 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 Option-Pricing Model, resulting
in a fair value of $76,299 on the date they were issued. The
allocation of the proceeds of the debt after modification which
resulted in a debt extinguishment was initially recorded using the
residual method, at $253,701, net of a debt discount of $76,299 for
the fair value of the warrants. The discount was being accreted as
non-cash interest expense over the expected term of the February
2014 Convertible Debenture using the effective interest method.
During the year ended December 31, 2015, the full amount of debt
discount has been accreted to interest expense. The fair
value of the common stock issued of $32,500 was recorded as a loss
on debt extinguishment, based on the estimated fair value of the
stock on date of issuance, in the accompanying consolidated
statement of operations during the year ended December 31, 2015.
This convertible debenture was repaid in September
2015. The anti-dilution protection for the warrants
survives for the life of the warrants which ends in March 2020 (see
Note 9).
Interest Expense
The
Company recognized interest expense on the short-term loans payable
and unsecured (non-related party) notes payable and convertible
debentures of $102,105 and $33,452 for the years ended December 31,
2015 and 2014, respectively. Amortization of the debt
discount to interest expense during the years ended December 31,
2015 and 2014 totaled $310,006 and $283,348
respectively.
Convertible Debentures - Third Quarter 2015 Financing
The
following table summarizes the outstanding Third Quarter 2015
Convertible Debentures at December 31, 2015 and 2014:
|
|
|
|
|
|
Investor
1 - July 27, 2015
|
$
500,000
|
$
-
|
Investor
1 - September 30, 2015
|
100,000
|
-
|
Investor
2 - August 25, 2015
|
500,000
|
-
|
Investor
2 - September 21, 2015
|
100,000
|
-
|
Investor
3 – August 27, 2015
|
125,000
|
-
|
Sub-total
of gross proceeds received
|
1,325,000
|
-
|
Plus:
Original issue discount (10%)
|
132,500
|
-
|
Face
amount
|
1,457,500
|
-
|
Less:
Debt discount
|
(952,464
|
-
|
Carrying
value
|
505,036
|
-
|
Less:
Current portion
|
(505,036
)
|
-
|
Convertible
debentures – long-term
|
$
-
|
$
-
|
In
the third quarter of 2015, the Company entered into Securities
Purchase Agreements with three (3) accredited investors (the
“Buyers”), pursuant to which the Company received
aggregate gross proceeds of $1,325,000 (net of OID) pursuant to
which it sold:
Six
(6) Convertible Promissory Notes of the Company. Two in the
principal amount of $275,000, one for $550,000, one for $137,500,
and two for $110,000 (each a “Q3 2015 Note” and
collectively the “Q3 2015 Notes”) (the Q3 2015 Notes
were sold at a 10% OID and the Company received an aggregate total
of $1,242,500 in funds thereunder after debt issuance costs of
$82,500). The principal amount due under the Q3 2015 Notes is
$1,457,500. The Q3 2015 Notes and accrued interest are convertible
into shares of common stock of the Company (the “Common
Stock”) beginning six (6) months from the date of execution,
at a conversion price of $0.15 per share, with certain adjustment
provisions noted below. The maturity date of the first and second
Q3 2015 Note is August 26, 2016. The third Q3 2015 Note has a
maturity date of September 24, 2016 the fourth has a maturity date
of September 26, 2016, the fifth is October 20, 2016 and the sixth
is October 29, 2016. The Q3 2015 Notes bear interest on the unpaid
principal amount at the rate of five percent (5%) per annum from
the date of issuance until the same becomes due and payable,
whether at maturity or upon acceleration or by prepayment or
otherwise. Notwithstanding the foregoing, upon the occurrence of an
Event of Default as defined in such Q3 2015 Note, a “Default
Amount” equal to the sum of (i) the principal amount,
together with accrued interest due thereon through the date of
payment payable at the holder’s option in cash or common
stock and (ii) an additional amount equal to the principal amount
payable at the Company’s option in cash or common stock. For
purposes of payments in common stock, the following conversion
formula shall apply: the conversion price shall be the lower of:
(i) the fixed conversion price ($0.15) or (ii) 60% multiplied by
the volume weighted average price of the Company’s common
stock during the ten consecutive trading days immediately prior to
the later of the Event of Default or the end of the applicable cure
period. Certain other conversion rates apply in the event of the
sale or merger of the Company, default and other defined
events.
The
Company may prepay the Q3 2015 Notes at any time on the terms set
forth in the Q3 2015 Notes at the rate of 115% of the then
outstanding balance of the Q3 2015 Notes. Under the terms of the Q3
2015 Notes, the Company shall not effect certain corporate and
business actions during the term of the Q3 2015 Notes, although
some may be done with proper notice. Pursuant to the Purchase
Agreement, with certain exceptions, the Note holder has a right of
participation during the term of the Q3 2015 Notes; additionally,
the Company granted the Q3 2015 Note holder registration rights for
the shares of common stock underlying the Q3 2015 Notes pursuant to
Registration Rights Agreements.
In
addition, bundled with the convertible debt, the Company
sold:
1.
A
common stock purchase warrant to each Buyer, which allows the
Buyers to purchase an aggregate of 1,325,000 shares of common
stock and the placement agent to purchase 483,333 shares of common
stock (aggregating 1,808,333 shares of the Company’s common
stock) at an exercise price of $0.30 per share (See Note 8);
and
2.
4,337,500
restricted shares of common stock to the Buyers.
In
addition, a Registration Rights Agreement was signed and, as a
result, the Company filed a Registration Statement on September 11,
2015 and filed an Amended Form S–1 on October 26, 2015 and
November 12, 2015.
The
Company allocated the proceeds from the Q3 2015 Notes to the
convertible debt, warrants and restricted shares of common stock
issued based on their relative fair values. The Company
determined the fair value of the warrants using the Black-Scholes
Option Pricing Model with the following range of
assumptions:
|
|
Expected
terms (in years)
|
5.00
|
Expected
volatility
|
101 - 119
%
|
Risk-free
interest rate
|
1.37 – 1.58
%
|
Dividend
yield
|
-
|
The
fair value of the restricted shares of common stock issued was
based on the market price of the Company’s common stock on
the date of issuance of the Q3 2015 Notes. The
allocation of the proceeds to the warrants and restricted shares of
common stock based on their relative fair values resulted in the
Company recording a debt discount of $89,551 and $374,474,
respectively. The remaining proceeds of $860,975 were
initially allocated to the debt. The Company determined
that the embedded conversion features in the Q3 2015 Notes were a
derivative instrument which was required to be bifurcated from the
debt host contracts and recorded at fair value as a derivative
liability. The fair value of the embedded conversion
features at issuance was determined using a Path-Dependent Monte
Carlo Simulation (see Note 9 for assumptions used to calculate fair
value). The initial fair value of the embedded
conversion features were $901,784, of which, $830,560 is recorded
as a debt discount. The initial fair value of the
embedded conversion feature derivative liabilities in excess of the
proceeds allocated to the debt was $71,224, and was
immediately expensed and recorded as interest expense during the
year ended December 31, 2015 in the accompanying consolidated
statement of operations. The Q3 2015 Notes were also
issued at an OID of 10% and the OID of $132,500 was recorded as an
addition to the principal amount of the Q3 2015 Notes and a debt
discount in the accompanying consolidated balance
sheet.
Interest Expense
The
Company recognized interest expense on the Q3 2015 Notes of $26,754
for the year ended December 31, 2015. The debt discount recorded
for the Q3 2015 Notes totaling $1,427,085 is being amortized as
interest expense over the term of the Q3 2015 using the effective
interest method. Total amortization of the debt discount
on the Q3 2015 Notes to interest expense for the year ended
December 31, 2015 was $474,621.
The
Company incurred debt issuance costs of $82,500 and the fair value
of the warrants issued to the placement agent totaled $68,419. Such
costs are amortized to interest expense over the term of the Q3
2015 Notes and the Company amortized $53,342 to interest expense
during the year ended December 31, 2015.
NOTE 6 – DEBENTURES – RELATED PARTIES
The
following table summarizes the long-term outstanding debentures to
related parties at December 31, 2015 and 2014.
|
|
|
Line
of credit convertible debenture – related party
|
$
409,192
|
$
424,078
|
2014
non-convertible debentures - related parties
|
25,000
|
150,000
|
Total
|
434,192
|
574,078
|
Less
: Debt discount
|
(17,720
)
|
(76,492
)
|
Carrying
value
|
416,472
|
497,586
|
Less:
Current portion
|
(391,472
)
|
-
|
Total
long-term debentures – related parties
|
$
25,000
|
$
497,586
|
January 2012 Convertible Debentures
In
January 2012, the Company issued 8% convertible debentures in the
aggregate principal amount of $174,668 (the “January 2012
Debentures”) to six individuals. Under their original terms,
the January 2012 Debentures were payable in cash at the earlier of
January 13, 2013 or when the Company completes a financing with
minimum gross proceeds of $4 million (the “Financing”),
and the holders had the right to convert outstanding principal and
interest accrued into the Company’s securities that were
issued to the investors in the Financing.
The
January 2012 Debentures contained a BCF of $40,889, which had been
included in the balance sheet as a discount to the related debt
security, and was being accreted as non-cash interest expense over
the expected term of the debt using the effective interest
method.
During
2013, four of the five holders of the outstanding January 2012
Debentures agreed to amend and restate the debentures to provide
for automatic conversion into securities of the Company upon the
earlier of either (a) the closing of the Financing and (b) July 1,
2016. The fifth holder of the January 2012 Debentures in the amount
of $20,000 did not amend the debenture.
On
February 19, 2014, the Company agreed with all five holders of the
January 2012 Debentures, to convert such debentures into shares of
the Company’s common stock at a conversion price of $0.40 per
share, and to terminate the January 2012 Debentures upon
conversion. Immediately prior to conversion, the January 2012
Debentures had an aggregate principal and interest amount of
$190,013, which was converted into 475,032 shares of the
Company’s common stock and terminated. The remaining discount
of $37,195 related to the BCF was recorded as interest expense in
2014.
January 2013 Convertible Debenture
In
January 2013, the Company issued a convertible debenture in the
principal amount of $70,000 to a director of the Company (the
“January 2013 Debenture”) with terms identical to those
of the January 2012 Debentures. In 2013, the terms were amended to
provide for automatic conversion into securities of the Company
upon the earlier of either (a) the closing of the Financing and (b)
July 1, 2016.
The
January 2013 Debenture contained a BCF of $18,651, which was
included in the balance sheet as a discount to the related debt
security, and was accreted as non-cash interest expense over the
expected term of the loan using the effective interest
method.
On
February 19, 2014, the Company agreed with the holder of the
January 2013 Debenture to convert such debenture on the same terms
described above for the January 2012 Debentures. The principal and
interest amount owed under the January 2013 Debenture immediately
prior to conversion was $76,122, which was converted into 190,304
shares of the Company’s common stock and terminated. The
remaining discount of $16,965 related to the BCF was recorded as
interest expense in 2014.
Line of Credit Convertible Debenture
In
January 2013, the Company entered into a line of credit convertible
debenture with its President and Chief Executive Officer (the
“LOC Convertible Debenture”). Under the terms of its
original issuance: (1) the Company could request to borrow up to a
maximum principal amount of $250,000 from time to time; (2) amounts
borrowed bore an annual interest rate of 8%; (3) the amounts
borrowed plus accrued interest were payable in cash at the earlier
of January 14, 2014 or when the Company completes a Financing, as
defined, and (4) the holder had sole discretion to determine
whether or not to make an advance upon the Company’s
request.
During
2013, the LOC Convertible Debenture was further amended to: (1)
increase the maximum principal amount available for borrowing to $1
million plus any amounts of salary or related payments paid to Dr.
Damaj prior to the termination of the funding commitment; and (2)
change the holder’s funding commitment to automatically
terminate on the earlier of either (a) when the Company completes a
financing with minimum net proceeds of at least $4 million, or (b)
July 1, 2016. The securities to be issued upon automatic conversion
will be either the Company’s securities that are issued to
the investors in a Qualified Financing or, if the financing does
not occur by July 1, 2016, shares of the Company’s common
stock based on a conversion price of $0.312 per share, 80% times
the quoted market price of the Company's common stock on the date
of the amendment. The LOC Convertible Debenture continues to bear
interest at a rate of 8% per annum. The other material terms of the
LOC Convertible Debenture were not changed. The Company recorded a
debt discount for the intrinsic value of the BCF with an offsetting
increase to additional paid-in-capital. The BCF is being accreted
as non-cash interest expense over the expected term of the LOC
debenture to its stated maturity date using the effective interest
rate method.
On
February 19, 2014, the Company agreed with its CEO to convert the
then outstanding principal and interest owed as of such date into
shares of the Company’s common stock at a conversion price of
$0.40 per share. The principal and interest amount owed under the
LOC Convertible Debenture immediately prior to conversion was
$476,165, which was converted into 1,190,411 shares of the
Company’s common stock. The debt discount of $89,452 related
to the BCF for the converted portion was recorded as interest
expense.
On
July 22, 2014, the Company agreed with its CEO to increase the
principal amount that may be borrowed from $1,000,000 to
$1,500,000. All other terms of the LOC Convertible
Debenture remained the same.
On
August 12, 2015, the principal amount that may be borrowed was
increased to $2,000,000 and the automatic termination date
described above was extended to October 1, 2016. The conversion
price is $.16 per share, 80% times the quoted market price of the
Company’s common stock on the date of the
amendment.
During
the year ended December 31, 2015 and 2014, the Company borrowed
$114 and $424,078, respectively, under the LOC Convertible
Debenture and it repaid $15,000 during 2015. The Company
recorded a BCF of $8,321 for the year ended December 31, 2015 and,
as of December 31, 2015, the Company owed $409,192 in principal
amount under the LOC Convertible Debenture and there was
approximately $1.6 million remaining on the line of credit and
available to use.
January 2015 Non-Convertible Debenture - Former CFO
On
January 21, 2015, the Company entered into a securities purchase
agreement with the Company’s former Chief Financial Officer
whereby the Company issued and sold a promissory note in the
principal face amount of $55,000 and warrants to purchase up to
250,000 shares of the Company’s common stock for gross
proceeds of $50,000. The Company recorded an OID of
$5,000 upon issuance.
The
note was due on July 31, 2015 and accrued a one-time interest
charge of 8% on the closing date. The warrants are exercisable for
five years from the closing date at an exercise price of $0.30 per
share of common stock. The warrants contain anti-dilution
protection, including protection upon dilutive issuances. The
principal and interest balance of $59,400 was repaid on July 31,
2015.
The
warrants issued in connection with the note, are measured at fair
value and classified as a liability because these warrants contain
anti-dilution protection and therefore, cannot be considered
indexed to the Company’s 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 Option-Pricing Model, resulting in a fair
value of $49,999 on the date they were issued.
The
allocation of the proceeds of the debt was initially recorded using
the residual method, at $1, net of a debt discount of $54,999 for
the fair value of the warrants and the OID. The discount was
accreted as non-cash interest expense over the expected term of the
note using the effective interest method and the unamortized
balance was expensed upon repayment. The fair value of the warrants
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. The Company 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 (see Note 9).
2014 Non-Convertible Notes – Related Parties
On
January 29, 2014, the Company issued an 8% note, in the amount of
$25,000, to the Company’s President and CEO. The principal
amount and interest were payable on January 22, 2015. This note was
amended to extend the maturity date until January 22,
2017. This note is still outstanding at December 31
2015.
On
May 30, 2014, the Company issued an 8% debenture, in the amount of
$50,000, to a member of the Company’s Board of
Directors. The principal amount and interest were payable on
May 30, 2015 and the repayment date had been extended to May 30,
2016. On August 5, 2015 the debenture was converted into 313,177
shares of common stock.
On
June 17, 2014, the Company issued an 8% debenture, in the amount of
$50,000, to the Company’s former Chief Financial
Officer. The principal and interest were payable on June 16,
2015 and were repaid in July 2015.
On
August 25, 2014, the Company issued an 8% debenture, in the amount
of $25,000, to a member of the Company’s Board of
Directors. The principal amount and interest were payable on
August 25, 2015. In July 2015, the repayment date was extended to
May 30, 2016. On August 5, 2015 the debenture was converted into
156,083 shares of common stock.
Interest Expense
The
Company recognized interest expense on the outstanding debentures
to related parties totaling $69,634 and $42,881 during the years
ended December 31, 2015 and 2014, respectively. Amortization of the
debt discount to interest expense during the years ended December
31, 2015 and 2014 totaled $122,092 and $160,519,
respectively.
NOTE 7 – RELATED PARTY TRANSACTIONS
Related Party Borrowings
There
were several related party borrowings which are described in more
detail in Note 6.
Accrued Compensation – Related Party
Accrued
compensation includes accruals for employee wages and vacation
pay. The components of accrued compensation as of December 31,
2015 and 2014 are as follows:
|
|
|
Wages
|
$
1,178,909
|
$
791,987
|
Vacation
|
170,371
|
114,941
|
Payroll
taxes on the above
|
93,510
|
-
|
Total
|
1,442,790
|
906,928
|
Classified
as long-term
|
(906,928
)
|
(906,928
)
|
Accrued
compensation
|
$
535,862
|
$
-
|
Accrued
employee wages at December 31 2015 are entirely, and at December
31, 2014 relate primarily, to wages owed to the Company’s CEO
and President. 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 the Company’s ability to
continue as a going concern. The CEO started to receive salary in
the third quarter of 2015. Under the third quarter 2015 financing
agreement, salaries prior to January 1, 2015 cannot be repaid until
the debentures are repaid in full or otherwise extinguished by
conversion or other means and, accordingly, the accrued
compensation is shown as a long-term liability. The
remaining accrued compensation of $535,862 is included in accounts
payable and accrued expenses in the accompanying consolidated
balance sheet at December 31, 2015.
NOTE 8 – STOCKHOLDERS’ EQUITY
Capital Stock
The
Company is authorized to issue 150,000,000 shares, all of which are
common stock with a par value of $0.001 per share.
Issuances of Common Stock
On
January 17, 2013, the Company entered into a service agreement with
a third party pursuant to which the Company agreed to issue over
the term of the agreement 250,000 shares of Company common stock in
exchange for services to be rendered. On September 18, 2013,
the Company extended the term of the agreement and agreed to issue
an additional aggregate of 300,000 shares of common stock in
exchange for services to be rendered. The term was further extended
in April 2014 and the Company agreed to issue an additional 300,000
shares of common stock in exchange for services to be rendered over
the term of the agreement. During the years ended December 31,
2015 and 2014, the Company issued 140,000 and 300,000 shares of
common stock, respectively, and recognized $20,650 and $82,500 of
services expense, respectively, under this agreement. This
agreement was terminated in June 2015.
On June 28, 2013, the Company entered into an
agreement with a consultant to provide drug development
pre-clinical consulting services for Sensum+
™
and EjectDelay
®
.
In consideration of such services, the Company issued 126,296
shares in 2014 to the consultant, which were valued at the closing
price of the Company’s common stock on the date of issuance.
The aggregate value of the shares issued was $55,521 in 2014, which
corresponds to the service period of the consultant’s
services. As of December 31, 2014, the studies have completed and
the consulting services have terminated.
On
February 19, 2014, the Company agreed with the holders of the
January 2012 Debentures, January 2013 Debenture, and the LOC
Convertible Debenture to convert such debentures into shares of the
Company’s common stock at a conversion price of $0.40 per
share. The conversion terminated the January 2012 Debentures and
the January 2013 Debenture. The conversion of the LOC Convertible
Debenture, would convert the then outstanding principal and
interest owed as of such date. The Company issued a total of
1,855,747 shares of the Company’s common stock that had a
value prior to the conversion of $742,299 in 2014.
On
September 15, 2014, the Company entered into a debt exchange
agreement with the investor, pursuant to which the Company agreed
to issue 1,900,000 shares of the Company’s common stock of
$790,507 based on the value at issuance, in exchange for the
retirement of the December 2013 Debenture. The holder of the
December 2013 Debenture sold it to the investor prior to the debt
exchange agreement.
On
March 17, 2015, the Company entered into a consulting agreement for
services. In consideration of such services, the Company issued
28,125 shares of Company common stock to the consultant on said
date and valued them at $3,938 based on the closing price of the
stock on the date of issuance. The fair value of such shares
was recognized in general and administrative expense in the
accompanying consolidated statement of operations.
On
August 27, 2014, the Company agreed to issue 200,000 shares of
Company common stock pursuant to a consulting contract with a third
party for services. The Company issued 100,000 shares of stock
pursuant to this agreement on September 2, 2014. The remaining
100,000 shares were issued on November 4, 2014. The Company
extended the consulting contract in January 2015 and agreed to
issue an additional 200,000 shares. The issued shares have been
valued at the closing price of the Company’s common stock on
the date of issuance and are expensed over the period that the
services are rendered. The Company recognized expense of $38,000
and $37,500 during the years ended December 31, 2015 and 2014,
respectively, related to services provided in general and
administrative expense in the accompanying consolidated statement
of operations.
On
January 23, 2015, the Company entered into a settlement agreement
with CRI whereby CRI returned 200,000 shares of common stock
initially issued for a product license acquired. The share return
was in consideration for the Company completing certain product
development and regulatory efforts relating to the sale of the
product in foreign territories and reduced the intangible asset
value by the fair value of such shares totaling
$38,000.
On
September 17, 2015 a consultant terminated his arrangement with the
Company and exchanged 500,000 of his restricted stock units for
500,000 shares of common stock. The Company had previously
recognized stock-based compensation expense of $110,621 (cumulative
to date of termination), which was greater than the fair value of
the stock issued to him. Accordingly, no additional compensation
expense was recognized.
On
September 29, 2015 the Company issued 375,000 shares of common
stock for services and recorded an expense of $23,250, which is
included in general and administrative expense in the accompanying
consolidated statement of operations.
The
Company issued an additional 1,037,500 and 343,907 shares of common
stock and expensed $124,691 and $101,300, during the years ended
December 31, 2015 and 2014 respectively, to other consultants for
various services, which is included in general and administrative
expense in the accompanying consolidated statement of operations.
The shares were issued under the Company’s 2013 Equity
Incentive Plan (the “Incentive Plan”) or under the
corresponding Plans, as filed with the Securities Exchange
Commission. All issued shares have been valued at the closing
price of the Company’s common stock on the date of
issuance.
See
Note 5 for more details on the shares of common stock issued in
connection with the Third Quarter 2015 Financing, shares of common
stock issued upon conversion of convertible debentures and note
payable and shares of common stock issued in connection with the
extension and amendment of certain convertible debentures during
2015. See Note 3 for more details on the shares of
common stock issued in connection with the Novalere acquisition
during 2015 and the return of shares of common stock during 2015 in
connection with the Semprae merger transaction.
2013 Equity Plan
The
Company has issued common stock, restricted stock units and stock
option awards to employees, non-executive directors and outside
consultants under the 2013 Incentive Plan, which was approved by
the Company’s Board of Directors in February of
2013. The 2013 Incentive Plan allows for the issuance of up to
10,000,000 shares of the Company’s 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 exercise price for all equity awards issued under
the 2013 Incentive Plan is based on the fair market value of the
common stock. Currently, because the Company’s common
stock is quoted on the OTCQB, the fair market value of the common
stock is equal to the last-sale price reported by the OTCQB as of
the date of determination, or if there were no sales on such date,
on the last date preceding such date on which a sale was
reported. Generally, each vested stock unit entitles the
recipient to receive one share of Company common stock which is
eligible for settlement at the earliest of their termination, a
change in control of the Company or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards, and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of December 31, 2015, 995,264 shares were available under this
plan.
2014 Equity Plan
The
Company has issued common stock, restricted stock units and stock
option awards to employees, non-executive directors and outside
consultants under the 2014 Incentive Plan, which was approved by
the Company’s Board of Directors in November 2014. The
2014 Incentive Plan allows for the issuance of up to 20,000,000
shares of the Company’s 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 exercise price for all equity awards issued under
the 2014 Incentive Plan is based on the fair market value of the
common stock. Currently, because the Company’s common
stock is quoted on the OTCQB, the fair market value of the common
stock is equal to the last-sale price reported by the OTCQB as of
the date of determination, or if there were no sales on such date,
on the last date preceding such date on which a sale was
reported. Generally, each vested stock unit entitles the
recipient to receive one share of Company common stock which is
eligible for settlement at the earliest of their termination, a
change in control of the Company or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of December 31, 2015 10,950,000 shares were available under this
plan.
Stock-Based Compensation
The
stock-based compensation expense for the years ended December 31,
2015 and 2014 was $1,298,240 and $1,509,005, respectively, for the
issuance of restricted stock units and stock options to management,
directors and consultants. The Company calculates the fair
value of the restricted stock units based upon the quoted market
value of the common stock at the date of grant. The Company
calculates the fair value of each stock option award on the date of
grant using Black-Scholes.
Stock Options
For
the years ended December 31, 2015 and 2014, the following weighted
average assumptions were utilized for the stock options granted
during the period:
|
|
|
2015
|
|
|
|
2014
|
|
Expected
life (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected
volatility
|
|
|
228.78
|
%
|
|
|
224.42%
- 236.78
|
%
|
Average
risk free interest rate
|
|
|
2.16
|
%
|
|
|
1.69%
- 2.02
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Grant
date fair value
|
|
|
$
0.10
|
|
|
|
$
0.31
|
|
The
dividend yield of zero is based on the fact that the Company has
never paid cash dividends and has no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of the Company’s 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. The Company believes that all stock options issued under
its stock option plans meet the criteria of “plain
vanilla” stock options. The Company uses 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:
INNOVUS
PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
|
|
|
ASSETS
|
|
|
CURRENT
ASSETS
|
|
|
Cash
|
$
1,454,545
|
$
55,901
|
Accounts
receivable, net
|
30,875
|
83,097
|
Prepaid
expenses and other current assets
|
1,179,212
|
53,278
|
Inventories
|
396,772
|
254,443
|
Total
current assets
|
3,061,404
|
446,719
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
32,235
|
35,101
|
|
|
|
OTHER
ASSETS
|
|
|
Deposits
|
14,958
|
14,958
|
Goodwill
|
549,368
|
549,368
|
Intangible
assets, net
|
5,401,571
|
5,300,859
|
TOTAL
ASSETS
|
$
9,059,536
|
$
6,347,005
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable and accrued expenses
|
$
1,623,547
|
$
155,503
|
Accrued
compensation
|
517,846
|
535,862
|
Deferred
revenue and customer deposits
|
11,000
|
24,079
|
Accrued
interest payable
|
30,656
|
79,113
|
Short-term
loans payable
|
-
|
230,351
|
Derivative
liabilities – embedded conversion features
|
1,091,544
|
301,779
|
Derivative
liabilities – warrants
|
239,049
|
432,793
|
Contingent
consideration
|
22,104
|
-
|
Current
portion of note payable and non-convertible debenture, net of debt
discount of $3,750 and $0, respectively
|
274,536
|
73,200
|
Line
of credit convertible debenture and non-convertible debenture
– related parties, net of debt discount of $0 and
$17,720, respectively
|
-
|
391,472
|
Convertible
debentures, net of debt discount of $1,474,342 and $1,050,041,
respectively
|
410,580
|
407,459
|
Total
current liabilities
|
4,220,862
|
2,631,611
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
Accrued
compensation – less current portion
|
1,506,010
|
906,928
|
Note
payable and non-convertible debenture, net of current portion and
debt discount of $1,405 and $0, respectively
|
132,593
|
-
|
Line of credit convertible debenture and
non-convertible debenture –
related parties, net of current
portion
|
-
|
25,000
|
Contingent
consideration – less current portion
|
3,207,700
|
3,229,804
|
Total
non-current liabilities
|
4,846,303
|
4,161,732
|
|
|
|
TOTAL
LIABILITIES
|
9,067,165
|
6,793,343
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
Common
stock: 150,000,000 shares authorized, at $0.001 par value,
104,164,880 and 47,141,230 shares issued and outstanding at
September 30, 2016 and December 31, 2015, respectively
|
104,165
|
47,141
|
Additional
paid-in capital
|
25,663,922
|
14,941,116
|
Accumulated
deficit
|
(25,775,716
)
|
(15,434,595
)
|
Total
stockholders' deficit
|
(7,629
)
|
(446,338
)
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
9,059,536
|
$
6,347,005
|
See
accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated
Statements of Operations
(Unaudited)
|
For
the
Three Months Ended
September 30,
|
For the
Nine
Months Ended
September 30,
|
|
|
|
|
|
NET
REVENUES:
|
|
|
|
|
Product sales, net
|
$
1,882,129
|
$
179,744
|
$
3,126,112
|
$
555,069
|
License revenues
|
-
|
-
|
1,000
|
5,000
|
Net
revenues
|
1,882,129
|
179,744
|
3,127,112
|
560,069
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
Cost of product sales
|
331,227
|
102,359
|
714,284
|
242,808
|
Research and development
|
43,775
|
-
|
47,667
|
-
|
Sales and marketing
|
1,972,155
|
80,682
|
2,257,166
|
132,778
|
General and administrative
|
1,779,048
|
650,539
|
4,012,357
|
2,948,413
|
Total
operating expenses
|
4,126,205
|
833,580
|
7,031,474
|
3,323,999
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
(2,244,076
)
|
(653,836
)
|
(3,904,362
)
|
(2,763,930
)
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSES):
|
|
|
|
|
Interest expense
|
(3,727,168
)
|
(473,360
)
|
(6,000,752
)
|
(744,726
)
|
Loss on extinguishment of debt
|
-
|
-
|
-
|
(32,500
)
|
Other income, net
|
194,744
|
-
|
196,620
|
-
|
Change in fair value of derivative liabilities
|
1,350,688
|
268,449
|
(632,627
)
|
316,378
|
Total
other expense, net
|
(2,181,736
)
|
(204,911
)
|
(6,436,759
)
|
(460,848
)
|
|
|
|
|
|
NET
LOSS
|
$
(4,425,812
)
|
$
(858,747
)
|
$
(10,341,121
)
|
$
(3,224,778
)
|
|
|
|
|
|
NET
LOSS PER SHARE OF COMMON STOCK - BASIC AND DILUTED
|
$
(0.04
)
|
$
(0.02
)
|
$
(0.12
)
|
$
(0.06
)
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING –
BASIC AND DILUTED
|
104,972,645
|
55,076,819
|
86,498,234
|
50,486,501
|
See
accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
|
For the
Nine Months Ended
Ended
September 30,
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
NET
LOSS
|
$
(10,341,121
)
|
$
(3,224,778
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
Depreciation
|
9,431
|
24,943
|
Allowance
for doubtful accounts
|
918
|
-
|
Common stock, restricted stock units and stock
options issued for services and board
compensation
|
1,889,837
|
1,288,993
|
Loss
on extinguishment of debt
|
-
|
32,500
|
Stock
issued for interest on debt amendment
|
-
|
48,000
|
Gain
on return of shares of common stock issued in Semprae
merger
|
-
|
(115,822
)
|
Imputed
interest on contingent consideration
|
30,302
|
-
|
Non-cash
gain on contingent consideration
|
(194,781
)
|
-
|
Change
in fair value of derivative liabilities
|
632,627
|
(316,378
)
|
Fair value of embedded conversion feature in
convertible debentures in excess
of allocated proceeds
|
2,756,899
|
71,462
|
Amortization
of debt discount
|
2,997,061
|
555,362
|
Amortization
of intangible assets
|
513,767
|
387,011
|
Changes
in operating assets and liabilities, net of acquisition
amounts
|
|
|
Accounts
receivable
|
51,304
|
123,372
|
Prepaid
expenses and other current assets
|
(450,394
)
|
27,324
|
Deposits
|
-
|
9,394
|
Inventories
|
(142,329
)
|
(45,245
)
|
Accounts
payable and accrued expenses
|
928,044
|
(53,794
)
|
Accrued
compensation
|
581,066
|
407,860
|
Accrued
interest payable
|
10,976
|
11,254
|
Deferred
revenue and customer deposits
|
(13,079
)
|
(17,470
)
|
Net
cash used in operating activities
|
(739,472
)
|
(786,012
)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
Purchase of property and equipment
|
(6,565
)
|
(9,540
)
|
Purchase of intangible assets
|
-
|
(3,276
)
|
Payments on Beyond Human™ contingent
consideration
|
(150,000
)
|
-
|
Net
cash used in investing activities
|
(156,565
)
|
(12,816
)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
Proceeds from (repayments of) line of credit convertible debenture
– related party
|
(409,192
)
|
114
|
Proceeds from short-term loans payable
|
21,800
|
50,000
|
Payments
on short-term loans payable
|
(252,151
)
|
(23,811
)
|
Proceeds
from notes payable and convertible debentures
|
3,074,000
|
1,455,000
|
Payments
on notes payable
|
(384,916
)
|
(402,933
)
|
Proceeds
from warrant exercises
|
310,140
|
-
|
Financing
costs in connection with convertible debentures
|
(40,000
)
|
(82,500
)
|
Proceeds
from non-convertible debentures – related party
|
-
|
50,000
|
Payments
on non-convertible debentures – related party
|
(25,000
)
|
(105,000
)
|
Net
cash provided by financing activities
|
2,294,681
|
940,870
|
|
|
|
NET
CHANGE IN CASH
|
1,398,644
|
142,042
|
|
|
|
CASH
AT BEGINNING OF PERIOD
|
55,901
|
7,479
|
|
|
|
CASH
AT END OF PERIOD
|
$
1,454,545
|
$
149,521
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
Cash paid for income taxes
|
$
-
|
$
-
|
Cash paid for interest
|
$
205,456
|
$
-
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
Common stock issued
for conversion of notes payable, convertible debentures and
accrued interest
|
$
2,935,900
|
$
167,000
|
Reclassification of
the fair value of the embedded conversion features from
derivative
liability to
additional paid-in capital upon conversion
|
$
2,962,666
|
$
-
|
Cashless exercise of warrants
|
$
3,385
|
$
-
|
Reclassification of
the fair value of the warrants from derivative liability to
additional
paid-in capital upon
cashless exercise
|
$
518,224
|
$
-
|
Common stock issued for acquisition
|
$
-
|
$
2,071,625
|
Relative fair value
of common stock issued in connection with notes payable
recorded as debt
discount
|
$
93,964
|
$
-
|
Relative fair value
of warrants issued in connection with convertible debentures
recorded as debt
discount
|
$
445,603
|
$
89,551
|
Relative fair value
of common stock issued in connection with convertible
debentures
recorded as debt
discount
|
$
1,127,225
|
$
374,474
|
Fair value of
embedded conversion feature derivative liabilities recorded
as
debt
discount
|
$
687,385
|
$
830,322
|
Fair value of
warrants issued to placement agents in connection with
convertible
debentures recorded
as debt discount
|
$
357,286
|
$
68,419
|
Fair value of the contingent consideration for
acquisition
|
$
314,479
|
$
2,862,300
|
Fair value of warrant derivative liabilities recorded as debt
discount
|
$
-
|
$
226,297
|
Proceeds from note payable paid to seller in connection with
acquisition
|
$
300,000
|
$
-
|
Financing costs paid with proceeds from note payable
|
$
7,500
|
$
-
|
Fair value of
unamortized non-forfeitable common stock issued to consultant
included
in prepaid expenses
and other current assets
|
$
135,540
|
$
-
|
Fair value of
non-forfeitable common stock to be issued to consultant included in
prepaid
expenses and other
current assets and accounts payable and accrued
expenses
|
$
540,000
|
$
-
|
Issuance of shares of common stock for vested restricted stock
units
|
$
19,229
|
$
-
|
Return of shares of common stock related to license
agreement
|
$
-
|
$
38,000
|
Common stock issued in connection with debt amendment
|
$
-
|
$
48,000
|
Fair value of
beneficial conversion feature on line of credit convertible
debenture –
related
party
|
$
3,444
|
$
6,275
|
See
accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 2016
(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” 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 revenues from sixteen 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)
BTH
®
Testosterone Booster, (b)
BTH
®
Human Growth Agent, (c)
Zestra
®
for female arousal, (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)
BTH
®
GCBE (k) BTH
®
Vision Formula, (l)
BTH
®
Blood Sugar, (m)
BTH
®
Colon Cleans, (n)
BTH
®
Ketones, (o) BTH
®
Krill Oil and (p)
BTH
®
Omega 3 Fish Oil. While we generate
revenues from the sale of our commercial products, most revenue is
currently generated by Vesele
®
,
Zestra
®
,
Zestra
®
Glide, RecalMax
™
,
Sensum +
®
and BTH
®
Testosterone
Booster.
Pipeline Products
Fluticare
™
(Fluticasone
propionate nasal spray).
Innovus acquired the worldwide rights to market
and sell the Fluticare
™
brand (Fluticasone propionate nasal
spray) and the related manufacturing agreement from Novalere FP in
February 2015. The Over-the-Counter (“OTC”) Abbreviated
New Drug Application (“ANDA”) filed at the end of 2014
by the manufacturer with the U.S. Food and Drug Administration
(“FDA”), subject to FDA approval, may allow the Company
to market and sell Fluticare
™
OTC. An ANDA is an application for a
U.S. generic drug approval for an existing licensed medication or
approved drug.
UriVarx
™
.
On September 29, 2016, the Company
entered into a product license agreement with Seipel Group Pty Ltd.
(Australia) to in-license their Urox
®
formulation for the indication of
overactive bladders and urinary incontinence. The Company is
expected to commercialize this licensed product formulation under
the name UriVarx
™
in the U.S. in November
2016.
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. The
Company expects to commercialize this product around the end of
2016.
Urocis
®
XR.
On October 27, 2015, the Company
entered into an exclusive distribution agreement with Laboratorios
Q Pharma (Spain) to distribute and commercialize
Urocis
®
XR in the U.S. and Canada.
Urocis
®
XR is a proprietary extended
release of Vaccinium Marcocarpon (cranberry) shown to provide 24
hour coverage in the body.
AndroVit
®
.
On October 27, 2015, the Company
entered into an exclusive distribution agreement with Laboratorios
Q Pharma (Spain) to distribute and commercialize
AndroVit
®
in the U.S. and Canada.
AndroVit
®
is a proprietary supplement to support
overall prostate and male sexual health currently marketed in
Europe. AndroVit
®
was specifically formulated with
ingredients known to support normal prostate health and vitality
and male sexual health.
Change in Accounting Principle
On January 1, 2016, the Company retrospectively
adopted Financial Accounting Standards Board (“FASB”)
Accounting Standards Update (“ASU”) No. 2015-03,
Interest -
Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs
. This ASU requires that debt issuance costs be
presented as a direct reduction from the carrying amount of debt.
As a result of the adoption of this ASU, the condensed consolidated
balance sheet at December 31, 2015 was adjusted to reflect the
reclassification of $97,577 from deferred financing costs, net to
convertible debentures, net. The adoption of this ASU
did not have an impact on the Company’s condensed
consolidated results of operations.
Basis of Presentation and Principles of Consolidation
The condensed
consolidated balance sheet as of December 31, 2015, which has been
derived from audited financial statements, and t
hese unaudited condensed consolidated financial
statements as of and for the periods ended September 30, 2016 and
2015 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, 2015. 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 September 30,
2016, are not necessarily indicative of the results to be expected
for the entire fiscal year ending December 31, 2016 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 and sales return adjustments,
realizability of inventories, valuation of deferred tax assets,
goodwill and intangible assets, valuation of contingent acquisition
considerations, recoverability of long-lived assets and goodwill,
fair value of derivative liabilities and the valuation of
equity-based instruments and beneficial conversion
features. The Company bases its estimates on historical
experience and various other assumptions that the Company believes
to be reasonable under the circumstances. Actual results could
differ from these estimates under different assumptions or
conditions.
Liquidity
The
Company’s operations have been financed primarily through
proceeds from convertible debentures, revenues generated from the
launch of its products and commercial partnerships signed for the
sale and distribution of its products domestically and
internationally. These funds have provided the Company with
the resources to operate its business, sell and support its
products, attract and retain key personnel and add new products to
its portfolio. The Company has experienced net losses from
operations each year since its inception. As of September 30,
2016, the Company had an accumulated deficit of $25,775,716 and a
working capital deficit of $1,159,458.
The
Company has raised funds through the issuance of debt and the sale
of common stock. The Company has also issued equity instruments in
certain circumstances to pay for services from vendors and
consultants. In June and July 2016, the Company raised $3,000,000
in gross proceeds from the issuance of convertible debentures to
eight investors (see Note 5). In the event the Company does not pay
the convertible debentures upon their maturity, or after the remedy
period, the principal amount and accrued interest on the
convertible debentures is convertible at the Company’s option
to common stock at the lower of the fixed conversion price or 60%
of the volume weighted average price (“VWAP”) during
the ten consecutive trading day period preceding the date of
conversion. In February 2016, the Company also raised $550,000 in
funds from a note payable with net proceeds of $242,500 to the
Company, which was used to pay for the asset acquisition of Beyond
Human™, LLC (see Note 5), a Texas limited liability company
(“Beyond Human”) and for working capital
purposes.
As
of November 8, 2016, we had approximately $0.9 million in cash and
approximately $296,000 of cash collections held by our third-party
merchant service provider. During the nine months ended
September 30, 2016 we had net cash used in operating activities of
$739,472 primarily from purchasing inventory to support our growing
revenues and certain prepayments of annual expenses. The Company
expects that its existing capital resources, revenues from sales of
its products and upcoming sales milestone payments from the
commercial partners signed for its products, and equity instruments
available to pay certain vendors and consultants, will be
sufficient to allow the Company to continue its operations,
commence the product development process and launch
selected products through at least the next 12 months. In
addition, the Company’s CEO, who is also a significant
shareholder, has deferred the payment of his salary earned thru
June 30, 2016 for at least the next 12 months. The Company’s
actual needs will depend on numerous factors, including timing of
introducing its products to the marketplace, its ability to attract
additional Ex-U.S. distributors for its products and its ability to
in-license in non-partnered territories and/or develop new product
candidates. The Company may also seek to raise capital, debt or
equity from outside sources to pay for further expansion and
development of its business and to meet current obligations. Such
capital may not be available to the Company when it needs it or on
terms acceptable to the Company, if at all.
Fair Value Measurement
The
Company’s 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 recorded fair value of the convertible
debentures, net of debt discount, is based upon the relative fair
value calculation of the common stock and warrants issued in
connection with the convertible debentures and the fair value of
the embedded conversion features. 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 9). 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 the Company, the carrying values of
the notes payable and convertible debentures approximate their
respective fair values.
The
Company follows 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 the Company has 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 and Major Customers
Financial instruments that potentially subject the
Company 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 online
sales of Zestra
®
to U.S. based retailers and Ex-U.S.
partners. The Company also requires a percentage of payment in
advance for product orders with its larger partners. The Company
performs ongoing credit evaluations of its customers and generally
does not require collateral.
Revenues
consist primarily of product sales and licensing rights to market
and commercialize our products. The Company had no
customers that accounted for 10% or greater of its total net
revenues during the three and nine months ended September 30, 2016.
Four customers accounted for 67% of total gross accounts receivable
as of September 30, 2016. The Company had three customers that
accounted for 43% of its total net revenues during the nine months
ended September 30, 2015 and had two customers that accounted for
38% of its total net revenues during the three months ended
September 30, 2015. Two customers accounted for 73% of gross
accounts receivable as of December 31, 2015.
Over
90% 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 percent or greater.
Debt Issuance Costs
Debt
issuance costs represent costs incurred in connection with the
issuance of the convertible debentures during the third quarter of
2015 and the note payable and convertible debentures during the
nine months ended September 30, 2016. Debt issuance costs related
to the issuance of the convertible debentures and note payable are
recorded as a reduction to the debt balances in the accompanying
condensed consolidated balance sheets. The debt issuance
costs are being amortized to interest expense over the term of the
financing instruments using the effective interest
method.
Derivative Liabilities
Certain
of the Company’s embedded conversion features on debt and
issued and outstanding common stock purchase warrants, which have
exercise price reset features and other anti-dilution protection
clauses, are treated as derivatives for accounting purposes. The
common stock purchase warrants were not issued with the intent of
effectively hedging any future cash flow, fair value of any asset,
liability or any net investment in a foreign operation. The
warrants do not qualify for hedge accounting, and as such, all
future changes in the fair value of these warrants are recognized
currently in earnings until such time as the warrants are
exercised, expire or the related rights have been waived. These
common stock purchase warrants do not trade in an active securities
market, and as such, the Company estimates the fair value of these
warrants using a Probability Weighted Black-Scholes Option-Pricing
Model and the embedded conversion features using a Path-Dependent
Monte Carlo Simulation Model (see Note 9).
Income Taxes
Income
taxes are provided for using the asset and liability method whereby
deferred tax assets and liabilities are recognized using current
tax rates on the difference between the consolidated financial
statement carrying amounts and the respective tax basis of the
assets and liabilities. The Company provides a valuation
allowance on deferred tax assets when it is more likely than not
that such assets will not be realized.
The
Company recognizes the consolidated financial statement benefit of
a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following
an audit. For tax positions meeting this standard, the amount
recognized in the consolidated financial statements is the largest
benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement with the relevant tax
authority. There were no uncertain tax positions at September
30, 2016 and December 31, 2015.
Revenue Recognition and Deferred Revenue
The
Company generates revenues from product sales and the licensing of
the rights to market and commercialize its products.
The Company recognizes revenue in accordance with
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
: The Company ships
product to its wholesale and retail customers pursuant to purchase
agreements or 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
Revenues
: The license
agreements the Company enters 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 the Company 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
The
Company accrues for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
The
Company’s 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. The Company estimates its volume rebates and
promotional discounts accrual based on its estimates of the level
of inventory of its 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 the Company’s 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.
The
Company provides a customer satisfaction warranty on all of its
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 expenses, was
approximately $104,000 and $5,000 at September 30, 2016 and
December 31, 2015, respectively.
Advertising Expenses
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 $1.4
million and $1.6 million for the three and nine months ended
September 30, 2016, respectively. Advertising costs for the three
and nine months ended September 30, 2015 were less than
$1,000.
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
restricted stock units during the period presented. Diluted
net loss per share is computed using the weighted average number of
common shares outstanding during the periods plus the effect of
dilutive securities outstanding during the periods. For the
three and nine months ended September 30, 2016 and 2015, basic net
loss per share is the same as diluted net loss per share as a
result of the Company’s common stock equivalents being
anti-dilutive. See Note 8 for more details.
Recent Accounting Pronouncements
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 the Company are
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
. Early adoption is permitted.
The Company is currently assessing the impact the
adoption of ASU 2016-15 will have on our condensed consolidated
financial statements.
In September 2015, the FASB issued ASU
2015-16,
Simplifying the Accounting for
Measurement-Period Adjustments,
which eliminates the requirement to
retrospectively adjust the consolidated financial statements for
measurement-period adjustments that occur in periods after a
business combination is consummated. Measurement period adjustments
are calculated as if they were known at the acquisition date, but
are recognized in the reporting period in which they are
determined. Additional disclosures are required about the impact on
current-period income statement line items of adjustments that
would have been recognized in prior periods if prior-period
information had been revised. The guidance is effective for annual
periods beginning after December 15, 2015 and is to be applied
prospectively to adjustments of provisional amounts that occur
after the effective date. Early application is permitted. The
adoption of this ASU during the nine months ended September 30,
2016 did not have a material impact on the Company’s
condensed consolidated financial position and results of
operations.
NOTE 2 – LICENSE AGREEMENTS
Seipel Group Pty Ltd. In-License Agreement
On September 29, 2016, the Company and Seipel
Group Pty Ltd. (“SG”) entered into a license and
purchase agreement (“SG License Purchase Agreement”)
pursuant to which the Company acquired the rights to use, market
and sell SG’s proprietary dietary supplement formula known as
Urox
®
for bladder support in the U.S. and
worldwide. Under this agreement, the Company has agreed to certain
minimum purchase order requirements and is obligated to pay a
brokerage fee of $200,000 which is included in sales and marketing
expense in the accompanying condensed consolidated statements of
operations for the three and nine months ended September 30, 2016
and accounts payable and accrued expenses in the accompanying
condensed consolidated balance sheet at September 30,
2016.
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 the
Company 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 the Company commercialization rights
for Sensum+
®
in the United States through its
Beyond Human™ marketing platform.
In
consideration for the CRI Asset Purchase Agreement, the Company
issued 631,313 shares of common stock to CRI in 2013. The
Company recorded an asset totaling $250,000 related to the CRI
Asset Purchase Agreement and will amortize this amount over its
estimated useful life of 10 years. Under the CRI Asset
Purchase Agreement, the Company was required to issue to CRI shares
of the Company’s common stock valued at an aggregate
of $200,000 for milestones relating to additional clinical
data to be received. As a result of the Amended CRI Asset Purchase
Agreement, the Company and CRI agreed to settle the clinical
milestone payments with a payment of 100,000 shares of restricted
common stock. The fair value of the restricted shares of common
stock of $23,000 was based on the market price of the
Company’s common stock on the date of issuance and is
included in research and development expense in the accompanying
condensed consolidated statement of operations for the three and
nine months ended September 30, 2016.
The
CRI Asset Purchase Agreement also requires the Company to pay to
CRI up to $7 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 are considered owed to CRI under this agreement
during the three and nine months ended September 30, 2016 and 2015,
and royalties owed to CRI were immaterial and included in cost of
product sales.
In consideration for the Amended CRI Asset
Purchase Agreement, the Company is required to pay CRI a percentage
of the monthly net profits, as defined in the agreement, from our
sales of Sensum+
®
in the U.S. through our Beyond
Human™ marketing platform. During the three and nine months
ended September 30, 2016, no amounts are due to CRI under the
Amended CRI Asset Purchase Agreement.
Sothema Laboratories Agreement
On September 23, 2014, the Company entered into an
exclusive license agreement with Sothema Laboratories, SARL, a
Moroccan publicly traded company (“Sothema”), under
which Innovus granted to Sothema an exclusive license to market and
sell Innovus’ topical treatment for Female Sexual
Interest/Arousal Disorder (“FSI/AD”) (based on the
latest Canadian approval of the indication),
Zestra
®
and its high viscosity low osmolality
water-based lubricant Zestra Glide
®
in the North African countries of
Egypt, Morocco, Algeria, Tunisia and Libya, the Middle Eastern
countries of Iraq, Jordan, Saudi Arabia and the United Arab
Emirates and the West African countries of Benin, Burkina Faso,
Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast,
Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo
(collectively the “Territory”).
Under
the agreement, Innovus received an upfront payment of $200,000 and
is eligible to receive up to approximately $171 million 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, the Company will recognize the revenue
from the milestone payments when the cumulative supplied units
volume is met. During the three and nine months ended September 30,
2016 and 2015, the Company recognized $666, $12,229, $0 and
$56,487, respectively, in 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, the Company entered into an
exclusive license agreement with Orimed Pharma
(“Orimed”), an affiliate of JAMP Pharma, under which
Innovus granted to Orimed an exclusive license to market and sell
in Canada, Innovus’ (a) topical treatment for FSI/AD,
Zestra
®
,
(b) topical treatment for premature ejaculation,
EjectDelay
®
,
(c) product Sensum+
™
to increase penile sensitivity and (d)
high viscosity low osmolality water-based lubricant, Zestra
Glide
®
.
Under
the agreement, Innovus received an upfront payment of $100,000 and
is eligible to receive up to approximately CN $94.5 million ($72.2
million USD based on September 30, 2016 exchange rate) 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, the Company will recognize the revenue
from the milestone payments when the cumulative gross sales volume
is met. The Company will recognize the revenue from the royalty
payments on a quarterly basis when the cumulative net sales have
been met. During the three and nine months ended
September 30, 2016 and 2015, under this agreement the Company
recognized $0, $40,233, $0 and $49,376, respectively, in revenue
for the sales of products and no revenue was recognized for the
sales-based milestones. During the three and nine months ended
September 30, 2016, the Company recognized royalty payments of $538
and $844, respectively, and no royalty payments were recognized
during the three and nine months ended September 30,
2015.
BroadMed SAL Agreements
On May 24, 2016, the Company entered into an
exclusive license and distribution agreement with BroadMed SAL, a
Lebanese company, (“BroadMed”) under which Innovus
granted to BroadMed an exclusive license to market and sell in
Lebanon Innovus Pharma’s EjectDelay
®
for treating premature ejaculation.
Under the agreement, the Company is eligible to receive up to $6.2
million in sales-based milestone payments. As the sales-based
milestones do not meet the definition of a milestone under ASC
605-28, the Company will recognize the revenue from the milestone
payments when the annual net sales volume is met. For the three and
nine months ended September 30, 2016, the Company did not recognize
revenue for the sales-based milestones of the
agreement.
In April 2015, the Company entered into an
exclusive license and distribution agreement with BroadMed under
which Innovus granted to BroadMed an exclusive license to market
and sell in Lebanon Innovus Pharma’s
Sensum+
®
to increase penile sensitivity. Under
the agreement, the Company received an upfront payment of $5,000
and is eligible to receive up to $11.1 million in annual
sales-based milestone payments plus double-digit tiered royalties
based on BroadMed’s cumulative net sales in Lebanon. 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, the Company will recognize the revenue
from the milestone payments when the annual net sales volume is
met. The Company will recognize the revenue from the royalty
payments on a quarterly basis when the cumulative net sales have
been met. For the nine months ended September 30, 2015, the Company
recognized the $5,000 upfront payment under this
agreement. No amounts were received or recognized during
the nine months ended September 30, 2016.
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 Innovus 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.
The
fair value of the contingent consideration is based on preliminary
cash flow projections and other assumptions for the milestone
payments and future changes in the estimate of such contingent
consideration will be recognized as a charge to other
expense. The amortization of imputed interest on the
contingent consideration is recorded to interest expense in the
accompanying condensed consolidated statement of
operations.
The
total purchase price is summarized as follows:
|
|
Cash
consideration
|
$
300,000
|
Fair
value of future earn out payments
|
314,479
|
Total
|
$
614,479
|
The
Company has preliminary recorded the purchase price of $614,479 as
an intangible asset on March 1, 2016 for the trademarks and domain
names associated with the Beyond Human™ products and
marketing platform acquired. The identifiable intangible
assets are being amortized over their estimated useful lives of
five years.
The
purchase price allocation is subject to completion of our analysis
of the fair value of the assets acquired from Beyond Human™
as of the date of the acquisition. These adjustments could be
material. The final valuation is expected to be completed as soon
as practicable but no later than one year from the closing of the
transaction. The establishment of the fair value of the contingent
consideration, and the allocation to identifiable intangible assets
requires the extensive use of accounting estimates and management
judgment. The fair values assigned to the assets acquired are based
on estimates and assumptions from data currently
available.
On
September 6, 2016, the Company and the sellers entered into an
agreement in which the Company agreed to pay the sellers $150,000
to settle the contingent consideration payments totaling $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 $344,781. As a result,
the Company recorded a non-cash gain on contingent consideration of
$194,781, which is included in other income, net in the
accompanying condensed consolidated statement of operations for the
three and nine months ended September 30, 2016. During the three
and nine months ended September 30, 2016, the Company recorded
imputed interest expense of $7,968 and $30,302, respectively, which
is included in interest expense in the accompanying condensed
consolidated statement of operations.
Supplemental Pro Forma Information for Acquisition of Assets of
Beyond Human™ (unaudited)
The
following unaudited supplemental pro forma information for the nine
months ended September 30, 2016 and 2015 and the three months ended
September 30, 2015, assumes the asset acquisition of Beyond
Human™ had occurred as of January 1, 2016 and 2015,
giving effect to purchase accounting adjustments such as
amortization of intangible assets. The pro forma data is for
informational purposes only and may not necessarily reflect the
actual results of operations had the assets of Beyond Human™
been operated as part of the Company since January 1, 2016 and
2015.
|
Nine Months Ended
September 30, 2016
|
Nine
Months Ended
September 30, 2015
|
|
|
|
|
|
Net
revenues
|
$
3,119,126
|
$
3,175,750
|
$
555,069
|
$
2,636,107
|
Net
loss
|
$
(10,341,121
)
|
$
(10,354,157
)
|
$
(3,224,778
)
|
$
(3,029,008
)
|
Net
loss per share of common stock – basic and
diluted
|
$
(0.12
)
|
$
(0.12
)
|
$
(0.06
)
|
$
(0.06
)
|
Weighted
average number of shares of common stock outstanding – basic
and diluted
|
86,498,234
|
86,498,234
|
50,486,501
|
50,486,501
|
|
Three Months Ended
September 30, 2015
|
|
As
Reported
|
Pro
Forma (unaudited)
|
Net
revenues
|
$
179,744
|
$
772,337
|
Net
loss
|
$
(858,747
)
|
$
(850,364
)
|
Net
loss per share of common stock – basic and
diluted
|
$
(0.02
)
|
$
(0.02
)
|
Weighted
average number of shares of common stock outstanding – basic
and diluted
|
55,076,819
|
55,076,819
|
The
acquisition of the assets of Beyond Human™ was not
individually significant and the Company incurred approximately
$70,000 in expenses related to the Acquisition.
Acquisition of Novalere in 2015
On
February 5, 2015 (the “Closing Date”), the Company,
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 the Company
(“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 the Company. Pursuant to the articles of
merger effectuating the Merger, Merger Subsidiary II changed its
name to Novalere, Inc.
With the Merger, the Company acquired the
worldwide rights to market and sell the
Fluticare
™
brand (Fluticasone propionate nasal
spray) and the related manufacturing agreement from Novalere FP.
The Company currently anticipates that the ANDA filed in November
2014 by the manufacturer with the FDA may be approved in the
fourth quarter of 2016, which, when and if approved, may allow the
Company to market and sell Fluticare
™
OTC in 2017.
Under
the terms of the Merger Agreement, at the Closing Date, the
Novalere Stockholders received 50% of the Consideration Shares (the
“Closing Consideration Shares”) and the remaining 50%
of the Consideration Shares (the “ANDA Consideration
Shares”) will be delivered only if an ANDA of Fluticasone
Propionate Nasal Spray of Novalere Manufacturing Partners (the
“Target Product”) is approved by the FDA (the
“ANDA Approval”). A portion of the Closing
Consideration Shares and, if ANDA Approval was obtained prior to
the 18 month anniversary of the Closing Date, a portion of the ANDA
Consideration Shares, would have been held in escrow for a period
of 18 months from the Closing Date to be applied towards any
indemnification claims by the Company pursuant to the Merger
Agreement.
In addition, the Novalere Stockholders are
entitled to receive, if and when earned, earn-out payments (the
“Earn-Out Payments”). For every $5 million in Net
Revenue (as defined in the Merger Agreement) realized from the
sales of Fluticare
™
,
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
closing price of the Company’s common stock on the Closing
Date was $0.20 per share. The Company issued 12,947,657 Closing
Consideration Shares of its common stock at the Closing Date, the
fair market value of the Closing Consideration Shares was
$2,071,625 as of the Closing Date.
The
establishment of the fair value of the consideration for the
Merger, and the allocation to identifiable tangible and intangible
assets and liabilities, requires the extensive use of accounting
estimates and management judgment. The fair values assigned to the
assets acquired and liabilities assumed were based on estimates and
assumptions. There has been no change to the estimated fair value
of the contingent consideration of $2,905,425 through September 30,
2016. On November 12, 2016, the Company entered into an Amendment
and Supplement to the Registration Rights and Stock Restriction
Agreement with Novalere Holdings in which the Company agreed to
issue the ANDA Consideration Shares of 12,947,655 (see Note
10).
Supplemental Pro Forma Information for Acquisition of Novalere
(unaudited)
The
following unaudited supplemental pro forma information for the nine
months ended September 30, 2015, assumes the acquisition of
Novalere had occurred as of January 1, 2015, giving effect to
purchase accounting adjustments such as amortization of intangible
assets. The pro forma data is for informational purposes only and
may not necessarily reflect the actual results of operations had
Novalere been operated as part of the Company since January 1,
2015.
|
Nine
Months Ended
September 30, 2015
|
|
|
|
Net
revenues
|
$
555,069
|
$
555,069
|
Net
loss
|
$
(3,224,778
)
|
$
(3,540,908
)
|
Net
loss per share of common stock – basic and
diluted
|
$
(0.06
)
|
$
(0.07
)
|
Weighted
average number of shares of common stock outstanding – basic
and diluted
|
50,486,501
|
52,193,884
|
Purchase of Semprae Laboratories, Inc. in 2013
On December 24, 2013 (the “Semprae Closing
Date”), the Company, through Merger Sub obtained 100% of the
outstanding shares of Semprae in exchange for the issuance of
3,201,776 shares of the Company’s common stock, which shares
represented fifteen percent of the total issued and outstanding
shares of the Company as of the close of business on the Closing
Date, whereupon Merger Sub was renamed Semprae Laboratories, Inc.
Also, the Company agreed to pay $343,500 to the New Jersey Economic
Development Authority (“NJEDA”) as settlement-in full
for an outstanding loan of approximately $640,000 owed by the
former stockholder’s of Semprae, in full satisfaction of the
obligation to the NJEDA. In addition, the Company agreed to pay the
former shareholders an annual royalty (“Royalty”) equal
to five percent 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 condensed consolidated statements of
operations. The fair value of the contingent consideration is based
on preliminary cash flow projections, growth in expected product
sales and other assumptions. Based on the assumptions, the fair
value of the Royalty was determined to be $308,273 at the date of
acquisition. The fair value of the Royalty was determined by
applying the income approach, using several significant
unobservable inputs for projected cash flows and a discount rate of
40% commensurate with the Company’s cost of capital and
expectation of the revenue growth for products at their life cycle
stage. These inputs are considered Level 3 inputs under the fair
value measurements and disclosure guidance. During the nine months
ended September 30, 2016 and 2015 no amounts were paid under this
arrangement. There were no changes in the fair value of
the expected royalties to be paid during the nine months ended
September 30, 2016 and 2015. The fair value of contingent
consideration was $324,379 at September 30, 2016 and December 31,
2015, based on the new estimated fair value of the consideration,
net of the amounts to be returned to the Company as discussed
above.
NOTE 4 – ASSETS AND LIABILITIES
Inventories
Inventories
consist of the following:
|
|
|
|
|
|
Raw
materials and supplies
|
$
99,492
|
$
77,649
|
Work
in process
|
-
|
90,540
|
Finished
goods
|
297,280
|
86,254
|
Total
|
$
396,772
|
$
254,443
|
Intangible Assets
Amortizable
intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
1,032,076
|
$
(154,489
)
|
$
877,587
|
5 - 15
|
Customer
Contracts
|
611,119
|
(173,150
)
|
437,969
|
10
|
Sensum+
®
License (from CRI)
|
234,545
|
(78,145
)
|
156,400
|
10
|
Vesele
®
trademark
|
25,287
|
(6,257
)
|
19,030
|
8
|
Novalere
Mfg. Contract
|
4,681,000
|
(770,415
)
|
3,910,585
|
10
|
Total
|
$
6,584,027
|
$
(1,182,456
)
|
$
5,401,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
417,597
|
$
(57,593
)
|
$
360,004
|
7 - 15
|
Customer
Contracts
|
611,119
|
(127,316
)
|
483,803
|
10
|
Sensum+
®
License (from CRI)
|
234,545
|
(60,554
)
|
173,991
|
10
|
Vesele
®
trademark
|
25,287
|
(3,886
)
|
21,401
|
8
|
Novalere
Mfg. Contract
|
4,681,000
|
(419,340
)
|
4,261,660
|
10
|
Total
|
$
5,969,548
|
$
(668,689
)
|
$
5,300,859
|
|
Amortization
expense for the three and nine months ended September 30, 2016 and
2015 was $178,082, $513,767, $147,429 and $387,011, respectively.
The following table summarizes the approximate expected future
amortization expense as of September 30, 2016 for intangible
assets:
Remainder
of 2016
|
$
178,000
|
2017
|
712,000
|
2018
|
712,000
|
2019
|
712,000
|
2020
|
712,000
|
2021
|
609,000
|
Thereafter
|
1,767,000
|
|
$
5,402,000
|
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consist of the
following:
|
|
|
|
|
|
Prepaid
insurance
|
$
97,237
|
$
27,816
|
Prepaid
inventory
|
127,000
|
-
|
Merchant
net settlement reserve receivable
|
228,855
|
-
|
Prepaid
consulting and other expenses
|
50,580
|
25,462
|
Prepaid
consulting and other service stock-based compensation expenses (see
Note 8)
|
675,540
|
-
|
Total
|
$
1,179,212
|
$
53,278
|
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following:
|
|
|
|
|
|
Accounts
payable
|
$
649,785
|
$
63,826
|
Accrued
credit card balances
|
55,391
|
91,037
|
Accrued
royalties
|
54,956
|
-
|
Sales
returns and allowances
|
103,533
|
-
|
Accrual
for stock to be issued to consultants (see Note 8)
|
540,000
|
-
|
Accrual
for amounts due under license agreement (see Note 2)
|
200,000
|
-
|
Accrued
other
|
19,882
|
640
|
Total
|
$
1,623,547
|
$
155,503
|
NOTE 5 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Short-Term Loans Payable
The
short-term non-convertible financings were from three funding
sources and all balances were guaranteed by the Company’s
CEO. The Company repaid these amounts in full in July
2016.
Note Payable and Non-Convertible Debentures
The
following table summarizes the outstanding note payable and
non-convertible debentures at September 30, 2016 and December 31,
2015:
|
|
|
Note
payable and non-convertible debenture:
|
|
|
February
2016 Note Payable
|
$
412,284
|
$
-
|
July
2015 Debenture (Amended August 2014 Debenture)
|
-
|
73,200
|
Total note payable and non-convertible debenture
|
412,284
|
73,200
|
Less:
Debt discount
|
(5,155
)
|
-
|
Carrying value
|
407,129
|
73,200
|
Less:
Current portion
|
(274,536
)
|
(73,200
)
|
Note payable and non-convertible debenture, net of current
portion
|
$
132,593
|
$
-
|
The
following table summarizes the future minimum payments as of
September 30, 2016 for the note payable and non-convertible
debentures:
Remainder
of 2016
|
$
64,286
|
2017
|
293,013
|
2018
|
54,985
|
|
$
412,284
|
July 2015 Debenture (Amended August 2014 Debenture)
On
August 30, 2014, the Company issued an 8% debenture to an unrelated
third party investor in the principal amount of $40,000 (the
“August 2014 Debenture”). The August 2014 Debenture
bore interest at the rate of 8% per annum. The principal amount and
interest were payable on August 29, 2015. On July 21, 2015, the
Company received an additional $30,000 from the investor and
amended and restated this agreement to a new principal balance of
$73,200 (including accrued interest of $3,200 added to principal)
and a new maturity date of July 21, 2016. The note was
repaid in full in July 2016.
February 2016 Note Payable
On
February 24, 2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered into a closing statement in which SBI
loaned the Company 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 the Company 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 in accordance with ASU
2015-03.
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. The Company 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 the Company 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 revenues received by the Company 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 the Company in the transaction including all revenue
received by the Company from these assets.
May 2016 Debenture
On
May 4, 2016, the Company issued a 10% non-convertible debenture to
an unrelated third party investor in the principal amount of
$24,000 (the “May 2016 Debenture”). The May 2016
Debenture bore interest at the rate of 10% per annum. The principal
amount and interest were payable on May 4, 2017. The note was
repaid in full in July 2016.
May 2016 Notes Payable
On
May 6, 2016, the Company entered into a securities purchase
agreement with an unrelated third party investor in which the
investor loaned the Company gross proceeds of $50,000 pursuant to a
3% promissory note (“May 6, 2016 Note
Payable”). The May 6, 2016 Note Payable bore
interest at the rate of 3% per annum. The principal amount and
interest were payable on November 6, 2016. The note was repaid in
full in June 2016.
In
connection with the May 6, 2016 Note Payable, the Company issued
the investor restricted shares of common stock totaling
500,000. The fair value of the restricted shares of
common stock issued was based on the market price of the
Company’s common stock on the date of issuance of the May 6,
2016 Note Payable. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value resulted in the Company recording a debt
discount of $23,684. The discount was amortized in full to interest
expense during the nine months ended September 30,
2016.
On
May 20, 2016, the Company entered into a securities purchase
agreement with an unrelated third party investor in which the
investor loaned the Company gross proceeds of $100,000 pursuant to
a 3% promissory note (“May 20, 2016 Note
Payable”). The May 20, 2016 Note Payable bore
interest at the rate of 3% per annum. The principal amount and
interest were payable on February 21, 2017. The note was repaid in
full in June 2016.
In
connection with the May 20, 2016 Note Payable, the Company issued
the investor restricted shares of common stock totaling
750,000. The fair value of the restricted shares of
common stock issued was based on the market price of the
Company’s common stock on the date of issuance of the May 20,
2016 Note Payable. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value resulted in the Company recording a debt
discount of $70,280. The discount was amortized in full to interest
expense during the nine months ended September 30,
2016.
Interest Expense
The
Company recognized interest expense on the short-term loans payable
and non-related party note payable and non-convertible debentures
of $42,652, $131,567, $62,863, and $84,779 for the three and nine
months ended September 30, 2016 and 2015,
respectively. Amortization of the debt discount to
interest expense during the three and nine months ended September
30, 2016 and 2015 totaled $938, $96,309, $97,617, and $286,070,
respectively.
Convertible Debentures - Third Quarter 2015 Financing
The
following table summarizes the outstanding Third Quarter 2015
Convertible Debentures at December 31, 2015:
|
|
|
|
Convertible
debentures
|
$
1,457,500
|
Less:
Debt discount
|
(1,050,041
)
|
Carrying value
|
407,459
|
Less:
Current portion
|
(407,459
)
|
Convertible debentures – long-term
|
$
-
|
In
the third quarter of 2015, the Company entered into Securities
Purchase Agreements with three accredited investors (the
“Buyers”), pursuant to which the Company received
aggregate gross proceeds of $1,325,000 (net of OID) pursuant to
which it sold:
Six
convertible promissory notes of the Company totaling $1,457,500
(each a “Q3 2015 Note” and collectively the “Q3
2015 Notes”) (the Q3 2015 Notes were sold at a 10% OID and
the Company received an aggregate total of $1,242,500 in funds
thereunder after debt issuance costs of $82,500). The principal
amount due under the Q3 2015 Notes was $1,457,500. The Q3 2015
Notes and accrued interest were convertible into shares of common
stock of the Company (the “Common Stock”) beginning six
months from the date of execution, at a conversion price of $0.15
per share, with certain adjustment provisions noted below. The
maturity date of the first and second Q3 2015 Note was August 26,
2016. The third Q3 2015 Note had a maturity date of September 24,
2016, the fourth had a maturity date of September 26, 2016, the
fifth was October 20, 2016 and the sixth was October 29, 2016. The
Q3 2015 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.
Notwithstanding
the foregoing, upon the occurrence of an Event of Default, as
defined in such Q3 2015 Note, a Default Amount is equal to the sum
of (i) the principal amount, together with accrued interest due
thereon through the date of payment payable at the holder’s
option in cash or common stock and (ii) an additional amount equal
to the principal amount payable at the Company’s option in
cash or common stock. For purposes of payments in common stock, the
following conversion formula applied: the conversion price shall be
the lower of: (i) the fixed conversion price ($0.15) or (ii) 60%
multiplied by the volume weighted average price of the
Company’s common stock during the ten consecutive trading
days immediately prior to the later of the Event of Default or the
end of the applicable cure period. Certain other conversion rates
applied in the event of the sale or merger of the Company,
default and other defined events. The embedded conversion
feature of these notes contained anti-dilution protection,
therefore, were treated as derivative instruments (see Note
9).
The
Company could have prepaid the Q3 2015 Notes at any time on the
terms set forth in the Q3 2015 Notes at the rate of 115% of the
then outstanding balance of the Q3 2015 Notes. Under the terms of
the Q3 2015 Notes, the Company could not effect certain corporate
and business actions during the term of the Q3 2015 Notes, although
some could have been done with proper notice. Pursuant to the
Purchase Agreement, with certain exceptions, the Note holder had a
right of participation during the term of the Q3 2015 Notes;
additionally, the Company granted the Q3 2015 Note holder
registration rights for the shares of common stock underlying the
Q3 2015 Notes pursuant to Registration Rights
Agreements.
In
addition, a Registration Rights Agreement was signed and, as a
result, the Company filed a Form S-1 Registration Statement on
September 11, 2015, filed an Amended Form S–1 on October 26,
2015, November 12, 2015 and December 10, 2015 and the Amended Form
S-1 became effective December 18, 2015.
During
the nine months ended September 30, 2016, the Q3 2015 Notes holders
elected to convert all principal and interest outstanding of
$1,515,635 into 10,104,228 shares of common stock at a conversion
price of $0.15 per share (see Note 8). As a result of
the conversion of the outstanding principal and interest balance
into shares of common stock, the fair value of the embedded
conversion feature derivative liabilities of $2,018,565 on the date
of conversion was reclassified to additional paid-in capital (see
Note 9) and the remaining unamortized debt discount was amortized
to interest expense during the nine months ended September 30,
2016.
Convertible Debentures - 2016 Financing
The
following table summarizes the outstanding 2016 Convertible
Debentures at September 30, 2016:
|
|
|
|
Convertible
debentures
|
$
1,884,922
|
Less:
Debt discount
|
(1,474,342
)
|
Carrying value
|
410,580
|
Less:
Current portion
|
(410,580
)
|
Convertible debentures – long-term
|
$
-
|
In
the second and third quarter of 2016, the Company entered into
Securities Purchase Agreements with eight accredited investors (the
“Investors”), pursuant to which the Company received
aggregate gross proceeds of $3,000,000 (net of OID) pursuant to
which it 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 the
Company received an aggregate total of $2,657,500 in funds
thereunder after debt issuance costs of $342,500). The 2016 Notes
and accrued interest are convertible into shares of common stock of
the Company at a conversion price of $0.25 per share, with certain
adjustment provisions noted below. The maturity date of the 2016
Notes issued on June 30, 2016 and July 15, 2016 is July 30, 2017
and the maturity date of the 2016 Notes issued on July 25, 2016 is
August 25, 2017. The 2016 Notes bear interest on the unpaid
principal amount at the rate of 5% per annum from the date of
issuance until the same becomes due and payable, whether at
maturity or upon acceleration or by prepayment or
otherwise.
Notwithstanding
the foregoing, upon the occurrence of an Event of Default, as
defined in such 2016 Notes, a Default Amount is equal to the sum of
(i) the principal amount, together with accrued interest due
thereon through the date of payment payable at the holder’s
option in cash or common stock and (ii) an additional amount equal
to the principal amount payable at the Company’s option in
cash or common stock. For purposes of payments in common stock, the
following conversion formula shall apply: the conversion price
shall be the lower of: (i) the fixed conversion price ($0.25) or
(ii) 75% multiplied by the volume weighted average price of the
Company’s common stock during the ten consecutive trading
days immediately prior to the later of the Event of Default or the
end of the applicable cure period. For purposes of the Investors
request of repayment in cash but the Company is unable to do so,
the following conversion formula shall apply: the conversion price
shall be the lower of: (i) the fixed conversion price ($0.25) or
(ii) 60% multiplied by the lowest daily volume weighted average
price of the Company’s common stock during the ten
consecutive trading days immediately prior to the conversion.
Certain other conversion rates apply in the event of the sale or
merger of the Company, default and other defined
events.
The
Company may 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. Pursuant to the Securities Purchase
Agreements, with certain exceptions, the Investors have a right of
participation during the term of the 2016 Notes; additionally, the
Company granted the 2016 Note holders registration rights for the
shares of common stock underlying the 2016 Notes up to $1,000,000
pursuant to Registration Rights Agreements. The Company filed a
Form S-1 Registration Statement on August 9, 2016, filed an Amended
Form S–1 on August 23, 2016 and August 24, 2016 and the
Amended Form S-1 became effective August 25, 2016.
In
addition, bundled with the convertible debenture, the Company
sold:
1.
A common stock purchase warrant to each
Investor, which allows the Investors to purchase an aggregate of
3,000,000 shares of common stock and the placement agent to
purchase 1,220,000 shares of common stock (aggregating 4,220,000
shares of the Company’s common stock) at an exercise price of
$0.40 per share (see Note 8); and
2.
7,500,000 restricted shares of common stock to the
Investors.
The
Company allocated the proceeds from the 2016 Notes to the
convertible debenture, warrants and restricted shares of common
stock issued based on their relative fair values. The
Company determined the fair value of the warrants using
Black-Scholes with the following range of assumptions:
|
|
Expected
terms (in years)
|
5.00
|
Expected
volatility
|
229
%
|
Risk-free
interest rate
|
1.01 - 1.15
%
|
Dividend
yield
|
-
|
The
fair value of the restricted shares of common stock issued to
Investors was based on the market price of the Company’s
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 the Company recording a debt discount of
$445,603 and $1,127,225, respectively. The remaining
proceeds of $1,427,172 were initially allocated to the debt. The
Company 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 at issuance was determined using a
Path-Dependent Monte Carlo Simulation Model (see Note 9 for
assumptions used to calculate fair value). The initial
fair value of the embedded conversion features were $3,444,284, of
which, $687,385 is recorded as a debt discount. The
initial fair value of the embedded conversion feature derivative
liabilities in excess of the proceeds allocated to the debt, after
the allocation of debt proceeds to the debt issuance costs, was
$2,756,899, and was immediately expensed and recorded as
interest expense during the nine months ended September 30, 2016 in
the accompanying condensed consolidated statement of
operations. The 2016 Notes were also issued at an OID of
10% and the OID of $303,889 was recorded as an addition to the
principal amount of the 2016 Notes and a debt discount in the
accompanying condensed consolidated balance sheet.
Total
debt issuance costs incurred in connection with the 2016 Notes was
$739,787, of which, $357,286 is the fair value of the warrants to
purchase 1,220,000 shares of common stock issued to the placement
agents. The debt issuance costs have been recorded as a
debt discount and are being amortized to interest expense using the
effective interest method over the term of the 2016
Notes.
During
the nine months ended September 30, 2016, certain of the 2016 Notes
holders elected to convert principal and interest outstanding of
$1,420,265 into 5,681,060 shares of common stock at a conversion
price of $0.25 per share (see Note 8). 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 $944,101 on the date of conversion was
reclassified to additional paid-in capital (see Note 9) and the
amortization of the debt discount was accelerated for the amount
converted and recorded to interest expense during the nine months
ended September 30, 2016.
Interest Expense
The
Company recognized interest expense on the Q3 2015 Notes and 2016
Notes for the three and nine months ended September 30, 2016 and
2015 of $29,333, $60,714, $11,267 and $11,267, respectively. The
debt discount recorded for the 2016 Notes are 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 Q3 2015 Notes and 2016 Notes to interest
expense for the three and nine months ended September 30, 2016 and
2015 was $1,829,547, $2,879,588, $165,540 and $165,540,
respectively.
NOTE 6 – DEBENTURES – RELATED PARTY
The
following table summarizes the outstanding debentures to a related
party at December 31, 2015:
|
|
Line
of credit convertible debenture – related party
|
$
409,192
|
2014
non-convertible debenture – related party
|
25,000
|
Total
|
434,192
|
Less
: Debt discount
|
(17,720
)
|
Carrying
value
|
416,472
|
Less:
Current portion
|
(391,472
)
|
Total
long-term debentures – related party
|
$
25,000
|
Line of Credit Convertible Debenture
In
January 2013, the Company entered into a line of credit convertible
debenture with its CEO (the “LOC Convertible
Debenture”). Under the terms of its original issuance: (1)
the Company could request to borrow up to a maximum principal
amount of $250,000 from time to time; (2) amounts borrowed bore an
annual interest rate of 8%; (3) the amounts borrowed plus accrued
interest were payable in cash at the earlier of January 14, 2014 or
when the Company completed a Financing, as defined, and (4) the
holder had sole discretion to determine whether or not to make an
advance upon the Company’s request.
During
2013, the LOC Convertible Debenture was further amended to: (1)
increase the maximum principal amount available for borrowing to $1
million plus any amounts of salary or related payments paid to Dr.
Damaj prior to the termination of the funding commitment; and (2)
change the holder’s funding commitment to automatically
terminate on the earlier of either (a) when the Company completes a
financing with minimum net proceeds of at least $4 million, or (b)
July 1, 2016.
On
August 12, 2015, the principal amount that may be borrowed was
increased to $2,000,000 and the automatic termination date
described above was extended to October 1, 2016. The LOC
Convertible Debenture was not renewed upon expiration. The
conversion price was $0.16 per share, 80% times the quoted market
price of the Company’s common stock on the date of the
amendment.
During
the nine months ended September 30, 2016 and 2015, the Company
borrowed $0 and $114, respectively, under the LOC Convertible
Debenture and recorded a beneficial conversion feature of $3,444
and $6,275, respectively, for the amounts borrowed and accrued
interest. The Company repaid the LOC Convertible Debenture balance
and accrued interest in full during the nine months ended September
30, 2016.
2014 Non-Convertible Note – Related Party
On
January 29, 2014, the Company issued an 8% note, in the amount of
$25,000, to the Company’s CEO. The principal amount and
interest were payable on January 22, 2015. This note was amended to
extend the maturity date until January 22, 2017. The Company
repaid the principal note balance and accrued interest in full in
August 2016.
Interest Expense
The
Company recognized interest expense on the outstanding debentures
to a related party totaling $2,124, $17,430, $47,507, and $74,324
during the three and nine months ended September 30, 2016 and 2015,
respectively. Amortization of the debt discount to interest expense
during the three and nine months ended September 30, 2016 and 2015
totaled $5,445, $21,164, $71,788 and $103,752,
respectively.
NOTE 7 – RELATED PARTY TRANSACTIONS
Related Party Borrowings
There
were certain related party borrowings that were repaid in full
during the nine months ended September 30, 2016 which are described
in more detail in Note 6.
Accrued Compensation – Related Party
Accrued
compensation includes accruals for employee wages, vacation pay and
target-based bonuses. The components of accrued compensation
as of September 30, 2016 and December 31, 2015 are as
follows:
|
|
|
Wages
|
$
1,407,486
|
$
1,178,909
|
Vacation
|
215,279
|
170,371
|
Bonus
|
282,773
|
-
|
Payroll
taxes on the above
|
118,318
|
93,510
|
Total
|
2,023,856
|
1,442,790
|
Classified
as long-term
|
(1,506,010
)
|
(906,928
)
|
Accrued
compensation
|
$
517,846
|
$
535,862
|
Accrued
employee wages at September 30, 2016 and December 31, 2015 are
entirely related to wages owed to the Company’s
CEO. 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 the Company’s ability to continue as
a going concern. The CEO started to receive payment of salary in
July 2016. Under the third quarter 2015 financing agreement,
salaries prior to January 1, 2015 totaling $906,928 could not be
repaid until the debentures were repaid in full or otherwise
extinguished by conversion or other means and, accordingly, the
accrued compensation was shown as a long-term
liability. During the nine months ended September 30, 2016,
the Q3 2015 Notes were fully converted into shares of common stock.
The Company does not expect to pay the wages and related payroll
tax amounts within the next 12 months and thus is classified as a
long-term liability.
NOTE 8 – STOCKHOLDERS’ DEFICIT
Capital Stock
The
Company is authorized to issue 150,000,000 shares, all of which are
common stock with a par value of $0.001 per share.
Issuances of Common Stock
On
January 6, 2016 and April 5, 2016, the Company entered into a
consulting agreement with a third party pursuant to which the
Company agreed to issue, over the term of the agreements, an
aggregate of 1,560,000 shares of common stock in exchange for
services to be rendered. During the nine months ended
September 30, 2016, the Company issued 1,335,000 shares under the
agreement related to services provided and recognized the fair
value of the shares issued of $116,760 in general and
administrative expense in the accompanying condensed consolidated
statement of operations. The 1,335,000 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 the
Company’s common stock on the date of vesting.
In
January 2016, the Company issued 300,000 shares of common stock for
services and recorded an expense of $17,000, which is included in
general and administrative expense in the accompanying condensed
consolidated statement of operations. The 300,000 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 the
Company’s common stock on the date of vesting.
On
February 10, 2016, the Company entered into a service agreement
with a third party pursuant to which the Company agreed to issue,
over the term of the agreement, 3,000,000 shares of common stock in
exchange for services to be rendered. During the nine months
ended September 30, 2016, the Company issued 3,000,000 shares under
the agreement related to services provided and recognized the fair
value of the shares issued of $352,500 in general and
administrative expense in the accompanying condensed consolidated
statement of operations. The 3,000,000 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 the Company’s
common stock on the date of vesting.
On
February 19, 2016, the Company entered into a consulting agreement
with a third party, pursuant to which the Company agreed to issue,
over the term of the agreement, 1,750,000 shares of common stock in
exchange for services to be rendered. During the nine months
ended September 30, 2016, the Company issued 1,750,000 shares under
the agreement related to services provided in connection with the
acquisition of Beyond Human™ (see Note 3) and recognized the
fair value of the shares issued of $181,013 in general and
administrative expense in the accompanying condensed consolidated
statement of operations. The 1,750,000 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 the Company’s
common stock on the date of vesting.
In
April and August 2016, the Company issued an aggregate of 3,385,354
shares of common stock upon the cashless exercise of warrants to
purchase 5,042,881 shares of common stock. Upon exercise
of certain warrants in April 2016, the fair value of the warrant
derivative liability on the date of exercise was reclassified to
additional paid-in capital (see Note 9).
In
April, May and August 2016, the Company issued an aggregate of
785,714 shares of common stock for services and recorded an expense
of $126,543, which is included in general and administrative
expense in the accompanying condensed consolidated statement of
operations. The 785,714 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 the Company’s common stock on
the date of vesting.
On
April 27, 2016, the Company entered into a service agreement with a
third party pursuant to which the Company agreed to issue 300,000
shares of common stock in exchange for services to be rendered over
the 3 month term of the agreement. The shares of common stock
issued were non-forfeitable and the fair value of $28,500 was based
on the market price of the Company’s common stock on the date
of vesting. During the nine months ended September 30, 2016, the
Company recognized $28,500 in general and administrative expense in
the accompanying condensed consolidated statement of
operations.
In
May 2016, the Company issued 1,250,000 shares of restricted common
stock to certain note holders in connection with their notes
payable. The relative fair value of the shares of
restricted common stock issued was determined to be $93,964 and was
recorded as a debt discount (see Note 5).
In
May and June 2016, the Buyers of the Q3 2015 Notes elected to
convert $1,515,635 in principal and interest into 10,104,228 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
9).
On
June 16, 2016, the Company entered into a consulting agreement with
a third party pursuant to which the Company agreed to issue 250,000
restricted shares of common stock in exchange for services to be
rendered. In July 2016, the Company issued 250,000
fully-vested shares under the agreement related to services to be
provided over the term of the agreement which ends on December 16,
2016. The fair value of the shares issued of $47,500 was based on
the market price of the Company’s common stock on the date of
vesting. During the nine months ended September 30, 2016, the
Company recognized $27,710 in general and administrative expense in
the accompanying condensed consolidated statement of operations and
the remaining unamortized expense of $19,790 is included in prepaid
expenses and other current assets in the accompanying condensed
consolidated balance sheet at September 30, 2016.
In July 2016, the Company issued 100,000 shares of common stock to
CRI pursuant to the Amended CRI Asset Purchase Agreement (see Note
2). The fair value of the restricted shares of common
stock of $23,000 was based on the market price of the
Company’s common stock on the date of issuance and is
included in research and development expense in the accompanying
condensed consolidated statement of operations.
On
August 3, 2016, the Company entered into a service agreement with a
third party pursuant to which the Company issued 75,000
fully-vested restricted shares of common stock in exchange for
services to be rendered over the term of the agreement which ended
on November 10, 2016. The fair value of the shares issued of
$32,250 was based on the market price of the Company’s common
stock on the date of vesting. During the nine months ended
September 30, 2016, the Company recognized $21,500 in general and
administrative expense in the accompanying condensed consolidated
statement of operations and the remaining unamortized expense of
$10,750 is included in prepaid expenses and other current assets in
the accompanying condensed consolidated balance sheet at September
30, 2016.
On
August 23, 2016, the Company entered into a consulting agreement
with a third party pursuant to which the Company 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 September 2016, the Company issued 400,000 shares of
common stock under the agreement. The fair value of the shares
issued of $180,000 was based on the market price of the
Company’s common stock on the date of agreement. As a result
of the shares being fully-vested at the execution of the agreement
but payable in equal installments, the Company recorded a liability
for the fair value of the remaining 1,200,000 shares of common
stock to be issued of $540,000 which is included in accounts
payable and accrued expenses in the accompanying condensed
consolidated balance sheet at September 30, 2016. The fair value
was based on the market price of the Company’s common stock
on the date of the agreement. Upon issuance of the remaining
shares, the Company will reclassify the liability to common stock
and additional paid-in-capital. During the nine months ended
September 30, 2016, the Company recognized $75,000 in general and
administrative expense in the accompanying condensed consolidated
statement of operations and the remaining unamortized expense of
$645,000 is included in prepaid expenses and other current assets
in the accompanying condensed consolidated balance sheet at
September 30, 2016.
On
September 1, 2016, the Company entered into a service agreement
with a third party pursuant to which the Company 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 nine months
ended September 30, 2016, the Company issued 330,000 shares under
the agreement related to services provided and recognized the fair
value of the shares issued of $89,100 in general and administrative
expense in the accompanying condensed consolidated statement of
operations. The 330,000 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 the Company’s common stock on
the date of vesting.
During
the nine months ended September 30, 2016, the Company issued
215,000 shares of common stock for legal fees in connection with
the Semprae merger transaction and recognized the fair value of the
shares issued of $64,500 in general and administrative expense in
the accompanying condensed consolidated statement of
operations.
During
the nine months ended September 30, 2016, the Company issued
19,228,494 shares of common stock in exchange for vested restricted
stock units.
In
connection with the issuance of the 2016 Notes, the Company issued
restricted shares of common stock totaling 7,500,000 to the
Investors. The relative fair value of the restricted shares of
common stock totaling $1,127,225 was recorded as a debt discount
(see Note 5).
In
August and September 2016, certain 2016 Notes holders elected to
convert $1,420,265 in principal and interest into 5,681,060 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
9).
During
the nine months ended September 30, 2016, the Company received
notifications from five of its warrant holders on their intent
to exercise their warrants to purchase shares of common stock
totaling 1,033,800 at an exercise price of $0.30 per
share. The Company received gross cash proceeds of
$310,140.
2013 Equity Incentive Plan
The
Company has issued common stock, restricted stock units and stock
option awards to employees, non-executive directors and outside
consultants under the 2013 Equity Incentive Plan, which was
approved by the Company’s Board of Directors in February of
2013. The 2013 Equity Incentive Plan allows for the issuance
of up to 10,000,000 shares of the Company’s 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 exercise price for all equity awards
issued under the 2013 Equity Incentive Plan is based on the fair
market value of the common stock. Currently, because the
Company’s common stock is quoted on the OTCQB, the fair
market value of the common stock is equal to the last-sale price
reported by the OTCQB as of the date of determination, or if there
were no sales on such date, on the last date preceding such date on
which a sale was reported. Generally, each vested stock unit
entitles the recipient to receive one share of Company common stock
which is eligible for settlement at the earliest of their
termination, a change in control of the Company or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards, and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of September 30, 2016, 119,516 shares were available under this
plan.
2014 Equity Incentive Plan
The
Company has issued common stock and restricted stock units to
employees and non-executive directors under the 2014 Equity
Incentive Plan, which was approved by the Company’s Board of
Directors in November 2014. The 2014 Equity Incentive Plan
allows for the issuance of up to 20,000,000 shares of the
Company’s 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
exercise price for all equity awards issued under the 2014 Equity
Incentive Plan is based on the fair market value of the common
stock. Generally, each vested stock unit entitles the
recipient to receive one share of Company common stock which is
eligible for settlement at the earliest of their termination, a
change in control of the Company or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of September 30, 2016, 950,001 shares were available under this
plan.
2016 Equity Incentive Plan
On
March 21, 2016, our Board of Directors approved the adoption of the
2016 Equity Incentive Plan. The 2016 Equity Incentive Plan
allows for the issuance of up to 20,000,000 shares of the
Company’s 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
exercise price for all equity awards issued under the 2016 Equity
Incentive Plan is based on the fair market value of the common
stock. Generally, each vested stock unit entitles the
recipient to receive one share of Company common stock which is
eligible for settlement at the earliest of their termination, a
change in control of the Company or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of September 30, 2016, 16,250,000 shares were available under this
plan.
Stock-Based Compensation
The
stock-based compensation expense for the three and nine months
ended September 30, 2016 and 2015 was $130,193, $766,711, $80,097
and $831,807, respectively, for the issuance of restricted stock
units and stock options to management, directors and
consultants. The Company calculates the fair value of the
restricted stock units based upon the quoted market value of the
common stock at the date of grant. The Company calculates the fair
value of each stock option award on the date of grant using
Black-Scholes.
Stock Options
For
the nine months ended September 30, 2016 and 2015, the following
weighted average assumptions were utilized for the stock options
granted during the period:
|
|
|
Expected
life (in years)
|
10.0
|
6.0
|
Expected
volatility
|
227.8
%
|
219.3
%
|
Average
risk-free interest rate
|
1.71
%
|
1.54
%
|
Dividend
yield
|
0
%
|
0
%
|
Grant
date fair value
|
$
0.17
|
$
0.12
|
The
dividend yield of zero is based on the fact that the Company has
never paid cash dividends and has no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of the Company’s 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. The Company believes that all stock options issued under
its stock option plans meet the criteria of “plain
vanilla” stock options. The Company uses 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, 2015
|
196,000
|
$
0.31
|
9.0
|
-
|
Granted
|
82,500
|
$
0.17
|
10.0
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
Cancelled
|
(50,000
)
|
$
0.31
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
-
|
Outstanding
at September 30, 2016
|
228,500
|
$
0.21
|
8.8
|
$
27,060
|
|
|
|
|
|
Vested
at September 30, 2016
|
228,500
|
$
0.21
|
8.8
|
$
27,060
|
The
aggregate intrinsic value is calculated as the difference between
the exercise price of all outstanding stock options and the quoted
price of the Company’s common stock at September 30,
2016. During the three and nine months ended September
30, 2016 and 2015, the Company recognized stock-based compensation
from stock options of $8,638, $18,138, $4,000 and $6,711,
respectively.
Restricted Stock Units
The
following table summarizes the restricted stock unit activity
for the nine months ended September 30, 2016:
|
|
Outstanding
at December 31, 2015
|
17,554,736
|
Granted
|
14,593,247
|
Exchanged
|
(19,228,494
)
|
Cancelled
|
-
|
Outstanding
at September 30, 2016
|
12,919,489
|
|
|
Vested
at September 30, 2016
|
7,906,990
|
The
vested restricted stock units at September 30, 2016 have not
settled and are not showing as issued and outstanding shares of the
Company 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
the Company, 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.
During
the nine months ended September 30, 2016, the Company issued
14,593,247 restricted stock units to employees and board members.
In 2016, 843,248 were from the 2013 Equity Incentive Plan and
vested immediately, 9,999,999 were from the 2014 Equity Incentive
Plan and 3,750,000 were from the 2016 Equity Incentive
Plan. A total of 6,000,001 of 9,999,999 restricted stock
units issued under the 2014 Equity Incentive Plan vested
immediately and the remaining 3,999,998 vested upon the closing of
the Beyond Human™ asset acquisition. The restricted stock
units issued under the 2016 Equity Incentive Plan vest as to 25% on
the one year anniversary from the date of grant and then in equal
quarterly installments for the next two years. The grant date fair
value of restricted stock units issued during the nine months ended
September 30, 2016 was $1,487,268. For the three and nine months
ended September 30, 2016 and 2015, the Company recognized $121,555,
$748,573, $76,097 and $825,096, respectively, of stock-based
compensation expense for the vested units. As of September 30,
2016, compensation expense related to unvested shares not yet
recognized in the condensed consolidated statement of operations
was approximately $1.2 million and will be recognized over a
remaining weighted-average term of 2.6 years.
Warrants
In
2014, the Company issued 380,973 warrants in connection with a note
payable. The warrants have an exercise price of $0.10 per share and
expire December 6, 2018. Warrants to purchase 245,157 shares of
common stock were exercised under the cashless exercise provisions
of the warrant agreement in July 2016, which resulted in the
issuance of 191,908 shares of common stock. The intrinsic value of
the warrants on the date of exercise was $86,359.
In
February 2014, the Company issued 250,000 warrants in connection
with a convertible debenture. The warrants had an exercise price of
$0.50 per share and were to expire on February 13, 2019. On
March 6, 2015 the Company entered into an agreement with the note
holder to extend the convertible debenture for six months. As
consideration for the extension, the Company issued the note holder
an additional 250,000 warrants, reduced the exercise price of the
warrants from $0.50 to $0.30 per share and extended the expiration
date to March 12, 2020. The warrants were also amended to include
certain anti-dilution protection, including protection upon
dilutive issuances. In connection with the third quarter 2015
convertible debenture financing, the exercise price of these
warrants was reduced to $0.0896 per share and an additional
1,173,410 warrants were issued per the anti-dilution protection
afforded in the warrant agreement during the year ended December
31, 2015. These warrants were exercised under the cashless exercise
provisions of the warrant agreement in April 2016. In
connection with the exercise of the warrants, the Company agreed to
reduce the exercise price of these warrants to $0.07 per share
which resulted in an additional 469,447 warrants being issued in
April 2016 prior to exercise. The warrants exercised
were classified as derivative liabilities and, upon exercise, the
fair value of the warrant derivative liability was reclassified to
additional paid-in capital (see Note 9). The intrinsic value of the
warrants on the date of exercise was $53,629.
In
January 2015, the Company issued 500,000 warrants in connection
with a non-convertible debenture. The warrants are exercisable for
five years from the closing date at an exercise price of $0.30 per
share of common stock or January 21, 2020. The warrants contain
anti-dilution protection, including protection upon dilutive
issuances. In connection with the third quarter 2015 convertible
debenture financing, the exercise price of these warrants was
reduced to $0.0896 per share and an additional 1,173,410 warrants
were issued per the anti-dilution protection afforded in the
warrant agreement during the year ended December 31, 2015. These
warrants were exercised under the cashless exercise provisions of
the warrant agreement in April 2016. In connection with
the exercise of the warrants, the Company agreed to reduce the
exercise price of these warrants to $0.0565 per share which
resulted in an additional 981,457 warrants being issued in April
2016 prior to exercise. The warrants exercised were
classified as derivative liabilities and, upon exercise, the fair
value of the warrant derivative liability was reclassified to
additional paid-in capital (see Note 9). The intrinsic value of the
warrants on the date of exercise was $99,121.
In
January 2015, the Company issued 250,000 warrants with an exercise
price of $0.30 per share to its former CFO in connection with a
non-convertible debenture. The warrants expire on January 21, 2020.
The warrants contain anti-dilution protection, including protection
upon dilutive issuances. In connection with the third quarter 2015
convertible debenture financing, 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 Q3 2015 Notes, the Company issued 1,808,333
warrants with an exercise price of $0.30 per share and expire in
2020. Warrants to purchase 1,033,800 shares of common stock were
exercised during the nine months ended September 30, 2016. The
intrinsic value of the warrants on the dates of exercise was
$150,200.
In
connection with the 2016 Notes, the Company issued 4,220,000
warrants to the Investors and placement agents with an exercise
price of $0.40 per share and expire in 2021.
At
September 30, 2016 and December 31, 2015, there are 5,967,054 and
6,372,831 fully vested warrants outstanding, respectively. The
weighted average exercise price of outstanding warrants at
September 30, 2016 is $0.34 per share, the weighted average
remaining contractual term is 4.4 years and the aggregate intrinsic
value of the outstanding warrants is $183,421.
Net Loss per Share
The
weighted average shares of common stock outstanding used in the
basic and diluted net loss per share calculation for the three and
nine months ended September 30, 2016 and 2015 was 97,222,394,
77,645,019, 42,453,051 and 39,440,755, 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 nine months ended September 30, 2016 and 2015 was
7,750,251, 8,853,215, 12,623,768 and 11,045,746,
respectively.
The
total weighted average shares outstanding used in the basic and
diluted net loss per share calculation for the three and nine
months ended September 30, 2016 and 2015 was 104,972,645,
86,498,234, 55,076,819 and 50,486,501, respectively.
The
following table shows the anti-dilutive shares excluded from the
calculation of basic and diluted net loss per common share as of
September 30, 2016 and 2015:
|
|
|
|
|
Gross number of shares excluded:
|
|
|
Restricted
stock units – unvested
|
5,012,499
|
4,623,333
|
Stock
options
|
228,500
|
164,500
|
Convertible
debentures and accrued interest
|
7,651,830
|
1,359,590
|
Warrants
|
5,967,054
|
3,439,306
|
Total
|
18,859,883
|
9,586,729
|
The
above table does not include the ANDA Consideration Shares related
to the Novalere acquisition, as they are considered contingently
issuable (see Note 3).
NOTE 9 – DERIVATIVE LIABILITIES
The
warrants issued in connection with certain previously outstanding
debentures are measured at fair value and classified as a liability
because these warrants contain anti-dilution protection and
therefore, cannot be considered indexed to the Company’s 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
Option-Pricing Model, resulting in a value of $226,297 at the date
of issuance. 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.
The Company 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. Certain of
these warrants were exercised under the cashless exercise
provisions of the warrant agreement in April 2016 and, as a result,
the fair value of the warrant derivative liability on the date of
exercise totaling $518,224 was reclassified to additional paid-in
capital (see Note 8).
The
assumptions for the Probability Weighted Black-Scholes
Option-Pricing Model for the nine months ended September 30, 2016
are represented in the table below.
|
September
30,
2016
|
Expected
life (in years)
|
3.31
- 3.95
|
Expected
volatility
|
206
%
- 230%
|
Average
risk-free interest rate
|
0.86
%
- 1.07%
|
Dividend
yield
|
0
%
|
The
Company has determined the embedded conversion features of the Q3
2015 Notes and 2016 Notes (see Note 5) to be derivative liabilities
because the terms of the embedded conversion features contain
anti-dilution protection and therefore, cannot be considered
indexed to the Company’s own stock which is a requirement for
the scope exception as outlined under FASB ASC 815. The
embedded conversion features are 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. The Company has 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 will be affected by changes in inputs
to that model and is 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 the Company
and acquisition of the Company. The Company will
continue to classify the fair value of the embedded conversion
features as a liability until the conversion features are
exercised, expire or are amended in a way that would no longer
require these embedded conversion features to be classified as a
liability, whichever comes first. During the nine months
ended September 30, 2016, the Q3 2015 Notes were fully converted
and certain 2016 Notes were converted into shares of common stock
which resulted in the fair value of the embedded conversion feature
derivative liability on the dates of conversion of $2,962,666 to be
reclassified to additional paid-in capital (see Note
8). The anti-dilution protection for the embedded
conversion features survive the life of the 2016 Notes which mature
at July 30, 2017 and August 25, 2017.
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 the Company’s embedded conversion feature
derivative liabilities that are categorized within Level 3 of the
fair value hierarchy during the nine months ended September 30,
2016 is as follows:
|
September
30, 2016
|
Stock
price
|
$
0.05
- 0.50
|
Strike
price
|
$
0.15
- 0.25
|
Expected
life (in years)
|
0.26
- 1.08
|
Expected
volatilty
|
121
%
- 274%
|
Average
risk-free interest rate
|
0.28
%
- 0.62%
|
Dividend
yield
|
-
|
At
September 30, 2016, the estimated Level 3 fair values of the
embedded conversion feature and warrant derivative liabilities
measured on a recurring basis are as follows:
|
|
|
Level
2
|
|
|
Embedded
conversion feature derivative liabilities
|
$
1,091,544
|
$
-
|
$
-
|
$
1,091,544
|
$
1,091,544
|
Warrant
derivative liabilities
|
239,049
|
-
|
-
|
239,049
|
239,049
|
Total
|
$
1,330,593
|
$
-
|
$
-
|
$
1,330,593
|
$
1,330,593
|
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 nine months ended September
30, 2016:
Fair Value Measurements Using Level 3 Inputs
Warrant
derivative liabilities:
|
|
Beginning
balance December 31, 2015
|
$
432,793
|
Reclassification of fair value of warrant
derivative liability to
additional paid-in capital upon cashless exercise
of warrants
|
(518,224
)
|
Change
in fair value
|
324,480
|
Ending
balance September 30, 2016
|
$
239,049
|
|
|
Embedded
conversion feature derivative liabilities:
|
|
Beginning
balance December 31, 2015
|
$
301,779
|
Fair
value of 2016 Notes embedded conversion feature derivative
liability
|
3,444,284
|
Reclassification of fair value of embedded
conversion feature derivative liability to
additional paid-in capital upon conversions of Q3
2015 Notes
|
(2,018,565
)
|
Reclassification of fair value of embedded
conversion feature derivative liability to
additional paid-in capital upon conversions of
2016 Notes
|
(944,101
)
|
Change
in fair value
|
308,147
|
Ending
balance September 30, 2016
|
$
1,091,544
|
NOTE 10 – SUBSEQUENT EVENTS
In
October and November 2016, the Company issued
1,315,220 shares of common stock to certain 2016 Notes Investors
upon the conversion of outstanding principal and interest totaling
$328,805.
In
October 2016, the Company issued 556,786 shares of common stock to
various consultants for services rendered and the fair value of the
common stock issued was approximately $150,000.
In
October 2016, the Company issued 43,750 shares of common stock to
an employee in exchange for vested restricted stock
units.
On November 12,
2016, the Company entered into an Amendment and Supplement to a
Registration Rights and Stock Restriction Agreement (the
"Agreement") with Novalere Holdings pursuant to which the
Company agreed to issue 12,947,655 shares of the Company’s
common stock (the “Novalere Shares”) that were
issuable pursuant to agreement upon the approval of
Fluticare
™
by the
FDA. Management agreed to issue the Novalere Shares due to
its confidence that FlutiCare
™
will be
approved by the FDA in the near future and the obligation of the
Company to issue and register for resale the Novalere Shares and
all other shares of common stock of the Company held by Novalere
Holdings. In connection with the issuance of the
Novalere Shares, Novalere Holdings also agreed to certain
restrictions, and to an extension in the date to register the
Novalere Shares and all other shares of common stock of the Company
held by Novalere Holdings until the second quarter of 2017.
Management believes that the issuance of the Novalere Shares
at this time is in the best interest of the Company and its
shareholders as it results in a restriction on the resale of all
shares of common stock of the Company held by Novalere Holdings,
including the Novalere Shares, until after the Company has achieved
certain milestones.
The
Company has evaluated subsequent events through the filing date of
this Form 10-Q and determined that no 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.
Shares of Common
Stock
and
Warrants to purchase up to Shares of
Common Stock
Prospectus
All dealers that buy, sell or trade the common stock
identified herein may be required to deliver a prospectus,
regardless of whether they are participating in this offering. This
is in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
[Alternate Page for Resale Prospectus]
|
|
|
The information in this preliminary prospectus is not complete and
may be changed. Neither we nor the selling stockholder may sell any
of these securities until the registration statement filed with
Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale
is not permitted.
|
|
|
|
Subject to completion, dated January , 2017
PRELIMINARY PROSPECTUS
Shares of Common
Stock
This prospectus related to the offer and resale by
the stockholder identified on page
Alternate Page for Resale Prospectus -
4
of this prospectus
(“
Selling
Stockholder
”) of up to
25,617,592 shares of our common stock, issued in connection with
the prior merger of Novalere FP, Inc., a Delaware corporation, with
and into a wholly-owned subsidiary of the Company (the
“
Novalere
Merger
”).
We will not receive any of the proceeds from the
sale or other disposition of the shares of common stock offered for
resale by the Selling Stockholder. Please refer to the
section of this prospectus titled “
Selling
Stockholder
” for a more
detailed description of the Novalere Merger and for a list of and
additional information regarding the Selling
Stockholder.
The Selling Stockholder may, from time to time,
sell, transfer or otherwise dispose of any or all of the shares of
common stock offered for resale on any exchange, market or trading
facility on which our common stock is traded or in private
transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to
the prevailing market price, at various prices determined at the
time of sale or at negotiated prices. We will pay the expenses
incurred in registering the shares of common stock on behalf of the
Selling Stockholder, including legal and accounting fees. The
Selling Stockholder will pay any commissions and selling expenses
incurred in connection with the resale of their shares of common
stock. See
Plan of
Distribution
” for more
information.
Our common stock is quoted on the OTCQB
Marketplace under the symbol “INNV”. The last reported
bid price of our common stock on January ,
201
7 was $0. per share.
An investment in our common stock involves a high degree of
risk.
We urge you to read carefully
the “Risk Factors” section beginning on page 8 where we
describe specific risks associated with an investment in Innovus
Pharmaceuticals, Inc. and our common stock before you make your
investment decision. You should purchase our common stock only if
you can afford a complete loss of your
purchase.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities,
or determined if this prospectus is truthful or
complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2017.
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Resale Prospectus - 1
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ABOUT THIS PROSPECTUS
You
should rely only on the information contained in this prospectus or
in any free writing prospectus we or the Selling Stockholder may
authorize to be delivered or made available to you. Neither we, nor
the Selling Stockholder have authorized anyone to provide you with
different information. We and the Selling Stockholder are offering
to sell, and seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. The information
in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus
or of any sale of shares of our common stock. Our business,
financial condition, operating results and prospects may have
changed since that date.
Unless the context
otherwise requires, the words “
Innovus
Pharmaceuticals, Inc.,
”
“
Innovus
Pharma
,”
“
Innovus
,”
“
we
,”
“
the
Company
,”
“
us
”
and “
our
”
refer to Innovus Pharmaceuticals, Inc., a Nevada
corporation.
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Resale Prospectus - 2
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The Offering
Common stock offered by Selling Stockholder
|
25,617,592
shares as of the date of this prospectus.
|
|
|
Common stock outstanding
|
shares
of common stock.
|
|
|
Use of proceeds
|
We will
not receive any proceeds from the sale of the common stock by the
Selling Stockholder.
|
|
|
Risk factors
|
You
should read the “
Risk
Factors
” section of this prospectus and the other
information in this prospectus for a discussion of factors to
consider carefully before deciding to invest in shares of our
common stock.
|
|
|
OTCQB symbol
|
“INNV”
|
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