N
otes to Condensed Consolidated
Financial Statements
September 30, 2017
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Innovus Pharmaceuticals, Inc., together with its subsidiaries
(collectively referred to as “Innovus”,
“we”, “our”, “us” or the
“Company”)
is a Nevada formed, San Diego,
California-based emerging commercial stage pharmaceutical company
delivering over-the-counter medicines and consumer care products
for men’s and women’s health and respiratory
diseases.
We
generate revenue from 22 commercial products in the United States,
including six of these commercial products in multiple countries
around the world through our commercial partners. Our commercial
product portfolio includes (a) Beyond Human® Testosterone
Booster, (b) Beyond Human® Growth Agent, (c) Zestra® to
increase female arousal and desire, (d) EjectDelay® for
premature ejaculation, (e) Sensum+® for reduced penile
sensitivity, (f) Zestra Glide®, (g) Vesele® for promoting
sexual health, (h) Androferti® to support overall male
reproductive health and sperm quality, (i) RecalMax™ for
cognitive brain health, (j) Beyond Human® Green Coffee
Extract, (k) Beyond Human® Vision Formula, (l) Beyond
Human® Blood Sugar, (m) Beyond Human® Colon Cleanse, (n)
Beyond Human® Ketones, (o) Beyond Human® Krill Oil, (p)
Beyond Human® Omega 3 Fish Oil, (q) UriVarx™ for bladder
health, (r) ProstaGorx™ for prostate health, (s)
AllerVarx
™
for
management of allergy symptoms, (t) Apeaz™ indicated for
arthritis pain relief, (u) ArthriVarx™ for joint health, and
(v) PEVarx for extension of sexual intercourse time. While we
generate revenue from the sale of our commercial products, most
revenue is currently generated by Vesele®, Zestra®,
Zestra® Glide, RecalMax™, Sensum+®, UriVarx™,
ProstaGorx™, AllerVarx
™,
Apeaz™,
ArthriVarx™, PEVarx™ and Beyond Human®
Testosterone Booster.
Pipeline Products
FlutiCare™ (fluticasone propionate nasal
spray)
.
FlutiCare™ is
our nationally
branded
Over-the-Counter (“OTC”)
fluticasone propionate nasal spray, United States
Pharmacopeia (“USP”) 50 mcg per spray, which is
indicated to treat individuals with allergic rhinitis, or more
commonly referred to as “allergies”. Allergic rhinitis
is one of the most common ailments in the western world and is
continuing to grow as there are approximately 50 million suffers in
the U.S. alone according to GlobalData. We received our first
commercial batch from our manufacturing partner in October 2017 and
w
e expect to launch our FlutiCare™ OTC product in the
U.S. in November 2017 (see Note 3).
Xyralid
™
.
Xyralid™ is an OTC FDA
monograph compliant drug containing the active drug ingredient
lidocaine and indicated for the relief of the pain and symptoms
caused by hemorrhoids. We launched this product under our Beyond
Human® platform in November 2017.
Urocis
™
XR
.
Urocis™ XR is a proprietary extended release of
Vaccinium Marcocarpon (cranberry) shown to provide 24-hour coverage
in the body in connection with
urinary
tract infections in women
. We expect to launch this product
in the first half of 2018.
AndroVit
™
. AndroVit™ is a
proprietary supplement to support overall prostate and male sexual
health. AndroVit™ was specifically formulated with
ingredients known to support normal prostate health and vitality
and male sexual health. We expect to launch this product in the
first half of 2018.
In
addition to the above listed product pipeline, we are continuously
looking to add additional drugs, supplements and medical devices to
our pipeline.
Basis of Presentation and Principles of Consolidation
The condensed consolidated balance sheet as of December 31, 2016,
which has been derived from audited consolidated financial
statements, and these unaudited condensed consolidated financial
statements have been prepared by management in accordance with
accounting principles generally accepted in the United States
(“U.S. GAAP”), and include all assets, liabilities,
revenues and expenses of the Company and its wholly owned
subsidiaries: FasTrack Pharmaceuticals, Inc., Semprae Laboratories,
Inc. (“Semprae”) and Novalere, Inc.
(“Novalere”). All material intercompany transactions
and balances have been eliminated. These interim unaudited
condensed consolidated financial statements and notes thereto
should be read in conjunction with Management’s Discussion
and Analysis of Financial Condition and Results of Operations and
the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended
December 31, 2016. Certain information required by U.S. GAAP has
been condensed or omitted in accordance with the rules and
regulations of the U.S. Securities and Exchange Commission
(“SEC”). The results for the period ended September 30,
2017 are not necessarily indicative of the results to be expected
for the entire fiscal year ending December 31, 2017 or for any
future period. Certain items have been reclassified to
conform to the current year presentation.
Use of Estimates
The preparation of these condensed consolidated financial
statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Such management estimates include the
allowance for doubtful accounts, sales returns and chargebacks,
realizability of inventories, valuation of deferred tax assets,
goodwill and intangible assets, valuation of contingent acquisition
consideration, recoverability of long-lived assets and goodwill,
fair value of derivative liabilities and the valuation of
equity-based instruments and beneficial conversion
features. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under
the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
Liquidity
Our operations have been financed primarily through proceeds from
convertible debentures and notes payable, sales of our common stock
and revenue generated from our products domestically and
internationally by our partners. These funds have provided us
with the resources to operate our business, sell and support our
products, attract and retain key personnel and add new products to
our portfolio. We have experienced net losses and negative
cash flows from operations each year since our inception. As
of September 30, 2017, we had an accumulated deficit of $34,144,243
and a working capital deficit of $1,239,906.
In March 2017, we raised net cash proceeds of $3,307,773 from the
sale of common stock and warrants in a registered public offering
(see Note 7) and, in October 2017, September 2017, January 2017 and
December 2016, we raised $1,300,000 in gross proceeds from the
issuance of notes payable to four investors
(see Notes 5 and
10).
We have also issued equity
instruments in certain circumstances to pay for services from
vendors and consultants.
As of September 30, 2017, we had $1,315,059 in cash. During the
nine months ended September 30, 2017,
we had net cash used
in operating activities of $1,546,527. We expect that our existing
capital resources, the proceeds received from the issuance of notes
payable in October 2017 totaling $500,000 (see Note 10), revenue
from sales of our products and upcoming sales milestone payments
from the commercial partners signed for our products will be
sufficient to allow us to continue our operations, commence the
product development process and launch selected products
through at least the next 12 months. In addition, our CEO, who is
also a significant shareholder, has deferred the remaining payment
of his salary earned through June 30, 2016 totaling $1,531,904 for
at least the next 12 months. Our actual needs will depend on
numerous factors, including timing of introducing our products to
the marketplace, our ability to attract additional international
distributors for our products and our ability to in-license in
non-partnered territories and/or develop new product candidates.
Although no assurances can be given,
we currently intend to raise additional capital
through the sale of debt or equity securities to provide additional
working capital, pay for further expansion and development of our
business, and to meet current obligations. Such capital may not be
available to us when we need it or on terms acceptable to us, if at
all.
Fair Value Measurement
Our financial instruments are cash, accounts receivable, accounts
payable, accrued liabilities, derivative liabilities, contingent
consideration and debt. The recorded values of cash, accounts
receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The fair values
of the warrant derivative liabilities and embedded conversion
feature derivative liabilities are based upon the Black Scholes
Option Pricing Model (“Black-Scholes”) and the
Path-Dependent Monte Carlo Simulation Model calculations,
respectively, and are a Level 3 measurement (see Note 8). The fair
value of the contingent acquisition consideration is based upon the
present value of expected future payments under the terms of the
agreements and is a Level 3 measurement (see Note
3). Based on borrowing rates currently available to us,
the carrying values of the notes payable approximate their
respective fair values.
We follow a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1) and
the lowest priority to measurements involving significant
unobservable inputs (Level 3). The three levels of the fair
value hierarchy are as follows:
●
Level 1 measurements are quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access at the measurement date.
●
Level 2 measurements are inputs other than quoted prices included
in Level 1 that are observable either directly or
indirectly.
●
Level 3 measurements are unobservable inputs.
Concentration of Credit Risk, Major Customers and Segment
Information
Financial instruments that potentially subject us to significant
concentrations of credit risk consist primarily of cash and
accounts receivable. Cash held with financial institutions may
exceed the amount of insurance provided by the Federal Deposit
Insurance Corporation on such deposits. Accounts receivable
consist primarily of sales of Zestra® to U.S. based retailers
and Ex-U.S. partners. We also require a percentage of payment in
advance for product orders with our larger partners. We perform
ongoing credit evaluations of our customers and generally do not
require collateral.
Revenues consist primarily of product sales and licensing rights to
market and commercialize our products. We have no
customers that accounted for 10% or more of our total net revenue
during the three and nine months ended September 30, 2017 and 2016
and three customers accounted for 76% and 62% of total net accounts
receivable as of September 30, 2017 and December 31, 2016,
respectively.
Over 95% of our sales are currently within the United States and
Canada. The balance of the sales are to various other countries,
none of which is 10% or greater.
We
operate our business on the basis of a single reportable segment,
which is the business of delivering over-the-counter medicines and
consumer care products for men’s and women’s health and
respiratory diseases. Our chief operating decision-maker is the
Chief Executive Officer, who evaluates us as a single operating
segment.
Revenue Recognition and Deferred Revenue
We
generate revenue from product sales and the licensing of the rights
to market and commercialize our products.
We
recognize revenue in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification
(“ASC”) 605,
Revenue
Recognition
. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales
: We ship products directly to consumers
pursuant to phone or online orders and to our wholesale and retail
customers pursuant to purchase agreements or sales
orders. Revenue from sales transactions where the buyer has
the right to return the product is recognized at the time of sale
only if (1) the seller’s price to the buyer is
substantially fixed or determinable at the date of sale,
(2) the buyer has paid the seller, or the buyer is obligated
to pay the seller and the obligation is not contingent on resale of
the product, (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction
or damage of the product, (4) the buyer acquiring the product
for resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant obligations
for future performance to directly bring about resale of the
product by the buyer and (6) the amount of future returns can
be reasonably estimated.
License Revenue
: The license agreements we enter into
normally generate three separate components of revenue: 1) an
initial payment due on signing or when certain specific conditions
are met; 2) royalties that are earned on an ongoing basis as
sales are made or a pre-agreed transfer price and 3) sales-based
milestone payments that are earned when cumulative sales reach
certain levels. Revenue from the initial payments or licensing fee
is recognized when all required conditions are met. Royalties are
recognized as earned based on the licensee’s sales. Revenue
from the sales-based milestone payments is recognized when the
cumulative revenue levels are reached. The achievement of the
sales-based milestone underlying the payment to be received
predominantly relates to the licensee’s performance of future
commercial activities. FASB ASC 605-28,
Milestone Method
, (“ASC
605-28”) is not used by us as these milestones do not meet
the definition of a milestone under ASC 605-28 as they are
sales-based and similar to a royalty and the achievement of the
sales levels is neither based, in whole or in part, on our
performance, a specific outcome resulting from our performance, nor
is it a research or development deliverable.
Sales Allowances
We accrue for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
Our product returns accrual is primarily based on estimates of
future product returns over the period customers have a right of
return, which is in turn based in part on estimates of the
remaining shelf-life of products when sold to customers. Future
product returns are estimated primarily based on historical sales
and return rates. We estimate our volume rebates and promotional
discounts accrual based on its estimates of the level of inventory
of our products in the distribution channel that remain subject to
these discounts. The estimate of the level of products in the
distribution channel is based primarily on data provided by our
customers.
In all cases, judgment is required in estimating these reserves.
Actual claims for rebates and returns and promotional discounts
could be materially different from the estimates.
We provide a customer satisfaction warranty on all of our products
to customers for a specified amount of time after product
delivery. Estimated return costs are based on historical
experience and estimated and recorded when the related sales are
recognized. Any additional costs are recorded when incurred or
when they can reasonably be estimated.
The estimated reserve for sales returns and allowances, which is
included in accounts payable and accrued expense, was approximately
$44,000 and $61,000 at September 30, 2017 and December 31, 2016,
respectively.
Advertising Expense
Advertising costs, which primarily includes print and online media
advertisements, are expensed as incurred and are included in sales
and marketing expense in the accompanying condensed consolidated
statements of operations. Advertising costs were approximately
$1,350,000 and $1,424,000 and $3,961,000 and $1,604,000 for the
three and nine months ended September 30, 2017 and 2016,
respectively.
Debt Extinguishment
Any gain or loss associated with debt extinguishment is recorded in
the period in which the debt is considered extinguished. Third
party fees incurred in connection with a debt restructuring
accounted for as an extinguishment are capitalized. Fees paid to
third parties associated with a term debt restructuring accounted
for as a modification are expensed as incurred. Third party and
creditor fees incurred in connection with a modification to a line
of credit or revolving debt arrangements are considered to be
associated with the new arrangement and are
capitalized.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding
and
vested but deferred RSUs during the period presented
. Diluted net loss per share is computed
using the weighted average number of common shares
outstanding
and vested but deferred RSUs
during the periods plus the effect of dilutive
securities outstanding during the periods. For the three and
nine months ended September 30, 2017 and 2016, basic net loss per
share is the same as diluted net loss per share as a result of our
common stock equivalents being anti-dilutive. See Note 7
for more details.
Recent Accounting Pronouncements
In July
2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features.
The amendments in Part I of this ASU
change the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entity’s
own stock. As a result, a freestanding equity-linked financial
instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result
of the existence of a down round feature. For freestanding equity
classified financial instruments, the amendments require entities
that present earnings per share to recognize the effect of the down
round feature when it is triggered. That effect is treated as a
dividend and as a reduction of income available to common
shareholders in basic earnings per share.
For public business entities, the amendments are
effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years.
Early
adoption is permitted in any interim or annual period, with any
adjustments reflected as of the beginning of the fiscal year of
adoption.
The amendments should
be applied retrospectively to outstanding financial instruments
with down round features by means of either a cumulative-effect
adjustment to the consolidated statement of financial position as
of the beginning of the first fiscal year and interim period of
adoption or retrospectively to each prior reporting period
presented in accordance with the guidance on accounting
changes.
We are currently in the process of evaluating the
effect this standard will have on our derivative liabilities and
the impact on our condensed consolidated financial position and
results of operation.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230) –
Classification of Certain Cash Receipts and Cash Payments
.
This ASU provides clarification regarding how certain cash receipts
and cash payments are presented and classified in the statement of
cash flows. This ASU addresses eight specific cash flow issues with
the objective of reducing the existing diversity in practice. The
issues addressed in this ASU that will affect us is classifying
debt prepayments or debt extinguishment costs and contingent
consideration payments made after a business combination. This
update is effective for annual and interim periods beginning after
December 15, 2017, and interim periods within that reporting period
and is to be applied using a retrospective transition method to
each period presented. Early adoption is permitted. We have elected
to early adopt ASU 2016-15 as of January 1, 2017 and, as a result,
the prepayment penalty of $127,247 in connection with the
extinguishment of the 2016 Notes (see Note 5) in March 2017 is
classified as a financing cash outflow in the accompanying
condensed consolidated statement of cash flows for the nine months
ended September 30, 2017. The adoption of this ASU did not have a
material impact on our condensed consolidated financial position,
results of operations and related disclosures and had no other
impact to the accompanying condensed consolidated statement of cash
flows for the nine months ended September 30, 2017 and
2016.
In March 2016, the FASB issued ASU No.
2016-09,
Improvements
to Employee Share-Based Payment Accounting
, which amends ASC
Topic 718,
Compensation
- Stock Compensation
.
The ASU
involves several aspects of the accounting for share-based payment
transactions, including the income tax consequences, forfeitures,
classification of awards as either equity or liabilities and
classification on the statement of cash flows. Certain of these
changes are required to be applied retrospectively, while other
changes are required to be applied prospectively.
ASU 2016-09 is
effective for public business entities for annual reporting periods
beginning after December 15, 2016, and interim periods within that
reporting period. Early adoption will be permitted in any interim
or annual period, with any adjustments reflected as of the
beginning of the fiscal year of adoption. As a result of the
adoption of this ASU as of January 1, 2017, we have made an
entity-wide accounting policy election to account for forfeitures
when they occur. There is no cumulative-effect adjustment as a
result of the adoption of this ASU as our estimated forfeiture rate
prior to adoption of this ASU was 0%. The adoption of this ASU did
not have a material impact on our condensed consolidated financial
statements and related disclosures.
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. In August 2015, the FASB issued ASU 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. In March 2016, the FASB issued ASU 2016-08 which
clarifies the implementation guidance on principal versus agent
considerations. In April 2016, the FASB issued ASU 2016-10 which
clarifies the principle for determining whether a good or service
is “separately identifiable” and, therefore, should be
accounted for separately. In May 2016 the FASB issued ASU 2016-12
which clarifies the objective of the collectability criterion. A
separate update issued in May 2016 clarifies the accounting for
shipping and handling fees and costs as well as accounting for
consideration given by a vendor to a customer. The guidance
includes indicators to assist an entity in determining whether it
controls a specified good or service before it is transferred to
the customers.
We plan
to adopt the standard on January 1, 2018. We currently believe that
once we do adopt this standard, we will use the modified
retrospective approach. Under the modified approach, an entity
recognizes “the cumulative effect of initially applying the
ASU as an adjustment to the opening balance of retained earnings of
the annual reporting period that includes the date of initial
application” (revenue in periods presented in the
consolidated financial statements before that date is reported
under guidance in effect before the change). Using this approach,
an entity applies the guidance in the ASU to existing contracts
(those for which the entity has remaining performance obligations)
as of, and new contracts after, the date of initial application.
The ASU is not applied to contracts that were completed before the
effective date (i.e., an entity has no remaining performance
obligations to fulfill). Entities that elect the modified approach
must disclose an explanation of the impact of adopting the ASU,
including the consolidated financial statement line items and
respective amounts directly affected by the standard’s
application.
While
we are still currently assessing the impact of the new standard,
our revenue is primarily generated from the sale of finished
product to customers. Those sales predominantly contain a single
delivery element and revenue is recognized at a single point in
time when ownership, risks and rewards transfer. The timing of
revenue recognition for these product sales are not materially
impacted by the new standard. However, we are utilizing a
comprehensive approach to assess the impact of the guidance on our
current contract portfolio by reviewing our current accounting
policies and practices to identify potential differences that would
result from applying the new requirements to our revenue contracts,
including evaluation of performance obligations in the contract,
estimating the amount of variable consideration to include in the
transaction price, allocating the transaction price to each
separate performance obligation and accounting treatment of costs
to obtain and fulfill contracts. We continue to make significant
progress on the potential impact on our accounting policies and
internal control processes including system readiness. In addition,
we will update certain disclosures, as applicable, included in our
filings pursuant to the Securities Exchange Act of 1934, as
amended, to meet the requirements of the new guidance.
In
February 2016, the FASB issued ASU 2016-02,
Leases
. The standard requires lessees
to recognize lease assets and lease liabilities on the consolidated
balance sheet and requires expanded disclosures about leasing
arrangements. We plan to adopt the standard on January 1, 2019. We
are currently assessing the impact that the new standard will have
on our consolidated financial statements, which will consist
primarily of a balance sheet gross up of our operating leases to
show equal and offsetting lease assets and lease
liabilities.
NOTE 2 – LICENSE AGREEMENTS
CRI In-License Agreement
On April 19, 2013, the Company and
Centric Research
Institute (“CRI”)
entered
into an asset purchase agreement (the “CRI Asset Purchase
Agreement”) pursuant to which we
acquired:
●
All of CRI’s rights in past, present and future Sensum+®
product formulations and presentations, and
●
An exclusive, perpetual license to commercialize
Sensum+® products in all territories except for the United
States.
On June
9, 2016, the Company and CRI amended the CRI Asset Purchase
Agreement (“Amended CRI Asset Purchase Agreement”) to
provide us commercialization rights for Sensum+® in the U.S.
through our Beyond Human® marketing platform through December
31, 2016. On January 1, 2017, the Company and CRI agreed to extend
the term of the Amended CRI Asset Purchase Agreement to December
31, 2017. In connection with the extension, we issued restricted
shares of common stock totaling 225,000 to CRI as a prepayment of
royalties due on net profit of Sensum+® in the U.S. in 2017.
The royalty prepayment amount is $44,662 as the number of shares of
common stock issued was based on the closing price of our common
stock on December 30, 2016. If CRI does not earn royalties larger
than the prepaid amount of $44,662 in 2017, the term of the Amended
CRI Asset Purchase Agreement is automatically extended one
additional year to December 31, 2018.
The CRI
Asset Purchase Agreement also requires us to pay to CRI up to $7.0
million in cash milestone payments based on first achievement of
annual Ex-U.S. net sales targets plus a royalty based on annual
Ex-U.S. net sales. The obligation for these payments expires
on April 19, 2023 or the expiration of the last of CRI’s
patent claims covering the product or its use outside the U.S.,
whichever is sooner. No sales milestone obligations have been
met and no royalties are owed to CRI under this agreement during
the three and nine months ended September 30, 2017 and
2016.
In
consideration for the Amended CRI Asset Purchase Agreement, we are
required to pay CRI a percentage of the monthly net profit, as
defined in the agreement, from our sales of Sensum+® in the
U.S. through our Beyond Human® marketing platform. During the
three and nine months ended September 30, 2017 and 2016, no amounts
have been earned by CRI under the Amended CRI Asset Purchase
Agreement.
Densmore Pharmaceutical International Agreement
On April 24, 2017, we entered into an exclusive ten-year license
agreement with Densmore Pharmaceutical International, a Monaco
company (“Densmore”), under which we granted to
Densmore an exclusive license to market and sell our topical
treatment for Female Sexual Interest/Arousal Disorder
(“FSI/AD”) Zestra® in France and Belgium.
Under the agreement, we received a non-refundable upfront payment
of $7,500 which was recognized as revenue in the accompanying
condensed consolidated statement of operations for the nine months
ended September 30, 2017. We believe the amount of the upfront
payment received is reasonable compared to the amounts to be
received upon obtainment of future minimum order quantities.
Densmore is obligated to order certain
minimum annual quantities of Zestra® at a pre-negotiated
transfer price per unit during the term of the agreement.
During the three and nine months ended September 30, 2017, we
recognized revenue for the sale of products related to this
agreement of $100,341.
In July
2017, we entered into an amendment to the agreement with Densmore
to expand the product territory to Singapore and
Vietnam.
Luminarie Pty Ltd. Agreement
On May 16, 2017, we entered into an exclusive ten-year license
agreement with Luminarie Pty Ltd., a Australia company
(“Luminarie”), under which we granted to Luminarie an
exclusive license to market and sell our topical treatment for
FSI/AD Zestra® and Zestra Glide® in Australia, New
Zealand and the Philippines.
Luminarie received approval for
Zestra® as a Class I Medical Device in Australia in July 2017
and New Zealand in September 2017.
Luminarie is obligated to order certain minimum
annual quantities of Zestra® and Zestra Glide® at a
pre-negotiated transfer price per unit during the term of the
agreement.
During the three and nine months ended September
30, 2017, we did not recognize any revenue for the sale of products
related to this agreement.
LI USA Co. Agreement
On November 9, 2016, we entered into an exclusive ten-year license
agreement with J&H Co. LTD, a South Korea company
(“J&H”), under which we granted to J&H an
exclusive license to market and sell our topical treatment for
Female Sexual Interest/Arousal Disorder (“FSI/AD”)
Zestra® and Zestra Glide® in South Korea. Under the
agreement, J&H is obligated to order minimum annual quantities
of Zestra® and Zestra Glide® totaling $2.0 million at a
pre-negotiated transfer price per unit. The minimum annual order
quantities by J&H are to be made over a 12-month period
following the approval of the product by local authorities and
beginning upon the completion of the first shipment of
product.
Our partner recently received the approval to
import the product and placed its first order in March 2017. During
the three and nine months ended September 30, 2017, we recognized
$0 and $60,000 in revenue for the sale of products related to this
agreement.
On
October 26, 2017, the exclusive license and distributor rights
under this agreement were assigned to LI USA Co., a U.S. company
(“LI USA”), from J&H and LI USA is now the
distributor under this agreement. LI USA is controlled by the same
original owners as J&H. All terms and conditions of the
original agreement remain intact.
Sothema Laboratories Agreement
On
September 23, 2014, we entered into an exclusive license agreement
with Sothema Laboratories, SARL, a Moroccan publicly traded company
(“Sothema”), under which we granted to Sothema an
exclusive license to market and sell Zestra
®
(based on the latest Canadian
approval of the indication) and Zestra Glide® in several
Middle Eastern and African countries (collectively the
“Territory”).
Under
the agreement, we received an upfront payment of $200,000 and are
eligible to receive additional consideration upon and subject to
the achievement of sales milestones based on cumulative supplied
units of the licensed products in the Territory, plus a
pre-negotiated transfer price per unit. We believe the amount of
the upfront payment received is reasonable compared to the amounts
to be received upon obtainment of future sales-based
milestones.
As the
sales-based milestones do not meet the definition of a milestone
under ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative supplied units’ volume is met.
During the three and nine months ended September 30, 2017 and 2016,
we recognized $0 and $666 and $0 and $12,229, respectively, in net
revenue for the sales of products related to this agreement, and no
revenue was recognized for the sales-based milestones of the
agreement.
Orimed Pharma Agreement
On
September 18, 2014, we entered into a twenty-year exclusive license
agreement with Orimed Pharma (“Orimed”), an affiliate
of JAMP Pharma, under which we granted to Orimed an exclusive
license to market and sell in Canada Zestra®, Zestra
Glide®, our topical treatment for premature ejaculation
EjectDelay® and our product Sensum+® to increase penile
sensitivity.
Under
the agreement, we received an upfront payment of $100,000 and are
eligible to receive additional consideration upon and subject to
the achievement of sales milestones based on cumulative gross sales
in Canada by Orimed plus double-digit tiered royalties based on
Orimed’s cumulative net sales in Canada. We believe the
amount of the upfront payment received is reasonable compared to
the amounts to be received upon obtainment of future sales-based
milestones.
As the
sales-based milestones do not meet the definition of a milestone
under ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative gross sales volume is met. We will
recognize the revenue from the royalty payments on a quarterly
basis when the cumulative net sales have been
met. During the three and nine months ended September
30, 2017 and 2016, under this agreement we recognized $11,230 and
$40,233 and $32,143 and $49,376, respectively, in net revenue for
the sales of products and no revenue was recognized for the
sales-based milestones.
NOTE 3 – BUSINESS AND ASSET ACQUISITIONS
Acquisition of Novalere in 2015
On February 5, 2015 (the “Closing Date”), Innovus,
Innovus Pharma Acquisition Corporation, a Delaware corporation and
a wholly-owned subsidiary of Innovus (“Merger Subsidiary
I”), Innovus Pharma Acquisition Corporation II, a Delaware
corporation and a wholly-owned subsidiary of Innovus (“Merger
Subsidiary II”), Novalere FP, Inc., a Delaware corporation
(“Novalere FP”) and Novalere Holdings, LLC, a Delaware
limited liability company (“Novalere Holdings”), as
representative of the shareholders of Novalere (the “Novalere
Stockholders”), entered into an Agreement and Plan of Merger
(the “Merger Agreement”), pursuant to which Merger
Subsidiary I merged into Novalere and then Novalere merged with and
into Merger Subsidiary II (the “Merger”), with Merger
Subsidiary II surviving as a wholly-owned subsidiary of Innovus.
Pursuant to the articles of merger effectuating the Merger, Merger
Subsidiary II changed its name to Novalere, Inc.
With the Merger, we acquired the worldwide rights to market and
sell the FlutiCare™ brand (fluticasone propionate nasal
spray) and the related third-party manufacturing agreement for the
manufacturing of FlutiCare
™
(“Acquisition Manufacturer”) from
Novalere FP.
The OTC Abbreviated New Drug Application
(“ANDA”) for fluticasone propionate nasal spray was
filed at the end of 2014 by our third-party manufacturer and
partner, who is currently selling the prescription version of the
drug, with the FDA and the OTC ANDA is still subject to FDA
approval. An ANDA is an application for a U.S. generic drug
approval for an existing licensed medication or approved drug. A
prescription ANDA (“RX ANDA”) is for a generic version
of a prescription pharmaceutical and an OTC ANDA is for a generic
version of an OTC pharmaceutical.
Due to the delay in approval of the Acquisition
Manufacturer’s OTC ANDA by the FDA, i
n May 2017, we
announced a commercial relationship with a different third-party
manufacturer (West-Ward Pharmaceuticals International Limited or
“
WWPIL”)
who has an
FDA approved OTC ANDA for fluticasone propionate nasal spray under
which they have agreed to manufacture our FlutiCare™ OTC
product for sale in the U.S. (see Note 9).
We currently still anticipate that the OTC ANDA
filed in November 2014 by the Acquisition Manufacturer with
the FDA may be approved in 2017. As we hold the worldwide rights to
market and sell FlutiCare
™
under the manufacturing agreement with the
Acquisition Manufacturer, we believe the agreement with the
Acquisition Manufacturer will still provide us with the opportunity
to market and sell FlutiCare
™
ex-U.S. and, if the OTC ANDA is approved by the
FDA, a second source of supply within the U.S., if ever
needed.
The Novalere Stockholders are entitled to receive, if and when
earned, earn-out payments (the “Earn-Out Payments”).
For every $5.0 million in Net Revenue (as defined in the Merger
Agreement) realized from the sales of FlutiCare™ through the
manufacturing agreement with the Acquisition Manufacturer, the
Novalere Stockholders will be entitled to receive, on a pro rata
basis, $500,000, subject to cumulative maximum Earn-Out Payments of
$2.5 million. The Novalere Stockholders are only entitled to the
Earn-Out Payments from the Acquisition Manufacturer’s OTC
ANDA under review by the FDA and have no earn-out rights to the
sales of FlutiCare™ supplied by WWPIL under the commercial
agreement entered into in May 2017.
During the three and nine months ended September 30, 2017, there
was a decrease in the estimated fair value of the remaining 138,859
ANDA consideration shares totaling $2,400 and $22,107 which is
included in fair value adjustment for contingent consideration in
the accompanying condensed consolidated statement of
operations.
The remaining 138,859 ANDA consideration shares
not issuable yet will be issued upon FDA approval of the ANDA filed
by the Acquisition Manufacturer and the estimated fair value of
such remaining shares of $10,109 is included in contingent
consideration in the accompanying condensed consolidated balance
sheet at September 30, 2017.
There was
no change to the estimated fair value of the future earn-out
payments of $1,248,124 during the three and nine months ended
September 30, 2017 and there was no change to the estimated fair
value of the contingent consideration during the three and nine
months ended September 30, 2016.
Purchase of Semprae Laboratories, Inc. in 2013
On December 24, 2013 (the “Semprae Closing Date”), we,
through Merger Sub, obtained 100% of the outstanding shares of
Semprae in exchange for the issuance of 3,201,776 shares of our
common stock, which shares represented 15% of our total issued and
outstanding shares as of the close of business on the Closing Date,
whereupon Merger Sub was renamed Semprae Laboratories, Inc. We
agreed to pay the former shareholders an annual royalty
(“Royalty”) equal to 5% of the net sales from
Zestra® and Zestra Glide® and any second generation
products derived primarily therefrom (“Target
Products”) up until the time that a generic version of such
Target Product is introduced worldwide by a third
party.
The agreement to pay the annual Royalty resulted in the recognition
of a contingent consideration, which is recognized at the inception
of the transaction, and subsequent changes to estimate of the
amounts of contingent consideration to be paid will be recognized
as charges or credits in the consolidated statement of operations.
The fair value of the contingent consideration is based on
preliminary cash flow projections, growth in expected product sales
and other assumptions. During the three and nine months ended
September 30, 2017 and 2016, no amounts have been paid under this
arrangement. The fair value of the expected royalties to
be paid was decreased by $66,905 and $0 and $173,352 and $0 during
the three and nine months ended September 30, 2017 and 2016,
respectively, which is included in the fair value adjustment for
contingent consideration in the accompanying condensed consolidated
statements of operations. The fair value of the contingent
consideration was $232,225 and $405,577 at September 30, 2017 and
December 31, 2016, respectively, based on the new estimated fair
value of the consideration.
NOTE 4 – ASSETS AND LIABILITIES
Inventories
Inventories consist of the following:
|
|
|
|
|
|
Raw
materials and supplies
|
$
194,895
|
$
85,816
|
Work
in process
|
62,786
|
48,530
|
Finished
goods
|
382,374
|
465,510
|
Total
|
$
640,055
|
$
599,856
|
Intangible Assets
Amortizable intangible assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
Patent & Trademarks
|
$
417,597
|
(116,408
)
|
$
301,189
|
7 – 15
|
Customer
Contracts
|
611,119
|
(234,262
)
|
376,857
|
10
|
Sensum+®
License (from CRI)
|
234,545
|
(101,600
)
|
132,945
|
10
|
Vesele®
Trademark
|
25,287
|
(9,418
)
|
15,869
|
8
|
Beyond
Human® Website and Trade Name
|
222,062
|
(62,360
)
|
159,702
|
5 – 10
|
Novalere
Manufacturing Contract
|
4,681,000
|
(1,238,515
)
|
3,442,485
|
10
|
Other Beyond Human® Intangible Assets
|
4,730
|
(3,205
)
|
1,525
|
1 – 3
|
Total
|
$
6,196,340
|
$
(1,765,768
)
|
$
4,430,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
417,597
|
$
(91,201
)
|
$
326,396
|
7 – 15
|
Customer
Contracts
|
611,119
|
(188,428
)
|
422,691
|
10
|
Sensum+®
License (from CRI)
|
234,545
|
(84,009
)
|
150,536
|
10
|
Vesele®
Trademark
|
25,287
|
(7,047
)
|
18,240
|
8
|
Beyond
Human® Website and Trade Name
|
222,062
|
(32,821
)
|
189,241
|
5 – 10
|
Novalere
Manufacturing Contract
|
4,681,000
|
(887,440
)
|
3,793,560
|
10
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(2,147
)
|
2,583
|
1 – 3
|
Total
|
$
6,196,340
|
$
(1,293,093
)
|
$
4,903,247
|
|
Amortization expense for the three and nine months ended September
30, 2017 and 2016 was $157,477 and $178,082 and $472,675 and
$513,767, respectively. The following table summarizes the
approximate expected future amortization expense as of September
30, 2017 for intangible assets:
Remainder
of 2017
|
$
157,000
|
2018
|
630,000
|
2019
|
629,000
|
2020
|
629,000
|
2021
|
600,000
|
2022
|
592,000
|
Thereafter
|
1,194,000
|
|
$
4,431,000
|
Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the
following:
|
|
|
|
|
|
Prepaid
insurance
|
$
75,522
|
$
69,976
|
Prepaid
inventory
|
80,208
|
20,750
|
Merchant
net settlement reserve receivable
|
-
|
221,243
|
Prepaid
consulting and other expense
|
64,825
|
21,094
|
Prepaid
CRI royalties (see Note 2)
|
44,662
|
-
|
Prepaid
consulting and other service stock-based compensation expense (see
Note 7)
|
-
|
530,601
|
Total
|
$
265,217
|
$
863,664
|
Accounts Payable and Accrued Expense
Accounts payable and accrued expense consist of the
following:
|
|
|
|
|
|
Accounts
payable
|
$
1,105,875
|
$
647,083
|
Accrued
credit card balances
|
43,614
|
31,654
|
Accrued
royalties
|
129,022
|
73,675
|
Sales
returns and allowances
|
44,051
|
60,853
|
Accrual
for stock to be issued to consultants (see Note 7)
|
-
|
360,000
|
Accrued
other
|
33,495
|
36,785
|
Total
|
$
1,356,057
|
$
1,210,050
|
NOTE 5 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Short-Term Loan Payable
The short-term loan payable consists of the financing of our
director and officer insurance premium with a third party totaling
$64,789. Under the financing agreement we are required
to make nine monthly installment payments of $7,371. The balance
outstanding as of September 30, 2017 is $57,590.
Notes Payable
The following table summarizes the outstanding notes payable at
September 30, 2017 and December 31, 2016:
|
|
|
Notes
payable:
|
|
|
February
2016 Note Payable
|
$
133,997
|
$
347,998
|
December
2016 and September 2017 Notes Payable
|
660,000
|
550,000
|
Total
notes payable
|
793,997
|
897,998
|
Less:
Debt discount
|
(71,531
)
|
(216,871
)
|
Carrying
value
|
722,466
|
681,127
|
Less:
Current portion
|
(722,466
)
|
(626,610
)
|
Notes
payable, net of current portion
|
$
-
|
$
54,517
|
The following table summarizes the future minimum payments as of
September 30, 2017 for the notes payable:
Remainder
of 2017
|
$
574,012
|
2018
|
219,985
|
|
$
793,997
|
February 2016 Note Payable
On
February 24, 2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered into an agreement in which SBI loaned
us gross proceeds of $550,000 pursuant to a purchase agreement, 20%
secured promissory note and security agreement (“February
2016 Note Payable”), all dated February 19, 2016
(collectively, the “Finance Agreements”), to purchase
substantially all of the assets of Beyond Human®. We began to
pay principal and interest on the February 2016 Note Payable on a
monthly basis beginning on March 19, 2016 for a period of 24 months
and the monthly mandatory principal and interest payment amount
thereunder is $28,209. The monthly amount shall be paid by us
through a deposit account control agreement with a third-party bank
in which SBI shall be permitted to take the monthly mandatory
payment amount from all revenue received by us from the Beyond
Human® assets in the transaction. The maturity date
for the February 2016 Note Payable is February 19,
2018.
The
February 2016 Note Payable is secured by SBI through a first
priority secured interest in all of the Beyond Human® assets
acquired by us in the transaction including all revenue received by
us from these assets.
December 2016, January 2017 and September 2017 Notes
Payable
On
December 5, 2016, January 19, 2017 and September 20, 2017, we
entered into a securities purchase agreement with three unrelated
third-party investors in which the investors loaned us gross
proceeds of $500,000 in December 2016, $150,000 in January 2017 and
$150,000 in September 2017 pursuant to a 5% promissory note
(“2016 and 2017 Notes
Payable”).
The notes
have an Original Issue Discount (“OID”) of $80,000 and
require payment of $880,000 in principal upon maturity.
The
2016 and 2017 Notes Payable bear interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on October 4, 2017, November 18, 2017 and May 20, 2018 for those
received in December 2016, January 2017 and September 2017,
respectively.
In
connection with the 2016 and 2017 Notes Payable, we issued the
investors restricted shares of common stock totaling 1,111,111 in
December 2016, 330,000 in January 2017 and 895,000 in September
2017. The fair value of the restricted shares of common
stock issued was based on the market price of our common stock on
the date of issuance of the 2016 and 2017 Notes Payable (see Note
7). The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value and the OID resulted in us recording a debt discount of
$182,203 in December 2016, $44,217 in January 2017 and $55,169 in
September 2017. The discount is being amortized to interest expense
using the effective interest method over the term of the 2016 and
2017 Notes Payable.
In
August and September 2017, we entered into a securities exchange
agreement with certain of the 2016 and 2017 Notes Payable holders.
In connection with the securities exchange agreements, we issued a
total of 2,840,316 shares of common stock in exchange for the
settlement of principal and interest due under the 2016 and 2017
Notes Payable totaling $227,225. The fair value of the
shares of common stock issued was based on the market price of our
common stock on the date of the securities exchange agreements (see
Note 7). Due to the settlement of the principal and interest
balance of $227,225 into shares of common stock, the transaction
was recorded as a debt extinguishment and the fair value of the
shares of common stock issued in excess of the settled principal
and interest balance totaling $72,166 and the remaining unamortized
debt discount as of the date of settlement of $17,175 were recorded
as a loss on debt extinguishment in the accompanying condensed
consolidated statement of operations for the three and nine months
ended September 30, 2017.
In
October 2017, certain of the 2016 and 2017 Notes Payable holders
with outstanding principal balances totaling $495,000 elected to
settle their outstanding principal and interest balances in
exchange for shares of common stock (see Note 10).
Interest Expense
We
recognized interest expense on notes payable of $17,750 and $42,652
and $64,463 and $131,567 for the three and nine months ended
September 30, 2017 and 2016, respectively. Amortization
of the debt discount to interest expense during the three and nine
months ended September 30, 2017 and 2016 totaled $86,250 and $938
and $257,550 and $96,309, respectively.
Convertible Debentures
2016 Financing
The following table summarizes the outstanding 2016 convertible
debentures at September 30, 2017 and December 31,
2016:
|
|
|
|
|
|
Convertible
debentures
|
$
-
|
$
1,559,922
|
Less:
Debt discount
|
-
|
(845,730
)
|
Carrying
value
|
-
|
714,192
|
Less:
Current portion
|
-
|
(714,192
)
|
Convertible
debentures, net of current portion
|
$
-
|
$
-
|
In the
second and third quarter of 2016, we entered into Securities
Purchase Agreements with eight accredited investors (the
“Investors”), pursuant to which we received aggregate
gross proceeds of $3.0 million (net of OID) pursuant to which we
sold:
Nine
convertible promissory notes of the Company totaling $3,303,889
(each a “2016 Note” and collectively the “2016
Notes”) (the 2016 Notes were sold at a 10% OID and we
received an aggregate total of $2,657,500 in funds thereunder after
debt issuance costs of $342,500). The 2016 Notes and accrued
interest were convertible into shares of our common stock at a
conversion price of $0.25 per share, with certain adjustment
provisions. The maturity date of the 2016 Notes issued on June 30,
2016 and July 15, 2016 was July 30, 2017 and the maturity date of
the 2016 Notes issued on July 25, 2016 was August 25, 2017. The
2016 Notes bore interest on the unpaid principal amount at the rate
of 5% per annum from the date of issuance until the same became due
and payable, whether at maturity or upon acceleration or by
prepayment or otherwise. We had the ability to prepay the 2016
Notes at any time on the terms set forth in the 2016 Notes at the
rate of 110% of the then outstanding balance of the 2016
Notes.
The
fair value of the restricted shares of common stock issued to
Investors in 2016 was based on the market price of our common stock
on the date of issuance of the 2016 Notes. The
allocation of the proceeds to the warrants and restricted shares of
common stock based on their relative fair values resulted in us
recording a debt discount. We also determined that the embedded
conversion features in the 2016 Notes were a derivative instrument
which was required to be bifurcated from the debt host contract and
recorded at fair value as a derivative liability. The
fair value of the embedded conversion features was determined using
a Path-Dependent Monte Carlo Simulation Model (see Note 8 for
assumptions used to calculate fair value). The initial fair value
of the embedded conversion features was recorded as a debt discount
with the amount in excess of the proceeds allocated to the debt,
after the allocation of debt proceeds to the debt issuance costs,
being immediately expensed and recorded as interest expense in
2016.
During
the nine months ended September 30, 2017, certain of the 2016 Notes
holders elected to convert principal and interest outstanding of
$350,610 into 1,402,440 shares of common stock at a conversion
price of $0.25 per share (see Note 7). As a result of
the conversion of the principal and interest balance into shares of
common stock, the fair value of the embedded conversion feature
derivative liabilities of $203,630 on the date of conversion was
reclassified to additional paid-in capital (see Note 8) and the
amortization of the debt discount was accelerated for the amount
converted and recorded to interest expense during the nine months
ended September 30, 2017.
As a
result of the completion of a public equity offering in March 2017
(see Note 7), we were required to prepay the outstanding principal
and accrued interest balance of the 2016 Notes with the cash
proceeds received from such offering. The outstanding principal and
accrued interest balance of $1,272,469 was repaid in March 2017, as
well as, a 10% prepayment penalty of $127,247. Due to the
acceleration of repayment of the 2016 Notes as a result of the
public equity offering, the transaction was recorded as a debt
extinguishment and the 10% prepayment penalty of $127,247 and the
remaining unamortized debt discount as of the date of repayment of
$415,682 were recorded as a loss on debt extinguishment in the
accompanying condensed consolidated statement of operations for the
nine months ended September 30, 2017. The repayment of the
outstanding principal and accrued interest balance of the 2016
Notes resulted in the extinguishment of the embedded conversion
feature derivative liability and thus the fair value as of the date
of repayment of $238,101 was recorded as a reduction to the loss on
debt extinguishment in the accompanying condensed consolidated
statement of operations for the nine months ended September 30,
2017.
Interest Expense
We
recognized interest expense on the 2016 Notes for the nine months
ended September 30, 2017 of $19,544. The debt discount recorded for
the 2016 Notes were being amortized as interest expense over the
term of the 2016 Notes using the effective interest
method. Total amortization of the debt discount on the
2016 Notes to interest expense for the nine months ended September
30, 2017 was $430,048.
NOTE 6 – RELATED PARTY TRANSACTIONS
Accrued Compensation – Related Party
Accrued compensation includes accruals for employee wages, vacation
pay and target-based bonuses. The components of accrued
compensation as of September 30, 2017 and December 31, 2016 are as
follows:
|
|
|
Wages
|
$
1,431,686
|
$
1,455,886
|
Vacation
|
323,163
|
261,325
|
Bonus
|
843,262
|
449,038
|
Payroll
taxes on the above
|
134,980
|
133,344
|
Total
|
2,733,091
|
2,299,593
|
Classified
as long-term
|
(1,531,904
)
|
(1,531,904
)
|
Accrued
compensation
|
$
1,201,187
|
$
767,689
|
Accrued employee wages at September 30, 2017 and December 31, 2016
are entirely related to wages owed to our President and Chief
Executive Officer. Under the terms of his employment
agreement, wages are to be accrued but no payment made for, so long
as payment of such salary would jeopardize our ability to continue
as a going concern. The President and Chief Executive Officer
started to receive payment of salary in July 2016.
Our
President and Chief Executive Officer has agreed to not receive
payment on his remaining accrued wages and related payroll tax
amounts within the next 12 months and thus the remaining balance is
classified as a long-term liability. In April 2017, our Board of
Directors approved for payment the accrued fiscal year 2016 bonus
of $33,442 to our former Executive Vice President and Chief
Financial Officer in accordance with his employment agreement and
the bonus amount was paid upon his departure. The fiscal year 2016
bonus for our President and Chief Executive Officer has not yet
been approved by our Board of Directors but is included in accrued
compensation in the accompanying condensed consolidated balance
sheets as of September 30, 2017 and December 31, 2016.
NOTE 7 – STOCKHOLDERS’ EQUITY
Issuances of Common Stock
Public Equity Offering
On March 21, 2017, we completed a sale of common stock and warrants
under a registered public offering. The gross proceeds to us from
the offering were $3,850,000, before underwriting discounts and
commissions and other offering expenses ($3,307,773 after
underwriting discounts, commissions and expenses).
The public offering price per share of common stock sold was $0.15.
Each investor who purchased a share of common stock in the offering
received a five-year warrant to purchase one share of common stock
at an exercise price of $0.15 per share (“Series A
Warrants”) and a one-year warrant to purchase one share of
common stock at an exercise price of $0.15 per share (“Series
B Warrants”). Under the terms of the offering, we issued
25,666,669 shares of common stock, Series A Warrants to purchase up
to an aggregate of 25,666,669 shares of common stock and Series B
Warrants to purchase up to an aggregate of 25,666,669 shares of
common stock. The Series A Warrants and Series B Warrants are
exercisable immediately. We allocated the net proceeds received of
$3,307,773 to the shares of common stock, Series A Warrants and
Series B Warrants sold in the offering based on their relative fair
values. The fair value of the Series A Warrants and Series B
Warrants was determined using Black-Scholes. Based on their
relative fair values, we allocated net of proceeds of $1,593,233 to
the shares of common stock, $1,075,995 to the Series A Warrants and
$638,545 to the Series B Warrants.
In connection with this offering, we issued to H.C. Wainwright
& Co. (“HCW”), the underwriter in the offering, a
warrant to purchase up to 1,283,333 shares of common stock and HCW
received total cash consideration, including the reimbursement of
public offering-related expenses, of $443,000. If such warrant is
exercised, each share of common stock may be purchased at $0.1875
per share (125% of the price of the common stock sold in the
offering), commencing on March 21, 2017 and expiring March 21,
2022. The fair value of the warrants issued to HCW totaled $129,755
and was determined using Black-Scholes. The fair value of the
warrants was recorded as an offering cost but has no net impact to
additional paid-in capital in stockholders’ equity in the
accompanying condensed consolidated balance sheet.
In connection with this offering, we incurred $99,227 in other
offering costs that have been offset against the proceeds from this
offering.
Other Stock Issuances and Related Stock-Based
Compensation
On
August 23, 2016, we entered into a consulting agreement with a
third party pursuant to which we agreed to issue 1,600,000
restricted shares of common stock, payable in four equal
installments, in exchange for services to be rendered over the
agreement which ended on August 23, 2017. The shares were
considered fully-vested and non-refundable at the execution of the
agreement. In 2016, we issued 800,000 shares of common stock and
during the nine months ended September 30, 2017, we issued a total
of 800,000 shares of common stock under the agreement. The fair
value of the shares issued during 2017 of $360,000 was based on the
market price of our common stock on the date of agreement. During
the three and nine months ended September 30, 2017, we recognized
$105,000 and $465,000, respectively, in general and administrative
expense in the accompanying condensed consolidated statements of
operations.
On
September 1, 2016, we entered into a service agreement with a third
party pursuant to which we agreed to issue, over the term of the
agreement, 2,000,000 shares of common stock in exchange for
services to be rendered. The agreement was extended on July
20, 2017 through December 31, 2017. In connection with the
extension, we agreed to issue 1,200,000 shares of common stock in
exchange for services to be rendered. We have terminated this
agreement effective November 9, 2017. During the nine months ended
September 30, 2017, we issued 1,270,000 shares under the agreement
related to services provided and recognized the fair value of the
shares issued of $187,315 in general and administrative expense in
the accompanying condensed consolidated statement of operations.
The 1,270,000 shares of common stock vested on the date of issuance
and the fair value of the shares of common stock was based on the
market price of our common stock on the date of vesting. There are
219,512 shares of common stock to be issued under this service
agreement as of September 30, 2017.
On
November 17, 2016, we entered into a service agreement with a third
party and in connection with the agreement issued 275,000
fully-vested shares for services to be provided over the term of
the service agreement through May 17, 2017. The fair value of the
shares issued of $69,575 was based on the market price of our
common stock on the date of vesting. During the nine months ended
September 30, 2017, we recognized $52,181 in general and
administrative expense in the accompanying condensed consolidated
statements of operations.
On
December 16, 2016, we amended a consulting agreement with a third
party to extend the term of the agreement to June 16, 2017 and in
connection with the amendment issued 80,000 fully-vested shares for
services to be provided over the remaining term of the amended
agreement. The fair value of the shares issued of $14,640 was based
on the market price of our common stock on the date of vesting. On
January 19, 2017, we further amended the agreement to expand the
scope of service performed by the consultant and as a result issued
an additional 78,947 shares of fully vested common stock for
services to be provided through June 16, 2017. The fair value of
the shares issued of $15,000 was based on the market price of our
common stock on the date of vesting. During the nine months ended
September 30, 2017, we recognized $28,420 in general and
administrative expense in the accompanying condensed consolidated
statements of operations.
In
January 2017, April 2017 and July 2017, we issued a total of 72,830
shares of common stock for services and recorded an expense of
$5,000 and $9,000 for the three and nine months ended September 30,
2017, respectively, which is included in general and administrative
expense in the accompanying condensed consolidated statements of
operations. The 72,830 shares of common stock vested on the date of
issuance and the fair value of the shares of common stock was based
on the market price of our common stock on the date of
vesting.
In
January 2017, we issued 225,000 shares of common stock to CRI
pursuant to the Amended CRI Asset Purchase Agreement (see Note 2)
for the prepayment of future royalties due on net profit of
Sensum+® in the U.S. in 2017. The fair value of the
restricted shares of common stock of $44,662 was based on the
market price of our common stock on the date of issuance and is
included in prepaid expense and other current assets in the
accompanying condensed consolidated balance sheet at September 30,
2017.
In
January 2017 and September 2017, we issued 1,225,000 shares of
restricted common stock to note holders in connection with their
notes payable. The relative fair value of the shares of
restricted common stock issued was determined to be $99,386 and was
recorded as a debt discount (see Note 5).
In
March 2017, certain 2016 Notes holders elected to convert $350,610
in principal and interest into 1,402,440 shares of common stock
(see Note 5). Upon conversion, the fair value of the embedded
conversion feature derivative liability on the date of conversion
was reclassified to additional paid-in capital (see Note
8).
In
March 2017 and July 2017, we issued shares of common stock totaling
71,500 upon the exercise of stock options for total cash proceeds
of $4,879.
In June
2017,
we
issued 92,000 shares of common stock in exchange for vested
restricted stock units.
In
September 2017, certain 2016 and 2017 Notes Payable holders elected
to exchange $227,225 in principal and interest for 2,840,316 shares
of common stock (see Note 5). The fair value of the shares of
common stock of $299,391 was based on the market price of our
common stock on the date of issuance.
2013 Equity Incentive Plan
We have
issued common stock, restricted stock units and stock option awards
to employees, non-executive directors and outside consultants under
the 2013 Equity Incentive Plan (“2013 Plan”), which was
approved by our Board of Directors in February of 2013. The
2013 Plan allows for the issuance of up to 10,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. As of September 30, 2017,
106,000 shares were available under the 2013 Plan.
2014 Equity Incentive Plan
We have
issued common stock, restricted stock units and stock options to
employees, non-executive directors and outside consultants under
the 2014 Equity Incentive Plan (“2014 Plan”), which was
approved by our Board of Directors in November 2014. The 2014
Plan allows for the issuance of up to 20,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. As of September 30, 2017,
58,367 shares were available under the 2014 Plan.
2016 Equity Incentive Plan
On
March 21, 2016, our Board of Directors approved the adoption of the
2016 Equity Incentive Plan and on October 20, 2016 adopted the
Amended and Restated 2016 Equity Incentive Plan (“2016
Plan”). The 2016 Plan was then approved by our
stockholders in November 2016. The 2016 Plan allows for the
issuance of up to 20,000,000 shares of our common stock to be
issued in the form of stock options, stock awards, stock unit
awards, stock appreciation rights, performance shares and other
share-based awards. The 2016 Plan includes an evergreen
provision in which the
number of
shares of common stock authorized for issuance and available for
future grants under the 2016 Plan will be increased each January 1
after the effective date of the 2016 Plan by a number of shares of
common stock equal to the lesser of: (a) 4% of the number of shares
of common stock issued and outstanding on a fully-diluted basis as
of the close of business on the immediately preceding December 31,
or (b) a number of shares of common stock set by our Board of
Directors.
In March 2017, our Board of Directors approved an
increase of 5,663,199 shares of common stock to the shares
authorized under the 2016 Plan in accordance with the evergreen
provision in the 2016 Plan. As of September 30, 2017, 21,140,750
shares were available under the 2016 Plan.
Stock Options
For the nine months ended September 30, 2017 and 2016, the
following weighted average assumptions were utilized for the
calculation of the fair value of the stock options granted during
the period using Black-Scholes:
|
|
|
Expected
life (in years)
|
8.9
|
10.0
|
Expected
volatility
|
215.4
%
|
227.8
%
|
Average
risk-free interest rate
|
2.27
%
|
1.71
%
|
Dividend
yield
|
0
%
|
0
%
|
Grant
date fair value
|
$
0.17
|
$
0.17
|
The dividend yield of zero is based on the fact that we have never
paid cash dividends and has no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of our common stock over the period commensurate with
the expected life of the stock options. Expected life in years
is based on the “simplified” method as permitted by ASC
Topic 718. We believe that all stock options issued under its
stock option plans meet the criteria of “plain vanilla”
stock options. We use a term equal to the term of the stock
options for all non-employee stock options. The risk-free
interest rate is based on average rates for treasury notes as
published by the Federal Reserve in which the term of the rates
correspond to the expected term of the stock options.
The following table summarizes the number of stock options
outstanding and the weighted average exercise price:
|
|
Weighted average exercise price
|
Weighted remaining contractual life (years)
|
Aggregate intrinsic value
|
Outstanding
at December 31, 2016
|
237,500
|
$
0.22
|
8.6
|
$
14,293
|
Granted
|
37,000
|
0.17
|
-
|
-
|
Exercised
|
(71,500
)
|
0.07
|
-
|
-
|
Cancelled
|
(124,000
)
|
0.31
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
-
|
Outstanding
at September 30, 2017
|
79,000
|
$
0.18
|
9.1
|
$
468
|
|
|
|
|
|
Vested
and Expected to Vest at September 30, 2017
|
79,000
|
$
0.18
|
9.1
|
$
468
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of all outstanding stock options and the
quoted price of our common stock at September 30,
2017. During the three and nine months ended September
30, 2017 and 2016, the Company recognized stock-based compensation
from stock options of $904 and $8,638 and $6,310 and $18,138,
respectively. The intrinsic value of the stock options exercised
during the nine months ended September 30, 2017 on the dates of
exercise were $7,133.
Restricted Stock Units
The following table summarizes the restricted stock
unit activity for the nine months ended September 30,
2017:
|
|
Outstanding
at December 31, 2016
|
12,874,848
|
Granted
|
2,777,119
|
Exchanged
|
(92,000
)
|
Cancelled
|
(2,500,000
)
|
Outstanding
at September 30, 2017
|
13,059,967
|
|
|
Vested
at September 30, 2017
|
9,622,467
|
The
vested restricted stock units at September 30, 2017 have not
settled and are not showing as issued and outstanding shares of
ours but are considered outstanding for earnings per share
calculations. Settlement of these vested restricted stock
units will occur on the earliest of (i) the date of termination of
service of the employee or consultant, (ii) change of control of
us, or (iii) 10 years from date of issuance. Settlement of
vested restricted stock units may be made in the form of (i) cash,
(ii) shares, or (iii) any combination of both, as determined by the
board of directors and is subject to certain criteria having been
fulfilled by the recipient.
We calculate the fair value of the restricted stock units
base
d
upon the quoted market value of the common stock at the date of
grant. The grant date fair value of restricted stock units issued
during the nine months ended September 30, 2017 was $503,500. For
the three and nine months ended September 30, 2017 and 2016, we
recognized $80,125 and $121,555 and $248,804 and $748,573,
respectively, of stock-based compensation expense for the vested
units. As of September 30, 2017, compensation expense related to
unvested shares not yet recognized in the condensed consolidated
statement of operations was approximately $586,000 and will be
recognized over a remaining weighted-average term of 2.2
years.
Warrants
During the year ended December 31, 2014, we issued warrants in
connection with notes payable (which were repaid in 2013). The
remaining warrants of 135,816 have an exercise price of $0.10 and
expire December 6, 2018.
In January 2015, we issued 250,000 warrants with an exercise price
of $0.30 per share to a former executive in connection with the
January 2015 debenture. The warrants expire on January 21, 2020.
The warrants contain anti-dilution protection, including protection
upon dilutive issuances. In connection with the convertible
debentures issued in 2015, the exercise price of these warrants was
reduced to $0.0896 per share and an additional 586,705 warrants
were issued per the anti-dilution protection afforded in the
warrant agreement during the year ended December 31,
2015.
In connection with the convertible debentures in 2015, we issued
warrants with an exercise price of $0.30 per share and expire in
2020 to investors and placement agents. Warrants to purchase
774,533 shares of common stock remain outstanding as of September
30, 2017.
In connection with the 2016 Notes, we issued warrants to the
Investors and placement agents with an exercise price of $0.40 per
share and expire in 2021. Warrants to purchase 4,220,000 shares of
common stock remain outstanding as of September 30,
2017.
In connection with the public equity offering in March 2017, we
issued Series A Warrants to purchase 25,666,669 shares of common
stock at $0.15 per share and Series B Warrants to purchase
25,666,669 shares of common stock at $0.15 per share. The Series A
Warrants expire in 2022 and the Series B Warrants expire in 2018.
We also issued warrants to purchase 1,283,333 shares of common
stock to our placement agent with an exercise price of $0.1875 per
share and expire in 2022.
For the nine months ended September 30, 2017, the following
weighted average assumptions were utilized for the calculation of
the fair value of the warrants issued during the period using
Black-Scholes:
|
|
Expected
life (in years)
|
3.1
|
Expected
volatility
|
203.3
%
|
Average
risk-free interest rate
|
1.49
%
|
Dividend
yield
|
0
%
|
At
September 30, 2017, there are 58,583,725 fully vested warrants
outstanding. The weighted average exercise price of outstanding
warrants at September 30, 2017 is $0.17 per share, the weighted
average remaining contractual term is 2.6 years and the aggregate
intrinsic value of the outstanding warrants is $837.
Net Loss per Share
Restricted stock units that are vested but the issuance and
delivery of the shares are deferred until the employee or director
resigns are included in the basic and diluted net loss per share
calculations.
The weighted average shares of common stock outstanding used in the
basic and diluted net loss per share calculation for the three and
nine months ended September 30, 2017 and 2016 was 152,250,793 and
143,192,157 and 97,222,394 and 77,645,019,
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, 2017 and 2016 was 9,337,141 and 9,133,039 and
7,750,251 and 8,853,215, 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, 2017 and 2016 was 161,587,934 and
152,325,196 and 104,972,645 and 86,498,234,
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, 2017 and 2016:
|
|
|
|
|
Gross number of shares excluded:
|
|
|
Restricted
stock units – unvested
|
3,437,500
|
5,012,499
|
Stock
options
|
79,000
|
228,500
|
Convertible
debentures and accrued interest
|
-
|
7,651,830
|
Warrants
|
58,583,725
|
5,967,054
|
Total
|
62,100,225
|
18,859,883
|
The above table does not include the ANDA Consideration Shares
related to the Novalere acquisition totaling 138,859 and 12,947,655
at September 30, 2017 and 2016, respectively, as they are
considered contingently issuable (see Note 3).
NOTE 8 – DERIVATIVE LIABILITIES
The warrants issued in connection with the January 2015
Non-Convertible Debenture to a former executive are measured at
fair value and classified as a liability because these warrants
contain anti-dilution protection and therefore, cannot be
considered indexed to our own stock which is a requirement for the
scope exception as outlined under FASB ASC 815. The estimated fair
value of the warrants was determined using the Probability Weighted
Black-Scholes Model. The fair value will be affected by changes in
inputs to that model including our stock price, expected stock
price volatility, the contractual term and the risk-free interest
rate. We will continue to classify the fair value of the warrants
as a liability until the warrants are exercised, expire or are
amended in a way that would no longer require these warrants to be
classified as a liability, whichever comes first. The anti-dilution
protection for the warrants survives for the life of the warrants
which ends in January 2020.
The derivative liabilities are a Level 3 fair value measure in the
fair value hierarchy and the assumptions for the Probability
Weighted Black-Scholes Option-Pricing Model for the nine months
ended September 30, 2017 are represented in the table
below:
|
|
September 30, 2017
|
|
Expected life (in years)
|
|
2.31 – 2.97
|
|
Expected volatility
|
|
173% – 187%
|
|
Average risk-free interest rate
|
|
1.33% – 1.50%
|
|
Dividend yield
|
|
0%
|
|
We have
determined the embedded conversion features of the 2016 Notes (see
Note 5) to be derivative liabilities because the terms of the
embedded conversion features contained anti-dilution protection and
therefore, could not be considered indexed to our own stock which
was a requirement for the scope exception as outlined under FASB
ASC 815. The embedded conversion features were to be
measured at fair value and classified as a liability with
subsequent changes in fair value recorded in earnings at the end of
each reporting period. We have determined the fair value
of the derivative liabilities using a Path-Dependent Monte Carlo
Simulation Model. The fair value of the derivative
liabilities using such model was affected by changes in inputs to
that model and was based on the individual characteristics of the
embedded conversion features on the valuation date as well as
assumptions for volatility, remaining expected life, risk-free
interest rate, credit spread, probability of default by us and
acquisition of us. During the nine months ended
September 30, 2017, the 2016 Notes were either converted into
shares of common stock or repaid in full. The conversion of the
2016 Notes during the nine months ended September 30, 2017 resulted
in the fair value of the embedded conversion feature derivative
liability on the dates of conversion of $203,630 to be reclassified
to additional paid-in capital (see Note 7). Upon
repayment of the remaining 2016 Notes in March 2017 (see Note 5),
the fair value of the embedded conversion features on date of
repayment of $238,101 was extinguished and included in loss on debt
extinguishment in the accompanying condensed consolidated statement
of operations.
The derivative liabilities are a Level 3 fair value measurement in
the fair value hierarchy and a summary of quantitative information
with respect to valuation methodology and significant unobservable
inputs used for our embedded conversion feature derivative
liabilities that are categorized within Level 3 of the fair value
hierarchy during the nine months ended September 30, 2017 is as
follows:
|
|
September 30, 2017
|
|
Stock price
|
|
|
$0.103 – $0.305
|
|
Strike price
|
|
|
$0.25
|
|
Expected life (in years)
|
|
|
0.36 – 0.43
|
|
Expected volatility
|
|
|
130% – 168%
|
|
Average risk-free interest rate
|
|
|
0.78% – 0.87%
|
|
Dividend yield
|
|
|
–
|
|
At September 30, 2017, the estimated Level 3 fair value of the
warrant derivative liabilities measured on a recurring basis is as
follows:
|
|
|
|
|
|
Warrant
derivative liabilities
|
$
74,151
|
$
-
|
$
-
|
$
74,151
|
$
74,151
|
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, 2017:
Fair
Value Measurements Using Level 3 Inputs
Warrant derivative liabilities:
|
|
Beginning
balance December 31, 2016
|
$
164,070
|
Change
in fair value
|
(89,919
)
|
Ending
balance September 30, 2017
|
$
74,151
|
|
|
Embedded conversion feature derivative liabilities:
|
|
Beginning
balance December 31, 2016
|
$
319,674
|
Reclassification
of fair value of embedded conversion feature derivative liability
to
additional paid-in capital upon conversions of 2016
Notes
|
(203,630
)
|
Extinguishment
of embedded conversion feature upon repayment of 2016
Notes
|
(238,101
)
|
Change
in fair value
|
122,057
|
Ending
balance September 30, 2017
|
$
-
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
In May 2017, we entered into a commercial agreement with West-Ward
Pharmaceuticals International Limited (“WWPIL”), a
wholly-owned subsidiary of Hikma Pharmaceuticals PLC
(“Hikma”) (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY).
Pursuant to the commercial agreement, WWPIL will provide us with
the rights to launch our branded, fluticasone propionate nasal
spray USP, 50 mcg per spray (FlutiC
are™), under
WWPIL’s FDA approved ANDA No. 207957 in the U.S. in November
2017. The initial term of the commercial agreement is for two
years, and upon expiration of the initial term, the agreement will
automatically renew for subsequent one-year terms unless either
party notifies the other party in writing of its desire not to
renew at least 90 days prior to the end of the then current term.
The agreement requires us to meet certain minimum product batch
purchase requirements in order for the agreement to continue to be
in effect.
NOTE 10 – SUBSEQUENT EVENTS
In
October and November 2017, we issued 235,996 shares of common stock
to consultants for services rendered. The fair value of the common
stock issued was approximately $21,000.
On
October 4, 2017, we entered into a securities exchange agreement
with certain of the 2016 and 2017 Notes Payable holders. In
connection with the securities exchange agreements, we issued a
total of 8,592,431 shares of common stock in exchange for the
settlement of principal and interest due under the 2016 and 2017
Notes Payable totaling $515,546. The fair value of the
shares of common stock issued was based on the market price of our
common stock on the date of the securities exchange agreements. Due
to the settlement of the principal and interest balance of $515,546
into shares of common stock, the transaction was recorded as a debt
extinguishment and the fair value of the shares of common stock
issued in excess of the settled principal and interest balance
totaling approximately $306,000 was recorded as a loss on debt
extinguishment.
On
October 10, 2017, we entered into a service agreement with a third
party pursuant to which we agreed to issue, over the term of the
agreement through October 10, 2018, 2,000,000 shares of common
stock in exchange for services to be rendered. The payment of
shares of common stock is to be made in equal monthly installments
beginning on November 1, 2017. On November 1, 2017, we issued
166,666 shares to the third party with a fair value of the shares
issued of approximately $14,000.
In
October 2017, we entered into a promissory note agreement with two
unrelated third-party investors in which the investors loaned us
gross proceeds of $500,000.
The promissory notes have an OID of $100,000
and
bear interest at the rate of 0% per annum. The principal
amount of $600,000 is to be repaid in nine equal monthly
installments of $66,667 beginning in November 2017.
In
October 2017, we entered into a commercial lease agreement for
16,705 square feet of office and warehouse space in San Diego, CA
that will commence on December 1, 2017 and continues until April
30, 2023. The initial monthly base rent is $20,881 with an
approximate 3% increase in the base rent amount on an annual basis.
We hold an option to extend the lease an additional 5 years at the
end of the initial term. The Company and the landlord of our
previous office space mutually agreed to terminate the existing
office lease agreement effective November 1, 2017 with no penalty
or future lease payments required by the Company.
We have evaluated subsequent events through the filing date of this
Form 10-Q and determined that no additional subsequent events have
occurred that would require recognition in the condensed
consolidated financial statements or disclosures in the notes
thereto other than as disclosed in the accompanying notes to the
condensed consolidated financial statements.