Quarterly Report (10-q)

Date : 11/14/2017 @ 4:41PM
Source : Edgar (US Regulatory)
Stock : Innovus Pharmaceuticals, Inc. (QB) (INNV)
Quote : 0.095  -0.003 (-3.06%) @ 2:41PM

Quarterly Report (10-q)

 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 (Mark One)
[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Quarterly Period ended September 30, 2017
or
[  ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act.
 
For the transition period from ___ to ____.
 
Commission File Number: 000-52991
 
INNOVUS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
90-0814124
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
 
 
 
8845 Rehco Road
San Diego, CA
 
92121
(Address of Principal Executive Offices)
 
(Zip Code)
 
858-964-5123
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes   No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company      
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 
As of November 10, 2017, the registrant had 164,434,088 shares of common stock outstanding.
 

 
 
 
 
 
TA B LE OF CONTENTS
 
 
 
 
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  INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated B alance Sheets
 
 
 
September 30,
2017
 
 
December 31,
2016
 
ASSETS
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Cash
  $ 1,315,059  
  $ 829,933  
Accounts receivable, net
    27,526  
    33,575  
Prepaid expense and other current assets
    265,217  
    863,664  
Inventories
    640,055  
    599,856  
Total current assets
    2,247,857  
    2,327,028  
 
       
       
Property and equipment, net
    31,442  
    29,569  
 
       
       
Deposits
    14,958  
    14,958  
Goodwill
    952,576  
    952,576  
Intangible assets, net
    4,430,572  
    4,903,247  
Total assets
  $ 7,677,405  
  $ 8,227,378  
 
       
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
       
 
 
 
 
       
 
 
 
Liabilities:
       
 
 
 
Accounts payable and accrued expense
  $ 1,356,057  
  $ 1,210,050  
Accrued compensation
    1,201,187  
    767,689  
Deferred revenue and customer deposits
    -  
    11,000  
Accrued interest payable
    21,353  
    47,782  
Derivative liabilities – embedded conversion features
    -  
    319,674  
Derivative liabilities – warrants
    74,151  
    164,070  
Contingent consideration
    54,959  
    170,015  
Short-term loan payable
    57,590  
    -  
Current portion of notes payable, net of debt discount of $71,531 and $216,403, respectively
    722,466  
    626,610  
Convertible debentures, net of debt discount of $0 and $845,730, respectively
    -  
    714,192  
Total current liabilities
    3,487,763  
    4,031,082  
 
       
       
Accrued compensation – less current portion
    1,531,904  
    1,531,904  
Notes payable, net of current portion and debt discount of $0 and $468, respectively
    -  
    54,517  
Contingent consideration – less current portion
    1,435,499  
    1,515,902  
 Total non-current liabilities
    2,967,403  
    3,102,323  
 
       
       
Total liabilities
    6,455,166  
    7,133,405  
 
       
       
Commitments and contingencies
       
       
 
       
       
Stockholders’ equity:
       
       
Preferred stock: 7,500,000 shares authorized, at $0.001 par value, no shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
    -  
    -  
Common stock: 292,500,000 shares authorized, at $0.001 par value, 155,438,995 and 121,694,293 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
    155,439  
    121,694  
Additional paid-in capital
    35,211,043  
    30,108,028  
Accumulated deficit
    (34,144,243 )
    (29,135,749 )
Total stockholders' equity
    1,222,239  
    1,093,973  
 
       
       
Total liabilities and stockholders’ equity
  $ 7,677,405  
  $ 8,227,378  
 
See accompanying notes to these condensed consolidated financial statements.
 
 
 
INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of O perations
(Unaudited)
 
 
 
For the
Three Months Ended
September 30,
 
 
For the
Nine Months Ended
September 30,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Net revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Product sales, net
  $ 2,218,343  
  $ 1,882,129  
  $ 6,426,790  
  $ 3,126,112  
License revenue
    2,500  
    -  
    10,000  
    1,000  
Net revenue
    2,220,843  
    1,882,129  
    6,436,790  
    3,127,112  
 
       
       
       
       
Operating expense:
       
       
       
       
Cost of product sales
    480,076  
    331,227  
    1,329,131  
    714,284  
Research and development
    8,736  
    43,775  
    26,982  
    47,667  
Sales and marketing
    1,626,630  
    1,972,155  
    4,869,717  
    2,257,166  
General and administrative
    1,321,001  
    1,779,048  
    4,207,899  
    4,012,357  
 Total operating expense
    3,436,443  
    4,126,205  
    10,433,729  
    7,031,474  
 
       
       
       
       
Loss from operations
    (1,215,600 )
    (2,244,076 )
    (3,996,939 )
    (3,904,362 )
 
       
       
       
       
Other income (expense):
       
       
       
       
Interest expense
    (104,276 )
    (3,719,200 )
    (771,885 )
    (5,970,450 )
Loss on extinguishment of debt
    (89,341 )
    -  
    (394,169 )
    -  
Other income (expense), net
    (4,800 )
    (37 )
    (5,622 )
    1,839  
Fair value adjustment for contingent consideration
    69,305  
    186,813  
    195,459  
    164,479  
Change in fair value of derivative liabilities
    16,055  
    1,350,688  
    (32,138 )
    (632,627 )
Total other expense, net
    (113,057 )
    (2,181,736 )
    (1,008,355 )
    (6,436,759 )
 
       
       
       
       
Loss before provision for income taxes
    (1,328,657 )
    (4,425,812 )
    (5,005,294 )
    (10,341,121 )
 
       
       
       
       
Provision for income taxes
    -  
    -  
    3,200  
    -  
 
       
       
       
       
Net loss
  $ (1,328,657 )
  $ (4,425,812 )
  $ (5,008,494 )
  $ (10,341,121 )
 
       
       
       
       
Net loss per share of common stock – basic and diluted
  $ (0.01 )
  $ (0.04 )
  $ (0.03 )
  $ (0.12 )
 
       
       
       
       
Weighted average number of shares of common stock outstanding – basic and diluted
    161,587,934  
    104,972,645  
    152,325,196  
    86,498,234  
 
See accompanying notes to these condensed consolidated financial statements.
 
 
 
INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of C ash Flows
(Unaudited)
 
 
 
For the
Nine Months Ended
September 30,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
  $ (5,008,494 )
  $ (10,341,121 )
Adjustments to reconcile net loss to net cash used in operating activities:
       
       
Depreciation
    8,258  
    9,431  
Allowance for doubtful accounts
    5,090  
    918  
Common stock, restricted stock units and stock options issued to employees, board of directors and consultants for compensation and services
    997,030  
    1,889,837  
Loss on extinguishment of debt
    394,169  
    -  
Fair value of embedded conversion feature in convertible debentures in excess of allocated proceeds
    -  
    2,756,899  
Change in fair value of contingent consideration
    (195,459 )
    (164,479 )
Change in fair value of derivative liabilities
    32,138  
    632,627  
Amortization of debt discount
    687,598  
    2,997,061  
Amortization of intangible assets
    472,675  
    513,767  
Changes in operating assets and liabilities, net of acquisition amounts
       
       
Accounts receivable
    959  
    51,304  
Prepaid expense and other current assets
    177,297  
    (450,394 )
Inventories
    (40,199 )
    (142,329 )
Accounts payable and accrued expense
    506,007  
    928,044  
Accrued compensation
    433,498  
    581,066  
Accrued interest payable
    (6,094 )
    10,976  
Deferred revenue and customer deposits
    (11,000 )
    (13,079 )
Net cash used in operating activities
    (1,546,527 )
    (739,472 )
 
       
       
Cash flows from investing activities:
       
       
Purchase of property and equipment
    (10,131 )
    (6,565 )
Payment on contingent consideration
    -  
    (150,000 )
 Net cash used in investing activities
    (10,131 )
    (156,565 )
 
       
       
Cash flows from financing activities:
       
       
Repayments of line of credit convertible debenture – related party
    -  
    (409,192 )
Proceeds from short-term loans payable
    -  
    21,800  
Payments on short-term loans payable
    (7,199 )
    (252,151 )
Proceeds from notes payable and convertible debentures
    300,000  
    3,074,000  
Payments on notes payable
    (214,000 )
    (384,916 )
Proceeds from stock option and warrant exercises
    4,879  
    310,140  
Financing costs in connection with convertible debentures
    -  
    (40,000 )
Proceeds from sale of common stock and warrants, net of offering costs
    3,307,773  
    -  
Payments on convertible debentures
    (1,222,422 )
    (25,000 )
Prepayment penalty on extinguishment of convertible debentures
    (127,247 )
    -  
Net cash provided by financing activities
    2,041,784  
    2,294,681  
 
       
       
Net change in cash
    485,126  
    1,398,644  
 
       
       
Cash at beginning of period
    829,933  
    55,901  
 
       
       
Cash at end of period
  $ 1,315,059  
  $ 1,454,545  
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
Cash paid for income taxes
  $ 5,600  
  $ -  
Cash paid for interest
  $ 89,931  
  $ 205,456  
 
       
       
Supplemental disclosures of non-cash investing and financing activities:
       
       
Common stock issued for conversion of convertible debentures, notes payable and accrued interest
  $ 577,835  
  $ 2,935,900  
Reclassification of the fair value of the embedded conversion features from derivative liability to additional paid-in capital upon conversion
  $ 203,630  
  $ 2,962,666  
Relative fair value of common stock issued in connection with notes payable recorded as debt discount
  $ 99,386  
  $ 93,964  
Proceeds from note payable paid to seller in connection with acquisition
  $ -  
  $ 300,000  
Financing costs paid with proceeds from note payable
  $ -  
  $ 7,500  
Cashless exercise of warrants
  $ -  
  $ 3,385  
Fair value of the contingent consideration for acquisition
  $ -  
  $ 314,479  
Reclassification of the fair value of the warrants from derivative liability to additional paid-in capital upon cashless exercise
  $ -  
  $ 518,224  
Relative fair value of warrants issued in connection with convertible debentures recorded as debt discount
  $ -  
  $ 445,603  
Relative fair value of common stock issued in connection with convertible debentures recorded as debt discount
  $ -  
  $ 1,127,225  
Fair value of embedded conversion feature derivative liabilities recorded as debt discount
  $ -  
  $ 687,385  
Fair value of warrants issued to placement agents in connection with convertible debentures recorded as debt discount
  $ -  
  $ 357,286  
Fair value of unamortized non-forfeitable common stock issued to consultant included in prepaid expense and other current assets
  $ -  
  $ 135,540  
Fair value of non-forfeitable common stock issued to consultant included in accounts payable and accrued expense
  $ 360,000  
  $ 540,000  
Issuance of shares of common stock for vested restricted stock units
  $ 92  
  $ 19,229  
Fair value of common stock issued for prepayment of future royalties due under the CRI License Agreement included in prepaid expense and other current assets
  $ 44,662  
  $ -  
Proceeds from short-term loan payable for payment of D&O insurance premium
  $ 64,789  
  $ -  
Fair value of beneficial conversion feature on line of credit convertible debenture – related party
  $ -  
  $ 3,444  
 
See accompanying notes to these condensed consolidated financial statements.
 
 
 
 INNOVUS PHARMACEUTICALS, INC.
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.
 
 
 
-9-
 
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:
 
 
September 30,
 
 
December 31,
 
 
 
2017
 
 
2016
 
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:
 
 
 
September 30, 2017
 
 
 
Amount
 
 
Accumulated
Amortization
 
 
Net Amount
 
 
Useful Lives
(years)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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  
       
 
 
 
 
 
December 31, 2016
 
 
 
Amount
 
 
Accumulated
Amortization
 
 
Net Amount
 
 
Useful Lives
(years)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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: 
 
 
September 30,
 
 
December 31,
 
 
 
2017
 
 
2016
 
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:
 
 
September 30,
 
 
December 31,
 
 
 
2017
 
 
2016
 
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:
 
 
 
2017
 
 
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:
 
 
 
2017
 
 
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:
 
 
 
September 30,
2017
 
 
December 31,
2016
 
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:
 
 
 
2017
 
 
2016
 
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:
 
 
 
 
 
 
Options
 
 
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:
 
 
 
Restricted Stock Units
 
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:
 
 
 
2017
 
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: 
 
 
 
As of September 30,
 
 
 
2017
 
 
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:
 
  
 
Fair value
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
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.
 
 
 
ITEM 2.
M ANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Innovus Pharmaceuticals, Inc., together with its subsidiaries, are collectively referred to as “Innovus”, the “Company”, “us”, “we”, or “our”. The following information should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the discussion and analysis included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on March 9, 2017, as well as the consolidated financial statements and related notes contained therein.
 
Forward Looking Statements
 
Certain statements in this report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs or other statements that are not statements of historical fact. Words such as “may,” “should,” “could,” “would,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” or “projects,” or the negative or other variation of such words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results and the development of our products, are forward-looking statements.
 
Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Factors” below, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We file reports with the SEC. You can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
 
Overview
 
We are an emerging over-the-counter ("OTC") consumer goods and specialty pharmaceutical company engaged in the commercialization, licensing and development of safe and effective non-prescription medicine and consumer care products to improve men’s and women’s health and vitality and respiratory diseases.  We deliver innovative and uniquely presented and packaged health solutions through our (a) OTC medicines and consumer and health products, which we market directly, (b) commercial partners to primary care physicians, urologists, gynecologists and therapists, and (c) directly to consumers through our print media, on-line channels, retailers and wholesalers. We are dedicated to be a leader in developing and marketing new OTC and branded Abbreviated New Drug Application (“ANDA”) products, men’s and women’s health supplements, related diagnostics and medical devices. We are actively pursuing opportunities where existing prescription drugs have recently, or are expected to, change from prescription (or Rx) to OTC, as well as, related products. These “Rx-to-OTC switches” require Food and Drug Administration (“FDA”) approval through a process initiated by the New Drug Application (“NDA”) holder.
 
Our business model leverages our ability to (a) develop and build our current pipeline of products, and (b) to also acquire outright or in-license commercial products that are supported by scientific and/or clinical evidence, place them through our existing supply chain, retail and on-line (including Amazon®-based business platform) channels to tap new markets and drive demand for such products and to establish physician relationships. We currently have 22 products marketed in the U.S. with six of those being marketed and sold in multiple countries around the world through some of our 15 commercial partners. We currently expect to launch an additional two products in the U.S. in the fourth quarter of 2017 and two products in the first half of 2018 and we currently have approvals to launch certain of our already marketed products in 33 additional countries. We are continuously looking to add additional drugs, supplements and medical devices to our pipeline.
 
 
 
Our Strategy
 
Our corporate strategy focuses on two primary objectives:
 
1.
Developing a diversified product portfolio of exclusive, unique and patented non-prescription OTC and branded ANDA drugs, FDA cleared medical devices and consumer health products through: (a) the introduction of line extensions and reformulations of either our or third-party currently marketed products; and (b) the acquisition of products or obtaining exclusive licensing rights to market such products; and
 
2.
Building an innovative, U.S. and global sales and marketing model through direct to consumer approaches such as our proprietary Beyond Human® sales and marketing platform, the addition of new online platforms such as Amazon® and commercial partnerships with established international complimentary partners that: (a) generates revenue, and (b) requires a lower cost structure compared to traditional pharmaceutical companies thereby increasing our gross margins.
 
Our Products
 
We currently generate revenue from 22 products in the U.S. and six in international countries, as follows:
 
1.
Vesele® for promoting sexual health (U.S. and U.K.);
2.
Zestra® for female arousal (U.S., U.K., Denmark, Canada, Morocco, the UAE and South Korea);
3.
Zestra Glide® (U.S, Canada and the MENA countries);
4.
UriVarx™ for bladder health;
5.
Sensum+® to alleviate reduced penile sensitivity (U.S., U.K. and Morocco);
6.
ProstaGorx™ for prostate health;
7.
AllerVarx™ for the management of allergy symptoms;
8.
Apeaz™ for arthritis related pain;
9.
ArthriVarx™ for joint health;
10
EjectDelay® indicated for the treatment of premature ejaculation (U.S. and Canada);
11.
RecalMax™ for brain health;
12.
Androferti® (U.S. and Canada) for the support of overall male reproductive health and sperm quality;
13.
PEVarx™ for extension of sexual intercourse time;
14.
Beyond Human® Testosterone Booster;
15.
Beyond Human® Ketones;
16.
Beyond Human® Krill Oil;
17.
Beyond Human® Omega 3 Fish Oil;
18.
Beyond Human® Vision Formula;
19.
Beyond Human® Blood Sugar;
20.
Beyond Human® Colon Cleanse;
21.
Beyond Human® Green Coffee Extract; and
22.
Beyond Human® Growth Agent.
 
In addition, we currently expect to launch in the U.S. the following products in the fourth quarter of 2017 and first half of 2018, subject to the applicable regulatory approvals, if required:
 
1.
FlutiCare™ for nasal allergy- November 2017;
2.
Xyralid™ for the relief of the pain and symptoms caused by hemorrhoids – November 2017;
3.
AndroVit™ for men's health; and
4.
Urocis™ XR for urinary tract infections.
 
 
 
Sales and Marketing Strategy U.S. and Internationally
 
Our sales and marketing strategy is based on (a) the use of direct to consumer advertisements in print and online media through our proprietary Beyond Human ® sales and marketing infrastructure acquired in March 2016, (b) working with direct commercial channel partners in the U.S. and also directly marketing the products ourselves to physicians, urologists, gynecologists and therapists and to other healthcare providers, and (c) working with exclusive commercial partners outside of the U.S. that would be responsible for sales and marketing in those territories. We have now fully integrated most of our existing line of products such as Vesele®, Sensum+®, UriVarx™, Zestra®, RecalMax™, ProstaGorx™, AllerVarx™, Apeaz ™ and ArthriVarx™ into the Beyond Human ® sales and marketing platform. We plan to integrate Xyralid , AndroVit , Urocis XR; and FlutiCare™ upon their expected commercial launches in 2017 and 2018. We also market and distribute our products in the U.S. through retailers, wholesalers and other online channels. Our strategy outside the U.S. is to partner with companies who can effectively market and sell our products in their countries through their direct marketing and sales teams. The strategy of using our partners to commercialize our products is designed to limit our expenses and fix our cost structure, enabling us to increase our reach while minimizing our incremental spending.
 
Our current OTC monograph, Rx-to-OTC ANDA switch drugs and consumer care products marketing strategy is to focus on four main U.S. markets: (1) sexual health (male sexual dysfunction and health); (2) urology (bladder and prostate health); (3) respiratory disease; and (4) migraines and brain health. We will focus our current efforts on these four markets and will seek to develop, acquire or license products that we can sell through our sales channels in these fields.
 
In May 2017, we entered into a commercial agreement with West-Ward Pharmaceuticals International Limited (“WWPIL”). 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. Upon launch of FlutiC are™, it will be the third national branded OTC fluticasone propionate nasal spray in the allergic rhinitis market. Our current sales and marketing strategy for the launch of the product consists of the following:
 
1.
Finalizing agreements with wholesalers, retail stores in which we are a vendor of record and independent pharmacies;
2.
Provide sampling to the top prescribers of fluticasone propionate;
3.
Implement direct sampling and coupon programs to consumers to continue to build brand awareness;
4.
Launch under our Beyond Human® sales and marketing platform through print and online media; and
5.
Launch through our online platforms including our website, email subscriber lists and Amazon®.
 
 
 
 
Results of Operations for the Three and Nine Months Ended September 30, 2017 Compared with the Three and Nine Months Ended September 30, 2016
 
 
 
Three Months Ended
September 30,
2017
 
 
Three Months Ended
September 30,
2016
 
 
$
Increase
(Decrease)
 
 
%
Increase
(Decrease)
 
NET REVENUE:
 
 
 
 
 
 
 
 
 
 
 
 
Product sales, net
  $ 2,218,343  
  $ 1,882,129  
  $ 336,214  
    17.9 %
License revenue
    2,500  
    -  
    2,500  
    100.0 %
Net revenue
    2,220,843  
    1,882,129  
    338,714  
    18.0 %
 
       
       
       
       
OPERATING EXPENSE:
       
       
       
       
Cost of product sales
    480,076  
    331,227  
    148,849  
    44.9 %
Research and development
    8,736  
    43,775  
    (35,039 )
    (80.0 )%
Sales and marketing
    1,626,630  
    1,972,155  
    (345,525 )
    (17.5 )%
General and administrative
    1,321,001  
    1,779,048  
    (458,047 )
    (25.7 )%
Total operating expense
    3,436,443  
    4,126,205  
    (689,762 )
    (16.7 )%
LOSS FROM OPERATIONS
    (1,215,600 )
    (2,244,076 )
    (1,028,476 )
    (45.8 )%
OTHER INCOME (EXPENSE): 
       
       
       
       
Interest expense
    (104,276 )
    (3,719,200 )
    (3,614,924 )
    (97.2 )%
Loss on extinguishment of debt
    (89,341 )
    -  
    89,341  
    100.0 %
Other income (expense), net
    (4,800 )
    (37 )
    4,763  
    12,873.0 %
Fair value adjustment for contingent consideration
    69,305  
    186,813  
    (117,508 )
    (62.9 )%
Change in fair value of derivative liabilities
    16,055  
    1,350,688  
    (1,334,633 )
    (98.8 )%
Total other expense, net
    (113,057 )
    (2,181,736 )
    (2,068,679 )
    (94.8 )%
LOSS BEFORE PROVISION FOR INCOME TAXES
    (1,328,657 )
    (4,425,812 )
    (3,097,155 )
    (70.0 )%
Provision for income taxes
    -  
    -  
    -  
    - %
NET LOSS
  $ (1,328,657 )
  $ (4,425,812 )
    (3,097,155 )
    (70.0 )%
  
 
 
 
 
 
Nine Months Ended
September 30,
2017
 
 
Nine Months Ended
September 30,
2016
 
 
$
Increase
(Decrease)
 
 
%
Increase
(Decrease)
 
NET REVENUE:
 
 
 
 
 
 
 
 
 
 
 
 
Product sales, net
  $ 6,426,790  
  $ 3,126,112  
  $ 3,300,678  
    105.6 %
License revenue
    10,000  
    1,000  
    9,000  
    900.0 %
Net revenue
    6,436,790  
    3,127,112  
    3,309,678  
    105.8 %
 
       
       
       
       
OPERATING EXPENSE:
       
       
       
       
Cost of product sales
    1,329,131  
    714,284  
    614,847  
    86.1 %
Research and development
    26,982  
    47,667  
    (20,685 )
    (43.4) %
Sales and marketing
    4,869,717  
    2,257,166  
    2,612,551  
    115.7 %
General and administrative
    4,207,899  
    4,012,357  
    195,542  
    4.9 %
Total operating expense
    10,433,729  
    7,031,474  
    3,402,255  
    48.4 %
LOSS FROM OPERATIONS
    (3,996,939 )
    (3,904,362 )
    92,577  
    2.4 %
OTHER INCOME (EXPENSE): 
       
       
       
       
Interest expense
    (771,885 )
    (5,970,450 )
    (5,198,565 )
    (87.1) %
Loss on extinguishment of debt
    (394,169 )
    -  
    394,169  
    100.0 %
Other income (expense), net
    (5,622 )
    1,839  
    (7,461 )
    (405.7) %
Fair value adjustment for contingent consideration
    195,459  
    164,479  
    30,980  
    18.8 %
Change in fair value of derivative liabilities