N
otes to Condensed Consolidated
Financial Statements
June 30, 2018
(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 31 commercial products in the United States,
including 12 of these commercial products in multiple countries
around the world through our 16 international commercial partners.
While we generate revenue from the sale of our commercial products,
most revenue is currently generated by UriVarx®, Apeaz®,
Vesele®, Diabasens™, Sensum+®, ProstaGorx®,
Zestra®, Zestra® Glide, RecalMax™, FlutiCare®,
AllerVarx®, ArthriVarx®, Xyralid®, PEVarx®, and
Beyond Human® Testosterone Booster and related
products.
Pipeline Products
GlucoGorx™ Supplement, Glucometer, Lancing Device and
GlucoGorx™ Strips
. GlucoGorx™ is a supplement made of
a
combination of herbs
and nutrients designed to balance and maintain healthy
blood sugar levels.
The
Glucometer, Lancing Device and GlucoGorx™ Strips are part of
a recent FDA cleared kit that is co-marketed with GlucoGorx™
to provide customers with the ability to utilize the
supplement’s benefits and to test their blood sugar levels in
their own homes in a quick and efficient manner. We currently
expect to launch this product and the kit in the second half of
2018.
Musclin™
. Musclin
™
is a proprietary supplement made of an
FDA
Generally Recognized As
Safe (“
GRAS”)
approved ingredient designed to increase muscle mass, endurance and
activity. The main ingredient in Musclin
™
is a patent-pending natural activator of
the
transient receptor
potential cation channel, subfamily V, member 3
(
TRPV3) channels on muscle
fibers responsible to increase width of myotubules in fibers
resulting in larger muscles and higher endurance. We currently
expect to launch this product in the second half of
2018.
Regenerum™
.
Regenerum™ is a proprietary
product containing two natural molecules, one is an activator of
the TRPV3 channels resulting in the increase of muscle fiber width
and the second targets a different unknown receptor to build
the muscle's capacity for energy production and increase
in physical endurance, allowing an added benefit to increase muscle
mass and potentially decrease muscle wasting.
Regenerum™ is being developed for patients suffering
from muscle wasting or cachexia. We currently expect to launch
this product in 2019 pending successful clinical trials in patients
with muscle wasting or cachexia.
In addition to the above listed product pipeline, we are
continuously looking to add additional drugs, supplements and
medical devices to our pipeline.
Change in Accounting Principle
On January 1, 2018, we adopted Financial Accounting Standards Board
(“FASB”) Accounting Standards Update
(“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
. This ASU requires
that 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 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. The Company elected to use the modified retrospective
transition method, where the cumulative effect of the initial
application is recognized as an adjustment to opening retained
earnings at January 1, 2018. As a result of the adoption of
this ASU, we recorded a cumulative-effect adjustment to the
consolidated statement of financial position as of January 1, 2018
of $58,609 for the warrants previously classified as a derivative
liability due to a down round provision included in the terms of
the warrant agreement. Therefore, the cumulative-effect adjustment
was recorded as a reduction in accumulated deficit and derivative
liabilities in the accompanying condensed consolidated balance
sheet as of January 1, 2018. The adoption of this ASU
did not have an impact on our condensed consolidated results of
operations.
Basis of Presentation and Principles of Consolidation
The condensed consolidated balance sheet as of December 31, 2017,
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, 2017. Certain information required by U.S. GAAP has
been condensed or omitted in accordance with the rules and
regulations of the U.S. Securities and Exchange Commission
(“SEC”). The results for the period ended June 30, 2018
are not necessarily indicative of the results to be expected for
the entire fiscal year ending December 31, 2018 or for any future
period.
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 and
the valuation of equity-based instruments. We base our
estimates on historical experience and various other assumptions
that we believe to be reasonable under the
circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
Liquidity
Our operations have been financed primarily through proceeds from
convertible debentures and notes payable, sales of our common stock
and revenue generated from our products domestically and
internationally by our partners. These funds have provided us
with the resources to operate our business, sell and support our
products, attract and retain key personnel and add new products to
our portfolio. We have experienced net losses and negative
cash flows from operations each year since our inception. As
of June 30, 2018, we had an accumulated deficit of $39,250,348 and
a working capital deficit of $1,271,158.
During the six months ended June 30, 2018, we received net cash
proceeds of $2.7 million from the exercise of warrants (see Note
8). Additionally, during the period we raised $1,872,500 in gross
proceeds from the issuance of notes payable to six
investors (see Note 6). We have also issued equity
securities in certain circumstances to pay for services from
vendors and consultants.
As of June 30, 2018, we had $1,614,495 and as of August 9, 2018 we
had $1,902,307 in cash. During the six months ended June 30,
2018, we had net cash used in operating activities of $3.5
million. We expect that our existing capital resources, together
with 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 $1,227,554 and has agreed to refrain from receipt
of any funds which may jeopardize the ability of the Company to
operate. 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, 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 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 4). Based on
borrowing rates currently available to us, the carrying values of
the notes payable and short-term loans 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 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 six months ended June 30, 2018 and 2017. As of June 30,
2018 and December 31, 2017, two customers and four customers
accounted for 81% and 72% of total net accounts receivable of
$287,350 and $68,259, respectively.
Our operations are currently located in the U.S. and 83% and
86% of our product sales are currently within the U.S and 14% and
12% of our product sales are sold in Canada for the three and six
months ended June 30, 2018, respectively. The balance of the sales
are to various other countries, none of which is 10% or greater.
With the recent launch of our direct Canadian sales and continuous
expansion of our sales into other countries, we expect the
percentage of our Ex-US sales to grow potentially to over 20%. See
Note 2 for more details.
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
On January 1, 2018, we adopted FASB Accounting Standards
Codification (“ASC”) Topic
606,
Revenue
from Contracts with Customers
(“ASC 606”)
.
The new guidance sets forth a new five-step
revenue recognition model which replaces the prior revenue
recognition guidance in its entirety and is intended to eliminate
numerous industry-specific pieces of revenue recognition guidance
that have historically existed in U.S. GAAP. The underlying
principle of the new standard is that a business or other
organization will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
what it expects to receive in exchange for the goods or services.
The standard also requires more detailed disclosures and provides
additional guidance for transactions that were not addressed
completely in the prior accounting guidance.
We reviewed all contracts at the date of initial application and
elected to use the modified retrospective transition method, where
the cumulative effect of the initial application is recognized as
an adjustment to opening retained earnings at January 1, 2018.
Therefore, comparative prior periods have not been adjusted and
continue to be reported under FASB ASC Topic
605,
Revenue
Recognition
, (“ASC
605”). The adoption of the new revenue recognition guidance
was immaterial to our condensed consolidated statements of
operations, balance sheet, and cash flows as of and for the three
and six months ended June 30, 2018. Refer to Note 2 for additional
information regarding our adoption of ASC 606.
Our principal activities from which we generate our revenue are
product sales.
Revenue is measured based on consideration specified in a contract
with a customer. A contract with a customer exists when we enter
into an enforceable contract with a customer. The contract is based
on either the acceptance of standard terms and conditions on the
websites for e-commerce customers and via telephone with our
third-party call center for our print media and direct mail
customers, or the execution of terms and conditions contracts with
retailers and wholesalers. These contracts define each party's
rights, payment terms and other contractual terms and conditions of
the sale. Consideration is typically paid prior to shipment via
credit card or check when our products are sold direct to consumers
or approximately 30 days from the time control is transferred when
sold to wholesalers, distributors and retailers. We apply judgment
in determining the customer’s ability and intention to pay,
which is based on a variety of factors including the
customer’s historical payment experience and, in some
circumstances, published credit and financial information
pertaining to the customer.
A performance obligation is a promise in a contract to transfer a
distinct product to the customer, which for us is transfer of
over-the-counter drug and consumer care products to our customers.
Performance obligations promised in a contract are identified based
on the goods that will be transferred to the customer that are both
capable of being distinct and are distinct in the context of the
contract, whereby the transfer of the goods is separately
identifiable from other promises in the contract. We have concluded
the sale of bottled finished goods and related shipping and
handling are accounted for as the single performance
obligation.
The transaction price of a contract is allocated to each distinct
performance obligation and recognized as revenue when or as the
customer receives the benefit of the performance obligation. The
transaction price is determined based on the consideration to which
we will be entitled to receive in exchange for transferring goods
to the customer. We issue refunds to e-commerce and print media
customers, upon request, within 30 days of delivery. We
estimate the amount of potential refunds at each reporting period
using a portfolio approach of historical data, adjusted for changes
in expected customer experience, including seasonality and changes
in economic factors. For retailers, distributors and wholesalers,
we do not offer a right of return or refund and revenue is
recognized at the time products are shipped to customers. In all
cases, judgment is required in estimating these reserves. Actual
claims for returns could be materially different from the
estimates. The estimated reserve for sales returns and allowances,
which is included in accounts payable and accrued expense, was
approximately $211,000 and $53,000 at June 30, 2018 and December
31, 2017, respectively.
We recognize revenue when we satisfy a performance obligation in a
contract by transferring control over a product to a customer when
product is shipped. Taxes assessed by a governmental authority that
are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by us from a
customer, are excluded from revenue. Shipping and handling costs
associated with outbound freight after control over a product has
transferred to a customer are accounted for as a fulfillment cost
and are included in cost of product sales.
We enter into exclusive distributor and license agreements that are
within the scope of ASC Topic 606. The license agreements we
enter into normally generate three separate components of revenue:
(1) an initial nonrefundable 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
nonrefundable payments or licensing fee is recognized when all
required conditions are met. If the consideration for the initial
license fee is for the right to sell the licensed product in the
respective territory with no other required conditions to be met,
such type of nonrefundable license fee arrangement for the right to
sell the licensed product in the territory is recognized ratably
over the term of the license agreement. For arrangements with
licenses that include sales-based royalties, including sales-based
milestone payments based on the level of sales, and the license is
deemed to be the predominant item to which the royalties relate, we
recognize royalty revenue and sales-based milestones at the later
of (i) when the related sales occur, or (ii) when the performance
obligation to which the royalty has been allocated has been
satisfied. The achievement of the sales-based milestone
underlying the payment to be received predominantly relates to the
licensee’s performance of future commercial
activities.
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
$4,534,000 and $1,255,000 and $7,172,000 and $2,613,000 for the
three and six months ended June 30, 2018 and 2017,
respectively.
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 plus deferred
RSUs during the periods plus the effect of dilutive securities
outstanding during the periods. For the three and six months
ended June 30, 2018 and 2017, 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 8 for more
details.
Recent Accounting Pronouncements
In June 2018, the FASB issued Accounting Standards Update
(“ASU”) 2018-07,
Compensation – Stock
Compensation (Topic 718) Improvements to Nonemployee Share-Based
Payment Accounting
. This ASU expands the scope of Topic
718 to include share-based payment transactions for acquiring goods
and services from nonemployees. The amendments in this
ASU will become effective for us beginning January 1, 2019, and
early adoption is permitted. We do not anticipate that this ASU
will have a material effect on our consolidated financial
statements.
In January 2017, the FASB issued Accounting Standards Update
(“ASU”) 2017-04,
Intangibles - Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. The update
simplifies how an entity is required to test goodwill for
impairment by eliminating Step 2 from the goodwill impairment test.
Step 2 measures a goodwill impairment loss by comparing the implied
fair value of a reporting unit’s goodwill with the carrying
amount. This update is effective for annual and interim periods
beginning after December 15, 2019, and interim periods within that
reporting period. While we are still in the process of completing
our analysis on the impact this guidance will have on the
consolidated financial statements and related disclosures, we do
not expect the impact to be material.
In January 2017, the FASB issued ASU
2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
. The update provides that when substantially all
the fair value of the assets acquired is concentrated in a single
identifiable asset or a group of similar identifiable assets, the
set is not a business. This update is effective for annual and
interim periods beginning after December 15, 2017, and interim
periods within that reporting period. We adopted this ASU on
January 1, 2018 and the impact on our consolidated financial
statements will depend on the facts and circumstances of any
specific future transactions.
In February 2016, the FASB issued its new lease accounting guidance
in ASU No. 2016-02,
Leases (Topic
842)
. Under the new guidance,
lessees will be required to recognize the following for all leases
(with the exception of short-term leases) at the commencement date.
A lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to
align, where necessary, lessor accounting with the lessee
accounting model and ASC 606,
Revenue from Contracts with
Customers
. The new lease
guidance simplified the accounting for sale and leaseback
transactions primarily because lessees must recognize lease assets
and lease liabilities. Lessees will no longer be provided with a
source of off-balance sheet financing. Public business entities
should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted. Lessees (for
capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the
consolidated financial statements. The modified retrospective
approach would not require any transition accounting for leases
that expired before the earliest comparative period presented.
Lessees may not apply a full retrospective transition
approach. While we are currently assessing the impact
ASU 2016-02 will have on the consolidated financial statements, we
expect the primary impact to the consolidated financial position
upon adoption will be the recognition, on a discounted basis, of
the minimum commitments on the consolidated balance sheet under our
sole non-cancelable operating lease for our facility in San Diego
resulting in the recording of a right of use asset and lease
obligation.
NOTE 2 – REVENUE
Disaggregation of Revenue
Our revenue is primarily from distinct fixed-price product sales in
the over-the-counter drug and consumer care products market, to
similar customers and channels utilizing similar types of contracts
that are short term in nature (less than one year). During the six
months ended June 30, 2018 we did recognize service revenue
relating to sales, marketing, and fulfillment efforts performed for
the benefit of one of our customers. Additionally, during the same
period we recognized cooperative marketing revenue relating to the
sale of certain distribution list to help offset the expenses we
incur in obtaining such lists. We currently do not anticipate
either of these revenue streams to become a significant portion of
our revenues.
The following is a table that presents product, service, and
co-operative marketing sales, net by geographical
area:
|
For the
Three Months Ended
June
30,
|
|
|
|
United
States
|
$
6,102,416
|
$
2,007,697
|
Canada
|
1,048,302
|
3,820
|
All
Other
|
158,878
|
19,640
|
Total Product,
Service, Co-operative marketing sales, net
|
$
7,309,596
|
$
2,031,157
|
|
For the
Six Months Ended
June
30,
|
|
|
|
United
States
|
10,286,518
|
$
4,114,748
|
Canada
|
1,401,974
|
9,925
|
All
Other
|
163,130
|
83,774
|
Total Product,
Service, Co-operative marketing sales, net
|
$
11,851,622
|
$
4,208,447
|
All Other consists of Europe, Australia, Asia, and the Middle
East.
NOTE 3 – LICENSE AGREEMENTS
In-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
™
sales and 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. Since CRI did not
earn royalties larger than the prepaid amount of $44,662 in 2017,
the term of the Amended CRI Asset Purchase Agreement is
automatically extended one additional year to December 31,
2018.
The CRI Asset Purchase Agreement also requires us to pay to CRI up
to $7.0 million in cash milestone payments based on first
achievement of annual Ex-U.S. net sales targets plus a royalty
based on annual Ex-U.S. net sales. The obligation for these
payments expires on April 19, 2023 or the expiration of the last of
CRI’s patent claims covering the product or its use outside
the U.S., whichever is sooner. No sales milestone obligations
have been met and no royalties are owed to CRI under this agreement
during the three and six months ended June 30, 2018 and
2017.
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
™
sales and marketing platform. During the
three and six months ended June 30, 2018 and 2017, no amounts have
been earned by CRI under the Amended CRI Asset Purchase
Agreement.
Out-License Agreements
Acerus Pharmaceuticals Corporation Agreement
On January 5, 2018, we entered into an exclusive ten-year license
agreement with Acerus Pharmaceuticals Corporation, a Canadian
company (“Acerus”), under which we granted to Acerus an
exclusive license to market and sell UriVarx® in Canada. Under
the agreement, we received a non-refundable upfront payment, we
will be eligible to receive up to CAD $1.65 million (USD $1.28
million at March 31, 2018) in milestone payments based on Acerus
achieving certain sales targets and we will sell UriVarx® to
Acerus at an agreed-upon transfer price. Acerus also has minimum
annual purchase requirements for UriVarx® during the term of
the agreement.
In the first quarter of 2018, we received an upfront payment
totaling $78,105 (CAD $100,000) which is being recognized over the
term of the ten-year license agreement. During the three and six
months ended June 30, 2018, we recognized license revenue related
to this agreement of $1,953 and $3,906, respectively. As of June
30, 2018, $74,200 of the upfront payment is included in deferred
revenue and customer deposits in the accompanying condensed
consolidated balance sheet. 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. During
the three and six months ended June 30, 2018, we recognized revenue
for the sale of products related to this agreement of $0 and
$310,629, respectively.
Lavasta Pharma FZ-LLC Agreement
On January 18, 2018, we entered into an exclusive ten-year license
agreement with Lavasta Pharma FZ-LLC, a Dubai company
(“Lavasta”), under which we granted to Lavasta an
exclusive license to market and sell ProstaGorx® in the
Kingdom of Saudi Arabia, Algeria, Egypt, the United Arab Emirates,
Lebanon, Jordan, Kuwait, Morocco, Tunisia, Bahrain, Oman, Qatar,
and Turkey, among other countries. If any country in the territory
under this agreement is ever listed on the U.S. Department of
Treasury’s restricted OFAC List or other list of countries
that a U.S. OTC pharma company cannot do business with, then such
country shall be removed from the list of countries included in the
territory in this agreement for such applicable restricted
period. Under the agreement, we received a non-refundable
upfront payment and we will sell products to Lavasta at an
agreed-upon transfer price. Lavasta also has minimum annual
purchase requirements for the products during the term of the
agreement.
During the first quarter of 2018, we received an upfront payment
totaling $25,000 which is being recognized over the term of the
ten-year license agreement. During the three and six months ended
June 30, 2018, we recognized license revenue related to this
agreement of $625 and $1,250, respectively. As of June 30, 2018,
$23,750 of the upfront payment is included in deferred revenue and
customer deposits in the accompanying condensed consolidated
balance sheet. 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. During the three and
six months ended June 30, 2018, we recognized revenue for the sale
of products related to this agreement of $140,637.
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 through March 2018. The
minimum annual order quantities by J&H are to be made over a
12-month period following the approval of the product by local
authorities and beginning upon the completion of the first shipment
of product. Our partner recently received the approval to
import the product and placed its first order in March 2017. During
the three and six months ended June 30, 2018 and 2017, we
recognized $0, $0, $82,300 and $60,000 in revenue for the sale of
products related to this agreement, respectively, and thus J&H
did not meet its minimum annual revenue quantities as described
above.
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. All terms and conditions of the
original agreement remain intact.
NOTE 4 – BUSINESS AND ASSET ACQUISITIONS
Acquisition of Novalere in 2015
On February 5, 2015 (the “Closing Date”), we acquired
the worldwide rights to market and sell the FlutiCare®
brand (fluticasone propionate nasal spray) and the related
third-party manufacturing agreement for the manufacturing of
FlutiCare® (“Acquisition Manufacturer”) from
Novalere FP. The OTC Abbreviated New Drug Application
(“ANDA”) for fluticasone propionate nasal spray was
filed at the end of 2014 by our third-party manufacturer and
partner, who is currently selling the prescription version of the
drug, with the FDA and the OTC ANDA is still subject to FDA
approval. An ANDA is an application for a U.S. generic drug
approval for an existing licensed medication or approved drug. A
prescription ANDA (“RX ANDA”) is for a generic version
of a prescription pharmaceutical and an OTC ANDA is for a generic
version of an OTC pharmaceutical.
Due to the delay in approval of the Acquisition
Manufacturer’s OTC ANDA by the FDA, in May 2017, we announced
a commercial relationship with a different third-party manufacturer
(West-Ward Pharmaceuticals International Limited or
“WWPIL”) who has an FDA approved OTC ANDA for
fluticasone propionate nasal spray under which they have agreed to
manufacture our FlutiCare® OTC product for sale in the U.S.
(see Note 10). We currently still anticipate that the OTC ANDA
filed in November 2014 by the Acquisition Manufacturer with
the FDA may be approved in the fourth quarter of 2018. As we hold
the worldwide rights to market and sell FlutiCare® under
the manufacturing agreement with the Acquisition Manufacturer, we
believe the agreement with the Acquisition Manufacturer will still
provide us with the opportunity to market and sell
FlutiCare® ex-U.S. and, if the OTC ANDA is approved by
the FDA, a second source of supply within the U.S., if ever
needed.
The Novalere Stockholders are entitled to receive, if and when
earned, earn-out payments (the “Earn-Out Payments”).
For every $5.0 million in Net Revenue (as defined in the Merger
Agreement) realized from the sales of FlutiCare® through the
manufacturing agreement with the Acquisition Manufacturer, the
Novalere Stockholders will be entitled to receive, on a pro rata
basis, $500,000, subject to cumulative maximum Earn-Out Payments of
$2.5 million. The Novalere Stockholders are only entitled to the
Earn-Out Payments from the Acquisition Manufacturer’s OTC
ANDA under review by the FDA and have no earn-out rights to the
sales of FlutiCare® supplied by WWPIL under the commercial
agreement entered into in May 2017.
During the three and six months ended June 30, 2018 and 2017, there
was an increase (decrease) in the estimated fair value of the
remaining 138,859 ANDA consideration shares totaling $(1,366) and
$400 and $2,944 and ($19,707), respectively, which is included in
fair value adjustment for contingent consideration in the
accompanying condensed consolidated statements 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 $15,274 is included in contingent
consideration in the accompanying condensed consolidated balance
sheet at June 30, 2018. There was no change to the estimated fair
value of the future earn-out payments of $1,248,125 during the
three and six months ended June 30, 2018 and
2017.
Purchase of Semprae Laboratories, Inc. in 2013
On December 24, 2013 (the “Semprae Closing Date”), we,
through Merger Sub, obtained 100% of the outstanding shares of
Semprae in exchange for the issuance of 3,201,776 shares of our
common stock, which shares represented 15% of our total issued and
outstanding shares as of the close of business on the Closing Date,
whereupon Merger Sub was renamed Semprae Laboratories, Inc. We
agreed to pay the former shareholders an annual royalty
(“Royalty”) equal to 5% of the net sales from
Zestra® and Zestra Glide® and any second-generation
products derived primarily therefrom (“Target
Products”) up until the time that a generic version of such
Target Product is introduced worldwide by a third
party.
The agreement to pay the annual Royalty resulted in the recognition
of a contingent consideration, which is recognized at the inception
of the transaction, and subsequent changes to estimate of the
amounts of contingent consideration to be paid will be recognized
as charges or credits in the consolidated statement of operations.
The fair value of the contingent consideration is based on
preliminary cash flow projections, growth in expected product sales
and other assumptions. During the three and six months ended June
30, 2018 and 2017, no amounts have been paid under this
arrangement. The fair value of the expected royalties to
be paid was decreased by $19,566 and $99,379 and $21,031 and
$106,447 during the three and six months ended June 30, 2018 and
2017, 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 $200,571 and $221,602 at June 30, 2018
and December 31, 2017, respectively, based on the new estimated
fair value of the consideration.
NOTE 5 – ASSETS AND LIABILITIES
Inventories
Inventories consist of the following:
|
|
|
|
|
|
Raw
materials and supplies
|
$
174,468
|
$
164,469
|
Work
in process
|
28,924
|
152,935
|
Finished
goods
|
2,025,791
|
1,408,294
|
Total
|
$
2,229,183
|
$
1,725,698
|
Intangible Assets
Amortizable intangible assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
417,597
|
$
(141,613
)
|
$
275,984
|
7 – 15
|
Customer
Contracts
|
611,119
|
(280,096
)
|
331,023
|
10
|
Sensum+®
License (from CRI)
|
234,545
|
(119,191
)
|
115,354
|
10
|
Vesele®
Trademark
|
25,287
|
(11,788
)
|
13,499
|
8
|
Beyond
Human® Website and Trade Name
|
222,062
|
(91,899
)
|
130,163
|
5 – 10
|
Novalere
Manufacturing Contract
|
4,681,000
|
(1,589,590
)
|
3,091,410
|
10
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(4,012
)
|
718
|
1 – 3
|
Total
|
$
6,196,340
|
$
(2,238,189
)
|
$
3,958,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
417,597
|
$
(124,809
)
|
$
292,788
|
7 – 15
|
Customer
Contracts
|
611,119
|
(249,540
)
|
361,579
|
10
|
Sensum+®
License (from CRI)
|
234,545
|
(107,464
)
|
127,081
|
10
|
Vesele®
Trademark
|
25,287
|
(10,208
)
|
15,079
|
8
|
Beyond
Human® Website and Trade Name
|
222,062
|
(72,206
)
|
149,856
|
5 – 10
|
Novalere
Manufacturing Contract
|
4,681,000
|
(1,355,540
)
|
3,325,460
|
10
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(3,474
)
|
1,256
|
1 – 3
|
Total
|
$
6,196,340
|
$
(1,923,241
)
|
$
4,273,099
|
|
Amortization expense for the three and six months ended June 30,
2018 and 2017 was $157,473 and $157,473 and $314,948 and $315,198,
respectively. The following table summarizes the approximate
expected future amortization expense as of June 30, 2017 for
intangible assets:
Remainder
of 2018
|
$
314,948
|
2019
|
629,001
|
2020
|
628,525
|
2021
|
599,596
|
2022
|
591,834
|
2023
|
558,150
|
Thereafter
|
636,097
|
|
$
3,958,151
|
Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the
following:
|
|
|
|
|
|
Prepaid
insurance
|
$
35,676
|
$
109,990
|
Prepaid
inventory
|
236,870
|
124,871
|
Prepaid
rent
|
20,881
|
-
|
Prepaid
consulting and other expense
|
145,053
|
83,557
|
Prepaid
CRI royalties (see Note 2)
|
44,662
|
44,662
|
Merchant
account reserves
|
210,788
|
-
|
Total
|
$
693,930
|
$
363,080
|
Accounts Payable and Accrued Expense
Accounts payable and accrued expense consist of the
following:
|
|
|
|
|
|
Accounts
payable
|
$
1,771,050
|
$
2,305,884
|
Accrued
credit card balances
|
210,529
|
72,719
|
Accrued
royalties
|
132,326
|
132,326
|
Sales
returns and allowances
|
211,124
|
52,904
|
Sales
tax payable
|
259,558
|
-
|
Deferred
rent
|
149,203
|
-
|
Accrued
other
|
528,423
|
43,288
|
Total
|
$
3,262,213
|
$
2,607,121
|
NOTE 6 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Notes Payable
The following table summarizes the outstanding notes payable at
June 30, 2018 and December 31, 2017:
|
|
|
Notes
payable:
|
|
|
February
2016 Note Payable
|
$
-
|
$
54,984
|
September
2017 5% Note Payable
|
-
|
165,000
|
October
and December 2017 Notes Payable
|
333,333
|
1,066,667
|
December
2017 5% Note Payable
|
390,000
|
390,000
|
January
and March 2018 Notes Payable
|
985,678
|
-
|
February
and March 2018 5% Notes Payable
|
720,000
|
-
|
Total notes payable
|
2,429,011
|
1,676,651
|
Less:
Debt discount
|
(612,615
)
|
(437,355
)
|
Carrying value
|
1,816,396
|
1,239,296
|
Less:
Current portion
|
(1,816,396
)
|
(1,239,296
)
|
Notes payable, net of current portion
|
$
-
|
$
-
|
The following table summarizes the future minimum payments as of
June 30, 2018 for the notes payable:
Remainder
of 2018
|
$
1,931,530
|
2019
|
497,481
|
|
$
2,429,011
|
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 was to be paid by us
through a deposit account control agreement with a third-party bank
in which SBI was 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 was February 19, 2018 and was repaid in
full.
September 2017 5% Note Payable
On September 20, 2017, we entered into a securities purchase
agreement with an unrelated third-party investor in which the
investor loaned us gross proceeds of $150,000 pursuant to a 5%
promissory note. The note has an Original Issue Discount
(“OID”) of $15,000 and requires payment of $165,000 in
principal upon maturity. The note bears interest at the rate
of 5% per annum and the principal amount and interest were payable
at maturity on May 20, 2018.
In connection with the note, we issued the investor restricted
shares of common stock totaling 895,000 shares. 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
note. 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
$70,169. The discount is being amortized to interest expense using
the effective interest method over the term of the
note.
In April 2018, the Company elected to settle the September 2017
note payable outstanding principal and interest balance in exchange
for 1,474,287 shares of common stock. 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 agreement and was
determined to be $196,080. Due to the settlement of the principal
and interest balance of $169,543 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 $26,537 and the unamortized
debt discount as of the date of settlement of $12,050 were recorded
as a loss on debt extinguishment in the accompanying condensed
consolidated statement of operations
October and December 2017 Notes Payable
On October 17, 2017, October 20, 2017 and December 4, 2017, we
entered into a securities purchase agreement with two unrelated
third-party investors in which the investors loaned us gross
proceeds of $500,000 in October 2017 and $500,000 in December 2017
pursuant to a 0% promissory note (“October and December 2017
Notes Payable”). The notes have an OID of $200,000
and require nine payments of $66,667 in principal per month through
July 2018 and twelve payments of $50,000 in principal per month
through December 2018. The October and December 2017 Notes
Payable bear no interest per annum. The effective interest rate is
27% per annum for the notes issued in October and 20% per annum for
the notes issued in December.
In connection with the October and December 2017 Notes Payable, we
issued the investors restricted shares of common stock totaling
600,000 shares in December 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 October
and December 2017 Notes Payable. The allocation of the
proceeds received to the restricted shares of common stock based on
their relative fair value and the OID resulted in us recording a
debt discount of $100,000 in October 2017 and $149,712 in December
2017. In connection with the financing, we issued 576,373
restricted shares of common stock in October 2017 and 543,478
restricted shares of common stock in December 2017 to a third-party
consultant. The fair value of the restricted shares of common stock
issued of $48,761 in October 2017 and $50,000 in December 2017 were
recorded as a debt discount to the carrying value of the notes
payable. The discount is being amortized to interest expense using
the effective interest method over the term of the October and
December 2017 Notes Payable.
On March 1, 2018, we entered into a securities exchange agreement
with certain of the October and December 2017 Notes Payable
holders. In connection with the securities exchange agreement, we
issued a total of 2,250,000 shares of common stock in exchange for
the settlement of principal due under the October and December 2017
Notes Payable totaling $166,667 (see Note 8). 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 was determined to be $384,750. Due to the settlement of
the principal balance of $166,667 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 balance totaling $218,083 and the unamortized debt
discount as of the date of settlement of $37,602 were recorded as a
loss on debt extinguishment in the accompanying condensed
consolidated statement of operations.
December 2017 5% Note Payable
On December 13, 2017, we entered into a securities purchase
agreement with an unrelated third-party investor in which the
investor loaned us gross proceeds of $350,000 pursuant to a 5%
promissory note (“December 2017 5% Note
Payable”). The note has an OID of $40,000, bears
interest at 5% per annum and requires principal and interest
payments of $139,750, $133,250 and $131,625 on June 15, 2018,
September 15, 2018 and December 15, 2018,
respectively.
In connection with the December 2017 5% Note Payable, we issued the
investor restricted shares of common stock totaling 1,000,000
shares in December 2017. The fair value of the
restricted shares of common stock issued was based on the market
price of our common stock on the date of issuance of the December
2017 5% Note Payable. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value and the OID resulted in us recording a debt
discount of $107,807 in December 2017. The discount is being
amortized to interest expense using the effective interest method
over the term of the December 2017 5% Note Payable.
January and March 2018 Notes Payable
On January 8, 2018, January 30, 2018, March 1, 2018 and March 2,
2018, we entered into a securities purchase agreement with three
unrelated third-party investors in which the investors loaned us
gross proceeds of $677,500 in January 2018 and $550,000 in March
2018 pursuant to 0% promissory notes (“January and March 2018
Notes Payable”). The notes have an OID of $269,375
and bear interest at the rate of 0% per annum. The principal
amount of $1,496,875 is to be repaid in twelve equal monthly
installments. Monthly installments of $68,490 began in February
2018 and are due through January 2019 and monthly installments of
$56,250 begin in April 2018 and are due through March 2019. The
effective interest rate is 22% per annum for the January and March
2018 Notes Payable.
In connection with the January and March 2018 Notes Payable, we
issued the investors restricted shares of common stock totaling
1,282,000 shares. 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 January and March 2018
Notes Payable. The allocation of the proceeds received
to the restricted shares of common stock based on their relative
fair value and the OID resulted in us recording a debt discount of
$226,669 in January 2018 and $187,574 in March 2018. In connection
with the financing, we issued 621,317 restricted shares of common
stock in January 2018 and 314,737 restricted shares of common stock
in March 2018 to a third-party consultant. The fair value of the
restricted shares of common stock issued of $67,500 in January 2018
and $55,000 in March 2018 was recorded as a debt discount to the
carrying value of the January and March 2018 Notes Payable (see
Note 8). The discount is being amortized to interest expense using
the effective interest method over the term of the January and
March 2018 Notes Payable.
February and March 5% Notes Payable
On February 28, 2018 and March 28, 2018, we entered into a
securities purchase agreement with two unrelated third-party
investors in which the investors loaned us gross proceeds of
$650,000 pursuant to 5% promissory notes (“February and March
2018 5% Notes Payable”). The notes have an OID of
$70,000 and require payments of $720,000 in principal. The
notes bear interest at the rate of 5% per annum and the principal
amount and interest are payable at maturity on October 28, 2018 for
the note issued in February 2018 and in three installments on
October 1, 2018, January 1, 2019 and April 1, 2019 for the note
issued in March 2018.
In connection with the February and March 2018 5% Notes Payable, we
issued the investors restricted shares of common stock totaling
1,485,000 shares (see Note 8). 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 February
and March 2018 5% Notes Payable. The allocation of the
proceeds received to the restricted shares of common stock based on
their relative fair value and the OID resulted in us recording a
debt discount of $93,566 in February 2018 and $128,695 in March
2018. The discount is being amortized to interest expense using the
effective interest method over the term of the February and March
2018 5% Notes Payable.
Interest Expense
We
recognized interest expense on notes payable of $21,294 and $21,656
and $33,778 and $66,261 for the three and six months ended June 30,
2018 and 2017, respectively. Amortization of the debt
discount to interest expense during the three and six months ended
June 30, 2018 and 2017 totaled $304,688 and $88,474 and $534,092
and $601,348, respectively.
NOTE 7 – RELATED PARTY TRANSACTIONS
Accrued Compensation – Related Party
Accrued compensation includes accruals for employee wages, vacation
pay and target-based bonuses. The components of accrued
compensation as of June 30, 2018 and December 31, 2017 are as
follows:
|
|
|
Wages
|
$
1,131,686
|
$
1,431,686
|
Vacation
|
385,524
|
342,284
|
Bonus
|
332,144
|
742,481
|
Payroll
taxes on the above
|
124,095
|
133,746
|
Total
|
1,973,449
|
2,650,197
|
Classified
as long-term
|
(1,227,554
)
|
(1,531,904
)
|
Accrued
compensation
|
$
745,895
|
$
1,118,293
|
Accrued employee wages at June 30, 2018 and December 31, 2017 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 which may
jeopardize the ability of the Company to operate and thus the
remaining balance is classified as a long-term
liability.
NOTE 8 – STOCKHOLDERS’ EQUITY
Issuances of Common Stock
In the first quarter of 2018, eleven of our warrant holders
exercised their Series B Warrants to purchase shares of common
stock totaling 18,925,002 at an exercise price of $0.15 per share.
We received net cash proceeds of $2,657,538. The remaining Series B
Warrants totaling 6,741,667 expired on March 21, 2018. Per the
terms of the engagement letter with H.C. Wainwright & Co.
(“HCW”) in connection with the public offering in March
2017 and as a result of the Series B Warrant exercises, we paid HCW
$181,213 and issued a warrant to purchase 862,917 shares of common
stock at an exercise price of $0.1875 per share (125% of the price
of the common stock sold in the public offering in March 2017)
which expires on March 21, 2023. The fair value of the warrants
issued to HCW totaled $136,729 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.
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, 2,000,000 shares of common stock in exchange for
services to be rendered. We have terminated this agreement
effective January 30, 2018. During the three months ended March 31,
2018, we issued 166,666 shares of restricted common stock under the
agreement related to services provided and recognized the fair
value of the shares issued of $13,917 in general and administrative
expense in the accompanying consolidated statement of operations.
The 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 2018, we issued a total of 89,820 shares of common stock
for services and recorded an expense of $7,500 for the six months
ended June 30, 2018 which is included in general and administrative
expense in the accompanying condensed consolidated statement of
operations. The 89,820 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.
During the three and six months ended June 30, 2018, we issued 0
and 2,767,000 shares of restricted common stock, respectively, 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 $0 and $292,129, respectively, and was
recorded as a debt discount (see Note 6).
In connection with the January and March 2018 Notes, we issued
621,317 restricted shares of common stock in January 2018 and
314,737 restricted shares of common stock in March 2018 to a
third-party consultant. The fair value of the restricted shares of
common stock issued of $67,500 in January 2018 and $55,000 in March
2018 was recorded as a debt discount to the carrying value of the
notes payable during the six months ended June 30, 2018 (see Note
6).
In March 2018, certain October and December 2017 Notes Payable
holders elected to exchange $166,667 in principal for 2,250,000
shares of common stock (see Note 6). The fair value of the shares
of common stock of $384,750 was based on the market price of our
common stock on the date of issuance.
In April 2018, certain September 2017 5% Notes Payable holders
elected to exchange $169,543 in principal and interest for
1,474,287 shares of common stock (see Note 6). The fair value of
the shares of common stock of $196,080 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 June 30, 2018,
there were no shares available under the 2013
Plan.
2014 Equity Incentive Plan
We have
issued common stock, restricted stock units and stock options to
employees, non-executive directors and outside consultants under
the 2014 Equity Incentive Plan (“2014 Plan”), which was
approved by our Board of Directors in November 2014. The 2014
Plan allows for the issuance of up to 20,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. As of June 30, 2018, 63
shares were available under the 2014 Plan.
2016 Equity Incentive Plan
On
March 21, 2016, our Board of Directors approved the adoption of the
2016 Equity Incentive Plan and on October 20, 2016 adopted the
Amended and Restated 2016 Equity Incentive Plan (“2016
Plan”). The 2016 Plan was then approved by our
stockholders in November 2016. The 2016 Plan allows for the
issuance of up to 20,000,000 shares of our common stock to be
issued in the form of stock options, stock awards, stock unit
awards, stock appreciation rights, performance shares and other
share-based awards. The 2016 Plan includes an evergreen
provision in which the number of shares of common stock
authorized for issuance and available for future grants under the
2016 Plan will be increased each January 1 after the effective date
of the 2016 Plan by a number of shares of common stock equal to the
lesser of: (a) 4% of the number of shares of common stock issued
and outstanding on a fully-diluted basis as of the close of
business on the immediately preceding December 31, or (b) a number
of shares of common stock set by our Board of Directors. In
March 2017, our Board of Directors approved an increase of
5,663,199 shares of common stock to the shares authorized under the
2016 Plan in accordance with the evergreen provision in the 2016
Plan. As of June 30, 2018, 15,922,749 shares were available under
the 2016 Plan.
Stock Options
For the six months ended June 30, 2018 and 2017, the following
weighted average assumptions were utilized for the calculation of
the fair value of the stock options granted during the period using
Black-Scholes:
|
|
|
Expected
life (in years)
|
6.25
|
8.6
|
Expected
volatility
|
201.3
%
|
217.0
%
|
Average
risk-free interest rate
|
2.79
%
|
2.28
%
|
Dividend
yield
|
0
%
|
0
%
|
Grant
date fair value
|
$
0.06
|
$
0.19
|
The dividend yield of zero is based on the fact that the Company
has never paid cash dividends and has no present intention to pay
cash dividends. Expected volatility is based on the historical
volatility of 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
corresponds to the expected term of the stock options.
The following table summarizes the number of stock options
outstanding and the weighted average exercise price:
|
|
Weighted average exercise price
|
Weighted remaining contractual life (years)
|
Aggregate intrinsic value
|
Outstanding
at December 31, 2017
|
88,000
|
$
0.17
|
9.0
|
$
377
|
Granted
|
193,000
|
0.14
|
9.3
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
Cancelled
|
-
|
-
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
-
|
Outstanding
at June 30, 2018
|
281,000
|
$
0.15
|
9.3
|
$
1,148
|
|
|
|
|
|
Vested
and Expected to Vest at June 30, 2018
|
281,000
|
$
0.15
|
9.3
|
$
1,148
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of all outstanding stock options and the
quoted price of our common stock at June 30,
2018. During the three and six months ended June 30,
2018 and 2017, the Company recognized stock-based compensation from
stock options of $1,424 and $1,028 and $4,000 and $5,406,
respectively.
Restricted Stock Units
The following table summarizes the restricted stock
unit activity for the six months ended June 30,
2018:
|
|
Outstanding
at December 31, 2017
|
13,191,835
|
Granted
|
6,487,592
|
Exchanged
|
(713,541
)
|
Cancelled
|
(1,536,459
)
|
Outstanding
at June 30, 2018
|
17,429,427
|
|
|
Vested
at June 30, 2018
|
10,566,057
|
The vested restricted stock units at June 30, 2018 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) 7-10 years from date of issuance. Settlement of
vested restricted stock units may be made in the form of (i) cash,
(ii) shares, or (iii) any combination of both, as determined by the
board of directors and is subject to certain criteria having been
fulfilled by the recipient.
We calculate the fair value of the restricted stock units based
upon the quoted market value of the common stock at the date of
grant. The grant date fair value of restricted stock units issued
during the three and six months ended June 30, 2018 was $483,792
and $943,292. For the three and six months ended June 30, 2018 and
2017, we recognized $104,860 and $(52,115) and $197,414 and
$107,885, respectively, of stock-based compensation expense for the
vested units. As of June 30, 2018, compensation expense related to
unvested shares not yet recognized in the condensed consolidated
statement of operations was approximately $969,297 and will be
recognized over a remaining weighted-average term of 2.83
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 expiration
in 2020 to investors and placement agents. Warrants to purchase
774,533 shares of common stock remain outstanding as of June 30,
2018.
In connection with the convertible debentures in 2016, we issued
warrants to the investors and placement agents with an exercise
price of $0.40 per share and expire in 2021. Warrants to purchase
4,220,000 shares of common stock remain outstanding as of June 30,
2018.
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. In the first quarter of 2018, certain
investors elected to exercise 18,925,002 Series B Warrants and the
remaining Series B Warrants expired in March 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, as well as in March 2018 we issued our placement
agent warrants to purchase 862,917 shares of common stock with an
exercise price of $0.1875 per share and expire in 2023 in
connection with the Series B Warrants exercised.
For the six months ended June 30, 2018, the following weighted
average assumptions were utilized for the calculation of the fair
value of the warrants issued during the period using
Black-Scholes:
|
|
Expected
life (in years)
|
5.0
|
Expected
volatility
|
183.8
%
|
Average
risk-free interest rate
|
2.69
%
|
Dividend
yield
|
0
%
|
At June
30, 2018, there are 32,917,056 fully vested warrants outstanding.
The weighted average exercise price of outstanding warrants at June
30, 2018 is $0.19 per share, the weighted average remaining
contractual term is 3.5 years and the aggregate intrinsic value of
the outstanding warrants is $18,092.
Net Loss per Share
Restricted stock units that are vested but the issuance and
delivery of the shares are deferred until the employee or director
resigns are included in the basic and diluted net loss per share
calculations.
The weighted average shares of common stock outstanding used in the
basic and diluted net loss per share calculation for the three and
six months ended June 30, 2018 and 2017 was 194,450,454 and
150,713,121 and 185,706,616 and 77,455,497,
respectively.
The
weighted average restricted stock units vested but issuance of the
common stock is deferred until there is a change in control, a
specified date in the agreement or the employee or director resigns
used in the basic and diluted net loss per share calculation for
the three and six months ended June
30, 2018 and 2017 was 10,656,458 and 9,284,274 and 10,363,853 and
7,940,349, respectively.
The total weighted average shares outstanding used in the basic and
diluted net loss per share calculation for the three and six months
ended June 30, 2018 and 2017 was 205,106,912 and 159,997,395 and
196,070,459 and 85,395,846, respectively.
The following table shows the anti-dilutive shares excluded from
the calculation of basic and diluted net loss per common share as
of June 30, 2018 and 2017:
|
|
|
|
|
Gross number of shares excluded:
|
|
|
Restricted
stock units – unvested
|
6,863,370
|
3,750,000
|
Stock
options
|
272,000
|
185,500
|
Warrants
|
32,917,056
|
58,583,725
|
Total
|
40,052,426
|
62,519,225
|
The above table does not include the ANDA Consideration Shares
related to the Novalere acquisition totaling 138,859 at June 30,
2018 and 2017, respectively, as they are considered contingently
issuable (see Note 4).
NOTE 8 – DERIVATIVE LIABILITIES
Prior to the adoption of ASU 2017-11 (see Note 1), the warrants
issued in connection with the January 2015 non-convertible
debenture to a former executive were measured at fair value and
classified as a liability because these warrants contain
anti-dilution protection and therefore, could not be considered
indexed to our own stock which was a requirement for the scope
exception as outlined previously under FASB ASC 815. The estimated
fair value of the warrants was determined using the Probability
Weighted Black-Scholes Model. The fair value was 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. Upon the adoption of ASU 2017-11, we no longer
classify the fair value of these warrants as a
liability.
The derivative liabilities were a Level 3 fair value measure in the
fair value hierarchy. The following table presents the activity for
the Level 3 warrant derivative liabilities measured at fair value
on a recurring basis for the six months ended June 30,
2018:
Warrant derivative liabilities:
|
|
Beginning
balance December 31, 2017
|
$
58,609
|
Cumulative
adjustment from liabilities to accumulated deficit for the fair
value of the warrant
derivative
liability upon adoption of ASU 2017-11 on January 1,
2018
|
(58,609
)
|
Change
in fair value
|
-
|
Ending
balance June 30, 2018
|
$
-
|
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 provided us with the
rights to launch our branded, fluticasone propionate nasal spray
USP, 50 mcg per spray (FlutiCare®), under WWPIL’s FDA
approved ANDA No. 207957 in the U.S. in mid-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. We have met the minimum product batch purchase requirements
through May 2018.
Litigation
James L. Yeager, Ph.D., and Midwest Research Laboratories, LLC v.
Innovus Pharmaceuticals, Inc.
On January 18, 2018, Dr. Yeager and Midwest
Research Laboratories (the “Plaintiffs”) filed a
complaint in the Illinois Northern District Court in Chicago,
Illinois, which Plaintiffs amended on February 26, 2018
(“Amended Complaint”). The Amended Complaint
alleges that the Company violated Dr. Yeager’s right of
publicity and made unauthorized use of his name, likeness and
identity in advertising materials for its product Sensum+®.
Plaintiffs seek actual and punitive damages, costs and
attorney’s fees, an injunction and corrective advertising. We
intend to file a response to the Amended Complaint by August 23,
2018. We believe that the Plaintiffs’ allegations and claims
are wholly without merit, and we intend to defend the case
vigorously and assert counterclaims against the Plaintiffs.
More specifically, we believe that we secured and paid for
all of the rights claimed by Dr. Yeager from his company Centric
Research Institute (“CRI”) pursuant to agreements with
CRI (the “CRI Agreements”) and that CRI has
indemnification obligations under the CRI Agreements for all
expenses and losses associated with the claims made by the
Plaintiffs.
In the ordinary course of business, we may face various claims
brought by third parties and we may, from time to time, make claims
or take legal actions to assert our rights, including intellectual
property disputes, contractual disputes and other commercial
disputes. Any of these claims could subject us to litigation.
Management believes the outcomes of currently pending claims are
not likely to have a material effect on our consolidated financial
position and results of operations.
NOTE 10 – SUBSEQUENT EVENTS
In July
2018, we entered into a promissory note agreement and securities
purchase agreement with an unrelated third-party investor in which
the investor loaned us gross proceeds of $500,000 in consideration
for the issuance of a 5% promissory note. The note has an
original issue discount (“OID”) of $50,000 and requires
payment of $550,000 in principal. The note bears interest at
the rate of 5% per annum and the principal amount and interest are
payable at maturity on February 19, 2019. As additional
consideration for the purchase of the note, we issued 1,600,000
shares of restricted common stock to the investor.
In July
2018, we entered into an exchange agreement with a note holder of
the December 2017 5% Notes Payable to convert the principal and
interest balance of $402,433 to 3,832,695 shares of common
stock.
In July
2018, one of our warrant holders exercised their Series A Warrants
to purchase shares of common stock totaling 100,000 at an exercise
price of $0.15 per share.
In
August 2018, we entered in exchange agreements relating to four
outstanding notes to convert the principal outstanding balance of
$550,000 into 5,238,098 shares of common stock.
In
August 2018, we entered into two promissory note agreements and
securities purchase agreements with two unrelated third-party
investors in which the investors loaned us gross proceeds of
$1,000,000. The notes have an OID of $200,000 and requires
payment of $1,200,000 in principal. The notes require monthly
principal payments and mature on August 1, 2019. As additional
consideration for the purchase of the note, we issued 1,000,000
shares of restricted common stock to the investors. In connection
with these promissory note agreements, we issued 638,978 restricted
shares of common stock to a third-party consultant.
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.