INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
|
F-1
|
Consolidated Balance Sheets - December 31, 2017 and 2016
|
F-2
|
Consolidated Statements of Operations - Years Ended December 31, 2017 and 2016
|
F-3
|
Consolidated Statements of Stockholders’ Deficit - December 31, 2017 and 2016
|
F-4
|
Consolidated Statements of Cash Flows - Years Ended December 31, 2017 and 2016
|
F-5
|
Notes to the Consolidated Financial Statements - December 31, 2017 and 2016
|
F-6
|
|
|
Condensed Consolidated Balance Sheets - September 30, 2018 (Unaudited) and December 31, 2017
|
G-1
|
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017
|
G-2
|
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months ended September 30, 2018 and 2017
|
G-3
|
Notes to Condensed Consolidated Financial Statements - September 30, 2018 (Unaudited)
|
G-4
|
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Innovus Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Innovus Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Hall & Company
We have served as the Company’s auditor since 2016
Irvine, CA
April 2, 2018
INNOVUS PHARMACEUTICALS, INC.
Consolidated Balance Sheets
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,564,859
|
|
|
$
|
829,933
|
|
Accounts receivable, net
|
|
|
68,259
|
|
|
|
33,575
|
|
Prepaid expense and other current assets
|
|
|
363,080
|
|
|
|
863,664
|
|
Inventories
|
|
|
1,725,698
|
|
|
|
599,856
|
|
Total current assets
|
|
|
3,721,896
|
|
|
|
2,327,028
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
62,454
|
|
|
|
29,569
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
20,881
|
|
|
|
14,958
|
|
Goodwill
|
|
|
952,576
|
|
|
|
952,576
|
|
Intangible assets, net
|
|
|
4,273,099
|
|
|
|
4,903,247
|
|
Total assets
|
|
$
|
9,030,906
|
|
|
$
|
8,227,378
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expense
|
|
$
|
2,607,121
|
|
|
$
|
1,210,050
|
|
Accrued compensation
|
|
|
1,118,293
|
|
|
|
767,689
|
|
Deferred revenue and customer deposits
|
|
|
24,690
|
|
|
|
11,000
|
|
Accrued interest payable
|
|
|
3,648
|
|
|
|
47,782
|
|
Derivative liabilities – embedded conversion features
|
|
|
-
|
|
|
|
319,674
|
|
Derivative liabilities – warrants
|
|
|
58,609
|
|
|
|
164,070
|
|
Contingent consideration
|
|
|
28,573
|
|
|
|
170,015
|
|
Short-term loans payable
|
|
|
65,399
|
|
|
|
-
|
|
Current portion of notes payable, net of debt discount of $437,355 and $216,403, respectively
|
|
|
1,239,296
|
|
|
|
626,610
|
|
Convertible debentures, net of debt discount of $0 and $845,730, respectively
|
|
|
-
|
|
|
|
714,192
|
|
Total current liabilities
|
|
|
5,145,629
|
|
|
|
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
|
|
|
1,450,430
|
|
|
|
1,515,902
|
|
Total non-current liabilities
|
|
|
2,982,334
|
|
|
|
3,102,323
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,127,963
|
|
|
|
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 December 31, 2017 and 2016, respectively
|
|
|
-
|
|
|
|
-
|
|
Common Stock: 292,500,000 shares authorized, at $0.001 par value, 167,420,605 and 121,694,293 shares issued and outstanding at December 31, 2017 and 2016, respectively
|
|
|
167,421
|
|
|
|
121,694
|
|
Additional paid-in capital
|
|
|
36,375,359
|
|
|
|
30,108,028
|
|
Accumulated deficit
|
|
|
(35,639,837
|
)
|
|
|
(29,135,749
|
)
|
Total stockholders' equity
|
|
|
902,943
|
|
|
|
1,093,973
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,030,906
|
|
|
$
|
8,227,378
|
|
See accompanying notes to these consolidated financial statements.
INNOVUS PHARMACEUTICALS, INC.
Consolidated Statements of Operations
|
|
For the
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
8,806,300
|
|
|
$
|
4,817,603
|
|
License revenue
|
|
|
10,000
|
|
|
|
1,000
|
|
Net revenue
|
|
|
8,816,300
|
|
|
|
4,818,603
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
1,848,325
|
|
|
|
1,083,094
|
|
Research and development
|
|
|
38,811
|
|
|
|
77,804
|
|
Sales and marketing
|
|
|
6,853,559
|
|
|
|
3,621,045
|
|
General and administrative
|
|
|
5,174,827
|
|
|
|
5,870,572
|
|
Total operating expense
|
|
|
13,915,522
|
|
|
|
10,652,515
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,099,222
|
)
|
|
|
(5,833,912
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(872,166
|
)
|
|
|
(6,661,694
|
)
|
Loss on extinguishment of debt
|
|
|
(700,060
|
)
|
|
|
-
|
|
Other income (expense), net
|
|
|
(6,878
|
)
|
|
|
1,649
|
|
Fair value adjustment for contingent consideration
|
|
|
194,034
|
|
|
|
(1,269,857
|
)
|
Change in fair value of derivative liabilities
|
|
|
(16,596
|
)
|
|
|
65,060
|
|
Total other expense, net
|
|
|
(1,401,666
|
)
|
|
|
(7,864,842
|
)
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(6,500,888
|
)
|
|
|
(13,698,754
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
3,200
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,504,088
|
)
|
|
$
|
(13,701,154
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share of Common Stock – basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Common Stock outstanding – basic and diluted
|
|
|
157,933,458
|
|
|
|
94,106,382
|
|
See accompanying notes to these consolidated financial statements.
INNOVUS PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2017 and 2016
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders' Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2016
|
|
|
47,141,230
|
|
|
$
|
47,141
|
|
|
$
|
14,941,116
|
|
|
$
|
(15,434,595
|
)
|
|
$
|
(446,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for services
|
|
|
10,732,500
|
|
|
|
10,733
|
|
|
|
1,802,216
|
|
|
|
-
|
|
|
|
1,812,949
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
954,753
|
|
|
|
-
|
|
|
|
954,753
|
|
Common Stock issued to Novalere Holdings, LLC for payment of contingent consideration
|
|
|
12,808,796
|
|
|
|
12,809
|
|
|
|
2,958,832
|
|
|
|
-
|
|
|
|
2,971,641
|
|
Common Stock issued upon conversion of convertible debentures and accrued interest
|
|
|
17,100,508
|
|
|
|
17,100
|
|
|
|
3,247,605
|
|
|
|
-
|
|
|
|
3,264,705
|
|
Common Stock issued for vested restricted stock units
|
|
|
19,315,994
|
|
|
|
19,316
|
|
|
|
(19,316
|
)
|
|
|
-
|
|
|
|
-
|
|
Fair value of beneficial conversion feature on line of credit convertible debenture – related party
|
|
|
-
|
|
|
|
-
|
|
|
|
3,444
|
|
|
|
-
|
|
|
|
3,444
|
|
Relative fair value of shares of Common Stock issued in connection with notes payable and convertible debentures
|
|
|
9,861,111
|
|
|
|
9,861
|
|
|
|
1,393,531
|
|
|
|
-
|
|
|
|
1,403,392
|
|
Relative fair value of warrants issued in connection with convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
445,603
|
|
|
|
-
|
|
|
|
445,603
|
|
Fair value of warrants issued to placement agents in connection with convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
357,286
|
|
|
|
-
|
|
|
|
357,286
|
|
Common Stock issued for legal costs from Semprae merger transaction
|
|
|
215,000
|
|
|
|
215
|
|
|
|
64,285
|
|
|
|
-
|
|
|
|
64,500
|
|
Common Stock issued in connection with license agreement
|
|
|
100,000
|
|
|
|
100
|
|
|
|
22,900
|
|
|
|
-
|
|
|
|
23,000
|
|
Common Stock issued upon cashless exercise of warrants
|
|
|
3,385,354
|
|
|
|
3,385
|
|
|
|
(3,385
|
)
|
|
|
-
|
|
|
|
-
|
|
Common Stock issued upon exercise of warrants
|
|
|
1,033,800
|
|
|
|
1,034
|
|
|
|
309,106
|
|
|
|
-
|
|
|
|
310,140
|
|
Reclassification of embedded conversion feature derivative liability upon conversion of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
3,111,828
|
|
|
|
-
|
|
|
|
3,111,828
|
|
Reclassification of warrant derivative liability upon cashless exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
518,224
|
|
|
|
-
|
|
|
|
518,224
|
|
Net loss for year ended December 31, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,701,154
|
)
|
|
|
(13,701,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2016
|
|
|
121,694,293
|
|
|
|
121,694
|
|
|
|
30,108,028
|
|
|
|
(29,135,749
|
)
|
|
|
1,093,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for services
|
|
|
2,891,105
|
|
|
|
2,891
|
|
|
|
626,112
|
|
|
|
-
|
|
|
|
629,003
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
336,007
|
|
|
|
-
|
|
|
|
336,007
|
|
Common Stock issued upon conversion of convertible debentures, notes payable and accrued interest
|
|
|
12,835,187
|
|
|
|
12,835
|
|
|
|
1,458,603
|
|
|
|
-
|
|
|
|
1,471,438
|
|
Common Stock issued for vested restricted stock units
|
|
|
92,000
|
|
|
|
92
|
|
|
|
(92
|
)
|
|
|
-
|
|
|
|
-
|
|
Relative fair value of shares of Common Stock issued in connection with notes payable
|
|
|
2,825,000
|
|
|
|
2,825
|
|
|
|
214,080
|
|
|
|
-
|
|
|
|
216,905
|
|
Fair value of shares of Common Stock issued as financing fees in connection with notes payable
|
|
|
1,119,851
|
|
|
|
1,120
|
|
|
|
97,641
|
|
|
|
-
|
|
|
|
98,761
|
|
Common Stock issued upon exercise of stock options
|
|
|
71,500
|
|
|
|
72
|
|
|
|
4,807
|
|
|
|
-
|
|
|
|
4,879
|
|
Sale of Common Stock and warrants, net of offering costs
|
|
|
25,666,669
|
|
|
|
25,667
|
|
|
|
3,282,106
|
|
|
|
-
|
|
|
|
3,307,773
|
|
Reclassification of embedded conversion feature derivative liability upon conversion of convertible debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
203,630
|
|
|
|
-
|
|
|
|
203,630
|
|
Common Stock issued for the prepayment of royalties due under CRI License Agreement
|
|
|
225,000
|
|
|
|
225
|
|
|
|
44,437
|
|
|
|
-
|
|
|
|
44,662
|
|
Net loss for year ended December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,504,088
|
)
|
|
|
(6,504,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2017
|
|
|
167,420,605
|
|
|
$
|
167,421
|
|
|
$
|
36,375,359
|
|
|
$
|
(35,639,837
|
)
|
|
$
|
902,943
|
|
See accompanying notes to these consolidated financial statements.
INNOVUS PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
|
|
For the
Year Ended
December 31
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,504,088
|
)
|
|
$
|
(13,701,154
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
11,751
|
|
|
|
5,532
|
|
Allowance for doubtful accounts
|
|
|
7,067
|
|
|
|
2,066
|
|
Common Stock, restricted stock units and stock options issued to employees, board of directors and consultants for compensation and services
|
|
|
1,135,611
|
|
|
|
2,684,602
|
|
Loss on extinguishment of debt
|
|
|
700,060
|
|
|
|
-
|
|
Fair value of embedded conversion feature in convertible debentures in excess of allocated proceeds
|
|
|
-
|
|
|
|
2,756,899
|
|
Change in fair value of contingent consideration
|
|
|
(194,034
|
)
|
|
|
1,269,857
|
|
Change in fair value of derivative liabilities
|
|
|
16,596
|
|
|
|
(65,060
|
)
|
Amortization of debt discount
|
|
|
778,054
|
|
|
|
3,646,161
|
|
Amortization of intangible assets
|
|
|
630,148
|
|
|
|
624,404
|
|
Changes in operating assets and liabilities, net of acquisition amounts
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(41,751
|
)
|
|
|
47,456
|
|
Prepaid expense and other current assets
|
|
|
112,516
|
|
|
|
(279,786
|
)
|
Inventories
|
|
|
(1,125,842
|
)
|
|
|
(345,413
|
)
|
Deposits
|
|
|
(5,923
|
)
|
|
|
-
|
|
Accounts payable and accrued expense
|
|
|
1,757,071
|
|
|
|
694,547
|
|
Accrued compensation
|
|
|
350,604
|
|
|
|
856,803
|
|
Accrued interest payable
|
|
|
(3,253
|
)
|
|
|
31,907
|
|
Deferred revenue and customer deposits
|
|
|
13,690
|
|
|
|
(13,079
|
)
|
Net cash used in operating activities
|
|
|
(2,361,723
|
)
|
|
|
(1,784,258
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(44,636
|
)
|
|
|
-
|
|
Payment on contingent consideration
|
|
|
(12,880
|
)
|
|
|
(172,103
|
)
|
Net cash used in investing activities
|
|
|
(57,516
|
)
|
|
|
(172,103
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(32,471
|
)
|
|
|
(252,151
|
)
|
Proceeds from notes payable and convertible debentures
|
|
|
1,650,000
|
|
|
|
3,574,000
|
|
Payments on notes payable
|
|
|
(426,347
|
)
|
|
|
(449,204
|
)
|
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
|
|
|
3,124,165
|
|
|
|
2,730,393
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
734,926
|
|
|
|
774,032
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
|
829,933
|
|
|
|
55,901
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
1,564,859
|
|
|
$
|
829,933
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
5,600
|
|
|
$
|
-
|
|
Cash paid for interest
|
|
$
|
89,931
|
|
|
$
|
229,046
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common Stock issued for conversion of convertible debentures, notes payable and accrued interest
|
|
$
|
1,093,381
|
|
|
$
|
3,264,705
|
|
Reclassification of the fair value of the embedded conversion features from derivative liability to additional paid-in capital upon conversion
|
|
$
|
203,630
|
|
|
$
|
3,111,828
|
|
Relative fair value of Common Stock issued in connection with notes payable recorded as debt discount
|
|
$
|
216,905
|
|
|
$
|
276,167
|
|
Fair value of Common Stock issued as financing fees in connection with notes payable recorded as debt discount
|
|
$
|
98,761
|
|
|
$
|
-
|
|
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
|
|
$
|
-
|
|
|
$
|
330,000
|
|
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
|
|
$
|
-
|
|
|
$
|
170,600
|
|
Fair value of non-forfeitable Common Stock issued to consultant included in accounts payable and accrued expense
|
|
$
|
360,000
|
|
|
$
|
360,000
|
|
Issuance of shares of Common Stock for vested restricted stock units
|
|
$
|
92
|
|
|
$
|
19,316
|
|
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 loans payable for payment of business insurance premiums
|
|
$
|
97,871
|
|
|
$
|
-
|
|
Common Stock issued to Novalere Holdings for payment of the acquisition contingent consideration as a result of an amendment and supplement to the registration rights and stock restriction agreement
|
|
$
|
-
|
|
|
$
|
2,971,641
|
|
Fair value of beneficial conversion feature on line of credit convertible debenture – related party
|
|
$
|
-
|
|
|
$
|
3,444
|
|
See accompanying notes to these consolidated financial statements.
INNOVUS PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
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 28 commercial products in the United States, including 12 of these commercial products in multiple countries around the world through our 18 international 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® Eagle 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, (v) PEVarx® for extension of sexual intercourse time, (w) FlutiCare® for allergy symptom relief, (x) Xyralid® for relief of pain and symptoms caused by hemorrhoids, (y) Can-C® eye drops and supplement for lubricating the eye and to enhance free radical protection and reduce the oxidative environment inside the eye, (z) MZS™ melatonin for improved sleeping, and (aa) Diabasens™ a cream designed to increase blood flow in the diabetic foot. 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®, FlutiCare®, AllerVarx
®,
Apeaz®, ArthriVarx®, Xyralid®, PEVarx® and Beyond Human® Testosterone Booster.
Pipeline Products
UriVarx™ UTI Urine Strips.
UriVarx
™
UTI Urine Strips are FDA cleared diagnostic strips for home use that a man or woman can use to determine if they have a urinary tract infection. They will be sold with our UriVarx® supplement product as well as on their own as replacement strips. The UriVarx
™
UTI Urine Strips are manufactured by our partner, ACON Laboratories, Inc. We currently expect to launch the UriVarx
™
UTI Urine Strips in the second quarter of 2018.
Xyralid® Suppositories.
Xyralid® Suppositories are OTC FDA monograph suppositories indicated for the relief of both internal & external hemorrhoidal symptoms. The drug works by constricting or shrinking swollen hemorrhoidal tissues and gives prompt soothing relief from painful burning, itching and discomfort. We currently expect to launch this product in the second quarter of 2018.
GlucoGorx™ Supplement, Glucometer, Lancing Device ad 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 an expected FDA cleared kit that we will bundle 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. The Glucometer, Lancing Device and GlucoGorx™ Strips are manufactured by our partner ACON Laboratories, Inc. We currently expect to launch this product and the kit in the second half of 2018.
RecalMax™ Nitric Oxide Strips.
We have developed the RecalMax™ Nitric Oxide Strips to be used with our product RecalMax™ to measure saliva levels of nitric oxide and help consumers monitor the effect of RecalMax™ real time on their blood flow increase.
We currently expect to launch this product in the second quarter of 2018.
Musclin™
.
Musclin
™
is a proprietary supplement made of two FDA Generally Recognized As Safe (GRAS) approved ingredients designed to increase muscle mass, endurance and activity. The main ingredient in Musclin
™
is a natural activator of the transient receptor potential cation channel, subfamily V, member 3 (TRPV3) channels on muscle fibers responsible to increase fibers width resulting in larger muscles. 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 the TRPV3 channels resulting in the increase of muscle fiber width and the second targeting a different unknown receptor to build the muscle's capacity for energy production and increases physical endurance, allowing longer and more intense exercise. Regenerum
™
is being developed for patients suffering from muscle wasting. 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.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“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. Certain items have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such management estimates include the allowance for doubtful accounts, 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 December 31, 2017, we had an accumulated deficit of $35,639,837 and a working capital deficit of $1,423,733.
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 8) and in the first quarter of 2018, we received net cash proceeds of $2.7 million from the exercise of warrants (see Note 12). Additionally, during fiscal 2017 and the first quarter of 2018 we raised $1,650,000 and $1,877,500, respectively, in gross proceeds from the issuance of notes payable to six investors (see Notes 5 and 12). We have also issued equity instruments in certain circumstances to pay for services from vendors and consultants.
As of December 31, 2017, we had $1,564,859 in cash. During the year ended December 31, 2017, we had net cash used in operating activities of $2,361,723. We expect that our existing capital resources, the proceeds received from the exercise of warrants and issuance of notes payable in the first quarter of 2018 totaling $4.5 million (see Note 12), 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 9). The fair value of the contingent acquisition consideration is based upon the present value of expected future payments under the terms of the agreements and is a Level 3 measurement (see Note 3). Based on borrowing rates currently available to 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.
|
Cash
Cash consists of cash held with financial institutions. Cash held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation on such deposits.
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. 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 years ended December 31, 2017 and 2016. As of December 31, 2017 and 2016 four customers and three customers accounted for 72% and 62% of total net accounts receivable, respectively.
We categorize revenue by geographic area based on selling location. All operations are currently located in the U.S.; therefore, over 90% of our sales are currently within the U.S. 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.
Concentration of Suppliers
We have manufacturing relationships with a number of vendors or manufacturers for our various products. Pursuant to these relationships, we purchase products through purchase orders with our manufacturers.
Inventories
Inventories are stated at the lower of cost or market (net realizable value). Cost is determined on a first-in, first-out basis. We evaluate the carrying value of inventories on a regular basis, based on the price expected to be obtained for products in their respective markets compared with historical cost. Write-downs of inventories are considered to be permanent reductions in the cost basis of inventories.
We also regularly evaluate our inventories for excess quantities and obsolescence (expiration), taking into account such factors as historical and anticipated future sales or use in production compared to quantities on hand and the remaining shelf life of products and raw materials on hand. We establish reserves for excess and obsolete inventories as required based on our analyses.
Property and Equipment
Property and equipment, including software, are recorded at historical cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from three to ten years. The initial cost of property and equipment and software consists of its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.
Business Combinations
We account for business combinations by recognizing the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair values on the acquisition date. The final purchase price may be adjusted up to one year from the date of the acquisition. Identifying the fair value of the tangible and intangible assets and liabilities acquired requires the use of estimates by management and was based upon currently available data. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to future expected cash flows from product sales, support agreements, consulting contracts, other customer contracts, and acquired developed technologies and patents and discount rates utilized in valuation estimates.
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of relevant revenue or other targets, will be recognized in earnings in the period of the estimated fair value change. A change in fair value of the acquisition-related contingent consideration or the occurrence of events that cause results to differ from our estimates or assumptions could have a material effect on the consolidated statements of operations, financial position and cash flows in the period of the change in the estimate.
Goodwill and Intangible Assets
We test our goodwill for impairment annually, or whenever events or changes in circumstances indicates an impairment may have occurred, by comparing our reporting unit's carrying value to its implied fair value. The goodwill impairment test consists of a two-step process as follows:
Step 1. We compare the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying amount of each reporting unit is determined by specifically identifying and allocating the assets and liabilities to each reporting unit based on headcount, relative revenue or other methods as deemed appropriate by management. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and we then perform the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.
Step 2. If further analysis is required, we compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess.
Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. If we determine that an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to the recorded balances.
The goodwill was recorded as part of the acquisition of Semprae that occurred on December 24, 2013, the acquisition of Novalere that occurred on February 5, 2015, and the asset acquisition of Beyond Human® that closed on March 1, 2016. There was no impairment of goodwill for the years ended December 31, 2017 and 2016.
Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range from one to fifteen years. The useful life of the intangible asset is evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining useful life.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During the years ended December 31, 2017 and 2016, we did not recognize any impairment of our long-lived assets.
Debt Issuance Costs
Debt issuance costs represent costs incurred in connection with the notes payable and convertible debentures during the years ended December 31, 2017 and 2016. Debt issuance costs related to the issuance of the convertible debentures and notes payable are recorded as a reduction to the debt balances in the accompanying consolidated balance sheets. The debt issuance costs are being amortized to interest expense over the term of the financing instruments using the effective interest method (see Note 5).
Beneficial Conversion Feature
If a conversion feature of convertible debt is not accounted for separately as a derivative instrument and provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by us as a debt discount. We amortize the discount to interest expense over the life of the debt using the effective interest rate method.
Derivative Liabilities
Certain of our embedded conversion features on debt and issued and outstanding Common Stock purchase warrants, which have exercise price reset features and other anti-dilution protection clauses, are treated as derivatives for accounting purposes. The Common Stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived. These Common Stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using a Probability Weighted Black-Scholes Model and the embedded conversion features using a Path-Dependent Monte Carlo Simulation Model (see Note 9).
Debt Extinguishment
Any gain or loss associated with debt extinguishment is recorded in the consolidated statements of operations in the period in which the debt is considered extinguished. Third party fees incurred in connection with a debt restructuring accounted for as an extinguishment are capitalized. Fees paid to third parties associated with a term debt restructuring accounted for as a modification are expensed as incurred. Third party and creditor fees incurred in connection with a modification to a line of credit or revolving debt arrangements are considered to be associated with the new arrangement and are capitalized.
Income Taxes
Income taxes are provided for using the asset and liability method whereby deferred tax assets and liabilities are recognized using current tax rates on the difference between the financial statement carrying amounts and the respective tax basis of the assets and liabilities. We provide a valuation allowance on deferred tax assets when it is more likely than not that such assets will not be realized.
We recognize the benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting this standard, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. There were no uncertain tax positions at December 31, 2017 and 2016 (see Note 10).
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 in the accompanying consolidated balance sheets, was approximately $53,000 and $61,000 at December 31, 2017 and 2016, respectively.
Cost of Product Sales
Cost of product sales includes the cost of inventories, shipping costs, royalties and inventory reserves. We are required to make royalty payments based upon the net sales of three of our marketed products, Zestra®, Sensum+® and Vesele®. In October 2017, the royalty obligation for Vesele® ended (see Note 11).
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 consolidated statements of operations. Advertising costs were approximately $5,388,000 and $2,680,000 for the years ended December 31, 2017 and 2016, respectively.
Research and Development Costs
Research and development (“R&D”) costs, including research performed under contract by third parties, are expensed as incurred. Major components of R&D expense consists of salaries and benefits, testing, post marketing clinical trials, material purchases and regulatory affairs.
Stock-Based Compensation
We account for stock-based compensation in accordance with FASB ASC 718,
Stock Based Compensation
. All stock-based payments to employees and directors, including grants of stock options, warrants, restricted stock units (“RSUs”) and restricted stock, are recognized in the consolidated financial statements based upon their estimated fair values. We use Black-Scholes to estimate the fair value of stock-based awards. The estimated fair value is determined at the date of grant. FASB ASC 718 requires that stock-based compensation expense be based on awards that are ultimately expected to vest. Prior to the adoption of Accounting Standards Update (“ASU”) ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, on January 1, 2017, stock-based compensation had been reduced for estimated forfeitures. When estimating forfeitures, voluntary termination behaviors, as well as trends of actual option forfeitures, were considered. To the extent actual forfeitures differed from then current estimates, cumulative adjustments to stock-based compensation expense were recorded. As a result of the adoption of ASU No. 2016-09 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%.
Except for transactions with employees and directors that are within the scope of FASB ASC 718, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
Equity Instruments Issued to Non-Employees for Services
Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows FASB guidance. As such, the value of the applicable stock-based compensation is periodically remeasured and income or expense is recognized during the vesting terms of the equity instruments. The measurement date for the estimated fair value of the equity instruments issued is the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the estimated fair value of the equity instrument is primarily recognized over the term of the consulting agreement. According to FASB guidance, an asset acquired in exchange for the issuance of fully vested, nonforfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we record the estimated fair value of nonforfeitable equity instruments issued for future consulting services as prepaid expense and other current assets in our consolidated balance sheets.
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 years ended December 31, 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 8 for more details.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers.
This updated guidance supersedes the current revenue recognition guidance, including industry-specific guidance. The updated guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 which deferred the effective date by one year for public entities and others. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2017 for public business entities, certain not-for-profit entities, and certain employee benefit plans. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In March 2016, the FASB issued ASU 2016-08 which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10 which clarifies the principle for determining whether a good or service is “separately identifiable” and, therefore, should be accounted for separately. In May 2016 the FASB issued ASU 2016-12 which clarifies the objective of the collectability criterion. A separate update issued in May 2016 clarifies the accounting for shipping and handling fees and costs as well as accounting for consideration given by a vendor to a customer. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers.
We adopted the standard on January 1, 2018. Upon adoption of 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.
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 utilized 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 resulted 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 2018.
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 consolidated financial position and results of operation.
In January 2017, the FASB issued 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. 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 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 consolidated statement of cash flows for the year ended December 31, 2017. The adoption of this ASU did not have a material impact on our consolidated financial position, results of operations and related disclosures and had no other impact to the accompanying consolidated statement of cash flows for the years ended December 31, 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 consolidated financial statements and related disclosures.
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 noncancelable operating lease for our facility in San Diego resulting in the recording of a right of use asset and lease obligation. The current minimum commitment under the noncancelable operating lease is disclosed in Note 11.
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. Current U.S. GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. The amendments in this update will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS) and are effective for fiscal years after December 15, 2016, including interim periods within those annual periods. The adoption of this ASU as of January 1, 2017 did not have a material impact on our consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11
, Inventory (Topic 330): Simplifying the Measurement of Inventory. Topic 330
. Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this ASU more closely align the measurement of inventory in U.S. GAAP with the measurement of inventory in IFRS. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The adoption of this ASU as of January 1, 2017 did not have a material impact on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
This ASU 2014-15 describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in the condensed consolidated financial statements. The standard provides accounting guidance that will be used along with existing auditing standards. The ASU 2014-15 is effective for the annual period ending after December 15, 2016. Early application is permitted. The adoption of this ASU as of January 1, 2017 did not have a material impact on our consolidated financial statements and related disclosures.
NOTE 2 – LICENSE AGREEMENTS
In-License Agreements
NTC S.r.l. In-License Agreement
On December 15, 2016, the Company and NTC S.r.l (“NTC”) entered into a license and distribution agreement (“NTC License Agreement”) pursuant to which we acquired the rights to use, market and sell NTC’s proprietary modified release bilayer tablet formerly known as LERTAL® for the management of allergic rhinitis in the U.S. and Canada. Such licensed product is sold by us under the name AllerVarx
®
in the U.S. and Canada. Under this agreement, we are obligated to pay a non-refundable upfront license fee of €15,000, or $15,684 USD, and cash payments of up to €120,000 ($143,743 USD based on December 31, 2017 exchange rate) upon the achievement of certain sales milestones. The non-refundable upfront license is included in sales and marketing expense in the accompanying consolidated statement of operations for the year ended December 31, 2016. No other amounts have been paid under this agreement.
Seipel Group Pty Ltd. In-License Agreement
On September 29, 2016, the Company and Seipel Group Pty Ltd. (“SG”) entered into a license and purchase agreement (“SG License Purchase Agreement”) pursuant to which we acquired the exclusive rights to use, market and sell SG’s proprietary dietary supplement formula known as Urox® for bladder support in the U.S. and worldwide. Under this agreement, we have agreed to minimum purchase order requirements of 25,000 units per calendar quarter beginning 12 months after our initial order to retain our exclusivity (see Note 11) and paid a brokerage fee of $200,000 which is included in sales and marketing expense in the accompanying consolidated statement of operations for the year ended December 31, 2016. We have met the quarterly minimum purchase order requirements under this agreement as of December 31, 2017.
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:
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All of CRI’s rights in past, present and future Sensum+® product formulations and presentations, and
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An exclusive, perpetual license to commercialize Sensum+® products in all territories except for the United States.
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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.
In consideration for the CRI Asset Purchase Agreement, we issued 631,313 shares of Common Stock to CRI in 2013. We recorded an asset totaling $250,000 related to the CRI Asset Purchase Agreement and are amortizing this amount over its estimated useful life of 10 years. Under the CRI Asset Purchase Agreement, we were required to issue to CRI shares of our Common Stock valued at an aggregate of $200,000 for milestones relating to additional clinical data to be received. As a result of the Amended CRI Asset Purchase Agreement, the Company and CRI agreed to settle the clinical milestone payments with a payment of 100,000 shares of restricted Common Stock. The fair value of the restricted shares of Common Stock of $23,000 was based on the market price of our Common Stock on the date of issuance and is included in research and development expense in the accompanying consolidated statement of operations for the year ended December 31, 2016.
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 years ended December 31, 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
™
sales and marketing platform. During the years ended December 31, 2017 and 2016, no amounts have been earned by CRI under the Amended CRI Asset Purchase Agreement.
Out-License Agreements
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 consolidated statement of operations for the year ended December 31, 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 year ended December 31, 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 year ended December 31, 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 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 years ended December 31, 2017 and 2016, we recognized $60,000 and $0 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 years ended December 31, 2017 and 2016, we recognized $0 and $16,056, 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 years ended December 31, 2017 and 2016, under this agreement we recognized $31,015 and $42,153, respectively, in net revenue for the sales of products and no revenue was recognized for the sales-based milestones. During the years ended December 31, 2017 and 2016, we recognized royalty payments of $4,112 and $1,252, respectively.
Khandelwal Laboratories Agreement
On September 9, 2015, we entered into an exclusive license and distribution agreement with Khandelwal Laboratories, an Indian company (“KLabs”) under which we have granted to KLabs an exclusive ten-year distribution right to market and sell in the Indian Subcontinent, which is defined as India, Nepal, Bhutan, Bangladesh and Sri Lanka our products including Zestra®, EjectDelay®, Sensum+® and Zestra Glide®. If KLabs exceeds its minimum yearly orders, the agreement has two five-year term extensions. During the years ended December 31, 2017 and 2016, we recognized $5,371 and $0, respectively, in net revenue for the sales of products related to this agreement.
Elis Pharmaceuticals Agreements
On July 4, 2015, we announced that we had entered into an exclusive license and distribution agreement with Elis Pharmaceuticals, an emirates company (“Elis”), under which we granted to Elis an exclusive ten-year distribution right to market and sell Zestra® EjectDelay®, Sensum+® and Zestra Glide® in Turkey and select African and gulf countries. If Elis exceeds its minimum yearly orders, the agreement has a ten-year term extension. Under the agreement, we are eligible to receive certain sales milestone payments plus an agreed-upon transfer price upon sale of products. We had preliminary listed Syria, Yemen and Somalia as countries in the definition of licensed territories, but these countries were removed by the agreement of both parties from the agreement effective the date of signing of the agreement. As the sales-based milestones are not considered a milestone under ASC 605-28, we will recognize the revenue from the milestone payments when the cumulative gross sales volume is met. We did not recognize any revenue from this agreement during the years ended December 31, 2017 and 2016.
On October 31, 2016, we entered into another exclusive license and distribution agreement with Elis under which we granted to Elis an exclusive ten-year distribution right to market and sell Zestra® in Lebanon. Under the agreement, we are eligible to receive certain sales milestone payments plus an agreed-upon transfer price upon sale of products. As the sales-based milestones are not considered a milestone under ASC 605-28, we will recognize the revenue from the milestone payments when the cumulative gross sales volume is met. During the years ended December 31, 2017 and 2016, no revenue was recognized related to this agreement.
NOTE 3 – BUSINESS AND ASSET ACQUISITIONS
Acquisition of Assets of Beyond Human® in 2016
On February 8, 2016, we entered into an Asset Purchase Agreement (“APA”), pursuant to which we agreed to purchase substantially all of the assets of Beyond Human® (the “Acquisition”) for a total cash payment of up to $662,500 (the “Purchase Price”). The Purchase Price was payable in the following manner: (1) $300,000 in cash at the closing of the Acquisition (the “Initial Payment”), (2) $100,000 in cash four months from the closing upon the occurrence of certain milestones as described in the APA, (3) $100,000 in cash eight months from the closing upon the occurrence of certain milestones as described in the APA, and (4) $130,000 in cash in twelve months from the closing upon the occurrence of certain milestones as described in the APA. An additional $32,500 in cash is due if certain milestones occur twelve months from closing. The transaction closed on March 1, 2016.
The fair value of the contingent consideration is based on cash flow projections and other assumptions for the milestone payments and future changes in the estimate of such contingent consideration will be recognized as a charge to fair value adjustment for contingent consideration.
The total purchase price is summarized as follows:
Cash consideration
|
|
$
|
300,000
|
|
Fair value of future earn out payments
|
|
|
330,000
|
|
Total
|
|
$
|
630,000
|
|
We accounted for such asset acquisition as a business combination under ASC 805,
Business Combinations
. We did not acquire any identifiable tangible assets and did not assume any liabilities as a result of the asset acquisition. The excess of the acquisition date fair value of consideration transferred of $630,000 over the estimated fair value of the intangible assets acquired was recorded as goodwill. The establishment of the fair value of the contingent consideration, and the allocation to identifiable intangible assets requires the extensive use of accounting estimates and management judgment. The fair values assigned to the assets acquired are based on estimates and assumptions from data currently available.
In determining the fair value of the intangible assets, we considered, among other factors, the best use of acquired assets such as the Beyond Human® website, analyses of historical financial performance of the Beyond Human® products and estimates of future performance of the Beyond Human® products and website acquired. The fair values of the identified intangible assets related to Beyond Human®’s website, trade name, non-competition covenant and customer list. The fair value of the website, customer list and the non-competition covenant were calculated using an income approach. The fair value of the trade name was calculated using a cost approach. The following table sets forth the components of identified intangible assets associated with the Acquisition and their estimated useful lives:
|
|
Fair Value
|
|
|
Useful Life
(in years)
|
|
Website
|
|
$
|
171,788
|
|
|
|
5
|
|
Trade name
|
|
|
50,274
|
|
|
|
10
|
|
Non-competition covenant
|
|
|
3,230
|
|
|
|
3
|
|
Customer list
|
|
|
1,500
|
|
|
|
1
|
|
Total
|
|
$
|
226,792
|
|
|
|
|
|
We determined the useful lives of intangible assets based on the expected future cash flows and contractual lives associated with the respective asset. Website represents the fair value of the expected benefit from revenue to be generated from the Beyond Human® website and domain name for both Beyond Human® products as well as our existing products. Trade name represents the fair value of the brand and name recognition associated with the marketing of Beyond Human® products. Customer list represents the expected benefit from customer contracts that, at the date of acquisition, were reasonably anticipated to continue given the history and operating practices of Beyond Human®. The non-competition covenant represents the contractual period and expected degree of adverse economic impact that would exist in its absence.
Of the total estimated purchase price, $403,208 was allocated to goodwill and is attributable to expected synergies the acquired assets will bring to our existing business, including access for us to market and sell our existing products through the Beyond Human
™
sales and marketing platform. Goodwill represents the excess of the purchase price of the acquired business over the estimated fair value of the underlying intangible assets acquired. Goodwill resulting from the Acquisition will be tested for impairment at least annually and more frequently if certain indicators of impairment are present. In the event we determine that the value of goodwill has become impaired, we will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made. All of the goodwill is expected to be deductible for income tax purposes.
On September 6, 2016, the Company and the sellers entered into an agreement in which we agreed to pay the sellers $150,000 to settle the contingent consideration payments totaling up to $362,500 under the APA. The settlement agreement was not contemplated at the time of the acquisition and the fair value of the contingent consideration on the date of settlement was $330,000. As a result, we recorded a non-cash gain on contingent consideration of $180,000, which is included in fair value adjustment for contingent consideration in the accompanying consolidated statement of operations for the year ended December 31, 2016.
Supplemental Pro Forma Information for Acquisition of Assets of Beyond Human® (unaudited)
The following unaudited supplemental pro forma information for the year ended December 31, 2016 assumes the asset acquisition of Beyond Human® had occurred as of January 1, 2016, giving effect to purchase accounting adjustments such as amortization of intangible assets. The pro forma data is for informational purposes only and may not necessarily reflect the actual results of operations had the assets of Beyond Human® been operated as part of the Company since January 1, 2016.
|
|
Year Ended
December 31, 2016
|
|
|
|
As
Reported
|
|
|
Pro Forma (unaudited)
|
|
Net revenues
|
|
$
|
4,818,603
|
|
|
$
|
4,868,241
|
|
Net loss
|
|
$
|
(13,701,154
|
)
|
|
$
|
(13,700,702
|
)
|
Net loss per share of Common Stock – basic and diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.15
|
)
|
Weighted average number of shares outstanding – basic and diluted
|
|
|
94,106,382
|
|
|
|
94,106,382
|
|
We incurred approximately $70,000 in expense related to the Acquisition.
Acquisition of Novalere in 2015
On February 5, 2015 (the “Closing Date”), Innovus, Innovus Pharma Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Innovus (“Merger Subsidiary I”), Innovus Pharma Acquisition Corporation II, a Delaware corporation and a wholly-owned subsidiary of Innovus (“Merger Subsidiary II”), Novalere FP, Inc., a Delaware corporation (“Novalere FP”) and Novalere Holdings, LLC, a Delaware limited liability company (“Novalere Holdings”), as representative of the shareholders of Novalere (the “Novalere Stockholders”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Subsidiary I merged into Novalere and then Novalere merged with and into Merger Subsidiary II (the “Merger”), with Merger Subsidiary II surviving as a wholly-owned subsidiary of Innovus. Pursuant to the articles of merger effectuating the Merger, Merger Subsidiary II changed its name to Novalere, Inc.
With the Merger, we acquired the worldwide rights to market and sell the FlutiCare® brand (fluticasone propionate nasal spray) and the related third-party manufacturing agreement for the manufacturing of FlutiCare® (“Acquisition Manufacturer”) from Novalere FP. The OTC Abbreviated New Drug Application (“ANDA”) for fluticasone propionate nasal spray was filed at the end of 2014 by our third-party manufacturer and partner, who is currently selling the prescription version of the drug, with the FDA and the OTC ANDA is still subject to FDA approval. An ANDA is an application for a U.S. generic drug approval for an existing licensed medication or approved drug. A prescription ANDA (“RX ANDA”) is for a generic version of a prescription pharmaceutical and an OTC ANDA is for a generic version of an OTC pharmaceutical.
Due to the delay in approval of the Acquisition Manufacturer’s OTC ANDA by the FDA, in May 2017, we announced a commercial relationship with a different third-party manufacturer (West-Ward Pharmaceuticals International Limited or “WWPIL”) who has an FDA approved OTC ANDA for fluticasone propionate nasal spray under which they have agreed to manufacture our FlutiCare® OTC product for sale in the U.S. (see Note 11). We currently still anticipate that the OTC ANDA filed in November 2014 by the Acquisition Manufacturer with the FDA may be approved in 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.
Under the terms of the Merger Agreement, at the Closing Date, the Novalere Stockholders received 50% of the Consideration Shares (the “Closing Consideration Shares”) and the remaining 50% of the Consideration Shares (the “ANDA Consideration Shares”) were to be delivered only if an ANDA of Fluticasone Propionate Nasal Spray of Novalere Manufacturing Partners (the “Target Product”) was approved by the FDA (the “ANDA Approval”). A portion of the Closing Consideration Shares and, if ANDA Approval was obtained prior to the 18 month anniversary of the Closing Date, a portion of the ANDA Consideration Shares, would have been held in escrow for a period of 18 months from the Closing Date to be applied towards any indemnification claims by us pursuant to the Merger Agreement.
In addition, the Novalere Stockholders are entitled to receive, if and when earned, earn-out payments (the “Earn-Out Payments”). For every $5.0 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.
On November 12, 2016, we entered into an Amendment and Supplement to a Registration Rights and Stock Restriction Agreement (the "Agreement") with Novalere Holdings pursuant to which we agreed to issue 12,808,796 shares of our Common Stock (the “Novalere Shares”) that were issuable pursuant to agreement upon the approval of the Acquisition Manufacturer’s OTC ANDA for fluticasone propionate nasal spray by the FDA. In connection with the issuance of the Novalere Shares, Novalere Holdings also agreed to certain restrictions, and to an extension in the date to register the Novalere Shares and all other shares of our Common Stock held by Novalere Holdings until the second quarter of 2017. In the event a registration statement to register the Novalere Shares was not filed by February 1, 2017, and did not become effective by May 15, 2017, we would have been required to issue additional shares of Common Stock as a penalty to Novalere Holdings equal to 10% of the total shares to be registered of 25,617,592. We filed a Registration Statement on Form S-1 on February 1, 2017 to register the 25,617,592 shares of Common Stock issued to Novalere Holdings and the Form S-1 was declared effective on March 15, 2017. As a result of the issuance of the Novalere Shares, the fair value of the Novalere Shares on the date of issuance of $2,971,641 was reclassified from liabilities to equity. During the year ended December 31, 2016, there was an increase in the estimated fair value of the Novalere Shares of $1,332,670 due to the amended agreement entered into with Novalere Holdings (see above) which is included in fair value adjustment for contingent consideration in the accompanying 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 $9,275 and $32,215 is included in contingent consideration in the accompanying consolidated balance sheets at December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and 2016, there was an increase/(decrease) in the estimated fair value of the remaining 138,859 ANDA consideration shares totaling $(22,940) and $13,886, respectively, which is included in fair value adjustment for contingent consideration in the accompanying consolidated statements of operations.
There was no change to the estimated fair value of the future earn-out payments of $1,248,126 during the years ended December 31, 2017 and 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. The fair value of the Royalty was determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate of approximately 22% commensurate with our cost of capital and expectation of the revenue growth for products at their life cycle stage. These inputs are considered Level 3 inputs under the fair value measurements and disclosure guidance. During the years ended December 31, 2017 and 2016, $12,881 and $22,103 have been paid under this arrangement, respectively. The fair value of the expected royalties to be paid was increased/(decreased) by $(171,094) and $103,301 during the years ended December 31, 2017 and 2016, respectively, which is included in the fair value adjustment for contingent consideration in the accompanying consolidated statements of operations. The fair value of the contingent consideration was $221,602 and $405,577 at December 31, 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:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials and supplies
|
|
$
|
164,469
|
|
|
$
|
85,816
|
|
Work in process
|
|
|
152,935
|
|
|
|
48,530
|
|
Finished goods
|
|
|
1,408,294
|
|
|
|
465,510
|
|
Total
|
|
$
|
1,725,698
|
|
|
$
|
599,856
|
|
Property and Equipment
Property and equipment consists of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Computer equipment
|
|
$
|
22,473
|
|
|
$
|
5,254
|
|
Office furniture and fixtures
|
|
|
34,249
|
|
|
|
33,376
|
|
Leasehold improvements
|
|
|
24,658
|
|
|
|
-
|
|
Production equipment
|
|
|
278,365
|
|
|
|
276,479
|
|
Software
|
|
|
338,976
|
|
|
|
338,976
|
|
Total cost
|
|
|
698,721
|
|
|
|
654,085
|
|
Less accumulated depreciation
|
|
|
(636,267
|
)
|
|
|
(624,516
|
)
|
Property and equipment, net
|
|
$
|
62,454
|
|
|
$
|
29,569
|
|
Depreciation expense for the years ended December 31, 2017 and 2016 was $11,751 and $5,532, respectively.
Intangible Assets
Amortizable intangible assets consist of the following:
|
|
December 31, 2017
|
|
|
|
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Amount
|
|
|
Useful Lives
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
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 years ended December 31, 2017 and 2016 was $630,148 and $624,404, respectively. The following table summarizes the approximate expected future amortization expense as of December 31, 2017 for intangible assets:
2018
|
|
$
|
630,000
|
|
2019
|
|
|
629,000
|
|
2020
|
|
|
629,000
|
|
2021
|
|
|
600,000
|
|
2022
|
|
|
592,000
|
|
Thereafter
|
|
|
1,193,000
|
|
|
|
$
|
4,273,000
|
|
Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid insurance
|
|
$
|
109,990
|
|
|
$
|
69,976
|
|
Prepaid inventory
|
|
|
124,871
|
|
|
|
20,750
|
|
Merchant net settlement reserve receivable
|
|
|
-
|
|
|
|
221,243
|
|
Prepaid consulting and other expense
|
|
|
83,557
|
|
|
|
21,094
|
|
Prepaid CRI royalties (see Note 2)
|
|
|
44,662
|
|
|
|
-
|
|
Prepaid consulting and other service stock-based compensation expense (see Note 8)
|
|
|
-
|
|
|
|
530,601
|
|
Total
|
|
$
|
363,080
|
|
|
$
|
863,664
|
|
Goodwill
The change in the carrying value of our goodwill for the year ended December 31, 2016 is as follows:
Beginning balance December 31, 2015
|
|
$
|
549,368
|
|
Asset acquisition of Beyond Human® (see Note 3)
|
|
|
403,208
|
|
Ending balance December 31, 2016
|
|
$
|
952,576
|
|
There was no change in the carrying value of our goodwill during the year ended December 31, 2017.
Accounts Payable and Accrued Expense
Accounts payable and accrued expense consist of the following:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts payable
|
|
$
|
2,305,884
|
|
|
$
|
647,083
|
|
Accrued credit card balances
|
|
|
72,719
|
|
|
|
31,654
|
|
Accrued royalties
|
|
|
132,326
|
|
|
|
73,675
|
|
Sales returns and allowances
|
|
|
52,904
|
|
|
|
60,853
|
|
Accrual for stock to be issued to consultants (see Note 7)
|
|
|
-
|
|
|
|
360,000
|
|
Accrued other
|
|
|
43,288
|
|
|
|
36,785
|
|
Total
|
|
$
|
2,607,121
|
|
|
$
|
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 business insurance premiums with a third party totaling $97,871. Under the financing agreements we are required to make nine monthly installment payments of $11,155. The balance outstanding as of December 31, 2017 is $65,399.
Notes Payable
The following table summarizes the outstanding notes payable at December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
February 2016 Note Payable
|
|
$
|
54,984
|
|
|
$
|
347,998
|
|
December 2016 and September 2017 Notes Payable
|
|
|
165,000
|
|
|
|
550,000
|
|
October and December 2017 Notes Payable
|
|
|
1,066,667
|
|
|
|
-
|
|
December 2017 Note Payable
|
|
|
390,000
|
|
|
|
-
|
|
Total notes payable
|
|
|
1,676,651
|
|
|
|
897,998
|
|
Less: Debt discount
|
|
|
(437,355
|
)
|
|
|
(216,871
|
)
|
Carrying value
|
|
|
1,239,296
|
|
|
|
681,127
|
|
Less: Current portion
|
|
|
(1,239,296
|
)
|
|
|
(626,610
|
)
|
Notes payable, net of current portion
|
|
$
|
-
|
|
|
$
|
54,517
|
|
The following table summarizes the future minimum payments as of December 31, 2017 for the notes payable:
February 2016 Note Payable
On February 24, 2016, the Company and SBI Investments, LLC, 2014-1 (“SBI”) entered into an agreement in which SBI loaned us gross proceeds of $550,000 pursuant to a purchase agreement, 20% secured promissory note and security agreement (“February 2016 Note Payable”), all dated February 19, 2016 (collectively, the “Finance Agreements”), to purchase substantially all of the assets of Beyond Human® (see Note 3). Of the $550,000 gross proceeds, $300,000 was paid into an escrow account held by a third party bank and was released to Beyond Human® upon closing of the transaction, $242,500 was provided directly to us for use in building the Beyond Human® business and $7,500 was provided for attorneys’ fees. The attorneys’ fees were recorded as a discount to the carrying value of the February 2016 Note Payable in accordance with ASU 2015-03.
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 was $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 February 2016 Note Payable was 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. The maturity date for the February 2016 Note Payable was February 19, 2018. In February 2018, the February 2016 Notes Payable was repaid in full.
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 8). 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 $232,203 in December 2016, $59,217 in January 2017 and $70,169 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, September and October 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 11,432,747 shares of Common Stock in exchange for the settlement of principal and interest due under the 2016 and 2017 Notes Payable totaling $742,771. 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 8). Due to the settlement of the principal and interest balance of $742,771 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 $378,057 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 consolidated statement of operations for the year ended December 31, 2017.
The remaining principal balance of $165,000 under the 2016 and 2017 Notes Payable is due on May 20, 2018.
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 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 (see Note 8). 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.
In March 2018, we entered into a securities exchange agreement with one 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 note payable totaling $166,667 (see Note 12).
December 2017 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 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 Note Payable, we issued the investor restricted shares of Common Stock totaling 1,000,000 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 Note Payable (see Note 8). 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 Note Payable.
July 2015 Debenture (Amended August 2014 Debenture)
On August 30, 2014, we issued an 8% debenture to an unrelated third party investor in the principal amount of $40,000 (the “August 2014 Debenture”). The August 2014 Debenture bore interest at the rate of 8% per annum. The principal amount and interest were payable on August 29, 2015. On July 21, 2015, we received an additional $30,000 from the investor and amended and restated this agreement to a new principal balance of $73,200 (including accrued interest of $3,200 added to principal) and a new maturity date of July 21, 2016. The note was repaid in full in July 2016.
May 2016 Debenture
On May 4, 2016, we issued a 10% non-convertible debenture to an unrelated third party investor in the principal amount of $24,000 (the “May 2016 Debenture”). The May 2016 Debenture bore interest at the rate of 10% per annum. The principal amount and interest were payable on May 4, 2017. The note was repaid in full in July 2016.
May 2016 Notes Payable
On May 6, 2016, we entered into a securities purchase agreement with an unrelated third party investor in which the investor loaned us gross proceeds of $50,000 pursuant to a 3% promissory note (“May 6, 2016 Note Payable”). The May 6, 2016 Note Payable bore interest at the rate of 3% per annum. The principal amount and interest were payable on November 6, 2016. The note was repaid in full in June 2016.
In connection with the May 6, 2016 Note Payable, we issued the investor restricted shares of Common Stock totaling 500,000. The fair value of the restricted shares of Common Stock issued was based on the market price of our Common Stock on the date of issuance of the May 6, 2016 Note Payable. The allocation of the proceeds received to the restricted shares of Common Stock based on their relative fair value resulted in us recording a debt discount of $23,684. The discount was amortized in full to interest expense during the year ended December 31, 2016.
On May 20, 2016, we entered into a securities purchase agreement with an unrelated third party investor in which the investor loaned us gross proceeds of $100,000 pursuant to a 3% promissory note (“May 20, 2016 Note Payable”). The May 20, 2016 Note Payable bore interest at the rate of 3% per annum. The principal amount and interest were payable on February 21, 2017. The note was repaid in full in June 2016.
In connection with the May 20, 2016 Note Payable, we issued the investor restricted shares of Common Stock totaling 750,000. The fair value of the restricted shares of Common Stock issued was based on the market price of our Common Stock on the date of issuance of the May 20, 2016 Note Payable. The allocation of the proceeds received to the restricted shares of Common Stock based on their relative fair value resulted in us recording a debt discount of $70,280. The discount was amortized in full to interest expense during the year ended December 31, 2016.
Interest Expense
We recognized interest expense on notes payable of $72,747 and $151,924 for the years ended December 31, 2017 and 2016, respectively. Amortization of the debt discount to interest expense during the years ended December, 2017 and 2016 totaled $348,006 and $116,798, respectively.
Convertible Debentures
2016 Financing
The following table summarizes the outstanding 2016 convertible debentures at December 31, 2017 and 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.
Notwithstanding the foregoing, upon the occurrence of an Event of Default, as defined in such 2016 Notes, a Default Amount was equal to the sum of (i) the principal amount, together with accrued interest due thereon through the date of payment payable at the holder’s option in cash or Common Stock and (ii) an additional amount equal to the principal amount payable at our option in cash or Common Stock. For purposes of payments in Common Stock, the following conversion formula shall have applied: the conversion price shall have been the lower of: (i) the fixed conversion price ($0.25) or (ii) 75% multiplied by the volume weighted average price of our Common Stock during the ten consecutive trading days immediately prior to the later of the Event of Default or the end of the applicable cure period. For purposes of the Investors request of repayment in cash but we were unable to do so, the following conversion formula shall have applied: the conversion price shall have been the lower of: (i) the fixed conversion price ($0.25) or (ii) 60% multiplied by the lowest daily volume weighted average price of our Common Stock during the ten consecutive trading days immediately prior to the conversion. Certain other conversion rates applied in the event of the sale or merger of us, default and other defined events.
We could have prepaid the 2016 Notes at any time on the terms set forth in the 2016 Notes at the rate of 110% of the then outstanding balance of the 2016 Notes. Pursuant to the Securities Purchase Agreements, with certain exceptions, the Investors had a right of participation during the term of the 2016 Notes; additionally, we granted the 2016 Notes holders registration rights for the shares of Common Stock underlying the 2016 Notes up to $1,000,000 pursuant to Registration Rights Agreements. We filed a Form S-1 Registration Statement on August 9, 2016, filed an Amended Form S–1 on August 23, 2016 and August 24, 2016 and the Amended Form S-1 became effective August 25, 2016.
In addition, bundled with the convertible debt, we sold:
|
1.
|
A Common Stock purchase warrant to each Investor, which allows the Investors to purchase an aggregate of 3,000,000 shares of Common Stock and the placement agent to purchase 1,220,000 shares of Common Stock (aggregating 4,220,000 shares of our Common Stock) at an exercise price of $0.40 per share (see Note 8); and
|
|
2.
|
7,500,000 restricted shares of Common Stock to the Investors.
|
We allocated the proceeds from the 2016 Notes to the convertible debenture, warrants and restricted shares of Common Stock issued based on their relative fair values. We determined the fair value of the warrants using Black-Scholes with the following range of assumptions:
|
December 31,
2016
|
Expected terms (in years)
|
|
5.00
|
|
Expected volatility
|
|
229%
|
|
Risk-free interest rate
|
1.01%
|
–
|
1.15%
|
Dividend yield
|
|
–
|
|
The fair value of the restricted shares of Common Stock issued to Investors 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 of $445,603 and $1,127,225, respectively. The remaining proceeds of $1,427,172 were initially allocated to the debt. We determined that the embedded conversion features in the 2016 Notes were a derivative instrument which was required to be bifurcated from the debt host contract and recorded at fair value as a derivative liability. The fair value of the embedded conversion features at issuance was determined using a Path-Dependent Monte Carlo Simulation Model (see Note 9 for assumptions used to calculate fair value). The initial fair value of the embedded conversion features were $3,444,284, of which, $687,385 is recorded as a debt discount. The initial fair value of the embedded conversion feature derivative liabilities in excess of the proceeds allocated to the debt, after the allocation of debt proceeds to the debt issuance costs, was $2,756,899, and was immediately expensed and recorded as interest expense during the year ended December 31, 2016 in the accompanying consolidated statement of operations. The 2016 Notes were also issued at an OID of 10% and the OID of $303,889 was recorded as an addition to the principal amount of the 2016 Notes and a debt discount in the accompanying consolidated balance sheet.
Total debt issuance costs incurred in connection with the 2016 Notes was $739,787, of which, $357,286 is the fair value of the warrants to purchase 1,220,000 shares of Common Stock issued to the placement agents. The debt issuance costs have been recorded as a debt discount and are being amortized to interest expense using the effective interest method over the term of the 2016 Notes.
During the years ended December 31, 2017 and 2016, certain of the 2016 Notes holders elected to convert principal and interest outstanding of $350,610 and $1,749,070 into 1,402,440 and 6,996,280 shares of Common Stock, respectively, at a conversion price of $0.25 per share (see Note 8). As a result of the conversion of the principal and interest balance into shares of Common Stock, the fair value of the embedded conversion feature derivative liabilities of $203,630 and $1,093,263 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 years ended December 31, 2017 and 2016, respectively.
As a result of the completion of a public equity offering in March 2017 (see Note 8), 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 consolidated statement of operations for the year ended December 31, 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 consolidated statement of operations for the year ended December 31, 2017.
2015 Financing
In the third quarter of 2015, we entered into Securities Purchase Agreements with three accredited investors (the “Buyers”), pursuant to which we received aggregate gross proceeds of $1,325,000 (net of OID) pursuant to which we sold:
Six convertible promissory notes of the Company totaling $1,457,500 (each a “Q3 2015 Note” and collectively the “Q3 2015 Notes”) (the Q3 2015 Notes were sold at a 10% OID and we received an aggregate total of $1,242,500 in funds thereunder after debt issuance costs of $82,500). The principal amount due under the Q3 2015 Notes was $1,457,500. The Q3 2015 Notes and accrued interest were convertible into shares of our Common Stock (the “Common Stock”) beginning six months from the date of execution, at a conversion price of $0.15 per share, with certain adjustment provisions noted below. The maturity date of the first and second Q3 2015 Note was August 26, 2016. The third Q3 2015 Note had a maturity date of September 24, 2016, the fourth had a maturity date of September 26, 2016, the fifth was October 20, 2016 and the sixth was October 29, 2016. The Q3 2015 Notes bore interest on the unpaid principal amount at the rate of 5% per annum from the date of issuance until the same became due and payable, whether at maturity or upon acceleration or by prepayment or otherwise.
During the year ended December 31, 2016, the Q3 2015 Notes holders elected to convert all principal and interest outstanding of $1,515,635 into 10,104,228 shares of Common Stock at a conversion price of $0.15 per share (see Note 8). As a result of the conversion of the outstanding principal and interest balance into shares of Common Stock, the fair value of the embedded conversion feature derivative liabilities of $2,018,565 on the date of conversion was reclassified to additional paid-in capital (see Note 9) and the remaining unamortized debt discount was amortized to interest expense during the year ended December 31, 2016.
Interest Expense
We recognized interest expense on the Q3 2015 Notes and 2016 Notes for the years ended December 31, 2017 and 2016 of $19,544 and $80,095, respectively. Total amortization of the debt discount on the Q3 2015 Notes and 2016 Notes to interest expense for the years ended December 31, 2017 and 2016 was $430,048 and $3,508,199, respectively.
NOTE 6 – DEBENTURES – RELATED PARTIES
Line of Credit Convertible Debenture
In January 2013, we entered into a line of credit convertible debenture with our President and Chief Executive Officer (the “LOC Convertible Debenture”). Under the terms of its original issuance: (1) we could request to borrow up to a maximum principal amount of $250,000 from time to time; (2) amounts borrowed bore an annual interest rate of 8%; (3) the amounts borrowed plus accrued interest were payable in cash at the earlier of January 14, 2014 or when we complete a Financing, as defined, and (4) the holder had sole discretion to determine whether or not to make an advance upon our request.
During 2013, the LOC Convertible Debenture was further amended to: (1) increase the maximum principal amount available for borrowing to $1 million plus any amounts of salary or related payments paid to Dr. Damaj prior to the termination of the funding commitment; and (2) change the holder’s funding commitment to automatically terminate on the earlier of either (a) when we complete a financing with minimum net proceeds of at least $4 million, or (b) July 1, 2016. The securities to be issued upon automatic conversion would have been either our securities that were issued to the investors in a Qualified Financing or, if the financing did not occur by July 1, 2016, shares of the our Common Stock based on a conversion price of $0.312 per share, 80% times the quoted market price of our Common Stock on the date of the amendment. The LOC Convertible Debenture bore interest at a rate of 8% per annum. The other material terms of the LOC Convertible Debenture were not changed. We recorded a debt discount for the intrinsic value of the BCF with an offsetting increase to additional paid-in-capital. The BCF was being accreted as non-cash interest expense over the expected term of the LOC debenture to its stated maturity date using the effective interest rate method.
On July 22, 2014, we agreed with our CEO to increase the principal amount that may be borrowed from $1,000,000 to $1,500,000. All other terms of the LOC Convertible Debenture remained the same.
On August 12, 2015, the principal amount that may be borrowed was increased to $2,000,000 and the automatic termination date described above was extended to October 1, 2016. The LOC Convertible Debenture was not renewed upon expiration. The conversion price was $0.16 per share, 80% times the quoted market price of our Common Stock on the date of the amendment.
During the year ended December 31, 2016 no amounts were borrowed under the LOC Convertible Debenture and we recorded a beneficial conversion feature of $3,444 for accrued interest. We repaid the LOC Convertible Debenture balance and accrued interest in full during the year ended December 31, 2016.
2014 Non-Convertible Notes – Related Parties
On January 29, 2014, we issued an 8% note, in the amount of $25,000, to our President and Chief Executive Officer. The principal amount and interest were payable on January 22, 2015. This note was amended to extend the maturity date until January 22, 2017. We repaid the principal note balance and accrued interest in full in August 2016.
Interest Expense
We recognized interest expense on the outstanding debentures to related parties totaling $17,430 during the year ended December 31, 2016. Amortization of the debt discount to interest expense during the year ended December 31, 2016 totaled $21,164.
NOTE 7 – RELATED PARTY TRANSACTIONS
Related Party Borrowings
There were certain related party borrowings that were repaid in full during the year ended December 31, 2016 which are described in more detail in Note 6.
Accrued Compensation – Related Party
Accrued compensation includes accruals for employee wages, vacation pay and target-based bonuses. The components of accrued compensation as of December 31, 2017 and 2016 are as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Wages
|
|
$
|
1,431,686
|
|
|
$
|
1,455,886
|
|
Vacation
|
|
|
342,284
|
|
|
|
261,325
|
|
Bonus
|
|
|
742,481
|
|
|
|
449,038
|
|
Payroll taxes on the above
|
|
|
133,746
|
|
|
|
133,344
|
|
Total
|
|
|
2,650,197
|
|
|
|
2,299,593
|
|
Classified as long-term
|
|
|
(1,531,904
|
)
|
|
|
(1,531,904
|
)
|
Accrued compensation
|
|
$
|
1,118,293
|
|
|
$
|
767,689
|
|
Accrued employee wages at December 31, 2017 and 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 2017 and 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 consolidated balance sheets as of December 31, 2017 and 2016 in accordance with the terms of his employment agreement.
NOTE 8 – STOCKHOLDERS’ EQUITY
Capital Stock
We have 292,500,000 authorized shares of Common Stock with a par value of $0.001 per share which were increased in November 2016 upon approval from our stockholders from 150,000,000 authorized shares. In November 2016, our stockholders approved the Amended and Restated Articles of Incorporation to authorize a class of undesignated or "blank check" preferred stock, consisting of 7,500,000 shares at $0.001 par value per share. Shares of preferred stock may be issued in one or more series, with such rights, preferences, privileges and restrictions to be fixed by the Board of Directors.
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 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 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 year ended December 31, 2017, we issued 333,332 shares of restricted Common Stock under the agreement related to services provided and recognized the fair value of the shares issued of $28,767 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. There were 1,666,668 shares of restricted Common Stock remaining to be issued under this service agreement as of December 31, 2017, of which we issued 166,666 prior to termination.
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 years ended December 31, 2017 and 2016, we issued 1,489,512 shares and 1,330,000 shares, respectively, under the agreement related to services provided and recognized the fair value of the shares issued of $206,276 and $332,970, respectively, in general and administrative expense in the accompanying consolidated statements 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. There are no shares of Common Stock to be issued under this service agreement as of December 31, 2017.
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 year ended December 31, 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 years ended December 31, 2017 and 2016, we recognized $465,000 and $255,000, respectively, in general and administrative expense in the accompanying consolidated statements of operations.
On August 3, 2016, we entered into a service agreement with a third party pursuant to which we issued 75,000 fully-vested restricted shares of Common Stock in exchange for services to be rendered over the term of the agreement which ended on November 10, 2016. The fair value of the shares issued of $32,250 was based on the market price of our Common Stock on the date of vesting. On November 17, 2016, we entered into a service agreement with the same 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 years ended December 31, 2017 and 2016, we recognized $52,181 and $49,644, respectively, in general and administrative expense in the accompanying consolidated statements of operations.
In July 2016, we issued 100,000 shares of Common Stock to CRI pursuant to the Amended CRI Asset Purchase Agreement (see Note 2). The fair value of the restricted shares of Common Stock of $23,000 was based on the market price of our Common Stock on the date of issuance and is included in research and development expense in the accompanying consolidated statement of operations during the year ended December 31, 2016. Additionally, in January 2017, we issued 225,000 shares of Common Stock to CRI pursuant to the Amended CRI Asset Purchase Agreement 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 consolidated balance sheet at December 31, 2017.
On June 16, 2016, we entered into a consulting agreement with a third party pursuant to which we agreed to issue 250,000 restricted shares of Common Stock in exchange for services to be rendered. In July 2016, we issued 250,000 fully-vested shares under the agreement related to services to be provided over the term of the agreement which ended on December 16, 2016. The fair value of the shares issued of $47,500 was based on the market price of our Common Stock on the date of vesting. On December 16, 2016, we amended the consulting agreement to extend the term 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 years ended December 31, 2017 and 2016, we recognized $28,420 and $48,720, respectively, in general and administrative expense in the accompanying consolidated statements of operations.
In 2017 and 2016, we issued a total of 189,314 shares and 1,012,500 shares of Common Stock, respectively, for services and recorded an expense of $18,960 and $192,043 for the years ended December 31, 2017 and 2016, respectively, which is included in general and administrative expense in the accompanying consolidated statements 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 2017 and 2016, we issued 2,825,000 shares and 2,361,111 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 $216,905 and $276,167, respectively, and was recorded as a debt discount during the years ended December 31, 2017 and 2016 (see Note 5).
In connection with the October and December 2017 Notes, 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 was recorded as a debt discount to the carrying value of the notes payable during the year ended December 31, 2017 (see Note 5).
In 2017 and 2016, certain 2016 Notes holders elected to convert $350,610 and $1,749,070 in principal and interest into 1,402,440 shares and 6,996,280 shares of Common Stock, respectively (see Note 5). Upon conversion, the fair value of the embedded conversion feature derivative liability on the date of conversion was reclassified to additional paid-in capital (see Note 9).
In September and October 2017, certain 2016 and 2017 Notes Payable holders elected to exchange $742,771 in principal and interest for 11,432,747 shares of Common Stock (see Note 5). The fair value of the shares of Common Stock of $1,120,828 was based on the market price of our Common Stock on the date of issuance.
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 2017 and 2016, we issued 92,000 shares and 19,315,994 shares of Common Stock, respectively, in exchange for vested restricted stock units.
2016 Issuances
In connection with the issuance of the 2016 Notes, we issued restricted shares of Common Stock totaling 7,500,000 to the Investors. The relative fair value of the restricted shares of Common Stock totaling $1,127,225 was recorded as a debt discount during the year ended December 31, 2016 (see Note 5).
During the year ended December 31, 2016, five of our warrant holders exercised their warrants to purchase shares of Common Stock totaling 1,033,800 at an exercise price of $0.30 per share. We received gross cash proceeds of $310,140.
In April and August 2016, we issued an aggregate of 3,385,354 shares of Common Stock upon the cashless exercise of warrants to purchase 5,042,881 shares of Common Stock. Upon exercise of certain warrants in April 2016, the fair value of the warrant derivative liability on the date of exercise was reclassified to additional paid-in capital (see Note 9).
During the year ended December 31, 2016, we issued 215,000 shares of Common Stock for legal fees in connection with the Semprae merger transaction and recognized the fair value of the shares issued of $64,500 in general and administrative expense in the accompanying consolidated statement of operations.
In November 2016, we issued 12,808,796 shares of Common Stock to Novalere Holdings in connection with the Amendment and Supplement to a Registration Rights and Stock Restriction Agreement and $2,971,641 of the acquisition contingent consideration was reclassified from liabilities to equity (see Note 3).
During the year ended December 31, 2016, the Q3 2015 Notes holders elected to convert all principal and interest outstanding of $1,515,635 into 10,104,228 shares of Common Stock at a conversion price of $0.15 per share (see Note 8). As a result of the conversion of the outstanding principal and interest balance into shares of Common Stock, the fair value of the embedded conversion feature derivative liabilities of $2,018,565 on the date of conversion was reclassified to additional paid-in capital (see Note 9) and the remaining unamortized debt discount was amortized to interest expense during the year ended December 31, 2016.
On January 6, 2016 and April 5, 2016, we entered into a consulting agreement with a third party pursuant to which we agreed to issue, over the term of the agreements, an aggregate of 1,560,000 shares of Common Stock in exchange for services to be rendered. During the year ended December 31, 2016, we issued 1,560,000 shares under the agreement related to services provided and recognized the fair value of the shares issued of $184,958 in general and administrative expense in the accompanying consolidated statement of operations. The 1,560,000 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.
In January 2016, we issued 300,000 shares of Common Stock for services and recorded an expense of $17,000, which is included in general and administrative expense in the accompanying consolidated statement of operations. The 300,000 shares of Common Stock vested on the date of issuance and the fair value of the shares of Common Stock was based on the market price of our Common Stock on the date of vesting.
On February 10, 2016, we entered into a service agreement with a third party pursuant to which we agreed to issue, over the term of the agreement, 3,000,000 shares of Common Stock in exchange for services to be rendered. During the year ended December 31, 2016, we issued 3,000,000 shares under the agreement related to services provided and recognized the fair value of the shares issued of $352,500 in general and administrative expense in the accompanying consolidated statement of operations. The 3,000,000 shares of Common Stock vested on the date of issuance and the fair value of the shares of Common Stock was based on the market price of our Common Stock on the date of vesting.
On February 19, 2016, we entered into a consulting agreement with a third party, pursuant to which we agreed to issue, over the term of the agreement, 1,750,000 shares of Common Stock in exchange for services to be rendered. During the year ended December 31, 2016, we issued 1,750,000 shares under the agreement related to services provided in connection with the acquisition of Beyond Human® (see Note 3) and recognized the fair value of the shares issued of $181,013 in general and administrative expense in the accompanying consolidated statement of operations. The 1,750,000 shares of Common Stock vested on the date of issuance and the fair value of the shares of Common Stock was based on the market price of our Common Stock on the date of vesting.
On April 27, 2016, we entered into a service agreement with a third party pursuant to which we agreed to issue 300,000 shares of Common Stock in exchange for services to be rendered over the 3 month term of the agreement. The shares of Common Stock issued were non-forfeitable and the fair value of $28,500 was based on the market price of our Common Stock on the date of vesting. During the year ended December 31, 2016, we recognized $28,500 in general and administrative expense in the accompanying consolidated statement of operations.
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. The exercise price for all equity awards issued under the 2013 Plan is based on the fair market value of the Common Stock. Currently, because our Common Stock is quoted on the OTCQB, the fair market value of the Common Stock is equal to the last-sale price reported by the OTCQB as of the date of determination, or if there were no sales on such date, on the last date preceding such date on which a sale was reported. Generally, each vested stock unit entitles the recipient to receive one share of our Common Stock which is eligible for settlement at the earliest of their termination, a change in control of us or a specified date. Restricted stock units can vest according to a schedule or immediately upon award. Stock options generally vest over a three-year period, first year cliff vesting with quarterly vesting thereafter on the three-year awards, and have a ten-year life. Stock options outstanding are subject to time-based vesting as described above and thus are not performance-based. As of December 31, 2017, 89,516 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. The exercise price for all equity awards issued under the 2014 Plan is based on the fair market value of the Common Stock. Generally, each vested stock unit entitles the recipient to receive one share of our Common Stock which is eligible for settlement at the earliest of their termination, a change in control of us or a specified date. Restricted stock units can vest according to a schedule or immediately upon award. Stock options generally vest over a three-year period, first year cliff vesting with quarterly vesting thereafter on the three-year awards and have a ten-year life. Stock options outstanding are subject to time-based vesting as described above and thus are not performance-based. As of December 31, 2017, 49,367 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. The exercise price for all equity awards issued under the 2016 Plan is based on the fair market value of the Common Stock. Generally, each vested stock unit entitles the recipient to receive one share of our Common Stock which is eligible for settlement at the earliest of their termination, a change in control of the us or a specified date. Restricted stock units can vest according to a schedule or immediately upon award. Stock options generally vest over a three-year period, first year cliff vesting with quarterly vesting thereafter on the three-year awards and have a ten-year life. Stock options outstanding are subject to time-based vesting as described above and thus are not performance-based. As of December 31, 2017, 21,008,882 shares were available under the 2016 Plan.
Stock Options
For the years ended December 31, 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)
|
|
|
9.1
|
|
|
|
10.0
|
|
Expected volatility
|
|
|
213.6
|
%
|
|
|
227.2
|
%
|
Average risk-free interest rate
|
|
|
2.30
|
%
|
|
|
1.76
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Grant date fair value
|
|
$
|
0.15
|
|
|
$
|
0.18
|
|
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, 2015
|
|
|
196,000
|
|
|
$
|
0.31
|
|
|
|
9.0
|
|
|
$
|
-
|
|
Granted
|
|
|
91,500
|
|
|
$
|
0.17
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(50,000
|
)
|
|
$
|
0.31
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2016
|
|
|
237,500
|
|
|
$
|
0.22
|
|
|
|
8.6
|
|
|
|
14,293
|
|
Granted
|
|
|
46,000
|
|
|
|
0.15
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(71,500
|
)
|
|
|
0.07
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
(124,000
|
)
|
|
|
0.31
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2017
|
|
|
88,000
|
|
|
$
|
0.17
|
|
|
|
9.0
|
|
|
$
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest at December 31, 2017
|
|
|
88,000
|
|
|
$
|
0.17
|
|
|
|
9.0
|
|
|
$
|
377
|
|
Vested and Expected to Vest at December 31, 2016
|
|
|
237,500
|
|
|
$
|
0.22
|
|
|
|
8.6
|
|
|
$
|
14,293
|
|
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 December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, the Company recognized stock-based compensation from stock options of $7,078 and $20,390, respectively. The intrinsic value of the stock options exercised during the year ended December 31, 2017 on the dates of exercise was $7,133.
Restricted Stock Units
The following table summarizes the restricted stock unit activity for the years ended December 31, 2017 and 2016:
|
|
Restricted
Stock Units
|
|
Outstanding at December 31, 2015
|
|
|
17,554,736
|
|
Granted
|
|
|
14,636,106
|
|
Exchanged
|
|
|
(19,315,994
|
)
|
Outstanding at December 31, 2016
|
|
|
12,874,848
|
|
Granted
|
|
|
2,908,987
|
|
Exchanged
|
|
|
(92,000
|
)
|
Cancelled
|
|
|
(2,500,000
|
)
|
Outstanding at December 31, 2017
|
|
|
13,191,835
|
|
|
|
|
|
|
Vested at December 31, 2017
|
|
|
9,871,523
|
|
Vested at December 31, 2016
|
|
|
8,493,600
|
|
The vested restricted stock units at December 31, 2017 and 2016 have not settled and are not showing as issued and outstanding shares of ours but are considered outstanding for earnings per share calculations. Settlement of these vested restricted stock units will occur on the earliest of (i) the date of termination of service of the employee or consultant, (ii) change of control of us, or (iii) 10 years from date of issuance. Settlement of vested restricted stock units may be made in the form of (i) cash, (ii) shares, or (iii) any combination of both, as determined by the board of directors and is subject to certain criteria having been fulfilled by the recipient.
We calculate the fair value of the restricted stock units based upon the quoted market value of the Common Stock at the date of grant. The grant date fair value of restricted stock units issued during the years ended December 31, 2017 and 2016 was $515,500 and $1,499,268, respectively. For the years ended December 31, 2017 and 2016, we recognized $328,929 and $934,363, respectively, of stock-based compensation expense for the vested units. As of December 31, 2017, compensation expense related to unvested shares not yet recognized in the consolidated statement of operations was approximately $518,000 and will be recognized over a remaining weighted-average term of 1.9 years.
Warrants
Outstanding 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. Warrants to purchase 245,157 shares of Common Stock were exercised under the cashless exercise provisions of the warrant agreement in July 2016, which resulted in the issuance of 191,908 shares of Common Stock. The intrinsic value of the warrants on the date of exercise was $86,359.
In 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 Q3 2015 Notes, we issued warrants to purchase 1,808,333 shares of Common Stock with an exercise price of $0.30 per share and expire in 2020 to investors and placement agents. Warrants to purchase 1,033,800 shares of Common Stock were exercised during the year ended December 31, 2016. The intrinsic value of the warrants on the dates of exercise was $150,200. Warrants to purchase 774,533 shares of Common Stock remain outstanding as of December 31, 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 December 31, 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 year ended December 31, 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 December 31, 2017, there are 58,583,725 fully vested warrants outstanding. The weighted average exercise price of outstanding warrants at December 31, 2017 is $0.17 per share, the weighted average remaining contractual term is 2.4 years and the aggregate intrinsic value of the outstanding warrants is $0.
2016 Activity
In February 2014, we issued 250,000 warrants in connection with the February 2014 Convertible Debentures. The warrants had an exercise price of $0.50 per share and expired February 13, 2019. On March 6, 2015, we entered into an agreement with the note holder to extend the February 2014 Convertible Debentures for six months. As consideration for the extension, we issued the note holder an additional 250,000 warrants, reduced the exercise price of the warrants from $0.50 to $0.30 per share and extended the expiration date to March 12, 2020. The warrants were also amended to include certain anti-dilution protection, including protection upon dilutive issuances. In connection with the Q3 2015 Notes, the exercise price of these warrants was reduced to $0.0896 per share and an additional 1,173,410 warrants were issued per the anti-dilution protection afforded in the warrant agreement during the year ended December 31, 2015. These warrants were exercised under the cashless exercise provisions of the warrant agreement in April 2016. In connection with the exercise of the warrants, we agreed to reduce the exercise price of these warrants to $0.07 per share which resulted in an additional 469,447 warrants being issued in April 2016 prior to exercise. The warrants exercised were classified as derivative liabilities and, upon exercise, the fair value of the warrant derivative liability was reclassified to additional paid-in capital (see Note 9). The intrinsic value of the warrants on the date of exercise was $53,629.
In January, 2015, we issued 500,000 warrants in connection with the January 2015 Non-Convertible Debentures. The warrants were exercisable for five years from the closing date at an exercise price of $0.30 per share of Common Stock or January 21, 2020. The warrants contained anti-dilution protection, including protection upon dilutive issuances. In connection with the Q3 2015 Notes, the exercise price of these warrants was reduced to $0.0896 per share and an additional 1,173,410 warrants were issued per the anti-dilution protection afforded in the warrant agreement during the year ended December 31, 2015. These warrants were exercised under the cashless exercise provisions of the warrant agreement in April 2016. In connection with the exercise of the warrants, we agreed to reduce the exercise price of these warrants to $0.0565 per share which resulted in an additional 981,457 warrants being issued in April 2016 prior to exercise. The warrants exercised were classified as derivative liabilities and, upon exercise, the fair value of the warrant derivative liability was reclassified to additional paid-in capital (see Note 9). The intrinsic value of the warrants on the date of exercise was $99,121.
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 years ended December 31, 2017 and 2016 was 148,640,929 and 85,436,145, 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 years ended December 31, 2017 and 2016 was 9,292,529 and 8,670,237, respectively.
The total weighted average shares outstanding used in the basic and diluted net loss per share calculation for the years ended December 31, 2017 and 2016 was 157,933,458 and 94,106,382, respectively.
The following table shows the anti-dilutive shares excluded from the calculation of basic and diluted net loss per common share as of December 31, 2017 and 2016:
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Gross number of shares excluded:
|
|
|
|
|
|
|
|
|
Restricted stock units – unvested
|
|
|
3,320,312
|
|
|
|
4,381,248
|
|
Stock options
|
|
|
88,000
|
|
|
|
237,500
|
|
Convertible debentures and accrued interest
|
|
|
-
|
|
|
|
6,414,132
|
|
Warrants
|
|
|
58,583,725
|
|
|
|
5,967,054
|
|
Total
|
|
|
61,992,037
|
|
|
|
16,999,934
|
|
The above table does not include the ANDA Consideration Shares related to the Novalere acquisition totaling 138,859 at December 31, 2017 and 2016 as they are considered contingently issuable (see Note 3).
NOTE 9 – DERIVATIVE LIABILITIES
The warrants issued in connection with the January 2015 Non-Convertible Debenture to a former executive and the February 2014 Convertible Debenture 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, resulting in a value of $226,297 at the date of issuance. The fair value will be affected by changes in inputs to that model including our stock price, expected stock price volatility, the contractual term and the risk-free interest rate. 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. Certain of these warrants were exercised under the cashless exercise provisions of the warrant agreement in April 2016 and, as a result, the fair value of the warrant derivative liability on the date of exercise totaling $518,224 was reclassified to additional paid-in capital (see Note 8).
The 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 years ended December 31, 2017 and 2016 are represented in the table below:
|
|
2017
|
|
|
2016
|
|
Expected life (in years)
|
|
2.1
|
–
|
3.0
|
|
|
3.1
|
–
|
4.0
|
|
Expected volatility
|
|
167%
|
–
|
187%
|
|
|
188%
|
–
|
230%
|
|
Average risk-free interest rate
|
|
1.33%
|
–
|
1.89%
|
|
|
0.86%
|
–
|
1.47%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
|
0%
|
|
|
We had determined the embedded conversion features of the Q3 2015 Notes and 2016 Notes (see Note 5) to be derivative liabilities because the terms of the embedded conversion features 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 had 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 years ended December 31, 2017 and 2016, the Q3 2015 Notes and 2016 Notes were either converted into shares of Common Stock or repaid in full. The conversion of the Q3 2015 and 2016 Notes during the years ended December 31, 2017 and 2016 resulted in the fair value of the embedded conversion feature derivative liability on the dates of conversion of $203,630 and $3,111,828, respectively, to be reclassified to additional paid-in capital (see Note 8). 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 consolidated statement of operations during the year ended December 31, 2017.
The derivative liabilities are a Level 3 fair value measurement in the fair value hierarchy and a summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for our embedded conversion feature derivative liabilities that are categorized within Level 3 of the fair value hierarchy during the years ended December 31, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
Stock price
|
|
$0.10
|
–
|
0.31
|
|
|
$0.05
|
–
|
0.50
|
|
Strike price
|
|
|
$0.25
|
|
|
|
$0.15
|
–
|
0.25
|
|
Expected life (in years)
|
|
|
0.4
|
|
|
|
0.3
|
–
|
1.1
|
|
Expected volatility
|
|
130%
|
–
|
168%
|
|
|
121%
|
–
|
274%
|
|
Average risk-free interest rate
|
|
0.78%
|
–
|
0.87%
|
|
|
0.28%
|
–
|
0.69%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
|
0%
|
|
|
At December 31, 2017 and 2016, the estimated Level 3 fair values of the embedded conversion feature and warrant derivative liabilities measured on a recurring basis are as follows:
|
|
At December 31, 2017
|
|
|
|
Fair
value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Warrant derivative liabilities
|
|
$
|
58,609
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
58,609
|
|
|
$
|
58,609
|
|
|
|
At December 31, 2016
|
|
|
|
Fair
value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Embedded conversion feature derivative liabilities
|
|
$
|
319,674
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
319,674
|
|
|
$
|
319,674
|
|
Warrant derivative liabilities
|
|
|
164,070
|
|
|
|
-
|
|
|
|
-
|
|
|
|
164,070
|
|
|
|
164,070
|
|
Total
|
|
$
|
483,744
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
483,744
|
|
|
$
|
483,744
|
|
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 years ended December 31, 2017 and 2016:
Fair Value Measurements Using Level 3 Inputs
Warrant derivative liabilities:
|
|
|
|
|
Beginning balance December 31, 2015
|
|
$
|
432,793
|
|
Reclassification of fair value of warrant derivative liability to additional paid-in capital upon cashless exercise of warrants
|
|
|
(518,224
|
)
|
Change in fair value
|
|
|
249,501
|
|
Ending balance December 31, 2016
|
|
|
164,070
|
|
Change in fair value
|
|
|
(105,461
|
)
|
Ending balance December 31, 2017
|
|
$
|
58,609
|
|
|
|
|
|
|
Embedded conversion feature derivative liabilities:
|
|
|
|
|
Beginning balance December 31, 2015
|
|
$
|
301,779
|
|
Initial fair value of embedded conversion feature derivative liabilities with the 2016 Notes
|
|
|
3,444,284
|
|
Reclassification of fair value of embedded conversion feature derivative liability to additional paid-in capital upon conversions of Q3 2015 Notes
|
|
|
(2,018,565
|
)
|
Reclassification of fair value of embedded conversion feature derivative liability to additional paid-in capital upon conversions of 2016 Notes
|
|
|
(1,093,263
|
)
|
Change in fair value
|
|
|
(314,561
|
)
|
Ending 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 December 31, 2017
|
|
$
|
-
|
|
NOTE 10 – INCOME TAXES
We are subject to taxation in the United States and California, Colorado and South Carolina. The provision for income taxes for the years ended December 31, 2017 and 2016 are summarized below:
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
(800
|
)
|
State
|
|
|
3,200
|
|
|
|
3,200
|
|
Total current
|
|
|
3,200
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,055,730
|
|
|
|
(2,552,758
|
)
|
State
|
|
|
(614,230
|
)
|
|
|
(650,597
|
)
|
Change in valuation allowance
|
|
|
(441,500
|
)
|
|
|
3,203,355
|
|
Total deferred
|
|
|
-
|
|
|
|
-
|
|
Income tax provision
|
|
$
|
3,200
|
|
|
$
|
2,400
|
|
At December 31, 2017, we had federal net operating loss carry forwards of approximately $24,259,000 which may be offset against future taxable income through 2037, and a California net operating loss carryforward of approximately $23,419,000. No net deferred tax assets are recorded at December 31, 2017 and 2016, as all deferred tax assets and liabilities have been fully offset by a valuation allowance due to the uncertainty of future utilization.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the "Act"). The Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction is effective on January 1, 2018. As a result of the rate reduction, we have reduced the deferred tax asset balance as of December 31, 2017 by $3.1 million. Due to our full valuation allowance position, there was no net impact on our income tax provision during the year ended December 31, 2017 as the reduction in the deferred tax asset balance was fully offset by a corresponding decrease in the valuation allowance.
In conjunction with the Act, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. We have recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities at December 31, 2017. There was no net impact on our consolidated financial statements as of and for the year ended December 31, 2017 as the corresponding adjustment was made to the valuation allowance. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Act.
At December 31, 2017 and 2016, the approximate deferred tax assets (liabilities) consist of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
$
|
6,730,000
|
|
|
$
|
8,108,000
|
|
State taxes
|
|
|
1,000
|
|
|
|
1,000
|
|
Equity based instruments
|
|
|
324,000
|
|
|
|
374,000
|
|
Deferred compensation
|
|
|
813,000
|
|
|
|
916,000
|
|
Intangibles
|
|
|
-
|
|
|
|
-
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
127,000
|
|
Other
|
|
|
191,000
|
|
|
|
125,000
|
|
Total deferred tax assets
|
|
|
8,059,000
|
|
|
|
9,651,000
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(825,000
|
)
|
|
|
(1,572,000
|
)
|
Derivative liabilities
|
|
|
(5,000
|
)
|
|
|
-
|
|
Warrants
|
|
|
(2,000
|
)
|
|
|
(170,000
|
)
|
Debt discount
|
|
|
(16,000
|
)
|
|
|
(252,000
|
)
|
Other
|
|
|
-
|
|
|
|
(4,000
|
)
|
Total deferred tax liabilities
|
|
|
(848,000
|
)
|
|
|
(1,998,000
|
)
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(7,211,000
|
)
|
|
|
(7,653,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2017 and 2016, we have recorded a full valuation allowance against its net deferred tax assets of approximately $7,211,000 and $7,653,000 respectively. The change in the valuation allowance during the years ended December 31, 2017 and 2016 was a decrease of approximately $442,000 and an increase of approximately $3,203,000, respectively, and a full valuation allowance has been recorded since, in the judgment of management, these net deferred tax assets are not more likely than not to be realized. The ultimate realization of deferred tax assets and liabilities is dependent upon the generation of future taxable income during periods in which those temporary differences and carryforwards become deductible or are utilized.
Pursuant to Section 382 of the Internal Revenue Code of 1986, the annual utilization of a company's net operating loss carryforwards could be limited if we experience a change in ownership of more than 50 percentage points within a three-year period. An ownership change occurs with respect to a corporation if it is a loss corporation on a testing date and, immediately after the close of the testing date, the percentage of stock of the corporation owned by one or more five-percent shareholders has increased by more than 50 percentage points over the lowest percentage of stock of such corporation owned by such shareholders at any time during the testing period. We do not believe such an ownership change occurred subsequent to the reverse merger transaction.
We have experienced an ownership change with regard to Semprae operating losses. Out of approximately $19,482,000 of Federal and California NOLs as of December 24, 2013, only approximately $44,000 per year can be used going forward for a total of approximately $844,000 each.
We have experienced an ownership change with regard to Novalere operating losses. A study has not been completed to evaluate the impact on the utilization of those losses.
A reconciliation of the statutory federal income tax rate for the years ended December 31, 2017 and 2016 to the effective tax rate is as follows:
|
|
2017
|
|
|
2016
|
|
Expected federal tax
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State tax (net of federal benefit)
|
|
|
(0.03
|
)%
|
|
|
(0.02
|
)%
|
Contingent consideration
|
|
|
0.86
|
%
|
|
|
(3.15
|
)%
|
Fair value of embedded conversion feature in excess of allocated debt proceeds
|
|
|
-
|
%
|
|
|
(5.01
|
)%
|
Loss on extinguishment of debt
|
|
|
(3.52
|
)%
|
|
|
-
|
%
|
Restricted stock units
|
|
|
(0.18
|
)%
|
|
|
(7.34
|
)%
|
Stock options
|
|
|
(0.21
|
)%
|
|
|
-
|
%
|
Change in federal tax rate
|
|
|
(45.59
|
)%
|
|
|
-
|
%
|
Release of valuation allowance
|
|
|
45.59
|
%
|
|
|
-
|
%
|
Other
|
|
|
(0.12
|
)%
|
|
|
0.86
|
%
|
Valuation allowance
|
|
|
(30.85
|
)%
|
|
|
(19.36
|
)%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(0.05
|
)%
|
|
|
(0.02
|
)%
|
We follow FASB ASC 740-10,
Uncertainty in Income Taxes
. We recognize interest and penalties associated with uncertain tax positions as a component of income tax expense. We do not have any unrecognized tax benefits or a liability for uncertain tax positions at December 31, 2017 and 2016. We do not expect to have any unrecognized tax benefits within the next twelve months. We recognize accrued interest and penalties associated with uncertain tax positions, if any, as part of income tax expense. There were no tax related interest and penalties recorded for 2017 and 2016. Since we incurred net operating losses in every tax year since inception, all of its income tax returns are subject to examination and adjustments by the IRS for at least three years following the year in which the tax attributes are utilized.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Royalties and Other Obligations
As described more fully in Note 2, we have several licensing agreements which could result in substantial payments for royalties and upon the obtainment of contractual milestones, as well as, certain minimum purchase order requirements. In October 2017, the royalty obligation due for net product sales of Vesele® ended as the royalty term was for three years from October 2014. The outstanding royalty obligation under such arrangement is $132,316 and $73,675 as of December 31, 2017 and 2016 and is included in accounts payable and accrued expense in the accompanying consolidated balance sheets.
As described more fully in Note 3, the Novalere Stockholders are entitled to receive earn-out payments.
We have annual royalty payments in connection with the Semprae acquisition discussed in Note 3.
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.
Operating Lease
In December 2013, we entered into a lease agreement for 2,578 square feet of office space in San Diego, CA that commenced on December 10, 2013 and continued until January 31, 2019. Monthly rent was in the amount of $7,347, with an approximate 4% increase in the base rent amount on an annual basis. In August 2017, we entered into a lease termination agreement with the landlord in which we were released from any future commitments under the lease, were not subject to any penalties and were to vacate the office space by November 1, 2017. In connection with the termination agreement, we received reimbursement of our lease deposit of $14,958, as well as, a moving expense reimbursement of $22,000 which was recorded as a reduction in general and administrative expense during the year ended December 31, 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 commenced 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, as well as, rent abatement for rent due from January 2018 through May 2018. We hold an option to extend the lease an additional 5 years at the end of the initial term. Under the terms of the lease we are also entitled to a tenant improvement allowance of $100,000 in which completion of the tenant improvements and receipt of the allowance was in 2018.
Rent expense for the years ended December 31, 2017 and 2016 was $77,983 and $88,513, respectively. The following represents future annual minimum lease payments as of December 31, 2017:
2018
|
|
$
|
146,794
|
|
2019
|
|
|
258,741
|
|
2020
|
|
|
266,501
|
|
2021
|
|
|
274,500
|
|
2022
|
|
|
282,024
|
|
Thereafter
|
|
|
94,008
|
|
Total
|
|
$
|
1,322,568
|
|
Employment Agreements
We have entered into employment agreements with certain of our officers and employees which payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control of our Company, or by the employee for good reason.
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 May 21, 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.
Indemnities
In addition to the indemnification provisions contained in our directors and officers. These agreements require us, among other things, to indemnify the director or officer against specified expenses and liabilities, such as attorneys’ fees, judgments, fines and settlements, paid by the individual in connection with any action, suit or proceeding arising out of the individual’s status or service as our director or officer, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against the individual with respect to which the individual may be entitled to indemnification by us. We also indemnify our lessor in connection with our facility lease for certain claims arising from the use of the facilities. These indemnities do not provide for any limitation of the maximum potential future payments we could be obligated to make. Historically, we have not incurred any payments for these obligations and, therefore, no liabilities have been recorded for these indemnities in the accompanying consolidated balance sheets.
NOTE 12 – SUBSEQUENT EVENTS
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$1.31 million at December 31, 2017) 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.
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 Zestra® and Zestra Glide® in Iran and 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.
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 approximately $2.7 million. The remaining Series B Warrants totaling 6,741,667 expired on March 21, 2018. Per the terms of the engagement letter with HCW in connection with the public offering in March 2017 and as a result of the Series B Warrant exercises, we paid HCW approximately $181,000 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.
In January 2018, we issued 256,486 shares of Common Stock to consultants for services rendered. The fair value of the Common Stock issued was approximately $21,000.
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. 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 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 and interest balance totaling approximately $218,000 was recorded as a loss on debt extinguishment.
In the first quarter of 2018, we entered into a securities purchase agreement with three unrelated third-party investors in which the investors loaned us gross proceeds of $1,227,500. The promissory 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. In connection with the promissory notes, we issued 1,282,000 restricted shares of Common Stock to the investors. 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 approximately $409,000. In connection with this financing in the first quarter of 2018, we issued 936,054 restricted shares of Common Stock to a third-party consultant. The fair value of the restricted shares of Common Stock issued of $122,500 was 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 promissory notes.
In February and March 2018, we entered into securities purchase agreements with two unrelated third-party investors in which the investors loaned us gross proceeds of $650,000 pursuant to 5% promissory notes. The notes have an OID of $70,000 and requires payment 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 and in three installments on October 1, 2018, January 1, 2019 and April 1, 2019 for the note issued in March. In connection with the notes, we issued the investors restricted shares of Common Stock totaling 1,485,000. 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 approximately $222,000. The discount is being amortized to interest expense using the effective interest method over the term of note.
We have evaluated subsequent events through the filing date of this Form 10-K and determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosures in the notes thereto other than as disclosed in the accompanying notes to the consolidated financial statements.
INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
703,012
|
|
|
$
|
1,564,859
|
|
Accounts receivable, net
|
|
|
356,347
|
|
|
|
68,259
|
|
Prepaid expense and other current assets
|
|
|
1,265,474
|
|
|
|
363,080
|
|
Inventories
|
|
|
2,198,045
|
|
|
|
1,725,698
|
|
Total current assets
|
|
|
4,522,878
|
|
|
|
3,721,896
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
206,425
|
|
|
|
62,454
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
20,881
|
|
|
|
20,881
|
|
Goodwill
|
|
|
952,576
|
|
|
|
952,576
|
|
Intangible assets, net
|
|
|
3,800,674
|
|
|
|
4,273,099
|
|
Total assets
|
|
$
|
9,503,434
|
|
|
$
|
9,030,906
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expense
|
|
$
|
2,530,687
|
|
|
$
|
2,607,121
|
|
Accrued compensation
|
|
|
1,027,068
|
|
|
|
1,118,293
|
|
Deferred revenue and customer deposits
|
|
|
95,372
|
|
|
|
24,690
|
|
Accrued interest payable
|
|
|
24,232
|
|
|
|
3,648
|
|
Derivative liabilities – warrants
|
|
|
-
|
|
|
|
58,609
|
|
Contingent consideration
|
|
|
-
|
|
|
|
28,573
|
|
Short-term loan payable
|
|
|
138,048
|
|
|
|
65,399
|
|
Notes payable, net of debt discount of $830,610 and $437,355, respectively
|
|
|
2,340,849
|
|
|
|
1,239,296
|
|
Total current liabilities
|
|
|
6,156,256
|
|
|
|
5,145,629
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation – less current portion
|
|
|
1,227,554
|
|
|
|
1,531,904
|
|
Contingent consideration – less current portion
|
|
|
1,261,455
|
|
|
|
1,450,430
|
|
Total non-current liabilities
|
|
|
2,489,009
|
|
|
|
2,982,334
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,645,265
|
|
|
|
8,127,963
|
|
|
|
|
|
|
|
|
|
|
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, 2018 and December 31, 2017, respectively
|
|
|
-
|
|
|
|
-
|
|
Common Stock: 292,500,000 shares authorized, at $0.001 par value, 208,169,412 and 167,420,605 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
|
|
|
208,169
|
|
|
|
167,421
|
|
Additional paid-in capital
|
|
|
42,350,286
|
|
|
|
36,375,359
|
|
Accumulated deficit
|
|
|
(41,700,286
|
)
|
|
|
(35,639,837
|
)
|
Total stockholders' equity
|
|
|
858,169
|
|
|
|
902,943
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,503,434
|
|
|
$
|
9,030,906
|
|
See accompanying notes to these condensed consolidated financial statements.
INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
For the
Three Months Ended
September 30,
|
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
6,956,861
|
|
|
$
|
2,218,343
|
|
|
$
|
18,469,199
|
|
|
$
|
6,426,790
|
|
License revenue
|
|
|
582
|
|
|
|
2,500
|
|
|
|
5,737
|
|
|
|
10,000
|
|
Service revenue
|
|
|
189,462
|
|
|
|
-
|
|
|
|
345,110
|
|
|
|
-
|
|
Cooperative marketing revenue
|
|
|
233,074
|
|
|
|
-
|
|
|
|
416,710
|
|
|
|
-
|
|
Net revenue
|
|
|
7,379,979
|
|
|
|
2,220,843
|
|
|
|
19,236,756
|
|
|
|
6,436,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
|
1,536,792
|
|
|
|
480,076
|
|
|
|
3,739,837
|
|
|
|
1,329,131
|
|
Research and development
|
|
|
59,201
|
|
|
|
8,736
|
|
|
|
93,093
|
|
|
|
26,982
|
|
Sales and marketing
|
|
|
5,263,533
|
|
|
|
1,626,630
|
|
|
|
14,094,203
|
|
|
|
4,869,717
|
|
General and administrative
|
|
|
2,023,030
|
|
|
|
1,321,001
|
|
|
|
5,638,352
|
|
|
|
4,207,899
|
|
Total operating expense
|
|
|
8,882,556
|
|
|
|
3,436,443
|
|
|
|
23,565,485
|
|
|
|
10,433,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,502,577
|
)
|
|
|
(1,215,600
|
)
|
|
|
(4,328,729
|
)
|
|
|
(3,996,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(381,663
|
)
|
|
|
(104,276
|
)
|
|
|
(949,533
|
)
|
|
|
(771,885
|
)
|
Loss on extinguishment of debt
|
|
|
(745,439
|
)
|
|
|
(89,341
|
)
|
|
|
(1,039,711
|
)
|
|
|
(394,169
|
)
|
Other income (expense), net
|
|
|
290
|
|
|
|
(4,800
|
)
|
|
|
665
|
|
|
|
(5,622
|
)
|
Fair value adjustment for contingent consideration
|
|
|
179,451
|
|
|
|
69,305
|
|
|
|
198,250
|
|
|
|
195,459
|
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
16,055
|
|
|
|
-
|
|
|
|
(32,138
|
)
|
Total other expense, net
|
|
|
(947,361
|
)
|
|
|
(113,057
|
)
|
|
|
(1,790,329
|
)
|
|
|
(1,008,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,449,938
|
)
|
|
$
|
(1,328,657
|
)
|
|
$
|
(6,119,058
|
)
|
|
$
|
(5,008,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of Common Stock – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Common Stock outstanding – basic and diluted
|
|
|
214,527,261
|
|
|
|
161,587,934
|
|
|
|
202,290,341
|
|
|
|
152,325,196
|
|
See accompanying notes to these condensed consolidated financial statements.
INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
For the
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,119,058
|
)
|
|
$
|
(5,008,494
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation & amortization
|
|
|
32,093
|
|
|
|
8,258
|
|
(Recovery of) Allowance for doubtful accounts
|
|
|
(179
|
)
|
|
|
5,090
|
|
Common Stock, restricted stock units and stock options issued to employees, board of directors and consultants for compensation and services
|
|
|
356,058
|
|
|
|
997,030
|
|
Loss on extinguishment of debt
|
|
|
1,039,712
|
|
|
|
394,169
|
|
Change in fair value of contingent consideration
|
|
|
(198,250
|
)
|
|
|
(195,459
|
)
|
Change in fair value of derivative liabilities
|
|
|
-
|
|
|
|
32,138
|
|
Amortization of debt discount
|
|
|
898,895
|
|
|
|
687,598
|
|
Amortization of intangible assets
|
|
|
472,425
|
|
|
|
472,675
|
|
Changes in operating assets and liabilities, net of acquisition amounts
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(287,909
|
)
|
|
|
959
|
|
Prepaid expense and other current assets
|
|
|
(764,346
|
)
|
|
|
177,297
|
|
Inventories
|
|
|
(472,347
|
)
|
|
|
(40,199
|
)
|
Accounts payable and accrued expense
|
|
|
(257,647
|
)
|
|
|
506,007
|
|
Accrued compensation
|
|
|
(395,575
|
)
|
|
|
433,498
|
|
Accrued interest payable
|
|
|
37,560
|
|
|
|
(6,094
|
)
|
Deferred revenue and customer deposits
|
|
|
70,682
|
|
|
|
(11,000
|
)
|
Net cash used in operating activities
|
|
|
(5,587,887
|
)
|
|
|
(1,546,527
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(176,064
|
)
|
|
|
(10,131
|
)
|
Contingent consideration payment
|
|
|
(19,298
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(195,362
|
)
|
|
|
(10,131
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on short-term loans payable
|
|
|
(245,383
|
)
|
|
|
(7,199
|
)
|
Proceeds from short-term loans payable
|
|
|
125,000
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
3,722,499
|
|
|
|
300,000
|
|
Payments on notes payable
|
|
|
(1,535,416
|
)
|
|
|
(214,000
|
)
|
Proceeds from warrant and stock option exercises
|
|
|
2,852,701
|
|
|
|
4,879
|
|
Issuance of Common Stock for services
|
|
|
2,000
|
|
|
|
-
|
|
Proceeds from sale of Common Stock and warrants, net of offering costs
|
|
|
-
|
|
|
|
3,307,773
|
|
Payments on convertible debentures
|
|
|
-
|
|
|
|
(1,222,422
|
)
|
Prepayment penalty on extinguishment of convertible debentures
|
|
|
-
|
|
|
|
(127,247
|
)
|
Net cash provided by financing activities
|
|
|
4,921,401
|
|
|
|
2,041,784
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(861,847
|
)
|
|
|
485,126
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
1,564,859
|
|
|
|
829,933
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
703,012
|
|
|
$
|
1,315,059
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
5,600
|
|
Cash paid for interest
|
|
$
|
4,519
|
|
|
$
|
80,344
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common Stock issued for conversion of convertible debentures and accrued interest
|
|
$
|
1,288,172
|
|
|
$
|
577,835
|
|
Reclassification of the fair value of the embedded conversion features from derivative liability to additional paid-in capital upon conversion
|
|
$
|
-
|
|
|
$
|
203,630
|
|
Relative fair value of Common Stock issued in connection with notes payable recorded as debt discount
|
|
$
|
693,911
|
|
|
$
|
99,386
|
|
Fair value of non-forfeitable Common Stock issued to consultant included in accounts payable and accrued expense
|
|
$
|
-
|
|
|
$
|
360,000
|
|
Offering costs in connection with warrant exercises included in accounts payable and accrued expenses
|
|
$
|
181,213
|
|
|
$
|
-
|
|
Cumulative adjustment to accumulated deficit for the fair value of the warrant derivative liability upon adoption of ASU 2017-11 on January 1, 2018
|
|
$
|
58,609
|
|
|
$
|
-
|
|
Issuance of shares of Common Stock for vested restricted stock units
|
|
$
|
-
|
|
|
$
|
92
|
|
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
|
|
Fair value of Common Stock issued as financing fees in connection with notes payable recorded as debt discount
|
|
$
|
222,500
|
|
|
$
|
-
|
|
See accompanying notes to these condensed consolidated financial statements.
INNOVUS PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
September 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.
Basis of Presentation
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 September 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.
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.
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, 2018, we had an accumulated deficit of $41,700,286 and negative working capital of $1,633,378.
During the nine months ended September 30, 2018, we received net cash proceeds of $2.7 million from the exercise of warrants (see Note 5). Additionally, during the period we raised $3.7 million in gross proceeds from the issuance of notes payable to six investors (see Note 4). We have also raised $1.5 million in gross proceeds from the issuance of notes payable to four investors subsequent to September 30, 2018 (see Note 7). We have also issued equity securities in certain circumstances to pay for services from vendors and consultants.
As of September 30, 2018, we had $703,012 in cash and $453,675 held by merchant processors reported in other current assets and as of November 13, 2018 we had $1,528,293 in cash and $387,062 held by merchant processors reported in other current assets. During the nine months ended September 30, 2018, we had net cash used in operating activities of approximately $5.6 million. We expect that our existing capital resources, together with revenue from sales of our products and expected 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.
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.
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. 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.
|
Revenue Recognition
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 $213,000 and $53,000 at September 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.
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 nine months ended September 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 5 for more details.
Recent Accounting Pronouncements
In June 2018, the FASB issued 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 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 – INVENTORY
Inventories consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials and supplies
|
|
$
|
317,070
|
|
|
$
|
164,469
|
|
Work in process
|
|
|
126,883
|
|
|
|
152,935
|
|
Finished goods
|
|
|
1,754,092
|
|
|
|
1,408,294
|
|
Total
|
|
$
|
2,198,045
|
|
|
$
|
1,725,698
|
|
NOTE 3 – INTANGIBLE ASSETS AND GOODWILL
Amortizable intangible assets consist of the following:
|
|
September 30, 2018
|
|
|
|
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Amount
|
|
|
Useful Lives
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent & Trademarks
|
|
$
|
417,597
|
|
|
$
|
(150,018
|
)
|
|
$
|
267,579
|
|
|
7
|
–
|
15
|
|
Customer Contracts
|
|
|
611,119
|
|
|
|
(295,374
|
)
|
|
|
315,745
|
|
|
|
10
|
|
|
Sensum+® License (from CRI)
|
|
|
234,545
|
|
|
|
(125,056
|
)
|
|
|
109,489
|
|
|
|
10
|
|
|
Vesele® Trademark
|
|
|
25,287
|
|
|
|
(12,578
|
)
|
|
|
12,709
|
|
|
|
8
|
|
|
Beyond Human® Website and Trade Name
|
|
|
222,062
|
|
|
|
(101,744
|
)
|
|
|
120,318
|
|
|
5
|
–
|
10
|
|
Novalere Manufacturing Contract
|
|
|
4,681,000
|
|
|
|
(1,706,615
|
)
|
|
|
2,974,385
|
|
|
|
10
|
|
|
Other Beyond Human® Intangible Assets
|
|
|
4,730
|
|
|
|
(4,281
|
)
|
|
|
449
|
|
|
1
|
–
|
3
|
|
Total
|
|
$
|
6,196,340
|
|
|
$
|
(2,395,666
|
)
|
|
$
|
3,800,674
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Amount
|
|
|
Useful Lives
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 30, 2018 and 2017 was $157,475 and $157,477 and $472,425 and $472,675, respectively. The following table summarizes the approximate expected future amortization expense as of September 30, 2018 for intangible assets:
Remainder of 2018
|
|
$
|
157,475
|
|
2019
|
|
|
629,001
|
|
2020
|
|
|
628,527
|
|
2021
|
|
|
599,598
|
|
2022
|
|
|
591,834
|
|
2023
|
|
|
558,150
|
|
Thereafter
|
|
|
636,089
|
|
|
|
$
|
3,800,674
|
|
NOTE 4 – NOTES PAYABLE
The following table summarizes the outstanding notes payable at September 30, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
February 2016 Note Payable
|
|
$
|
-
|
|
|
$
|
54,984
|
|
September 2017 5% Note Payable
|
|
|
-
|
|
|
|
165,000
|
|
October and December 2017 Notes Payable
|
|
|
-
|
|
|
|
1,066,667
|
|
December 2017 5% Note Payable
|
|
|
-
|
|
|
|
390,000
|
|
January and March 2018 Notes Payable
|
|
|
411,459
|
|
|
|
-
|
|
February and March 2018 5% Notes Payable
|
|
|
720,000
|
|
|
|
-
|
|
July 2018 5% Note Payable
|
|
|
550,000
|
|
|
|
-
|
|
August 2018 Notes Payable
|
|
|
1,100,000
|
|
|
|
-
|
|
September 2018 3.8% Note Payable
|
|
|
390,000
|
|
|
|
-
|
|
Total notes payable
|
|
|
3,171,459
|
|
|
|
1,676,651
|
|
Less: Debt discount
|
|
|
(830,610
|
)
|
|
|
(437,355
|
)
|
Carrying value
|
|
|
2,340,849
|
|
|
|
1,239,296
|
|
Less: Current portion
|
|
|
(2,340,849
|
)
|
|
|
(1,239,296
|
)
|
Notes payable, net of current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table summarizes the future minimum payments as of September 30, 2018 for the notes payable:
Remainder of 2018
|
|
$
|
1,004,004
|
|
2019
|
|
|
2,167,455
|
|
|
|
$
|
3,171,459
|
|
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 are 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, we entered into a securities purchase agreement with the September 2017 5% Note holder. In connection with the securities exchange agreement, we issued a total of 1,474,287 shares of Common Stock in exchange for the settlement of principal and interest due totaling $169,543. 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 $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 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.
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 original issue discount (“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.
On July 23, 2018, we entered into a securities exchange agreement with the December 2017 5% Note Payable holder. In connection with the securities exchange agreement, we issued a total of 3,832,695 shares of Common Stock in exchange for the settlement of principal and interest due totaling $402,433. 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 $682,220. Due to the settlement of the principal and interest balance of $402,433 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 $279,787 and the unamortized debt discount as of the date of settlement of $42,594 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.
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. The fair value of the shares of Common Stock issued, 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.
On July 31, 2018, we entered into a securities exchange agreement with the October and December 2017 Notes Payable holders. In connection with the securities exchange agreement, we issued a total of 2,380,954 shares of Common Stock in exchange for the settlement of principal due totaling $250,000. 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 $366,667. Due to the settlement of the principal balance of $250,000 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 $116,667 and the unamortized debt discount as of the date of settlement of $66,753 were recorded as a loss on debt extinguishment in the accompanying condensed consolidated statement of operations.
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, pursuant to 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 our 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 our 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. The discount is being amortized to interest expense using the effective interest method over the term of the January and March 2018 Notes Payable.
On July 31, 2018, we entered into a securities exchange agreement with the January and March 2018 Notes Payable holders. In connection with the securities exchange agreement, we issued a total of 2,857,144 shares of Common Stock in exchange for the settlement of principal due totaling $300,000. 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 $440,000. Due to the settlement of the principal balance of $300,000 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 $140,000 and the unamortized debt discount as of the date of settlement of $99,638 were recorded as a loss on debt extinguishment in the accompanying condensed consolidated statement of operations.
February and March 2018 5% Notes Payable
On February 28, 2018 and March 28, 2018, we entered into a securities purchase agreement with two unrelated third-party investors, pursuant to 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 aggregate 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 our Common Stock totaling 1,485,000 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 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.
July 2018 5% Note Payable
On July 19, 2018, we entered into a securities purchase agreement with an unrelated third-party investor in which the investor loaned us gross proceeds of $500,000 pursuant to 5% promissory notes (“July 2018 5% Notes Payable”). The notes have an OID of $50,000 and require payments of $550,000 in principal. The notes bear interest at the rate of 5% per annum and the principal amount and interest are payable at maturity on February 19, 2019.
In connection with the note, we issued the investor restricted shares of Common Stock totaling 1,600,000 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 $176,166. The discount is being amortized to interest expense using the effective interest method over the term of the note.
August 2018 Notes Payable
On August 1, 2018, we entered into a securities purchase agreement with two unrelated third-party investors in which the investors loaned us gross proceeds of $1,000,000 pursuant to a 0% promissory note (“August 2018 Notes Payable”). The notes have an OID of $200,000 and require twelve payments of $100,000 in principal per month through August 2019. The August 2018 Notes Payable bear no interest per annum. The effective interest rate is 20% per annum for the notes.
In connection with the August 2018 Notes Payable, we issued the investors restricted shares of Common Stock totaling 1,000,000 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 August 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 $435,322. In connection with the financing, we issued 638,978 restricted shares to a third-party consultant. The fair value of the restricted shares of Common Stock issued of $100,000 was recorded as a debt discount to the carrying value of the August 2018 Notes Payable. The discount is being amortized to interest expense using the effective interest method over the term of the August 2018 Notes Payable.
September 2018 5% Notes Payable
On September 12, 2018, 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 5% promissory notes (“September 2018 5% Notes Payable”). The notes have an OID of $40,000 and require payments of $390,000 in principal. The notes bear interest at the rate of 5% per annum and the principal amount and interest are payable in three installments on March 12, 2019, June 12, 2019 and September 12, 2019 for the note.
In connection with the September 2018 5% Notes Payable, we issued the investor restricted shares of Common Stock totaling 1,000,000 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 September 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 $130,296. The discount is being amortized to interest expense using the effective interest method over the term of the Note.
Interest Expense
We recognized interest expense on notes payable of approximately $14,497 and $17,750 and $48,275 and $64,463 for the three and nine months ended September 30, 2018 and 2017, respectively. Amortization of the debt discount to interest expense during the three and nine months ended September 30, 2018 and 2017 approximated $364,804 and $86,250 and $898,896 and $687,598, respectively.
NOTE 5 – 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. In the third quarter of 2018, a warrant holder exercised their Series A Warrants to purchase shares of Common Stock totaling 100,000 at an exercise price of $0.15 per share. We received net cash proceeds of $13,950.
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.
During the three and nine months ended September 30, 2018, we issued 0 and 106,486 shares of restricted Common Stock, respectively, for services and recorded expense of $0 and $10,500 which is included in general and administrative expense in the accompanying condensed consolidated statement of operations. The 106,486 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 nine months ended September 30, 2018, we issued 3,600,000 and 6,367,000 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 $401,782 and $693,911, respectively, and was recorded as a debt discount (see Note 4).
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 nine months ended September 30, 2018 (see Note 4).
In connection with the August 2018 Notes, we issued 638,978 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 $100,000 in August 2018 was recorded as a debt discount to the carrying value of the notes payable during the nine months ended September 30, 20018 (see Note 4).
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 4). 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 4). 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.
In July 2018, certain December 2017 5% Notes Payable holders elected to exchange $402,433 in principal and interest for 3,832,695 shares of Common Stock (see Note 4). The fair value of the shares of Common Stock of $682,220 was based on the market price of our Common Stock on the date of issuance.
In July 2018, certain January and March 2018 Notes Payable holders elected to exchange $300,000 in principal for 2,857,144 shares of Common Stock (see Note 4). The fair value of the shares of Common Stock of $440,000 was based on the market price of our Common Stock on the date of issuance.
In July 2018, certain October and December 2017 Notes Payable holders elected to exchange $250,000 in principal for 2,380,954 shares of Common Stock (see Note 4). The fair value of the shares of Common Stock of $366,667 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, 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 September 30, 2018, there were 63 shares were available under the 2014 Plan.
2016 Equity Incentive Plan
We have issued Common Stock, restricted stock units and stock options to employees, non-executive directors and outside consultants under the 2016 Equity Incentive Plan (“2016 Plan”), which was approved by our Board of Directors in March 2016. The 2016 Plan allows for the issuance of up to 25,663,199 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, 2018, 15,506,569 shares were available under the 2016 Plan.
Stock Options
For the nine months ended September 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:
|
|
2018
|
|
|
2017
|
|
Expected life (in years)
|
|
|
6.23
|
|
|
|
8.6
|
|
Expected volatility
|
|
|
200.6
|
%
|
|
|
217.0
|
%
|
Average risk-free interest rate
|
|
|
2.81
|
%
|
|
|
2.28
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Grant date fair value
|
|
$
|
0.15
|
|
|
$
|
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 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:
|
|
Options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
remaining
contractual
life (years)
|
|
|
Aggregate
intrinsic
value
|
|
Outstanding at December 31, 2017
|
|
|
88,000
|
|
|
$
|
0.17
|
|
|
|
8.2
|
|
|
$
|
1,590
|
|
Granted
|
|
|
282,000
|
|
|
|
0.15
|
|
|
|
9.6
|
|
|
|
280
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2018
|
|
|
370,000
|
|
|
$
|
0.15
|
|
|
|
9.3
|
|
|
$
|
1,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest at September 30, 2018
|
|
|
370,000
|
|
|
$
|
0.15
|
|
|
|
9.3
|
|
|
$
|
1,870
|
|
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, 2018. During the three and nine months ended September 30, 2018 and 2017, the Company recognized stock-based compensation from stock options of $4,820 and $904 and $9,218 and $6,310, respectively.
The weighted average grant date fair value of outstanding stock options for the nine months ended September 30, 2018 is $0.15 per share.
Restricted Stock Units
The following table summarizes the restricted stock unit activity for the nine months ended September 30, 2018:
|
|
Restricted
Stock Units
|
|
Outstanding at December 31, 2017
|
|
|
13,191,835
|
|
Granted
|
|
|
6,805,772
|
|
Exchanged
|
|
|
(713,541
|
)
|
Cancelled
|
|
|
(1,536,459
|
)
|
Outstanding at September 30, 2018
|
|
|
17,747,607
|
|
|
|
|
|
|
Vested at September 30, 2018
|
|
|
10,950,904
|
|
The vested restricted stock units at September 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 nine months ended September 30, 2018 was $39,000 and $982,292. For the three and nine months ended September 30, 2018 and 2017, we recognized $128,008 and $80,125 and $325,442 and $248,804, respectively, of stock-based compensation expense for the vested units. As of September 30, 2018, compensation expense related to unvested shares not yet recognized in the condensed consolidated statement of operations was approximately $878,289 and will be recognized over a remaining weighted-average term of 2.55 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 September 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 September 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 in connection with the Series B Warrants exercised, 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 nine months ended September 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:
|
|
2018
|
|
Expected life (in years)
|
|
|
5.0
|
|
Expected volatility
|
|
|
183.8
|
%
|
Average risk-free interest rate
|
|
|
2.69
|
%
|
Dividend yield
|
|
|
0
|
%
|
At September 30, 2018, there are 33,679,973 fully vested warrants outstanding. The weighted average exercise price of outstanding warrants at September 30, 2018 is $0.19 per share, the weighted average remaining contractual term is 3.3 years and the aggregate intrinsic value of the outstanding warrants is $27,817.
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, 2018 and 2017 was 203,576,357 and 152,250,793 and 191,530,885 and 143,192,157, 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, 2018 and 2017 was 10,950,904 and 9,337,141 and 10,759,456 and 9,133,039, 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, 2018 and 2017 was 214,527,261 and 161,587,934 and 202,290,341 and 152,325,196, 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, 2018 and 2017:
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Gross number of shares excluded:
|
|
|
|
|
|
|
|
|
Restricted stock units – unvested
|
|
|
6,796,703
|
|
|
|
3,437,500
|
|
Stock options
|
|
|
370,000
|
|
|
|
79,000
|
|
Warrants
|
|
|
33,679,973
|
|
|
|
58,583,725
|
|
Total
|
|
|
40,846,676
|
|
|
|
62,100,225
|
|
The above table does not include the ANDA Consideration Shares related to the Novalere acquisition totaling 138,859 at September 30, 2018 and 2017, respectively, as they are considered contingently issuable.
NOTE 6 – 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 annual minimum product batch purchase requirements to date.
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. In October 2018, we filed a motion to dismiss the action. 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 7 – SUBSEQUENT EVENTS
In October 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 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 May 1, 2019. As additional consideration for the purchase of the note, we issued 1,600,000 shares of restricted Common Stock to the investor.
PROSPECTUS
139,317,017 Shares
Common Stock
February 13, 2019