SEC Connect
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For
the fiscal year ended December 31, 2016
Commission
file number: 000-52991
INNOVUS PHARMACEUTICALS,
INC.
(Name
of registrant as specified in its charter)
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Nevada
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90-0814124
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer Identification No.)
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9171 Towne Centre Drive, Suite 440, San Diego,
CA
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92122
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(Address of principal executive offices)
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(Zip code)
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Registrant’s
telephone number: 858-964-5123
Securities
registered under Section 12(b) of the Act:
None.
Securities
registered under Section 12 (g) of the Act:
Common Stock $0.001 par value
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the
Exchange Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate website, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files) Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent
filers pursuant to item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer
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☐
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Accelerated
filed
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☐
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☒
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of June 30,
2016, the last business day of the registrant’s most recently
completed second fiscal quarter, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $11.2 million, based on the closing price of $0.21
for the registrant’s common stock as quoted on the
OTCQB Market on that date. For
purposes of this calculation, it has been assumed that shares of
common stock held by each director, each officer and each person
who owns 10% or more of the outstanding common stock of the
registrant are held by affiliates of the registrant. The treatment
of these persons as affiliates for purposes of this calculation is
not conclusive as to whether such persons are, affiliates of the
registrant for any other purpose.
As of March 3, 2017, the registrant had 124,810,756 shares of
common stock outstanding.
Portions of the
registrant’s definitive proxy statement for its 2016 Annual
Meeting of Stockholders (Proxy Statement) are incorporated by
reference in Part III of this annual report on Form 10-K (Annual
Report), to the extent stated herein.
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This
Annual Report on Form 10-K includes the accounts of Innovus
Pharmaceuticals, Inc., a Nevada corporation (“Innovus
Pharma”), together with its wholly-owned subsidiaries, as
follows (collectively referred to as “Innovus”,
“we”, “our”, “us” or the
“Company”): Semprae Laboratories, Inc., a Delaware
corporation (“Semprae”), FasTrack Pharmaceuticals,
Inc., a Delaware corporation (“FasTrack”) and Novalere,
Inc., a Delaware corporation (“Novalere”).
“Zestra®”,
“Zestra Glide®”,
“EjectDelay®”, “Sensum+®”,
“Vesele®”, “Beyond Human®”,
“Androferti®”,
“RecalMax™”, “UriVarx™”,
“FlutiCare™”, “Xyralid™”,
“AllerVarx™”, “Urocis™ XR”,
“AndroVit™” and
other trademarks and intellectual property of ours appearing in
this report are our property. This report contains additional trade
names and trademarks of other companies. We do not intend our use
or display of other companies’ trade names or trademarks to
imply an endorsement or sponsorship of us by such companies, or any
relationship with any of these companies.
FORWARD LOOKING STATEMENTS
Certain
statements in this report, including information incorporated by
reference, are “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended,
Section 21E of the Securities Exchange Act of 1934, as amended, and
the Private Securities Litigation Reform Act of 1995, as amended.
Forward-looking statements reflect current views about future
events and financial performance based on certain assumptions. They
include opinions, forecasts, intentions, plans, goals, projections,
guidance, expectations, beliefs or other statements that are not
statements of historical fact. Words such as “will,”
“may,” “should,” “could,”
“would,” “expects,” “plans,”
“believes,” “anticipates,”
“intends,” “estimates,”
“approximates,” “predicts,”
“forecasts,” “potential,”
“continue,” or “projects,” or the negative
or other variation of such words, and similar expressions may
identify a statement as a forward-looking statement. Any statements
that refer to projections of our future financial performance, our
anticipated growth and trends in our business, our goals,
strategies, focus and plans, and other characterizations of future
events or circumstances, including statements expressing general
optimism about future operating results and the development of our
products, are forward-looking statements.
Although
forward-looking statements in this Annual Report on Form 10-K
reflect the good faith judgment of our management, such statements
can only be based on facts and factors currently known by us.
Consequently, forward-looking statements are inherently subject to
risks and uncertainties and actual results and outcomes may differ
materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could
cause or contribute to such differences in results and outcomes
include, without limitation, those specifically addressed under the
heading “Risks Factors” below, as well as those
discussed elsewhere in this Annual Report on Form 10-K. Readers are
urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual Report
on Form 10-K. We file reports with the Securities and Exchange
Commission (“SEC”). You can read and copy any materials
we file with the SEC at the SEC's Public Reference Room at 100 F
Street, NE, Washington, DC 20549. You can obtain additional
information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains
an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC, including us.
We
undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may
arise after the date of this Annual Report on Form 10-K. Readers
are urged to carefully review and consider the various disclosures
made throughout the entirety of this Annual Report on Form 10-K,
which attempt to advise interested parties of the risks and factors
that may affect our business, financial condition, results of
operations and prospects.
Overview
We are an emerging over-the-counter
(“OTC”) consumer goods and specialty pharmaceutical
company engaged in the commercialization, licensing and
development of safe and effective non-prescription medicine and
consumer care products to improve men’s and women’s
health and vitality and respiratory diseases. We deliver
innovative and uniquely presented and packaged health solutions
through our (a) OTC medicines and consumer and health products,
which we market directly, (b) commercial partners to primary care
physicians, urologists, gynecologists and therapists, and (c)
directly to consumers through our on-line channels, retailers and
wholesalers. We are dedicated to being
a leader in developing and marketing new OTC and branded
Abbreviated New Drug Application (“ANDA”) products. We
are actively pursuing opportunities where existing prescription
drugs have recently, or are expected to, change from prescription
(or Rx) to OTC. These “Rx-to-OTC switches” require Food
and Drug Administration (“FDA”) approval through a
process initiated by the New Drug Application (“NDA”)
holder.
Our business model
leverages our ability to (a) develop and build our current pipeline
of products, and (b) to also acquire outright or in-license
commercial products that are supported by scientific and/or
clinical evidence, place them through our existing supply chain,
retail and on-line (including Amazon®-based business
platform) channels to tap new markets and drive demand for such
products and to establish physician relationships. We currently
have 17 products marketed in the United States with six of those
being marketed and sold in multiple countries around the world
through some of our 14 commercial partners. We currently expect to
launch an additional five products in the U.S. in 2017 and we
currently have approvals to launch certain of our already marketed
products in 31 additional countries.
Corporate
Structure
We incorporated in
the State of Nevada. In December 2011, we merged with FasTrack
Pharmaceuticals, Inc. and changed our name to Innovus
Pharmaceuticals, Inc.
In December 2013,
we acquired Semprae Laboratories, Inc., which had two commercial
products in the U.S. and one in Canada. As a result, Semprae became
our wholly-owned subsidiary.
In February 2015,
we entered into a merger agreement, whereby we acquired Novalere,
Inc. and its worldwide rights to the Fluticare™ brand
(fluticasone propionate nasal spray). We expect that the ANDA
filed in November 2014 with the FDA may be approved in 2017,
which will allow us to market and sell Fluticare™ over the
counter in the U.S in the second half of 2017.
Our
Strategy
Our corporate
strategy focuses on two primary objectives:
1.
Developing a
diversified product portfolio of exclusive, unique and patented
non-prescription OTC and branded ANDA drugs and consumer health
products through: (a) the introduction of line extensions and
reformulations of either our or third-party currently marketed
products; and (b) the acquisition of products or obtaining
exclusive licensing rights to market such products;
and
2.
Building an
innovative, U.S. and global sales and marketing model through
direct to consumer approaches such as our proprietary Beyond
Human® Sales and
Marketing platform, the addition of new online platforms such as
Amazon® and commercial partnerships with established
international complimentary partners that: (a) generates revenue,
and (b) requires a lower cost structure compared to traditional
pharmaceutical companies thereby increasing our gross
margins.
We believe that our
proven ability to market, license, acquire and develop brand name
non-prescription pharmaceutical and consumer health products
uniquely positions us to commercialize our products and grow in
this market in a differentiated way. The following are additional
details about our strategy:
●
Focusing on acquisition
and licensing of commercial, non-prescription pharmaceutical and
consumer health products that are well aligned with current
therapeutic areas of male and female sexual health, pain, vitality
and respiratory diseases . In general, we seek
non-prescription pharmaceutical (OTC monograph, Rx to OTC ANDA
switched drugs) and consumer health products that are already
marketed with scientific and/or clinical data and evidence that are
aligned with our therapeutic areas, which we then can grow through
promotion to physicians and expanding sales through our existing
retail and online channels and commercial partners on a worldwide
basis. We have done this through our acquisitions and licensing of
(1) Sensum+® from Centric Research Institute or CRI, (2)
Zestra® and Zestra Glide® from Semprae, (3) Vesele®
from Trōphikōs, LLC, (4) U.S. and Canada rights to
Androferti® from Laboratorios Q Pharma (Spain), (5)
FlutiCare™ from Novalere, and (6) UriVarx™ from Seipel
Group;
●
Increasing the number of
U.S. non-exclusive distribution channel partners for direct and
online sales and also open more channels directly to physicians,
urologists, gynecologists and therapists . One of our goals
is to increase the number of U.S. distribution channel partners
that sell our products. To do this, we have devised a three-pronged
approach. First, we are seeking to expand the number of OTC direct
selling partners, such as the larger in-store distributors for
selected products, and to expand sales to the more regional,
statewide and local distributors, such as regional pharmacy chains,
large grocery stores and supplement and health stores for selected
products. Second, we are working to expand our online presence
through relationships with well-known online sellers and the
acquisition of additional platforms such as established
Amazon® stores. Third, we are seeking to expand sales of our
OTC products directly through sampling programs and detailing to
physicians, urologists, gynecologists, therapists and to other
healthcare providers who generally are used to recommending to
their patients products that are supported by strongscientific
and/or clinical data and evidence;
●
Seeking commercial
partnerships outside the U.S. and developing consistent
international commercial and distribution systems. We seek
to develop a strong network of international distribution partners
outside of the U.S. To do so, we are relying in part on past
relationships that Dr. Bassam Damaj, our President and Chief
Executive Officer, has had with certain commercial partners
globally. In addition, we believe we have the ability to
develop new relationships with commercial distributors who can
demonstrate they have leading positions in their regions and can
provide us with effective marketing and sales efforts and teams to
detail our products to physicians and therapists. Our commercial
partners outside the U.S. are responsible for storing, distributing
and promoting our products to physicians, urologists,
gynecologists, therapists and to other healthcare providers. We
have already entered into 14 commercial partnerships covering our
products in 65 countries outside the U.S.;
●
Developing a proprietary
patent portfolio to protect the therapeutic products and categories
we desire to enter. We have filed and are working to secure
patent claims in the U.S. and abroad covering product inventions
and innovations that we believe are valuable. These patents, if
issued and ultimately found to be valid, may enable us to create a
barrier to entry for competitors on a worldwide basis;
and
●
Achieving cost economies
of scale from lower cost manufacturing, integrated distribution
channels and multiple product discounts. We believe that we
can achieve higher gross margins per product by shifting
manufacturing to lower cost manufacturers. We also feel that we can
acquire other OTC and consumer healthcare products and reintroduce
them into our networks and sales and marketing platforms utilizing
our integrated distribution and direct to consumer channels, thus
receiving multiple product economies of scale from our distribution
partners.
Our
Products
Marketed Products
We currently market
17 products in the U.S. and six in multiple countries around the
world through our commercial partners:
1.
Vesele® for
promoting sexual and health (U.S. and U.K.);
2.
Zestra® for
female arousal (U.S., U.K., Denmark, Canada, Morocco, the UAE and
South Korea);
3.
Zestra
Glide® (U.S, Canada and the MENA countries);
4.
EjectDelay®
indicated for the treatment of premature ejaculation (U.S. and
Canada);
5.
Sensum+® to
alleviate reduced penile sensitivity (U.S., U.K. and
Morocco);
6.
Beyond
Human® Testosterone Booster;
7.
Beyond
Human® Ketones;
8.
Beyond
Human® Krill Oil;
9.
Beyond
Human® Omega 3 Fish Oil;
10.
Beyond
Human® Vision Formula;
11.
Beyond
Human® Blood Sugar;
12.
Beyond
Human® Colon Cleanse;
13.
Beyond
Human® Green Coffee Extract;
14.
Beyond
Human® Growth Agent;
15.
RecalMax™
for brain health;
16.
Androferti®
(U.S. and Canada) supports overall male reproductive health and
sperm quality; and
17.
UriVarx™ for
overactive bladder and urinary incontinence.
Below is a more
detailed description of each of our main products that we currently
market and sell:
Vesele®
Vesele® is a
proprietary oral supplement of Arginine with high absorption backed
with clinical use data in men and women for sexual dysfunction.
Vesele® contains a patented formulation of L-Arginine and
L-Citrulline in combination with the natural absorption enhancer
Bioperine®. The beneficial effects of Vesele® on sexual
and cognitive functions were confirmed in a four month US clinical
survey study involving 152 patients (69 men and 83 women). Results
from the clinical survey have indicated (1) improvement of erectile
hardness and maintenance in men and increased sexual intercourse
frequency with their partners, and (2) lubrication in women, when
taken separately by each.
Sensum+®
Sensum+® is a
non-medicated cream which moisturizes the head and shaft of the
penis for enhanced feelings of sensation and greater sexual
satisfaction. It is a patent-pending blend of essential oils and
ingredients generally recognized as safe that recently commenced
marketing in the U.S. We acquired the global ex-U.S. distribution
rights to Sensum+® from CRI. The safety and efficacy of
Sensum+® was evaluated in two post-marketing survey studies in
circumcised and non-circumcised men. A total of 382 men used
Sensum+® twice daily for 14 consecutive days followed by once
daily for eight weeks and as needed thereafter. Study participants
reported a ~50% increase in penile sensitivity with the use of
Sensum+®.
Beyond Human® Testosterone Booster (BHT)
BHT is a
proprietary oral supplement containing clinically tested
ingredients to increase libido, vitality and sexual health
endpoints in combination with the natural absorption enhancer
Bioperine®.
Zestra®
Zestra® is our
proprietary blend of essential oils proven in two peer-reviewed and
published U.S. placebo controlled clinical trials in 276 women to
increase desire, arousal and satisfaction. Zestra® is
commercialized in the U.S. and Canada through major retailers, drug
wholesalers such as McKesson and Cardinal Health and
online.
Female Sexual
Arousal Disorder, or FSAD, is a disorder part of the Female Sexual
Dysfunction, or FSD, and is characterized by the persistent or
recurrent inability to attain sexual arousal or to maintain arousal
until completion of sexual activity. 43% of women age 18-59
experience some sort of sexual difficulties with one approved
prescription product (Laumann, E.O. et al. Sexual Dysfunction in
the United States: Prevalence and Predictors. JAMA, Feb. 10, 1999.
vol. 281, No. 6.537-542). The U.S. arousal liquid market is
estimated to be around $500.0 million.
RecalMax™
RecalMax™ is
a proprietary, novel oral dietary supplement to maximize nitric
oxide’s beneficial effects on brain health. RecalMax™
contains a patented formulation of low dose L-Arginine and
L-Citrulline, in combination with the natural absorption enhancer
Bioperine®. The beneficial effects of RecalMax™ on
cognitive functions were confirmed in a four month U.S. clinical
survey study involving 152 patients (69 men and 83 women). Results
from the clinical survey have indicated improvement in multiple
brain functions including word recall and focus.
UriVarx™
UriVarx™ is
proprietary supplement clinically proven and to reduce urinary
urgency, accidents and both day and night frequency in Overactive
Bladder (“OAB”) and Urinary Incontinence
(“UI”) patients. UriVarx™ was tested in OAB
and UI patients in a 152 double blind placebo patient study over a
period of eight weeks yielding up to 60% in reduction of urinary
urgency and nocturnia.
EjectDelay®
EjectDelay® is
our proprietary, clinical proven OTC monograph compliant 7.5%
benzocaine gel for premature ejaculation. Benzocaine
acts to inhibit the voltage-dependent sodium channels on the nerve
membrane, stopping the propagation of the action potential and
resulting in temporary numbing of the application
site. EjectDelay® is applied to the head of
the penis ten minutes before
intercourse. Premature Ejaculation, or PE, is the
absence of voluntary control over ejaculation resulting in
ejaculation either preceding vaginal entry or occurring immediately
upon vaginal entry and is defined as an ejaculation latency time of
less than one minute. It is estimated that over 30% of males suffer
from PE with a market size of $1.0 billion with a 10.3% annual
growth rate. Topical anesthetics make up 14% of the total PE market
(The Journal of Sexual
Medicine in 2007 Sex Med 2007).
Zestra Glide®
Zestra Glide®
is a clinically tested water-based longer lasting lubricant. We
acquired Zestra Glide® in our acquisition of Semprae in
December 2013. In a 57 patient safety clinical study, Zestra
Glide® proved to be safe and caused no irritation or skin side
effects during the six week trial. To our knowledge, Zestra
Glide® is the only water-based lubricant clinically tested for
safety and has a viscosity of over 16000cps on the market.
Increased viscosity usually translates into longer effects. The
lubricant market is estimated to be around $200.0 million in the
U.S. (Symphony IRI Group Study, 2012).
Androferti®
Androferti® is
a patented natural supplement that supports overall male
reproductive health and sperm quality. Androferti®, has been
shown in over five published clinical trials to statistically
increase seminal quality (concentration, motility, morphology and
vitality) and enhances spermatozoa quality (decreases of
vacuoles in the sperm nucleus), decreases DNA fragmentation,
decreases the dynamics of sperm DNA fragmentation and improvement
on the inventory of mobile sperms.
Pipeline Products
Fluticare™ (Fluticasone propionate nasal spray)
We expect that the
ANDA filed in November 2014 with the FDA to be approved in 2017,
which will allow us to market and sell Fluticare™ over the
counter in the second half of 2017. FlutiCare™ is
a nasal spray in the form of fluticasone propionate that has been
the most prescribed nasal spray to patients in the U.S. for more
than five consecutive years. The nasal steroid market is over $1.0
billion annually in the U.S. (Reed, Lee and McCrory, “The
Economic Burden of Allergic Rhinitis, Pharmacoecomics 2004, 22 (6)
345-361).
Xyralid™
Xyralid™ is a
lidocaine based cream for the relief of pain and symptoms caused by
hemorrhoids. We expect to launch Xyralid™ in the first half
of 2017 under our Beyond Human® sales and marketing
platform.
AllerVarx™
AllerVarx™ is
a patented formulation produced in bilayer tablets with a
technology that allows a controlled release of the ingredients. The
fast-release layer allows the rapid antihistaminic activity of
perilla. The sustained-release layer enhances quercetin and vitamin
D3 bioavailability, thanks to its lipidic matrix, and exerts
antiallergic activity spread over time. AllerVarx™ was
studied in a clinical trial assessing the reduction of both nasal
and ocular symptoms in allergic patients, and daily consumption of
anti-allergic drugs, over a period of 30 days. AllerVarx™
showed a reduction of approximately 70% in total symptom scores and
a reduction of approximately 73% in the use of anti-allergic drugs.
There were no side effects noted during the administration of
AllerVarx™ and all the patients enrolled finished the study
with good compliance. We expect to launch this product in the first
half of 2017.
Urocis™ XR
Urocis™ XR, a proprietary 24-hour extended release of
vaccinium marcocarpon for urinary tract infections in women shown
to provide 24-hour coverage in the body to increase compliance of
the use of the product to get full benefit. According to Business
Insights in their "The Antibacterials Market Outlook to 2016"
report, urinary tract infections are very common, with an estimated
incidence of 9.6%, or 7.0 million people in the U.S. Urinary tract
infections typically affect post-pubescent females and the
elderly. We expect to launch this product in the second half
of 2017.
AndroVit™
AndroVit™ is a proprietary supplement to support overall
prostate and male sexual health currently marketed in Europe.
AndroVit™ was
specifically formulated with ingredients known to support the
normal prostate health and vitality and male sexual health.
We expect to launch this product in the second half of
2017.
Sales and Marketing Strategy U.S. and Internationally
Our sales and marketing strategy is based on (a)
the use of direct to consumer advertisements in print and online
media through our proprietary Beyond Human®
sales and marketing platform acquired
in March 2016, (b) working with direct commercial channel partners
in the U.S. and also directly marketing the products ourselves to
physicians, urologists, gynecologists and therapists and to other
healthcare providers, and (c) working with exclusive commercial
partners outside of the U.S. that would be responsible for sales
and marketing in those territories. We have now fully integrated
most of our existing line of products such as Vesele®,
Sensum+®, UriVarx™, Zestra®, and
RecalMax™ into the Beyond
Human® sales and marketing
platform. We plan to integrate Xyralid™, AllerVarx™,
AndroVit™,
Urocis™ XR; and
FlutiCare™, subject to regulatory approvals, upon their
commercial launches in 2017. We also market and distribute our
products in the U.S. through retailers, wholesalers and other
online channels. Our strategy outside the U.S. is to partner with
companies who can effectively market and sell our products in their
countries through their direct marketing and sales teams. The
strategy of using our partners to commercialize our products is
designed to limit our expenses and fix our cost structure, enabling
us to increase our reach while minimizing our incremental
spending.
Our
current OTC, Rx-to-OTC ANDA switch drugs and consumer care products
marketing strategy is to focus on four main U.S. markets which we
all believe to be each in excess of $1.0 billion: (1) Sexual health
(female and male sexual dysfunction and health); (2) Urology
(bladder and prostate health); (3) Respiratory disease; and (4)
Brain health. We will focus our current efforts on these four
markets and will seek to develop, acquire or license products that
we can sell through our sales channels in these
fields.
Manufacturers
and Single Source Suppliers
We use third-party
manufacturers for the production of our products for development
and commercial purposes. We believe there is currently excess
capacity for manufacturing in the marketplace and opportunities to
lower manufacturing cost through outsourcing to regions and
countries that can do it in a more cost-effective basis. Some of
our products are currently available only from sole or limited
suppliers. We currently have multiple contract manufacturers for
our multiple products and we issue purchase orders to these
suppliers each time we require replenishment of our product
inventory. All of our current manufacturers are based in the U.S.
except for two based in Italy and we are looking to establish
contract manufacturing for certain of our products in Europe and
the Middle East and Northern Africa regions to reduce the cost and
risk of supply chain to our current and potential commercial
partners in their territories.
Government
Regulation
Our products are
normally subject to regulatory approval or must comply with various
U.S. and international regulatory requirements. Unlike
pharmaceutical companies who primarily sell prescription products,
we currently sell drug or health products into the OTC market.
While prescription products normally must progress from
pre-clinical to clinical to FDA approval and then can be marketed
and sold, our products are normally subject to conformity to FDA
monograph requirements and similar requirements in other countries,
which requires a shorter time frame for us to satisfy regulatory
requirements and permits us to begin
commercialization.
Below is a brief
description of the FDA regulatory process for our products in the
U.S.
U.S.
Food and Drug Administration
The FDA and other
federal, state, local and foreign regulatory agencies impose
substantial requirements upon the clinical development, approval,
labeling, manufacture, marketing and distribution of drug products.
These agencies regulate, among other things, research and
development activities and the testing, approval, manufacture,
quality control, safety, effectiveness, labeling, storage, record
keeping, advertising and promotion of our product candidates. The
regulatory approval process is generally lengthy and expensive,
with no guarantee of a positive result. Moreover, failure to comply
with applicable FDA or other requirements may result in civil or
criminal penalties, recall or seizure of products, injunctive
relief including partial or total suspension of production, or
withdrawal of a product from the market.
The FDA regulates,
among other things, the research, manufacture, promotion and
distribution of drugs in the U.S. under the Federal Food, Drug and
Cosmetic Act, or the ("FFDCA"), and other statutes and implementing
regulations. The process required by the FDA before prescription
drug product candidates may be marketed in the U.S. generally
involves the following:
●
Completion of
extensive nonclinical laboratory tests, animal studies and
formulation studies, all performed in accordance with the
FDA’s Good Laboratory Practice regulations;
●
Submission to the
FDA of an investigational new drug application, or IND, which must
become effective before human clinical trials may
begin;
●
For
some products, performance of adequate and well-controlled human
clinical trials in accordance with the FDA’s regulations,
including Good Clinical Practices, to establish the safety and
efficacy of the product candidate for each proposed
indication;
●
Submission to the
FDA of a new drug application, or NDA;
●
Submission to the
FDA of an abbreviated new drug application, or ANDA;
●
Satisfactory
completion of an FDA preapproval inspection of the manufacturing
facilities at which the product is produced to assess compliance
with current Good Manufacturing Practice, or cGMP, regulations;
and
●
FDA
review and approval of the NDA prior to any commercial marketing,
sale or shipment of the drug.
The testing and
approval process requires substantial time, effort and financial
resources, and we cannot be certain that any approvals for our
product candidates will be granted on a timely basis, if at
all.
Nonclinical tests
include laboratory evaluations of product chemistry, formulation
and stability, as well as studies to evaluate toxicity in animals
and other animal studies. The results of nonclinical tests,
together with manufacturing information and analytical data, are
submitted as part of an IND to the FDA. Some nonclinical testing
may continue even after an IND is submitted. The IND also includes
one or more protocols for the initial clinical trial or trials and
an investigator’s brochure. An IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA, within
the 30-day time period, raises concerns or questions relating to
the proposed clinical trials as outlined in the IND and places the
clinical trial on a clinical hold. In such cases, the IND sponsor
and the FDA must resolve any outstanding concerns or questions
before any clinical trials can begin. Clinical trial holds also may
be imposed at any time before or during studies due to safety
concerns or non-compliance with regulatory requirements. An
independent institutional review board, or IRB, at each of the
clinical centers proposing to conduct the clinical trial must
review and approve the plan for any clinical trial before it
commences. An IRB considers, among other things, whether the risks
to individuals participating in the trials are minimized and are
reasonable in relation to anticipated benefits. The IRB also
approves the consent form signed by the trial participants and must
monitor the study until completed.
Abbreviated
New Drug Application
An ANDA contains
data which when submitted to FDA's Center for Drug Evaluation and
Research, Office of Generic Drugs, provides for the review and
ultimate approval of a generic drug product. Once approved, an
applicant may manufacture and market the generic drug product to
provide a safe, effective, low cost alternative to the public than
a bioequivalent prescription product.
A generic drug
product is one that is comparable to an innovator drug product in
dosage form, strength, route of administration, quality,
performance characteristics and intended use. Generic drug
applications are termed "abbreviated" because they are generally
not required to include preclinical (animal) and clinical (human)
data to establish safety and effectiveness. Instead, generic
applicants must scientifically demonstrate that their product is
bioequivalent (i.e., performs in the same manner as the innovator
drug). One way scientists demonstrate bioequivalence is to
measure the time it takes the generic drug to reach the bloodstream
in 24 to 36 healthy, volunteers. This gives them the rate of
absorption, or bioavailability, of the generic drug, which they can
then compare to that of the innovator drug. The generic
version must deliver the same amount of active ingredients into a
patient's bloodstream in the same amount of time as the innovator
drug.
Using
bioequivalence as the basis for approving generic copies of drug
products was established by the Drug Price Competition and Patent
Term Restoration Act of 1984, also known as the Waxman-Hatch Act.
This Act expedites the availability of less costly generic drugs by
permitting FDA to approve applications to market generic versions
of brand-name drugs without conducting costly and duplicative
clinical trials. At the same time, the Act granted companies
the ability to apply for up to five additional years of patent
protection for the innovator drugs developed to make up for time
lost while their products were going through the FDA's approval
process. Brand-name drugs are subject to the same bioequivalence
tests as generics upon reformulation.
BioEquivalency
Studies
Studies to measure
bioavailability and/or establish bioequivalence of a product are
important elements in support of investigational new drug
applications, or INDs, new drug applications, or NDAs, ANDAs and
their supplements. As part of INDs and NDAs for orally administered
drug products, bioavailability studies focus on determining the
process by which a drug is released from the oral dosage form and
moves to the site of action. Bioavailability data provide an
estimate of the fraction of the drug absorbed, as well as its
subsequent distribution and elimination. Bioavailability can be
generally documented by a systemic exposure profile obtained by
measuring drug and/or metabolite concentration in the systemic
circulation over time. The systemic exposure profile determined
during clinical trials in the IND period can serve as a benchmark
for subsequent bioequivalence studies. Studies to establish
bioequivalence between two products are important for certain
changes before approval for a pioneer product in NDA and ANDA
submissions and in the presence of certain post-approval changes in
NDAs and ANDAs. In bioequivalence studies, an applicant compares
the systemic exposure profile of a test drug product to that of a
reference drug product. For two orally or intra-nasally
administered drug products to be bioequivalent, the active drug
ingredient or active moiety in the test product must exhibit the
same rate.
OTC
Monograph Process
The FDA regulates
certain non-prescription drugs using an OTC Monograph product
designation which, when final, is published in the Code of Federal
Regulations at 21 C.F.R. Parts 330-358. Such products that meet
each of the conditions established in the OTC Monograph
regulations, as well as all other applicable regulations, may be
marketed without prior approval by the FDA.
The general
conditions set forth for OTC Monograph products include, among
other things:
●
The
product is manufactured at FDA registered establishments and in
accordance with cGMPs;
●
The
product label meets applicable format and content requirements
including permissible “Indications” and all required
dosing instructions and limitations, warnings, precautions and
contraindications that have been established in an applicable OTC
Monograph;
●
The
product contains only permissible active ingredients in permissible
strengths and dosage forms;
●
The
product contains only suitable inactive ingredients which are safe
in the amounts administered and do not interfere with the
effectiveness of the preparation; and
●
The
product container and container components meet FDA’s
requirements.
The advertising for
OTC drug products is regulated by the Federal Trade Commission, or
FTC, which generally requires that advertising claims be truthful,
not misleading, and substantiated by adequate and reliable
scientific evidence. False, misleading or unsubstantiated OTC drug
advertising may be subject to FTC enforcement action and may also
be challenged in court by competitors or others under the federal
Lanham Act or similar state laws. Penalties for false or misleading
advertising may include monetary fines or judgments as well as
injunctions against further dissemination of such advertising
claims.
A product marketed
pursuant to an OTC Monograph must be listed with the FDA’s
Drug Regulation and Listing System and have a National Drug Code
listing which is required for all marketed drug products. After
marketing, the FDA may test the product or otherwise investigate
the manufacturing and development of the product to ensure
compliance with the OTC Monograph. Should the FDA determine that a
product is not marketed in compliance with the OTC Monograph or is
advertised outside of its regulations, the FDA may require
corrective action up to and including market withdrawal and
recall.
Other
Regulatory Requirements
Maintaining
substantial compliance with appropriate federal, state, local and
international statutes and regulations requires the expenditure of
substantial time and financial resources. Drug manufacturers are
required to register their establishments with the FDA and certain
state agencies and, after approval, the FDA and these state
agencies conduct periodic unannounced inspections to ensure
continued compliance with ongoing regulatory requirements,
including cGMPs. In addition, after approval, some types of changes
to the approved product, such as adding new indications,
manufacturing changes and additional labeling claims, are subject
to further FDA review and approval. The FDA may require
post-approval testing and surveillance programs to monitor safety
and the effectiveness of approved products that have been
commercialized. Any drug products manufactured or distributed by us
pursuant to FDA approvals are subject to continuing regulation by
the FDA, including:
●
Meeting
record-keeping requirements;
●
Reporting of
adverse experiences with the drug;
●
Providing the FDA
with updated safety and efficacy information;
●
Reporting on
advertisements and promotional labeling;
●
Drug
sampling and distribution requirements; and
●
Complying with
electronic record and signature requirements.
In addition, the FDA strictly regulates labeling, advertising,
promotion and other types of information on products that are
placed on the market. There are numerous regulations and policies
that govern various means for disseminating information to
health-care professionals as well as consumers, including to
industry sponsored scientific and educational activities,
information provided to the media and information provided over the
Internet. Drugs may be promoted only for the approved indications
and in accordance with the provisions of the approved
label.
The FDA has very
broad enforcement authority and the failure to comply with
applicable regulatory requirements can result in administrative or
judicial sanctions being imposed on us or on the manufacturers and
distributors of our approved products, including warning letters,
refusals of government contracts, clinical holds, civil penalties,
injunctions, restitution and disgorgement of profit, recall or
seizure of products, total or partial suspension of production or
distribution, withdrawal of approvals, refusal to approve pending
applications and criminal prosecution resulting in fines and
incarceration. The FDA and other agencies actively enforce the laws
and regulations prohibiting the promotion of off-label uses, and a
company that is found to have improperly promoted off-label or
unapproved uses may be subject to significant liability. In
addition, even after regulatory approval is obtained, later
discovery of previously unknown problems with a product may result
in restrictions on the product or even complete withdrawal of the
product from the market.
Competition
The OTC
pharmaceutical market is highly competitive with many established
manufacturers, suppliers and distributors that are actively engaged
in all phases of the business. We believe that competition in the
sale of our products will be based primarily on efficacy,
regulatory compliance, brand awareness, availability, product
safety and price. Our brand name OTC pharmaceutical products may be
subject to competition from alternate therapies during the period
of patent protection and thereafter from generic or other
competitive products. All of our existing products, and products we
have agreements to acquire, compete with generic and other
competitive products in the marketplace.
Competing in the
branded product business requires us to identify and quickly bring
to market new products embodying technological innovations.
Successful marketing of branded products depends primarily on the
ability to communicate the efficacy, safety and value to healthcare
professionals in private practice, group practices and managed care
organizations. We anticipate that our branded product offerings
will support our existing lines of therapeutic focus. Based upon
business conditions and other factors, we regularly reexamine our
business strategies and may from time to time reallocate our
resources from one therapeutic area to another, withdraw from a
therapeutic area or add an additional therapeutic area in order to
maximize our overall growth opportunities.
Some of our
existing products, and products we have agreements to acquire,
compete with one or more products marketed by very large
pharmaceutical companies that have much greater financial resources
for marketing, selling and developing their products. These
competitors, as well as others, have been in business for a longer
period of time, have a greater number of products on the market and
have greater financial and other resources than we do. If we
directly compete with them for the same markets and/or products,
their financial and market strength could prevent us from capturing
a meaningful share of those markets.
We also compete
with other OTC pharmaceutical companies for product line
acquisitions as well as for new products and acquisitions of other
companies.
Research
and Development
We have used
outside contract research organizations to carry out our research
and development activities. During the years ended
December 31, 2016 and 2015, we incurred research and development
costs totaling $77,804, and $0, respectively. This increase was a
result of the cost of salary and the related health benefits for an
employee, conclusion of testing, non-human primate safety studies,
clinical studies for our products Zestra®, Zestra Glide®,
EjectDelay® and Sensum+®, as well as the fair value of
the shares of common stock issued to CRI totaling $23,000 for the
settlement of certain clinical and regulatory milestone payments
due under the in-license agreement for Sensum+®.
Employees
We currently have
five full-time employees, including Dr. Bassam Damaj, who serves as
our President and Chief Executive Officer. We also rely on a
number of consultants. Our employees are not represented by a labor
union or by a collective bargaining agreement. Subject to the
availability of financing, we intend to expand our staff to
implement our growth strategy.
Intellectual
Property Protection
Our ability to
protect our intellectual property, including our technology, will
be an important factor in the success and continued growth of our
business. We protect our intellectual property through trade
secrets law, patents, copyrights, trademarks and contracts. Some of
our technology relies upon third-party licensed intellectual
property.
We currently hold
four patents in the U.S. and six patents registered outside the
U.S. We currently have no patent applications pending in the U.S.
and 11 patent applications pending in countries other than the U.S.
We also have exclusive U.S. rights to multiple patents in the U.S.
and Europe licensed under the product license agreements we have
with NTC Pharma and Q Pharma.
We own nine
trademark registrations and have four trademark applications
pending in the U.S. We also own 19 trademarks registered outside of
the U.S., with no applications currently pending.
We have established
business procedures designed to maintain the confidentiality of our
proprietary information, including the use of confidentiality
agreements and assignment-of-inventions agreements with employees,
independent contractors, consultants and companies with which we
conduct business.
Company
Information
Our executive
offices are located at 9171 Towne Centre Drive, Suite 440, San
Diego, California 92122 and our telephone number at such office is
(858) 964-5123. Our website
address is innovuspharma.com. Information contained on our website
is not deemed part of this Annual Report.
Our
business endeavors and our common stock involve a high degree of
risk. You should carefully consider the risks described below with
all of the other information included in this report. If any of the
following risks actually occur, they may materially harm our
business and our financial condition and results of operations. In
that event, the market price of our common stock could decline, and
investors could lose part or all of their investment.
Risks
Associated with Our Financial Condition
We have a history of significant recurring losses and these losses
may continue in the future, therefore negatively impacting our
ability to achieve our business objectives.
As of December 31, 2016, we had an accumulated
deficit of approximately $29.1 million.
In addition, we incurred net losses of approximately $13.7
million and $4.2 million for the years ended December 31, 2016 and
2015, respectively. These losses may
continue in the future. We expect to continue to incur significant
sales and marketing, research and development, and general and
administrative expense. As a result, we will need to generate
significant revenue to achieve profitability, and we may never
achieve profitability. Revenue and profit, if any, will
depend upon various factors, including (1) growing the current
sales of our products, (2) the successful acquisition of additional
commercial products, (3) raising capital to implement our growth
strategy, (4) obtaining any applicable regulatory approvals of our
proposed product candidates, (5) the successful licensing and
commercialization of our proposed product candidates, and (6)
growth and development of our operations. We may not achieve our
business objectives and the failure to achieve such goals would
have an adverse impact on us.
We may require additional
financing to satisfy our current contractual obligations and
execute our business plan.
We have not been profitable since
inception. As of December 31, 2016, we had approximately
$0.8 million in cash. We had a
net loss of approximately $13.7 million and $4.2 million for the
years ended December 31, 2016 and 2015, respectively.
Additionally, sales of our existing
products are significantly below the levels necessary to achieve
positive cash flow. Although we expect that our existing
capital resources, revenue from sales of our products will be
sufficient to allow us to continue our operations, commence the
product development process and launch selected products through at
least January 1, 2018, no assurances can be given that we will not
need to raise additional capital to fund our business plan.
Although no assurances can be given, we currently plan to raise
additional capital through the sale of equity or debt securities.
If we are not able to raise sufficient capital, our continued
operations may be in jeopardy and we may be forced to cease
operations and sell or otherwise transfer all or substantially all
of our remaining assets.
If we issue
additional shares of common stock in the future, it will result in
the dilution of our existing shareholders.
Our Amended and Restated Articles of Incorporation authorize the
issuance of up to 292.5 million shares of common stock and up to
7.5 million shares of preferred stock. The issuance of any such
shares of common stock may result in a
decrease in value of your investment. If we do issue any
such additional shares of common stock, such issuance also will
cause a reduction in the proportionate ownership and voting power
of all other shareholders. Further, any such issuance may result in
a change of control of our corporation.
If we issue additional debt securities, our operations could be
materially and negatively affected.
We have
historically funded our operations partly through the issuance of
debt securities. If we obtain additional debt financing, a
substantial portion of our operating cash flow may be dedicated to
the payment of principal and interest on such indebtedness, thus
limiting funds available for our business activities. If adequate
funds are not available, we may be required to delay, reduce the
scope of or eliminate our research and development programs, reduce
our commercialization efforts or curtail our operations. In
addition, we may be required to obtain funds through arrangements
with collaborative partners or others that may require us to
relinquish rights to technologies or products that we would
otherwise seek to develop or commercialize ourselves or license
rights to technologies or products on terms that are less favorable
to us than might otherwise be available.
Our ability to use our net operating loss carry-forwards and
certain other tax attributes may be limited.
We
have incurred substantial losses during our history. To the extent
that we continue to generate taxable losses, unused losses will
carry forward to offset future taxable income, if any, until such
unused losses expire. Under Sections 382 and 383 of the Internal
Revenue Code of 1986, as amended, if a corporation undergoes an
“ownership change,” generally defined as a greater than
50% change (by value) in its equity ownership over a three-year
period, the corporation’s ability to use its pre-change net
operating loss carry-forwards, or NOLs, and other pre-change tax
attributes (such as research tax credits) to offset its post-change
income may be limited. We may experience ownership changes in the
future as a result of subsequent shifts in our stock ownership. As
a result, if we earn net taxable income, our ability to use our
pre-change net operating loss carry-forwards to offset U.S. federal
taxable income may be subject to limitations, which could
potentially result in increased future tax liability to us. In
addition, at the state level, there may be periods during which the
use of NOLs is suspended or otherwise limited, which could
accelerate or permanently increase state taxes owed.
Risks
Associated with Our Business Model
We have a short operating history and have not produced significant
revenue over a period of time. This makes it difficult
to evaluate our future prospects and increases the risk that we
will not be successful.
We have a short
operating history with our current business model, which involves
the commercialization, licensing and development of
over-the-counter healthcare products. While we have been
in existence for years, we only began our current business model in
2013 and have only generated approximately $1.0 million in net
revenue in 2014, approximately $736,000 in 2015 and approximately
$4.8 million in net revenue for the year ended December 31, 2016,
and our operations have not yet been profitable. No
assurances can be given that we will generate any significant
revenue in the future. As a result, we have a very limited
operating history for you to evaluate in assessing our future
prospects. Our operations have not produced significant
revenue over a period of time, and may not produce significant
revenue in the near term, which may harm our ability to obtain
additional financing and may require us to reduce or discontinue
our operations. You must consider our business and prospects
in light of the risks and difficulties we will encounter as an
early-stage company. We may not be able to successfully
address these risks and difficulties, which could significantly
harm our business, operating results and financial
condition.
The success of our business currently depends on the successful
continuous commercialization of our main products and these
products may not be successfully grown beyond their current
levels.
We currently have a
limited number of products for sale. The success of our business
currently depends on our ability, directly or through a commercial
partner, to successfully market and sell those limited products
outside the U.S. and to expand our retail and online channels in
the U.S.
Although we have commercial products that we can currently market
and sell, we will continue to seek to acquire or license other
products and we may not be successful in doing so.
We currently have a
limited number of products. We may not be successful in marketing
and commercializing these products to the extent necessary to
sustain our operations. In addition, we will continue to seek to
acquire or license non-prescription pharmaceutical and consumer
health products. The successful consummation of these types of
acquisitions and licensing arrangements is subject to the
negotiation of complex agreements and contractual relationships and
we may be unable to negotiate such agreements or relationships on a
timely basis, if at all, or on terms acceptable to us.
If
we fail to successfully introduce new products, we may lose market
position.
New products,
product improvements, line extensions and new packaging will be an
important factor in our sales growth. If we fail to identify
emerging consumer trends, to maintain and improve the
competitiveness of our existing products or to successfully
introduce new products on a timely basis, we may lose market
position. Continued product development and marketing efforts have
all the risks inherent in the development of new products and line
extensions, including development delays, the failure of new
products and line extensions to achieve anticipated levels of
market acceptance and the cost of failed product
introductions.
Our sales and marketing function is currently very limited and we
currently rely on third parties to help us promote our products to
physicians in the U.S. and rely on our partners outside the U.S. We
will need to maintain the commercial partners we currently have and
attract others or be in a position to afford qualified or
experienced marketing and sales personnel for our
products.
We have had only
approximately $736,000 in net revenue in 2015, and approximately
$4.8 million during the year ended December 31, 2016. We will need
to continue to develop strategies, partners and distribution
channels to promote and sell our products.
We have no commercial manufacturing capacity and rely on
third-party contract manufacturers to produce commercial quantities
of our products.
We do not have the
facilities, equipment or personnel to manufacture commercial
quantities of our products and therefore must rely on qualified
third-party contract manufactures with appropriate facilities and
equipment to contract manufacture commercial quantities of
products. These third-party contract manufacturers are also subject
to current good manufacturing practice, or cGMP regulations, which
impose extensive procedural and documentation requirements. Any
performance failure on the part of our contract manufacturers could
delay commercialization of any approved products, depriving us of
potential product revenue.
Failure by our
contract manufacturers to achieve and maintain high manufacturing
standards could result in patient injury or death, product recalls
or withdrawals, delays or failures in testing or delivery, cost
overruns or other problems that could materially adversely affect
our business. Contract manufacturers may encounter difficulties
involving production yields, quality control and quality assurance.
These manufacturers are subject to ongoing periodic unannounced
inspection by the FDA and corresponding state and foreign agencies
to ensure strict compliance with cGMP and other applicable
government regulations; however, beyond contractual remedies that
may be available to us, we do not have control over third-party
manufacturers’ compliance with these regulations and
standards.
If for some reason
our contract manufacturers cannot perform as agreed, we may be
required to replace them. Although we believe there are a number of
potential replacements, we may incur added costs and delays in
identifying and qualifying any such replacements.
The inability of a
manufacturer to ship orders of our products in a timely manner or
to meet quality standards could cause us to miss the delivery date
requirements of our customers for those items, which could result
in cancellation of orders, refusal to accept deliveries or a
reduction in purchase prices, any of which could have a material
adverse effect as our revenue would decrease and we would incur net
losses as a result of sales of the product, if any sales could be
made.
We are also
dependent on certain third parties for the supply of the raw
materials necessary to develop and manufacture our products,
including the active and inactive pharmaceutical ingredients used
in our products. We are required to identify the supplier of all
the raw materials for our products in any drug applications that we
file with the FDA and all FDA-approved products that we acquire
from others. If raw materials for a particular product become
unavailable from an approved supplier specified in a drug
application, we would be required to qualify a substitute supplier
with the FDA, which would likely delay or interrupt manufacturing
of the affected product. To the extent practicable, we attempt to
identify more than one supplier in each drug application. However,
some raw materials are available only from a single source and, in
some of our drug applications, only one supplier of raw materials
has been identified, even in instances where multiple sources
exist.
In addition, we
obtain some of our raw materials and products from foreign
suppliers. Arrangements with international raw material suppliers
are subject to, among other things, FDA regulation, various import
duties, foreign currency risk and other government clearances. Acts
of governments outside the U.S. may affect the price or
availability of raw materials needed for the development or
manufacture of our products. In addition, any changes in patent
laws in jurisdictions outside the U.S. may make it increasingly
difficult to obtain raw materials for research and development
prior to the expiration of the applicable U.S. or foreign
patents.
Our U.S. business could be
adversely affected by changes in the U.S. presidential
administration.
A new U.S.
presidential administration came to power in January 2017 and
President Trump has publicly stated that he will take certain
efforts to impose importation tariffs from certain countries such
as China and Mexico which could affect the cost of certain of our
product components. In addition, the Trump Administration has and
will appoint and employ many new secretaries, directors and the
like into positions of authority in the U.S. Federal government
dealing with the pharmaceutical and healthcare industries that may
potentially have a negative impact on the prices and the regulatory
pathways for certain pharmaceuticals, nutritional supplements and
health care products such as those developed, marketed and sold by
us. Such changes in the regulatory pathways could adversely affect
and or delay our ability to market and sell our products in the
U.S.
The business that we conduct outside the U.S. may be adversely
affected by international risk and uncertainties.
Although our
operations are based in the U.S., we conduct business outside the
U.S and expect to continue to do so in the future. In addition, we
plan to seek approvals to sell our products in foreign countries.
Any business that we conduct outside the U.S. will be subject to
additional risks that may materially adversely affect our ability
to conduct business in international markets,
including:
●
Potentially
reduced protection for intellectual property rights;
●
Unexpected changes
in tariffs, trade barriers and regulatory
requirements;
●
Economic weakness,
including inflation or political instability in particular foreign
economies and markets;
●
Workforce
uncertainty in countries where labor unrest is more common than in
the United States;
●
Production
shortages resulting from any events affecting a product candidate
and/or finished drug product supply or manufacturing capabilities
abroad;
●
Business
interruptions resulting from geo-political actions, including war
and terrorism or natural disasters, including earthquakes,
hurricanes, typhoons, floods and fires; and
●
Failure to comply
with Office of Foreign Asset Control rules and regulations and the
Foreign Corrupt Practices Act, or FCPA.
These factors or
any combination of these factors may adversely affect our revenue
or our overall financial performance.
Acquisitions involve risks that could result in a reduction of our
operating results, cash flows and liquidity.
We have made and in
the future may, continue to make strategic acquisitions including
licenses of third-party products. However, we may not be able to
identify suitable acquisition and licensing opportunities. We may
pay for acquisitions and licenses with our common stock or with
convertible securities, which may dilute your investment in our
common stock, or we may decide to pursue acquisitions and licenses
that investors may not agree with. In connection with one of our
latest acquisitions, we have also agreed to substantial earn-out
arrangements. To the extent we defer the payment of the purchase
price for any acquisition or license through a cash earn-out
arrangement, it will reduce our cash flows in subsequent periods.
In addition, acquisitions or licenses may expose us to operational
challenges and risks, including:
●
The
ability to profitably manage acquired businesses or successfully
integrate the acquired business’ operations and financial
reporting and accounting control systems into our
business;
●
Increased
indebtedness and contingent purchase price obligations associated
with an acquisition;
●
The
ability to fund cash flow shortages that may occur if anticipated
revenue is not realized or is delayed, whether by general economic
or market conditions or unforeseen internal
difficulties;
●
The
availability of funding sufficient to meet increased capital
needs;
●
Diversion of
management’s attention; and
●
The
ability to retain or hire qualified personnel required for expanded
operations.
Completing
acquisitions may require significant management time and financial
resources. In addition, acquired companies may have
liabilities that we failed, or were unable, to discover in the
course of performing due diligence investigations. We cannot assure
you that the indemnification granted to us by sellers of acquired
companies will be sufficient in amount, scope or duration to fully
offset the possible liabilities associated with businesses or
properties we assume upon consummation of an acquisition. We may
learn additional information about our acquired businesses that
materially adversely affect us, such as unknown or contingent
liabilities and liabilities related to compliance with applicable
laws. Any such liabilities, individually or in the aggregate, could
have a material adverse effect on our business.
Failure to
successfully manage the operational challenges and risks associated
with, or resulting from, acquisitions could adversely affect our
results of operations, cash flows and liquidity. Borrowings or
issuances of convertible securities associated with these
acquisitions may also result in higher levels of indebtedness,
which could impact our ability to service our debt within the
scheduled repayment terms.
We will need to expand our operations and increase our size, and we
may experience difficulties in managing growth.
As we increase the
number of products we own or have the right to sell, we will need
to increase our sales, marketing, product development and
scientific and administrative headcount to manage these programs.
In addition, to meet our obligations as a public company, we will
need to increase our general and administrative capabilities. Our
management, personnel and systems currently in place may not be
adequate to support this future growth. Our need to effectively
manage our operations, growth and various projects requires that
we:
●
Successfully
attract and recruit new employees with the expertise and experience
we will require;
●
Successfully grow
our marketing, distribution and sales infrastructure;
and
●
Continue to
improve our operational, manufacturing, financial and management
controls, reporting systems and procedures.
If we are unable to
successfully manage this growth and increased complexity of
operations, our business may be adversely
affected.
If we fail to attract and keep senior management and key scientific
personnel, we may be unable to successfully operate our
business.
Our success depends
to a significant extent upon the continued services of Dr. Bassam
Damaj, our President and Chief Executive Officer. Dr. Damaj has
overseen our current business strategy since inception and provides
leadership for our growth and operations strategy as well as being
our sole employee with any significant scientific or pharmaceutical
experience. Loss of the services of Dr. Damaj would have a material
adverse effect on our growth, revenue and prospective business. The
loss of any of our key personnel, or the inability to attract and
retain qualified personnel, may significantly delay or prevent the
achievement of our research, development or business objectives and
could materially adversely affect our business, financial condition
and results of operations.
Any employment
agreement we enter into will not ensure the retention of the
employee who is a party to the agreement. In addition, we have only
limited ability to prevent former employees from competing with us.
Furthermore, our future success will also depend in part on the
continued service of our key scientific and management personnel
and our ability to identify, hire and retain additional personnel.
We experience intense competition for qualified personnel and may
be unable to attract and retain the personnel necessary for the
development of our business. Moreover, competition for personnel
with the scientific and technical skills that we seek is extremely
high and is likely to remain high. Because of this competition, our
compensation costs may increase significantly. We presently have no
scientific employees.
We may not be able to continue to pay consultants, vendors and
independent contractors through the issuance of equity instruments
in order to conserve cash.
We have paid
numerous consultants and vendor fees through the issuance of equity
instruments in order to conserve our cash, however there can be no
assurance that we, our vendors, consultants or independent
contractors, current or future, will continue to agree to this
arrangement. As a result, we may be asked to spent more cash for
the same services, or we may not be able to retain the same
consultants, vendors, etc.
We face significant
competition and have limited resources compared to our
competitors.
We are engaged in a
highly competitive industry. We can expect competition from
numerous companies, including large international enterprises and
others entering the market for products similar to ours. Most of
these companies have greater research and development,
manufacturing, patent, legal, marketing, financial, technological,
personnel and managerial resources. Acquisitions of competing
companies by large pharmaceutical or healthcare companies could
further enhance such competitors’ financial, marketing and
other resources. Competitors may complete clinical trials, obtain
regulatory approvals and commence commercial sales of their
products before we could enjoy a significant competitive advantage.
Products developed by our competitors may be more effective than
our product candidates.
Competition and technological change may make our product
candidates and technologies less attractive or
obsolete.
We compete with
established pharmaceutical and biotechnology companies that are
pursuing other products for the same markets we are pursuing and
that have greater financial and other resources. Other companies
may succeed in developing or acquiring products earlier than us,
developing products that are more effective than our products or
achieve greater market acceptance. As these companies
develop their products, they may develop competitive positions that
may prevent, make futile, or limit our product commercialization
efforts, which would result in a decrease in the revenue we would
be able to derive from the sale of any products.
Risks Relating to Intellectual Property
If we fail to protect our intellectual property rights, our ability
to pursue the development of our technologies and products would be
negatively affected.
Our success will
depend in part on our ability to obtain patents and maintain
adequate protection of our technologies and products. If we do not
adequately protect our intellectual property, competitors may be
able to use our technologies to produce and market products in
direct competition with us and erode our competitive advantage.
Some foreign countries lack rules and methods for defending
intellectual property rights and do not protect proprietary rights
to the same extent as the U.S. Many companies have had difficulty
protecting their proprietary rights in these foreign countries. We
may not be able to prevent misappropriation of our proprietary
rights.
We have received,
and are currently seeking, patent protection for numerous compounds
and methods of use. However, the patent process is subject to
numerous risks and uncertainties, and there can be no assurance
that we will be successful in protecting our products by obtaining
and defending patents. These risks and uncertainties include the
following: patents that may be issued or licensed may be
challenged, invalidated or circumvented, or otherwise may not
provide any competitive advantage; our competitors, many of which
have substantially greater resources than us and many of which have
made significant investments in competing technologies, may seek,
or may already have obtained, patents that will limit, interfere
with or eliminate our ability to make, use and sell our potential
products either in the U.S. or in international markets and
countries other than the U.S. may have less restrictive patent laws
than those upheld by U.S. courts, allowing foreign competitors the
ability to exploit these laws to create, develop and market
competing products.
Moreover, any
patents issued to us may not provide us with meaningful protection
or others may challenge, circumvent or narrow our patents. Third
parties may also independently develop products similar to our
products, duplicate our unpatented products or design around any
patents on products we develop. Additionally, extensive time is
required for development, testing and regulatory review of a
potential product. While extensions of patent term due to
regulatory delays may be available, it is possible that, before any
of our products candidates can be commercialized, any related
patent, even with an extension, may expire or remain in force for
only a short period following commercialization, thereby reducing
any advantages of the patent.
In addition, the
U.S. Patent and Trademark Office (the "PTO") and patent offices in
other jurisdictions have often required that patent applications
concerning pharmaceutical and/or biotechnology-related inventions
be limited or narrowed substantially to cover only the specific
innovations exemplified in the patent application, thereby limiting
the scope of protection against competitive challenges. Thus, even
if we or our licensors are able to obtain patents, the patents may
be substantially narrower than anticipated.
Our success depends
on our patents, patent applications that may be licensed
exclusively to us and other patents to which we may obtain
assignment or licenses. We may not be aware, however, of all
patents, published applications or published literature that may
affect our business either by blocking our ability to commercialize
our products, by preventing the patentability of our products to us
or our licensors or by covering the same or similar technologies
that may invalidate our patents, limit the scope of our future
patent claims or adversely affect our ability to market our
products.
In addition to
patents, we rely on a combination of trade secrets,
confidentiality, nondisclosure and other contractual provisions and
security measures to protect our confidential and proprietary
information. These measures may not adequately protect our trade
secrets or other proprietary information. If they do not adequately
protect our rights, third parties could use our technology and we
could lose any competitive advantage we may have. In addition,
others may independently develop similar proprietary information or
techniques or otherwise gain access to our trade secrets, which
could impair any competitive advantage we may have.
Patent protection
and other intellectual property protection are crucial to the
success of our business and prospects, and there is a substantial
risk that such protections will prove inadequate.
We may be involved in lawsuits to protect or enforce our patents,
which could be expensive and time consuming.
The pharmaceutical
industry has been characterized by extensive litigation regarding
patents and other intellectual property rights, and companies have
employed intellectual property litigation to gain a competitive
advantage. We may become subject to infringement claims or
litigation arising out of patents and pending applications of our
competitors or additional interference proceedings declared by the
PTO to determine the priority of inventions. The defense and
prosecution of intellectual property suits, PTO proceedings and
related legal and administrative proceedings are costly and
time-consuming to pursue and their outcome is uncertain. Litigation
may be necessary to enforce our issued patents, to protect our
trade secrets and know-how, or to determine the enforceability,
scope and validity of the proprietary rights of others. An adverse
determination in litigation or interference proceedings to which we
may become a party could subject us to significant liabilities,
require us to obtain licenses from third parties or restrict or
prevent us from selling our products in certain markets. Although
patent and intellectual property disputes might be settled through
licensing or similar arrangements, the costs associated with such
arrangements may be substantial and could include our paying large
fixed payments and ongoing royalties. Furthermore, the necessary
licenses may not be available on satisfactory terms or at
all.
Competitors may
infringe our patents and we may file infringement claims to counter
infringement or unauthorized use. This can be expensive,
particularly for a company of our size, and time-consuming. In
addition, in an infringement proceeding, a court may decide that a
patent of ours is not valid or is unenforceable, or may refuse to
stop the other party from using the technology at issue on the
grounds that our patents do not cover its technology. An adverse
determination of any litigation or defense proceedings could put
one or more of our patents at risk of being invalidated or
interpreted narrowly.
Also, a third party
may assert that our patents are invalid and/or unenforceable. There
are no unresolved communications, allegations, complaints or
threats of litigation related to the possibility that our patents
are invalid or unenforceable. Any litigation or claims against us,
whether merited or not, may result in substantial costs, place a
significant strain on our financial resources, divert the attention
of management and harm our reputation. An adverse decision in
litigation could result in inadequate protection for our product
candidates and/or reduce the value of any license agreements we
have with third parties.
Interference
proceedings brought before the PTO may be necessary to determine
priority of invention with respect to our patents or patent
applications. During an interference proceeding, it may be
determined that we do not have priority of invention for one or
more aspects in our patents or patent applications and could result
in the invalidation in part or whole of a patent or could put a
patent application at risk of not issuing. Even if successful, an
interference proceeding may result in substantial costs and
distraction to our management.
Furthermore,
because of the substantial amount of discovery required in
connection with intellectual property litigation or interference
proceedings, there is a risk that some of our confidential
information could be compromised by disclosure. In addition, there
could be public announcements of the results of hearings, motions
or other interim proceedings or developments. If investors perceive
these results to be negative, the price of our common stock could
be adversely affected.
If we infringe the rights of third parties we could be prevented
from selling products, forced to pay damages and defend against
litigation.
If our products,
methods, processes and other technologies infringe the proprietary
rights of other parties, we could incur substantial costs and we
may have to: obtain licenses, which may not be available on
commercially reasonable terms, if at all; abandon an infringing
product candidate; redesign our products or processes to avoid
infringement; stop using the subject matter claimed in the patents
held by others; pay damages; and/or defend litigation or
administrative proceedings which may be costly whether we win or
lose, and which could result in a substantial diversion of our
financial and management resources.
We may be subject to potential product liability and other claims,
creating risks and expense.
We are also exposed
to potential product liability risks inherent in the development,
testing, manufacturing, marketing and sale of human therapeutic
products. Product liability insurance for the pharmaceutical
industry is extremely expensive, difficult to obtain and may not be
available on acceptable terms, if at all. We have no guarantee that
the coverage limits of such insurance policies will be adequate. A
successful claim against us, which is in excess of our insurance
coverage, could have a material adverse effect upon us and on our
financial condition.
Changes in trends in the pharmaceutical and biotechnology
industries, including difficult market conditions, could adversely
affect our operating results.
The biotechnology,
pharmaceutical and medical device industries generally, and drug
discovery and development companies more specifically, are subject
to increasingly rapid technological changes. Our competitors and
others might develop technologies or products that are more
effective or commercially attractive than our current or future
technologies or products or that render our technologies or
products less competitive or obsolete. If competitors introduce
superior technologies or products and we cannot make enhancements
to our technologies or products to remain competitive, our
competitive position and, in turn, our business, revenue and
financial condition, would be materially and adversely
affected.
We may encounter new FDA rules, regulations and laws that could
impede our ability to sell our OTC products
The FDA regulates
most of our OTC or non-prescription drugs using its OTC Monograph,
which when final, is published in the Code of Federal Regulations
at 21 CFR Parts 330-358. Such of our products that meet each of
these conditions established in the OTC Monograph regulations, as
well as all other regulations, may be marketed without prior
approval by the FDA. If the FDA changes its OTC Monograph
regulatory process, it may subject us to additional FDA rules,
regulations and laws that may be more time consuming and costly to
us and could negatively affect our business.
We may never receive ANDA approval for our product
Fluticare™, which we
are relying upon to generate a significant amount of future
revenue.
Because of the
unpredictability of the FDA review process for generic drugs, the
ANDA filed for our product Fluticare™ may never be approved by the
FDA for a variety of reasons. If such ANDA is not
approved, we will not be able to realize revenue from the sale of
this drug and our revenue will not grow as quickly as we
anticipate.
If the
Fluticare™
ANDA is
approved, we have no assurances as to the additional costs
associated with launching our new product, and may need to raise
additional capital in the future to fund such
efforts.
Since approval is
dependent upon a complex FDA review and regulatory process, should
we receive approval for our product Fluticare™, it is unclear the extent of the
additional work and costs associated with launching the new
product. There can be no assurances to the time frame in which we
could get approval, and so no assurances as to the timing and
extent of the possible additional expenses. As a result, additional
funding may be required to cover such expenses.
Risks
Related to Ownership of our Common Stock
Sales of additional shares of our common stock could cause the
price of our common stock to decline.
As of December 31,
2016, we had 121,694,293 shares of common stock outstanding. A
substantial number of those shares are restricted securities and
such shares may be sold under Rule 144 of the Securities Act of
1933, as amended ("Securities Act"), subject to any applicable
holding period. As such, sales of the above shares or other
substantial amounts of our common stock in the public or private
markets, or the availability of such shares for sale by us,
including the issuance of common stock upon conversion and/or
exercise of outstanding convertible securities, warrants and
options, could adversely affect the price of our common stock. We
may sell additional shares or securities convertible into shares of
common stock, which could adversely affect the market price of
shares of our common stock. In addition, the sale of a
substantial number of shares of our common stock, or anticipation
of such sales, could make it more difficult for us to obtain future
financing. To the extent the trading price of our common stock at
the time of exercise of any of our outstanding options or warrants
exceeds their exercise price, such exercise will have a dilutive
effect on our stockholders.
If we default on our Convertible Notes, or if such Convertible
Notes are voluntarily converted, it could result in a significant
dilution of stockholders’ position.
As
of December 31, 2016, we have issued and outstanding convertible
promissory notes in the aggregate principal amount of approximately
$1.6 million (the “Convertible Notes”). Upon the
occurrence of an Event of Default, as such term is defined in the
Convertible Notes, a “Default Amount” equal to the sum
of (i) the outstanding principal amount, together with accrued
interest due thereon through the date of payment, and (ii) an
additional amount equal to the outstanding principal amount is
payable, either in cash or shares of common stock. Assuming the
Convertible Notes are in default on their maturity date, we may be
required to issue up to 16,027,339 shares of our common stock to
the holders of the Convertible Notes.
The
holders of our Convertible Notes also have the right to convert
such Convertible Notes into common stock at $0.25 per share. In the
event the holders of such Convertible Notes elect to convert their
Convertible Notes into common stock, an additional 6,414,132 shares
of our common stock will be issued, resulting in substantial
dilution to existing stockholders. In the event such holders elect
to sell their common stock issued upon conversion of such
Convertible Notes, the price of our common stock may be negatively
and materially impacted.
The market price for our common stock may be volatile and your
investment in our common stock could decline in value.
The stock market in
general has experienced extreme price and volume fluctuations. The
market prices of the securities of biotechnology and specialty
pharmaceutical companies, particularly companies like ours with
limited product revenue, have been highly volatile and may continue
to be highly volatile in the future. This volatility has often been
unrelated to the operating performance of particular companies. The
following factors, in addition to other risk factors described in
this section, may have a significant impact on the market price of
our common stock:
●
Announcements of
technological innovations or new products by us or our
competitors;
●
Announcement of
FDA approval or disapproval of our product candidates or other
product-related actions;
●
Developments
involving our discovery efforts and clinical trials;
●
Developments or
disputes concerning patents or proprietary rights, including
announcements of infringement, interference or other litigation
against us or our potential licensees;
●
Developments
involving our efforts to commercialize our products, including
developments impacting the timing of
commercialization;
●
Announcements
concerning our competitors or the biotechnology, pharmaceutical or
drug delivery industry in general;
●
Public
concerns as to the safety or efficacy of our products or our
competitors’ products;
●
Changes in
government regulation of the pharmaceutical or medical
industry;
●
Actual
or anticipated fluctuations in our operating results;
●
Changes in
financial estimates or recommendations by securities
analysts;
●
Developments
involving corporate collaborators, if any;
●
Changes in
accounting principles; and
●
The
loss of any of our key management personnel.
In the
past, securities class action litigation has often been brought
against companies that experience volatility in the market price of
their securities. Whether meritorious or not, litigation brought
against us could result in substantial costs and a diversion of
management’s attention and resources, which could adversely
affect our business, operating results and financial
condition.
We do not anticipate paying dividends on our common stock and,
accordingly, shareholders must rely on stock appreciation for any
return on their investment.
We have never
declared or paid cash dividends on our common stock and do not
expect to do so in the foreseeable future. The declaration of
dividends is subject to the discretion of our board of directors
and will depend on various factors, including our operating
results, financial condition, future prospects and any other
factors deemed relevant by our board of directors. You should not
rely on an investment in our Company if you require dividend income
from your investment in our Company. The success of your investment
will likely depend entirely upon any future appreciation of the
market price of our common stock, which is uncertain and
unpredictable. There is no guarantee that our common stock will
appreciate in value.
Nevada law and provisions in our charter documents may delay or
prevent a potential takeover bid that would be beneficial to common
stockholders.
Our articles of
incorporation and our bylaws contain provisions that may enable our
board of directors to discourage, delay or prevent a change in our
ownership or in our management. In addition, these provisions could
limit the price that investors would be willing to pay in the
future for shares of our common stock. These provisions include the
following:
●
Our
board of directors may increase the size of the board of directors
up to nine directors and fill vacancies on the board of directors;
and
●
Our
board of directors is expressly authorized to make, alter or repeal
our bylaws.
In addition,
Chapter 78 of the Nevada Revised Statutes also contains provisions
that may enable our board of directors to discourage, delay or
prevent a change in our ownership or in our management. The
combinations with interested stockholders provisions of the Nevada
Revised Statutes, subject to certain exceptions, restrict our
ability to engage in any combination with an interested stockholder
for three years after the date a stockholder becomes an interested
stockholder, unless, prior to the stockholder becoming an
interested stockholder, our board of directors gave approval for
the combination or the acquisition of shares which caused the
stockholder to become an interested stockholder. If the combination
or acquisition was not so approved prior to the stockholder
becoming an interested stockholder, the interested stockholder may
effect a combination after the three-year period only if either the
stockholder receives approval from a majority of the outstanding
voting shares, excluding shares beneficially owned by the
interested stockholder or its affiliates or associates, or the
consideration to be paid by the interested stockholder exceeds
certain thresholds set forth in the statute. For purposes of the
foregoing provisions, "interested stockholder" means either a
person, other than us or our subsidiaries, who directly or
indirectly beneficially owns 10% or more of the voting power of our
outstanding voting shares, or one of our affiliates or associates
which at any time within three years immediately before the date in
question directly or indirectly beneficially owned 10% or more of
the voting power of our outstanding shares.
In addition, the
acquisition of controlling interest provisions of the Nevada
Revised Statutes provide that a stockholder acquiring a controlling
interest in our Company, and those acting in association with that
stockholder, obtain no voting rights in the control shares unless
voting rights are conferred by stockholders holding a majority of
our voting power (exclusive of the control shares). For purposes of
these provisions, "controlling interest" means the ownership of
outstanding voting shares enabling the acquiring person to exercise
(either directly or indirectly or in association with others)
one-fifth or more but less than one-third, one-third or more but
less than a majority, or a majority or more of the voting power in
the election of our directors, and "control shares" means those
shares the stockholder acquired on the date it obtained a
controlling interest or in the 90-day period preceding that
date.
Accordingly, the
provisions could require multiple votes with respect to voting
rights in share acquisitions effected in separate stages, and the
effect of these provisions may be to discourage, delay or prevent a
change in control of our Company.
The rights of the holders of common stock may be impaired by the
potential issuance of preferred stock.
Our articles of
incorporation give our board of directors the right to create new
series of preferred stock. As a result, the board of directors may,
without stockholder approval, issue preferred stock with voting,
dividend, conversion, liquidation or other rights, which could
adversely affect the voting power and equity interest of the
holders of common stock. Preferred stock, which could be issued
with the right to more than one vote per share, could be utilized
as a method of discouraging, delaying or preventing a change of
control. The possible impact on takeover attempts could adversely
affect the price of our common stock. Although we have no present
intention to issue any shares of preferred stock or to create a
series of preferred stock, we may issue such shares in the
future.
Our common stock is subject to the "penny stock" rules of the
Securities and Exchange Commission and the trading market in our
securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our
stock.
The SEC has adopted
Rule 15g-9 which establishes the definition of a "penny stock," for
the purposes relevant to us, as any equity security that has a
market price of less than $5.00 per share or with an exercise price
of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:
●
That a
broker or dealer approve a person's account for transactions in
penny stocks; and
●
The
broker or dealer receives from the investor a written agreement to
the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve
a person's account for transactions in penny stocks, the broker or
dealer must:
●
Obtain
financial information and investment experience objectives of the
person; and
●
Make a
reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or
dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the SEC relating to the
penny stock market, which, in highlight form:
●
Sets
forth the basis on which the broker or dealer made the suitability
determination; and
●
That
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers
may be less willing to execute transactions in securities subject
to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the
market value of our stock.
Disclosure also has
to be made about the risks of investing in penny stocks in both
public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered
representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in
penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny
stocks.
FINRA sales practice
requirements may also limit a shareholder’s ability to buy
and sell our stock.
In addition to the
“penny stock” rules described above, the Financial
Industry Regulatory Authority (“FINRA”) has adopted
rules that require that in recommending an investment to a
customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable
efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information.
Under interpretations of these rules, FINRA believes that there is
a high probability that speculative low priced securities will not
be suitable for at least some customers. The FINRA requirements
make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy
and sell our stock and have an adverse effect on the market for our
shares.
Item
1B. Unresolved Staff Comments.
There
are no unresolved staff comments at December 31, 2016.
Item
2.
Properties.
We lease 2,578
square feet of office space in San Diego, California that commenced
on December 10, 2013 and continues until January 31, 2019. This
facility serves as our corporate headquarters. Monthly rent at
December 31, 2016 is in the amount of $7,347, with an approximate
4% increase in the base rent amount on an annual
basis.
We
believe that our existing facilities are suitable and adequate to
meet our current business requirements, but we will require a
larger, more permanent space as we add personnel consistent with
our business plan. We anticipate we will be able to acquire
additional facilities as needed on terms consistent with our
current lease.
Item
3. Legal Proceedings.
From
time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to
time that may harm our business. We are currently not aware of any
such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our
business, financial condition or operating results.
Item
4. Mine Safety Disclosures.
Not
applicable.
PART II
Item
5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchase of Equity
Securities.
Market Information
Our
common stock is available for quotation on the OTCQB Marketplace
under the trading symbol “INNV.” The market for our
common stock is limited. The prices at which our common stock may
trade may be volatile and subject to broad price
movements.
The
following table sets forth the high and low bid prices per share of
our common stock for the periods indicated as reported on the OTCQB
Marketplace. The quotes represent inter-dealer prices, without
adjustment for retail mark-up, markdown or commission and may not
represent actual transactions. The trading volume of our securities
fluctuates and may be limited during certain periods. As a result
of these volume fluctuations, the liquidity of an investment in our
securities may be adversely affected.
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
$0.10
|
$0.03
|
$0.28
|
$0.13
|
|
Second
Quarter
|
$0.37
|
$0.05
|
$0.19
|
$0.11
|
|
Third
Quarter
|
$0.66
|
$0.21
|
$0.16
|
$0.05
|
|
Fourth
Quarter
|
$0.33
|
$0.16
|
$0.12
|
$0.05
|
As
of March 3, 2017, we had 544 record holders of our common stock.
The number of record holders does not include holders who hold
their stock in “street name” or “nominee
name” inside bank or brokerage accounts.
Dividend Policy
We
have never declared or paid any cash dividends on our common stock
and do not anticipate declaring or paying any cash dividends on our
common stock in the foreseeable future. We expect to retain all
available funds and any future earnings to support operations and
fund the development and growth of our business. Our board of
directors will determine whether we pay and the amount of future
dividends (including cash dividends), if any.
Recent Sales of Unregistered Securities
In
the fourth quarter of 2016, we issued 2,206,786 restricted shares
of common stock valued at $641,783 in exchange for services under
our existing consulting and service agreements with third
parties.
In
the fourth quarter of 2016, certain 2016 Notes holders elected
to convert $328,805 in principal and interest into 1,315,220 shares
of common stock.
In
January and February 2017, we issued 1,159,023 shares of common
stock to various consultants for services rendered. The fair value
of the common stock issued was approximately $321,000.
On
January 1, 2017, we issued restricted shares of common stock
totaling 225,000 to Centric Research Institute as a prepayment of
royalties due on net profits of Sensum+® in the U.S. in 2017.
The royalty prepayment amount is $45,000.
In
March 2017, certain 2016 Notes holders elected to convert
$350,610 in principal and interest into 1,402,440 shares of common
stock.
In November 2016,
we issued 12,808,796 shares of common stock to Novalere Holdings,
LLC 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 stockholders’ equity.
We
entered into a private financing for $550,000 on December 5, 2016
with three institutional investors and for $165,000 with one
institutional investor on January 19, 2017. We issued 1,441,111
restricted shares of common stock to the investors in connection
with the notes payable. Each of the securities were offered and
sold in transactions exempt from registration under the Securities
Act, in reliance on Section 4(a)(2) thereof and Rule 506 of
Regulation D thereunder and/or Section 3(a)(9) of the Securities
Act. Each of the investors represented that it was an "accredited
investor" as defined in Regulation D under the Securities
Act.
There
were no issuances of unregistered securities to report which were
sold or issued by us without the registration of these securities
under the Securities Act of 1933 in reliance on exemptions from
such registration requirements, within the period covered by this
report, which have not been previously included in an Annual Report
on Form 10-K, a Quarterly Report on Form 10-Q or a Current Report
on Form 8-K.
Item
6. Selected Financial Data.
Under
SEC rules and regulations, because of the aggregate worldwide
market value of our common stock held by non-affiliates as of the
last business day of our most recently completed second fiscal
quarter, we are considered to be a “smaller reporting
company.” Accordingly, we are not required to provide the
information required by this item in this report.
Item
7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
consolidated financial statements and the related notes contained
in this annual report on Form 10-K (Annual Report). Our
consolidated financial statements have been prepared and, unless
otherwise stated, the information derived therefrom as presented in
this discussion and analysis is presented, in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP). In addition to historical information, the
following discussion contains forward-looking statements based upon
our current views, expectations and assumptions that are subject to
risks and uncertainties. Actual results may differ substantially
from those expressed or implied by any forward-looking statements
due to a number of factors, including, among others, the risks
described in the “Risk Factors” section and elsewhere
in this Annual Report.
As used in this discussion and analysis, unless the context
indicates otherwise, the terms the “Company”,
“Innovus” “we”, “us” and
“our” refer to Innvous Pharmaceuticals, Inc. and its
consolidated subsidiaries, consisting of FasTrack Pharmaceuticals,
Inc. (FasTrack), Semprae Laboratories, Inc. (Semprae), and
Novalere, Inc. (Novalere).
Overview
We are an emerging over-the-counter ("OTC")
consumer goods and specialty pharmaceutical company engaged
in the commercialization, licensing and development of safe and
effective non-prescription medicine and consumer care products to
improve men’s and women’s health and vitality and
respiratory diseases. We deliver innovative and uniquely
presented and packaged health solutions through our (a) OTC
medicines and consumer and health products, which we market
directly, (b) commercial partners to primary care physicians,
urologists, gynecologists and therapists, and (c) directly to
consumers through our on-line channels, retailers and wholesalers.
We are dedicated to being a leader in
developing and marketing new OTC and branded Abbreviated New Drug
Application (“ANDA”) products. We are actively pursuing
opportunities where existing prescription drugs have recently, or
are expected to, change from prescription (or Rx) to OTC. These
“Rx-to-OTC switches” require Food and Drug
Administration (“FDA”) approval through a process
initiated by the New Drug Application (“NDA”)
holder.
Our business model
leverages our ability to (a) develop and build our current pipeline
of products and (b) to also acquire outright or in-license
commercial products that are supported by scientific and/or
clinical evidence, place them through our existing supply chain,
retail and on-line (including Amazon®-based business
platform) channels to tap new markets and drive demand for such
products and to establish physician relationships. We currently
have 17 products marketed in the U.S. with six of those being
marketed and sold in multiple countries around the world through
some of our 14 commercial partners. We currently expect to launch
an additional five products in the U.S. in 2017 and we currently
have approvals to launch certain of our already marketed products
in 31 additional countries.
Our Strategy
Our corporate
strategy focuses on two primary objectives:
1.
Developing a
diversified product portfolio of exclusive, unique and patented
non-prescription OTC and branded ANDA drugs and consumer health
products through: (a) the introduction of line extensions and
reformulations of either our or third-party currently marketed
products; and (b) the acquisition of products or obtaining
exclusive licensing rights to market such products;
and
2.
Building an
innovative, U.S. and global sales and marketing model through
direct to consumer approaches such as our proprietary Beyond
Human® Sales and Marketing platform, the addition of new
online platforms such as Amazon® and commercial partnerships
with established international complimentary partners that: (a)
generates revenue, and (b) requires a lower cost structure compared
to traditional pharmaceutical companies thereby increasing our
gross margins.
Our Products
We currently
generate revenue from 17 products in the U.S. and six in
international countries, as follows:
1.
Vesele® for
promoting sexual and health (U.S. and U.K.);
2.
Zestra® for
female arousal (U.S., U.K., Denmark, Canada, Morocco, the UAE and
South Korea);
3.
Zestra
Glide® (U.S, Canada and the MENA countries);
4.
EjectDelay®
indicated for the treatment of premature ejaculation (U.S. and
Canada);
5.
Sensum+® to
alleviate reduced penile sensitivity (U.S., U.K. and
Morocco);
6.
Beyond
Human® Testosterone Booster;
7.
Beyond
Human® Ketones;
8.
Beyond
Human® Krill Oil;
9.
Beyond
Human® Omega 3 Fish Oil;
10.
Beyond
Human® Vision Formula;
11.
Beyond
Human® Blood Sugar;
12.
Beyond
Human® Colon Cleanse;
13.
Beyond
Human® Green Coffee Extract;
14.
Beyond
Human® Growth Agent;
15.
RecalMax™
for brain health;
16.
Androferti®
(U.S. and Canada) for the support of overall male reproductive
health and sperm quality; and
17.
UriVarx™ for
overactive bladder and urinary incontinence.
In addition, we
currently expect to launch in the U.S. the following products in
2017, subject to the applicable regulatory approvals, if
required:
1.
Xyralid™ for
the relief of the pain and symptoms caused by hemorrhoids (first
half of 2017);
2.
AllerVarx™
for allergic rhinitis symptoms (first half of 2017);
3.
AndroVit™ for
prostate and sexual health (second half of 2017);
4.
Urocis™ XR
for urinary tract infections (second half of 2017);
and
5.
FlutiCare™
for allergic rhinitis subject to FDA ANDA approval (second half of
2017).
Sales and Marketing Strategy U.S. and Internationally
Our sales and marketing strategy is based on (a)
the use of direct to consumer advertisements in print and online
media through our proprietary Beyond Human®
sales and marketing infrastructure
acquired in March 2016, (b) working with direct commercial channel
partners in the U.S. and also directly marketing the products
ourselves to physicians, urologists, gynecologists and therapists
and to other healthcare providers, and (c) working with exclusive
commercial partners outside of the U.S. that would be responsible
for sales and marketing in those territories. We have now fully
integrated most of our existing line of products such as
Vesele®, Sensum+®, UriVarx™, Zestra®, and
RecalMax™ into the Beyond
Human® sales and marketing
platform. We plan to integrate Xyralid™, AllerVarx™,
AndroVit™,
Urocis™ XR; and
FlutiCare™, subject to regulatory approvals, upon their
commercial launches in 2017. We also market and distribute our
products in the U.S. through retailers, wholesalers and other
online channels. Our strategy outside the U.S. is to partner with
companies who can effectively market and sell our products in their
countries through their direct marketing and sales teams. The
strategy of using our partners to commercialize our products is
designed to limit our expenses and fix our cost structure, enabling
us to increase our reach while minimizing our incremental
spending.
Our
current OTC monograph, Rx-to-OTC ANDA switch drugs and consumer
care products marketing strategy is to focus on four main U.S.
markets which we believe each to be in excess of $1.0 billion: (1)
Sexual health (female and male sexual dysfunction and health); (2)
Urology (bladder and prostate health); (3) Respiratory disease; and
(4) Brain health. We will focus our current efforts on these four
markets and will seek to develop, acquire or license products that
we can sell through our sales channels in these
fields.
Recent Developments
Acquisition of Assets of Beyond Human®
On February 8, 2016 we entered into an Asset
Purchase Agreement (“APA”), pursuant to which Innovus
agreed to purchase substantially all of the assets of Beyond
Human® (the
“Acquisition”) for a total cash payment of $630,000
(the “Purchase Price”). The Purchase Price was paid in
the following manner: (1) $300,000 in cash at the
closing of the Acquisition (the “ Initial Payment”),
(2) $100,000 in cash four months from the closing upon the
occurrence of certain milestones as described in the APA, (3)
$100,000 in cash eight months from the closing upon the occurrence
of certain milestones as described in the APA, and (4) $130,000 in
cash in twelve months from the closing upon the occurrence of
certain milestones as described in the APA. 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 all of the
contingent consideration payments under the APA.
2016 and 2017 Notes Payable Financing
On December 5, 2016
and January 19, 2017, we entered into securities purchase
agreements with three 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 $65,000 and requires payment of $715,000 in
principal upon maturity. The notes bear interest at the rate
of 5% per annum and the principal amount and interest are payable
at maturity on October 4, 2017 and November 18, 2017.
Zestra® and Zestra Glide® License 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 Innovus granted to J&H an
exclusive license to market and sell 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 $2,000,000 at a pre-negotiated transfer
price per unit. On February 3, 2017, we announced that J&H
received approval from the South Korean government to market and
sell the two products in South Korea.
Product In-License Agreements
On December 15,
2016, we entered into a license and distribution agreement with NTC
S.r.l (“NTC”) 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. Under this agreement, we
are obligated to pay a non-refundable upfront license fee of
€15,000
($15,806 USD based on December 31, 2016 exchange rate) and cash
payments of up to €120,000
($126,448 USD based on December 31, 2016 exchange rate) upon the
achievement of certain sales milestones. Such licensed product will
be sold by us under the name AllerVarx™ in the U.S. and Canada and is
expected to launch in the first of 2017.
On September 29,
2016, we entered into a license and purchase agreement with Seipel
Group Pty Ltd. (“SG”) pursuant to which we acquired the
rights to use, market and sell SG’s proprietary dietary
supplement formula known as Urox® for bladder support in the
U.S. and worldwide. Under this agreement, we have agreed to minimum
purchase order requirements to retain our exclusivity of 25,000
units per calendar quarter beginning 12 months after our initial
order and paid a brokerage fee of $200,000. We launched this
product in the U.S. under the name UriVarx™ in December 2016.
Results of Operations
Year Ended December 31, 2016 Compared to Year Ended December 31,
2015
|
|
Year Ended
December 31,
2016
|
Year Ended
December 31,
2015
|
|
|
|
NET
REVENUE:
|
|
|
|
|
|
Product
sales, net
|
$4,817,603
|
$730,717
|
$4,086,886
|
$559.3%
|
|
License
revenue
|
1,000
|
5,000
|
(4,000)
|
(80.0)%
|
|
Net revenue
|
4,818,603
|
735,717
|
4,082,886
|
555.0%
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
Cost
of product sales
|
1,083,094
|
340,713
|
742,381
|
217.9%
|
|
Research
and development
|
77,804
|
-
|
77,804
|
100.0%
|
|
Sales
and marketing
|
3,621,045
|
82,079
|
3,538,966
|
4,311.7%
|
|
General
and administrative
|
5,870,572
|
3,828,113
|
2,042,459
|
53.4%
|
|
Impairment
of goodwill
|
-
|
759,428
|
(759,428)
|
(100.0)%
|
|
Total
operating expense
|
10,652,515
|
5,010,333
|
5,642,182
|
112.6%
|
|
LOSS
FROM OPERATIONS
|
(5,833,912)
|
(4,274,616)
|
(1,559,296)
|
36.5%
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
Interest
expense
|
(6,661,694)
|
(1,153,376)
|
(5,508,318)
|
477.6%
|
|
Loss
on extinguishment of debt
|
-
|
(32,500)
|
32,500
|
(100.0)%
|
|
Other
income (expense), net
|
1,649
|
(8,495)
|
10,144
|
(119.4)%
|
|
Change
in fair value of contingent consideration
|
(1,269,857)
|
115,822
|
(1,385,679)
|
(1,196.4)%
|
|
Change
in fair value of derivative liabilities
|
65,060
|
393,509
|
(328,449)
|
(83.5)%
|
|
LOSS
BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES
|
(13,698,754)
|
(4,959,656)
|
(8,739,098)
|
176.2%
|
|
Provision
for (benefit from) income taxes
|
2,400
|
(757,028)
|
759,428
|
(100.3)%
|
|
NET
LOSS
|
$(13,701,154)
|
$(4,202,628)
|
$(9,498,526)
|
226.0%
|
Net Revenue
We recognized net
revenue of approximately $4.8 million for the year ended December
31, 2016 compared to $0.7 million for the year ended December 31,
2015. The increase in revenue in 2016 was primarily the result
of the product sales generated through the sales and marketing
platform acquired in the Beyond Human® asset acquisition. The
increase was also due to an increase in sales of Vesele® and
Sensum+® which generated net revenue of approximately $2.2
million and $0.4 million during the year ended December 31, 2016,
respectively, compared to approximately $7,000 and less than $1,000
during the year ended December 31, 2015, respectively. We generated
additional net revenue of approximately $0.8 million and $0.2
million when selling Vesele® and Sensum+® with other
Beyond Human® products during the year ended December 31,
2016, respectively. The increase in net revenue from the sale of
products through the Beyond Human® sales and marketing
platform was offset by decreases in our other existing product
sales channels to major retailers and wholesalers as we
concentrated our sales efforts and resources on integrating our
existing products into the Beyond Human® sales and marketing
platform. The decreases in existing product sales channels resulted
in net revenue from the Zestra® products decreasing
approximately $0.3 million during the year ended December 31, 2016
when compared to the same period in 2015. We signed an exclusive
licensed and distribution agreement in November 2016 which is
expected to lead to an increase in product sales of Zestra®
and Zestra Glide® through that sales channel in
2017.
Cost of Product Sales
We recognized cost
of product sales of approximately $1.1 million for the year ended
December 31, 2016 compared to $0.3 million for the year ended
December 31, 2015. The cost of product sales includes the cost of
inventory, shipping and royalties. The increase in cost of product
sales is a result of higher shipping costs due to an increase in
the number of units shipped. The increase in the gross
margin to 78% in 2016 compared to 54% in 2015 is due to the higher
margins earned on the increased volume of our product sales through
the Beyond Human® sales and marketing platform. The increased
margin in 2016 is also due to fewer sales when compared to 2015
through our retail and wholesale sales channels which have lower
margins.
Research and Development
We recognized
research and development expense of approximately $78,000 for the
year ended December 31, 2016 compared to no expense for the year
ended December 31, 2015. The research and development expense
includes salary and the related health benefits for an employee,
the fair value of the shares of common stock issued to CRI totaling
$23,000 for the settlement of certain clinical and regulatory
milestone payments due under the in-license agreement for
Sensum+®, as well as, clinical costs incurred related to post
marketing studies for Vesele® and Beyond Human®
Testosterone Booster.
Sales and Marketing
We recognized sales and marketing expense of
approximately $3.6 million for the year ended December 31, 2016
compared to $82,000 for the year ended December 31,
2015. Sales and marketing
expense of $3.6 million during the year ended December 31, 2016
consist primarily of print advertisements and sales and marketing
support. The increase in sales and marketing expense during the
year ended December 31, 2016 when compared to the same period in
2015 is due to the costs of integration of our existing products
into the Beyond Human® sales and marketing platform and the
increase in the number of print and online media advertisements of
our existing products through the Beyond Human® platform. The
increase is also attributable to increased costs in sales and
marketing support services due to the higher volume of sales orders
received as a result of the Beyond Human® asset acquisition
and the integration of more products into this
platform.
General and Administrative
We recognized
general and administrative expense of approximately $5.9 million
for the year ended December 31, 2016 compared to $3.8 million for
the year ended December 31, 2015. General and administrative
expense consists primarily of investor relation expense, legal,
accounting, public reporting costs and other infrastructure expense
related to the launch of our products. Additionally, our
general and administrative expense includes professional fees,
insurance premiums and general corporate expense. The increase is
primarily due to the increase in non-cash stock-based compensation
to consultants for services rendered, an increase in merchant
processing fees due to increased credit card sales volume, an
increase in the amortization of intangible assets as a result of
the acquisitions in 2016 and 2015 and increased payroll and related
costs due to the increase in headcount when compared to
2015.
Other Income and Expense
We recognized
interest expense of approximately $6.7 million for the year ended
December 31, 2016 compared to $1.2 million for the year ended
December 31, 2015. Interest expense primarily includes interest
related to our debt, amortization of debt discounts and the fair
value of the embedded conversion feature derivative liability in
excess of the proceeds allocated to the debt (see Notes 5, 6 and 9
to the accompanying consolidated financial statements included
elsewhere in this Annual Report). Due to the shares, warrants and
cash discounts provided to our lenders, the effective interest rate
is significantly higher than the coupon rate. The increase in
interest expense reflects the larger amount of debt discount
amortization of approximately $2.7 million when compared to 2015
due to the convertible debt and note payable financings completed
in 2016 and 2015 and the increase in the fair value in excess of
the allocated proceeds of the embedded conversion feature in the
convertible debt financings in June and July of 2016 of
approximately $2.7 million.
We recognized a
loss from the change in fair value of contingent consideration of
approximately $1.3 million for the year ended December 31, 2016
compared to a gain from the change in fair value of consideration
of $0.1 million for the year ended December 31, 2015. Change in
fair value of contingent consideration consists primarily of the
increase in the fair value of the contingent ANDA shares of common
stock issuable to Novalere Holdings, LLC in connection with our
acquisition in 2015 totaling approximately $1.4 million and the
increase in the royalty contingent consideration to Semprae of
approximately $103,000 (see Note 3 to the accompanying consolidated
financial statements included elsewhere in this Annual Report).
Such amount was offset with the gain on contingent consideration of
$180,000 as a result of the settlement agreement entered into with
the sellers of the Beyond Human® assets in September 2016 (see
Note 3 to the accompanying consolidated financial statements
included elsewhere in this Annual Report).
We recognized a
gain from the change in fair value of derivative liabilities of
approximately $65,000 for the year ended December 31, 2016 compared
a gain from the change in fair value of derivative liabilities of
$0.4 million for the year ended December 31, 2015. Change in fair
value of derivative liabilities primarily includes the change in
the fair value of the warrants and embedded conversion features
classified as derivative liabilities. The decrease in the gain on
change in fair value of derivative liabilities during the year
ended December 31, 2016 is due to the increase in our stock price
during that period when compared to 2015.
Income Taxes
We
recognized a provision for income taxes of $2,400 for the year
ended December 31, 2016 compared to a benefit from income taxes of
approximately $0.8 million for the year ended December 31,
2015. The benefit from income taxes during the year
ended December 31, 2015 is due to the release of a portion of the
deferred tax valuation allowance as a result of the Novalere
acquisition.
Net Loss
Net loss for the
year ended December 31, 2016 was approximately $(13.7 million), or
$(0.15) basic and diluted net loss per share, compared to a net
loss for the same period in 2015 of $(4.2 million), or $(0.08)
basic and diluted net loss per share.
Liquidity and Capital Resources
Historically, we
have funded losses from operations through the sale of equity and
issuance of debt instruments. Combined with revenue, these funds
have provided us with the resources to operate our business, to
sell and support our products, attract and retain key personnel,
and add new products to our portfolio. To date, we have experienced
net losses each year since our inception. As of December 31, 2016,
we had an accumulated deficit of $29.1 million and a working
capital deficit of $1.7 million.
As of February 28,
2017, we had approximately $0.7 million in cash and $150,000 of
cash collections held by our third-party merchant service provider,
which is expected to be remitted to us by April 2017. Although no
assurances can be given, we currently plan to raise additional
capital through the sale of equity or debt securities. We expect,
however, that our existing capital resources, revenue from sales of
our products and upcoming new product launches and sales milestone
payments from the commercial partners signed for our products, and
equity instruments available to pay certain vendors and
consultants, 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 Chief Executive Officer, who is also a significant
shareholder, has deferred the payment of his salary earned thru
June 30, 2016 for at least the next 12 months.
Our principle debt
instruments include the following:
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®. 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.
Pursuant to the
Finance Agreements, the principal amount of the February 2016 Note
Payable is $550,000 and the interest rate thereon is 20% per
annum. We began to pay principal and interest on the
February 2016 Note Payable on a monthly basis beginning on March
19, 2016 for a period of 24 months and the monthly mandatory
principal and interest payment amount thereunder is $28,209. The
monthly amount shall be paid by us through a deposit account
control agreement with a third-party bank in which SBI shall be
permitted to take the monthly mandatory payment amount from all
revenue received by us from the Beyond Human® assets in the
transaction. The maturity date for the February 2016
Note Payable is February 19, 2018. The February 2016 Note Payable
is secured by SBI through a first priority secured interest in all
of the Beyond Human® assets acquired by us in the transaction
including all revenue received by us from these
assets.
Convertible Debentures - 2016 Financing
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 $3,000,000 (net of OID). We sold nine convertible
promissory notes 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 are convertible
into shares of our common stock at a conversion price of $0.25 per
share, with certain adjustment provisions noted below. The maturity
date of the 2016 Notes issued on June 30, 2016 and July 15, 2016 is
July 30, 2017 and the maturity date of the 2016 Notes issued on
July 25, 2016 is August 25, 2017. The 2016 Notes bear interest on
the unpaid principal amount at the rate of 5% per annum from the
date of issuance until the same becomes due and payable, whether at
maturity or upon acceleration or by prepayment or
otherwise.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default as defined in
such 2016 Notes, a Default Amount is equal to the sum of (i) the
principal amount, together with accrued interest due thereon
through the date of payment payable at the holder’s option in
cash or common stock and (ii) an additional amount equal to the
principal amount payable at our option in cash or common stock. For
purposes of payments in common stock, the following conversion
formula shall apply: the conversion price shall be the lower of:
(i) the fixed conversion price ($0.25) or (ii) 75% multiplied by
the volume weighted average price of 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 are
unable to do so, the following conversion formula shall apply: the
conversion price shall be the lower of: (i) the fixed conversion
price ($0.25) or (ii) 60% multiplied by the lowest daily volume
weighted average price of our common stock during the ten
consecutive trading days immediately prior to the conversion.
Certain other conversion rates apply in the event of our sale or
merger, default and other defined events.
We may prepay the
2016 Notes at any time on the terms set forth in the 2016 Notes at
the rate of 110% of the then outstanding balance of the 2016 Notes.
Under the terms of the 2016 Notes, we shall not effect certain
corporate and business actions during the term of the 2016 Notes,
although some may be done with proper notice. Pursuant to the
Securities Purchase Agreements, with certain exceptions, the
Investors have a right of participation during the term of the 2016
Notes; additionally, we granted the 2016 Note holders registration
rights for the shares of common stock underlying the 2016 Notes up
to $1,000,000 pursuant to Registration Rights
Agreements.
December 2016 and January 2017 Notes Payable
On December 5, 2016
and January 19, 2017, we entered into a securities purchase
agreement with three 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 $65,000 and requires payment of $715,000 in
principal upon maturity. The notes bear interest at the rate
of 5% per annum and the principal amount and interest are payable
at maturity on October 4, 2017 and November 18, 2017. In connection
with the notes, we issued the investors restricted shares of common
stock totaling 1,441,111. 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
notes.
Net Cash Flows
|
|
For the Year Ended December 31, 2016
|
For the Year Ended December 31, 2015
|
|
|
|
|
|
Net
cash used in operating activities
|
$(1,784,258)
|
$(1,031,727)
|
|
Net
cash used in investing activities
|
(172,103)
|
(12,816)
|
|
Net
cash provided by financing activities
|
2,730,393
|
1,092,965
|
|
Net
change in cash
|
774,032
|
48,422
|
|
Cash
at beginning of the year
|
55,901
|
7,479
|
|
Cash
at the end of the year
|
$829,933
|
$55,901
|
Operating Activities
For the year ended
December 31, 2016, cash used in operating activities was
approximately $1.8 million, consisting primarily of the net loss
for the period of approximately $13.7 million, which was primarily
offset by non-cash common stock, restricted stock units and stock
options issued for services and compensation of approximately $2.7
million, amortization of debt discount of $3.6 million, fair value
of the embedded conversion feature in excess of allocated proceeds
of $2.8 million, change in fair value of contingent consideration
of $1.4 million and amortization of intangible assets of $0.6
million. The non-cash expense was offset with the non-cash gain on
contingent consideration of $0.2 million and change in fair value
of derivative liabilities of $65,000. Additionally, working capital
changes consisted of cash increases of approximately $1.0 million
related to a decrease in accounts receivable from cash collections
from customers of approximately $48,000, $0.9 million related to an
increase in accrued compensation, and $0.7 million related to an
increase in accounts payable and accrued expense, partially offset
by a cash decrease related to the increase in prepaid expense and
other current assets of $0.3 million and inventories of $0.3
million. The increase in net cash used in operating activities from
2015 was mainly due to expanding our operations, including hiring
additional personnel, commercialization and marketing activities
related to our existing products and those acquired in 2016, as
well as, purchasing more finished goods inventory to fulfill the
forecasted increase in revenue in 2017.
Investing Activities
For the year ended
December 31, 2016, cash used in investing activities was
approximately $0.2 million which consisted of the contingent
consideration payment of approximately $0.2 million made to the
seller of the Beyond Human® assets, as well as, a contingent
royalty payment to Semprae for Zestra® product sales in 2015.
Cash used in investing activities in 2015 was primarily related to
the purchase of property and equipment.
Financing Activities
For the year ended
December 31, 2016, cash provided by financing activities was
approximately $2.7 million, consisting primarily of the net
proceeds from notes payable and convertible debentures of
approximately $3.6 million and proceeds from warrant exercises of
$0.3 million, offset by the repayment of short-term loans payable
of $0.3 million, notes payable of $0.4 million and the related
party line of credit convertible debenture of $0.4 million.
Cash provided by financing activities in 2015 was primarily related
to net proceeds from notes payable and convertible debentures of
approximately $1.5 million and proceeds from short-term loans
payable of $0.3 million, offset by the repayment of notes payable
of $0.4 million and related party non-convertible debentures of
$0.1 million.
Sources of Capital
Our operations have been financed primarily
through the sale of equity and issuance of debt instruments
and revenue generated from the launch
of our products and commercial partnerships signed for the sale and
distribution of our products domestic and internationally. 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, 2016, we had an
accumulated deficit of approximately $29.1 million and a working
capital deficit of $1.7 million.
We have raised funds through the issuance of debt
and the sale of common stock. We have also issued equity
instruments in certain circumstances to pay for services from
vendors and consultants. For the year ended December 31, 2016, we
raised approximately $3.6 million in funds, which included net
proceeds of $2.7 million from the issuance of convertible
debentures (with warrants and common stock) and $0.9 million from
the issuance of notes payable. The funds raised through the
issuance of the convertible debentures were used to pay off other
debt instruments and accounts payable, to increase inventory and
for the expanded operations in 2016. In the event we do not pay the
convertible debentures upon their maturity, or after the remedy
period, the note holder has the right to convert the principal
amount and accrued interest into shares of common stock at the
lower of $0.25 per share or 60% multiplied by the lowest
daily volume weighted average price of our shares of common
stock. The outstanding convertible
debentures principal and interest balance at December 31, 2016 was
approximately $1.6 million.
Our
actual needs will depend on numerous factors, including timing of
introducing our products to the marketplace, our ability to attract
additional Ex-U.S. distributors for our products and our ability to
in-license in non-partnered territories and/or develop new product
candidates. In addition, we continue to seek new licensing
agreements from third-party vendors to commercialize our products
in territories outside the U.S., which could result in upfront,
milestone, royalty and/or other payments.
We currently intend to raise additional capital
through the sale of debt or equity securities to provide additional
working capital, for further expansion and development of our
business, and to meet current obligations, although no assurances
can be given. If we issue equity or convertible debt
securities to raise additional funds, our existing stockholders may
experience substantial dilution, and the newly issued equity or
debt securities may have more favorable terms or rights,
preferences and privileges senior to those of our existing
stockholders. If we raise funds by incurring additional debt, we
may be required to pay significant interest expense and our
leverage relative to our earnings or to our equity capitalization
may increase. Obtaining commercial loans, assuming they would be
available, would increase our liabilities and future cash
commitments and may impose restrictions on our activities, such as
financial and operating covenants. Further, we may incur
substantial costs in pursuing future capital and/or financing
transactions, including investment banking fees, legal fees,
accounting fees, printing and distribution expense and other costs.
We may also be required to recognize non-cash expense in connection
with certain securities we may issue, such as convertible notes and
warrants, which would adversely impact our financial results. We
may be unable to obtain financing when necessary as a result of,
among other things, our performance, general economic
conditions,conditions in the pharmaceuticals industries, or our
operating history. In addition, the fact that we are not and have
never been profitable could further impact the availability or cost
to us of future financings. As a result, sufficient funds may not
beavailable when needed from any source or, if available, such
funds may not be available on terms that are acceptable to us. If
we are unable to raise funds to satisfy our capital needs when
needed, then we may need to forego pursuit of potentially valuable
development or acquisition opportunities, we may not be able to
continue to operate our business pursuant to our business plan,
which would require us to modify our operations to reduce spending
to a sustainable level by, among other things, delaying, scaling
back or eliminating some or all of our ongoing or planned
investments in corporate infrastructure, business development,
sales and marketing and other activities, or we may be forced to
discontinue our operations entirely.
Critical Accounting Policies and Management Estimates
The
SEC defines critical accounting policies as those that are, in
management’s view, important to the portrayal of our
financial condition and results of operations and demanding of
management’s judgment. Our discussion and analysis of
financial condition and results of operations is based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America, or U.S. GAAP. The preparation of these
consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenue and expense and related disclosures. We base our estimates
on historical experience and on various assumptions that we believe
are reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
Actual results may differ significantly from those
estimates.
While our significant accounting policies are
described in more detail in Note 1 to our consolidated financial
statements, we believe that the accounting policies
described below are critical to understanding our business,
results of operations and financial condition because they involve
the use of more significant judgments and estimates in the
preparation of our consolidated financial statements. An accounting
policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are
highly uncertain at the time the estimate is made, and any changes
in the assumptions used in making the accounting estimates that are
reasonably likely to occur could materially impact our consolidated
financial statements.
Revenue Recognition and Deferred Revenue
We generate revenue
from product sales and the licensing of the rights to market and
commercialize its products.
We recognize
revenue in accordance with FASB Accounting Standards Codification
(“ASC”) 605, Revenue
Recognition. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales: We ship product 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 our 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.
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. Stock-based compensation for the
years ended December 31, 2016 and 2015 have been reduced for
estimated forfeitures. When estimating forfeitures, voluntary
termination behaviors, as well as trends of actual option
forfeitures, are considered. To the extent actual forfeitures
differ from our current estimates, cumulative adjustments to
stock-based compensation expense are recorded.
Except
for transactions with employees and directors that are within the
scope of FASB ASC 718, all transactions in which goods or services
are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Equity Instruments Issued to Non-Employees for
Services
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 its
consolidated balance sheets.
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.
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.
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.
Recent Accounting Pronouncements
See
Note 1 to our consolidated financial statements for the years ended
December 31, 2016 and 2015 included elsewhere in this Annual
Report.
Off-Balance Sheet Arrangements
Since our
inception, except for standard operating leases, we have not
engaged in any off-balance sheet arrangements as defined in Item
303(a)(4)(ii) of Regulation S-K, including the use of structured
finance, special purpose entities or variable interest entities. We
have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial
condition, changes in financial condition, revenue or expense,
results of operations, liquidity, capital expenditures or capital
resources that is material to stockholders.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk.
Not
required under Regulation S-K for “smaller reporting
companies.”
Item
8. Financial Statements and
Supplementary Data.
The consolidated
financial statements and supplementary data required by this item
are included in this Annual Report beginning on page F-1
immediately following the Exhibits Index and are incorporated
herein by reference.
Item
9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Disclosure
Controls and Procedures
Our management,
under the supervision and with the participation of our Chief
Executive Officer (“CEO”), our principal executive
officer, and our Chief Financial Officer (“CFO”), our
principal financial and accounting officer, conducted an evaluation
of the effectiveness of our disclosure controls and procedures as
of December 31, 2016, the end of the period covered by this Annual
Report, pursuant to Rules 13a-15(b) and 15d-15(b) under the
Securities Exchange Act of 1934, as amended (“Exchange
Act”).
In connection with
that evaluation, our CEO and CFO concluded that, as of December 31,
2016, our disclosure controls and procedures were effective. For
the purpose of this review, disclosure controls and procedures
means controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities
and Exchange Commission’s rules and forms. These disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to management,
including our principal executive officer and principal accounting
and financial officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, our management recognized that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, and our management necessarily was
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Management’s Annual Report on Internal Control over Financial
Reporting
Our management is
responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Internal control over financial
reporting is a process designed by, or under the supervision of,
our CEO and CFO and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in
accordance with accepted accounting principles generally accepted
in the United States of America. Our management, under the
supervision and with the participation of our CEO and CFO,
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control —
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations (“COSO”). Based on such
evaluation, management concluded that our internal control over
financial reporting was effective as of December 31,
2016.
This
Annual Report does not include an attestation report by our
independent registered public accounting firm regarding internal
control over financial reporting. As a smaller reporting
company, our management's report was not subject to attestation by
our independent registered public accounting firm pursuant to rules
of the Securities and Exchange Commission that permit us to provide
only management's report in this annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over
financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that occurred during
the year ended December 31, 2016 that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting. During 2016, we have expanded our
financial and accounting department with the employment of a new
CFO and a vice president of finance to maintain the effectiveness
of our internal controls.
Inherent
Limitations on Effectiveness of Controls
Our management,
including our CEO and CFO, do not expect that our disclosure
controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives
will be met. The design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and
instances of fraud, if any, have been detected. These inherent
limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error
or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the
likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all
potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over
time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with
policies or procedures.
Item
9B. Other Information.
None.
PART III
Item
10. Directors, Executive Officers, and
Corporate Governance.
The information
required by this item is incorporated by reference to information
contained in the Proxy Statement or an amendment to this Annual
Report, in either case to be filed with the Securities and Exchange
Commission on or before the 120th day after the end
of the fiscal year covered by this Annual Report.
Item
11. Executive Compensation.
The information
required by this item is incorporated by reference to information
contained in the Proxy Statement or an amendment to this Annual
Report, in either case to be filed with the Securities and Exchange
Commission on or before the 120th day after the end
of the fiscal year covered by this Annual Report.
Item
12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.
The information
required by this item is incorporated by reference to information
contained in the Proxy Statement or an amendment to this Annual
Report, in either case to be filed with the Securities and Exchange
Commission on or before the 120th day after the end
of the fiscal year covered by this Annual Report.
Item
13. Certain Relationships and Related
Transactions, and Director Independence.
The information
required by this item is incorporated by reference to information
contained in the Proxy Statement or an amendment to this Annual
Report, in either case to be filed with the Securities and Exchange
Commission on or before the 120th day after the end
of the fiscal year covered by this Annual Report.
Item
14. Principal Accountant Fees and
Services.
The information
required by this item is incorporated by reference to information
contained in the Proxy Statement or an amendment to this Annual
Report, in either case to be filed with the Securities and Exchange
Commission on or before the 120th day after the end
of the fiscal year covered by this Annual Report.
PART IV
Item
15. Exhibits and Financial Statement
Schedules.
(a) Documents
Filed. The following documents
are filed as part of this report:
(1) Consolidated Financial
Statements:
●
Report
of Hall and Company, Independent Registered Public Accounting
Firm
●
Consolidated
Balance Sheets as of December 31, 2016 and 2015
●
Consolidated
Statements of Operations for the Years Ended December 31, 2016 and
2015
●
Consolidated
Statements of Stockholders’ Equity (Deficit) for the Years
Ended December 31, 2016 and 2015
●
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2016 and
2015
●
Notes
to Consolidated Financial Statements
(2) Financial Statement
Schedules. See subsection (c)
below.
(3) Exhibits.
See subsection (b)
below.
(b) Exhibits.
The exhibits filed or furnished with
this report are set forth on the Exhibit Index immediately
following the signature page of this report, which Exhibit Index is
incorporated herein by reference.
(c) Financial Statement
Schedules. All schedules are
omitted because they are not applicable, the amounts involved are
not significant or the required information is shown in the
financial statements or notes thereto.
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized:
|
Date:
March 9, 2017
|
Innovus Pharmaceuticals, Inc.
|
|
|
|
|
|
By:
|
/s/ Bassam Damaj
|
|
|
|
Bassam Damaj, Ph.D.
|
|
|
|
President and Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Bassam Damaj and Robert E. Hoffman, and each of them
individually, as his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents or any of them the full power and
authority to do and perform each and every act and thing requisite
and necessary to be done in connection therewith, as fully for all
intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents
or any of them, or his substitutes or resubstitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Bassam Damaj
|
|
Director,
President and Chief Executive Officer
|
|
March 9, 2017
|
|
Bassam Damaj, Ph.D.
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Robert E. Hoffman
|
|
Executive
Vice President and Chief Financial Officer
|
|
March 9, 2017
|
|
Robert E. Hoffman
|
|
(Principal
Accounting and Financial Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Henry Esber
|
|
Chairman
of the Board of Directors
|
|
March 9, 2017
|
|
Henry Esber, Ph.D.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ziad Mirza
|
|
Director
|
|
March 9, 2017
|
|
Ziad Mirza, M.D.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Vivian Liu
|
|
Director
|
|
March 9, 2017
|
|
Vivian Liu
|
|
|
|
|
INDEX TO EXHIBITS
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
2.1
|
|
Merger
Agreement and Plan of Merger, dated as of July 13, 2011, by and
among FasTrack, Inc., a Delaware corporation, North Horizon, Inc.,
a Nevada corporation and North First General, Inc., a Utah
corporation, a wholly-owned subsidiary of North Horizon, Inc. filed
as an exhibit to the Registrant’s current report on Form 8-K,
filed with the SEC on July 20, 2011 and incorporated herein by
reference.
|
|
2.2
|
|
Asset
Purchase Agreement dated April 19, 2013, between Innovus
Pharmaceuticals, Inc. and Centric Research Institute, Inc. filed as
an exhibit to the Registrant’s current report on Form 8-K,
filed with the SEC on April 24, 2013 and incorporated herein by
reference.
|
|
2.3
|
|
Agreement
and Plan of Merger, made as of December 24, 2013, by and among
Innovus Pharmaceuticals, Inc., Innovus Acquisition Corporation,
Semprae Laboratories, Inc., the major stockholders of Semprae
Laboratories, Inc. party thereto and Quaker Bioventures II, L.P.,
as principal stockholder of Semprae Laboratories, Inc., filed as an
exhibit to the Registrant’s current report on Form 8-K, filed
with the SEC on December 30, 2013 and incorporated herein by
reference.
|
|
2.4
|
|
Agreement
and Plan of Merger, dated February 4, 2015, by and among Innovus
Pharmaceuticals, Inc., Innovus Pharma Acquisition Corporation,
Innovus Pharma Acquisition Corporation II, Novalere FP, Inc. and
Novalere Holdings, LLC, filed as an exhibit to the
Registrant’s current report on Form 8-K, filed with the SEC
on February 5, 2015 and incorporated herein by
reference.
|
|
2.5
|
|
Asset
Purchase Agreement, dated February 8, 2016, by and between Innvous
Pharmaceuticals, Inc. and Beyond Human LLC, filed as an exhibit to
the Registrant’s current report on Form 8-k, filed with the
SEC on February 11, 2016, and incorporated herein by
reference.
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation of the Registrant as filed
with the Office of the Secretary of State of the State of Nevada on
October 10, 2016, filed as an exhibit to the Registrant’s
registration statement on Form S-8, filed with the SEC on November
28, 2016, and incorporated herein by reference.
|
|
3.2
|
|
Amended
and Restated Bylaws of the Registrant, filed as an exhibit to the
Registrant’s registration statement on Form S-8, filed with
the SEC on November 28, 2016, and incorporated herein by
reference.
|
|
3.3
|
|
Certificate
of Amendment to Articles of Incorporation of the Registrant as
filed with the Office of the Secretary of State of the State of
Nevada on October 13, 2011 changing the Registrant’s name
from North Horizon, Inc., a Nevada corporation to Innovus
Pharmaceuticals, Inc., a Nevada corporation, filed as an exhibit to
the Registrant’s current report on Form 8-K, filed with the
SEC on December 12, 2011 and incorporated herein by
reference.
|
|
3.4
|
|
Certificate
of Correction to the Company’s Articles of Incorporation,
dated July 30, 2013, filed with the Secretary of State for the
State of Nevada, filed as an exhibit to the Registrant’s
annual report on Form 10-K, filed with the SEC on March 28, 2014
and incorporated herein by reference.
|
|
10.1#
|
|
Employment
Agreement, dated January 22, 2013, between Innovus Pharmaceuticals,
Inc. and Bassam Damaj, Ph.D., filed as an exhibit to the
Registrant’s annual report on Form 10-K, filed with the SEC
on March 19, 2013, and incorporated herein by
reference.
|
|
10.2#
|
|
2013
Equity Incentive Plan of the Registrant, effective February 15,
2013, filed as an exhibit to the Registrant’s registration
statement on Form S-8, filed with the SEC on February 15, 2013, and
incorporated herein by reference.
|
|
10.3#
|
Form
of Restricted Stock Agreement under the Registrant’s 2013
Equity Incentive Plan, effective February 15, 2013, filed as an
exhibit to the Registrant’s registration statement on Form
S-8, filed with the SEC on February 15, 2013, and incorporated
herein by reference.
|
|
10.4#
|
Form
of Stock Unit Agreement under the Registrant’s 2013 Equity
Incentive Plan, effective February 15, 2013, filed as an exhibit to
the Registrant’s registration statement on Form S-8, filed
with the SEC on February 15, 2013, and incorporated herein by
reference.
|
|
10.5#
|
Form
of Nonstatutory Stock Option Agreement under the Registrant’s
2013 Equity Incentive Plan, effective February 15, 2013, filed as
an exhibit to the Registrant’s registration statement on Form
S-8, filed with the SEC on February 15, 2013, and incorporated
herein by reference.
|
|
10.6#
|
|
Form
of Incentive Stock Option Agreement under the Registrant’s
2013 Equity Incentive Plan, effective February 15, 2013, filed as
an exhibit to the Registrant’s registration statement on Form
S-8, filed with the SEC on February 15, 2013, and incorporated
herein by reference.
|
|
10.7
|
|
Form
of Officer and Director Indemnification Agreement, dated June 2013,
filed as an exhibit to the Registrant’s quarterly report on
Form 10-Q, filed with the SEC on August 13, 2013, and incorporated
herein by reference.
|
|
10.8#
|
|
Amended
and Restated Innovus Pharmaceuticals, Inc. Non-Employee Director
Compensation Plan, dated October 1, 2013, filed as an exhibit to
the Registrant’s quarterly report on Form 10-Q, filed with
the SEC on November 14, 2013, and incorporated herein by
reference.
|
|
10.9#
|
|
Innovus
Pharmaceuticals, Inc. 2014 Equity Incentive Plan, filed as an
exhibit to the registration statement on Form S-8, filed with the
SEC on January 2, 2015, and incorporated herein by
reference.
|
|
|
|
|
|
10.10
|
|
Form
of Warrant between the Company and Lynnette Dillen, dated January
21, 2015, filed as an exhibit to the Registrant’s current
report on Form 8-K, filed with the SEC on January 23, 2015, and
incorporated herein by reference.
|
|
10.11
|
|
Form
of Warrant Amendment between the Company and Lynnette Dillen, dated
January 21, 2015, filed as an exhibit to the Registrant’s
current report on Form 8-K, filed with the SEC on January 23, 2015,
and incorporated herein by reference.
|
|
10.12#
|
|
Employment
Agreement Amendment, between Innovus Pharmaceuticals, Inc. and
Bassam Damaj, dated January 21, 2015, filed as an exhibit to the
Registrant’s current report on Form 8-K, filed with the SEC
on January 23, 2015, and incorporated herein by
reference.
|
|
10.13
|
|
Registration
Rights and Stock Restriction Agreement, dated February 4, 2015, by
and between Innovus Pharmaceuticals, Inc., and Novalere Holdings,
LLC, filed as an exhibit to the Registrant’s current report
on Form 8-K, filed with the SEC on February 5, 2015, and
incorporated herein by reference.
|
|
10.14
|
|
Voting
Agreement, dated February 4, 2015, by and between Innovus
Pharmaceuticals, Inc., and Novalere Holdings, LLC, filed as an
exhibit to the Registrant’s current report on Form 8-K, filed
with the SEC on February 5, 2015, and incorporated herein by
reference.
|
|
10.15
|
|
Form
of Securities Purchase Agreement, dated July 15, 2015, filed as an
exhibit to the Registrant's current report on Form 8-K, filed with
the SEC on August 3, 2015, and incorporated herein by
reference.
|
|
10.16
|
|
Form
of Securities Purchase Agreement, dated August 25, 2015, filed as
an exhibit to the Registrant's current report on Form 8-K, filed
with the SEC on September 2, 2015, and incorporated herein by
reference.
|
|
10.17
|
|
Form
of Common Stock Purchase Warrant Agreement, dated August 25, 2015,
filed as an exhibit to the Registrant's current report on Form 8-K,
filed with the SEC on September 2, 2015, and incorporated herein by
reference.
|
|
10.18
|
|
Form
of Registration Rights Agreement, dated August 25, 2015, filed as
an exhibit to the Registrant's current report on Form 8-K, filed
with the SEC on September 2, 2015, and incorporated herein by
reference.
|
|
10.19
|
|
Form
of Share Issuance Agreement, dated August 27, 2015, filed as an
exhibit to the Registrant's current report on Form 8-K, filed with
the SEC on September 2, 2015, and incorporated herein by
reference.
|
|
10.20
|
|
Form
of Purchase Agreement, dated February 19, 2016, by and among the
Company and SBI Investments, LLC 2014-1, filed as an exhibit to the
Registrant’s report on Form 8-K with the SEC on March 1,
2016, and incorporated herein by reference.
|
|
10.21
|
|
20%
Secured Promissory Note, dated February 19, 2016 by and among the
Company ad SGI Investments, LLC 2014-1, filed as an exhibit to the
Registrant’s report on Form 8-K with the SEC on March 1,
2016, and incorporated herein by reference.
|
|
10.22
|
|
Security
Agreement, dated February 19, 2016 by and among the Company and SGU
Investments, LLC 2014-1, filed as an exhibit to the
Registrant’s report on Form 8-K with the SEC on March 1,
2016, and incorporated herein by reference.
|
|
10.23
|
|
Form
of Securities Purchase Agreement, dated June 30, 2016, filed as an
exhibit to the Registrant's current report on Form 8-K, filed with
the SEC on July 6, 2016, and incorporated herein by
reference.
|
|
10.24
|
|
Form
of Convertible Promissory Note, dated June 30, 2016, filed as an
exhibit to the Registrant's current report on Form 8-K, filed with
the SEC on July 6, 2016, and incorporated herein by
reference.
|
|
10.25
|
|
Form
of Common Stock Purchase Warrant Agreement, dated June 30, 2016,
filed as an exhibit to the Registrant's current report on Form 8-K,
filed with the SEC on July 6, 2016, and incorporated herein by
reference.
|
|
10.26
|
|
Form
of Registration Rights Agreement, filed as an exhibit to the
Registrant's current report on Form 8-K, filed with the SEC on July
6, 2016, and incorporated herein by reference.
|
|
10.27
|
|
Garden
State Securities Engagement Agreement, filed as an exhibit to the
Registrant's Registration Statement on Form S-1, filed with the SEC
on August 9, 2016, and incorporated herein by
reference.
|
|
10.28
|
|
H.C.
Wainwright and Co., LLC Engagement Agreement filed as an exhibit to
the Registrant's Registration Statement on Form S-1, filed with the
SEC on August 9, 2016, and incorporated herein by
reference.
|
|
10.29
|
|
First
Amendment to the Securities Purchase Agreement filed as an exhibit
to the Registrant's Registration Statement on Form S-1, filed with
the SEC on August 9, 2016, and incorporated herein by
reference.
|
|
10.30
|
|
10%
Debenture, filed as an exhibit to the Registrant's Current Report
on Form 8-K, filed with the SEC on August 15, 2016, and
incorporated herein by reference.
|
|
10.31
|
|
Securities
Purchase Agreement, filed as an exhibit to the Registrant's Current
Report on Form 8-K, filed with the SEC on August 15, 2016, and
incorporated herein by reference.
|
|
10.32
|
|
Promissory
Note, filed as an exhibit to the Registrant's Current Report on
Form 8-K, filed with the SEC on August 15, 2016, and incorporated
herein by reference.
|
|
10.33#
|
|
Employment
Agreement, between Innovus Pharmaceuticals, Inc. and Robert
Hoffman, dated September 6, 2016, filed as an exhibit to the
Registrant’s current report on Form 8-K, filed with the SEC
on August 29, 2016 and incorporated herein by
reference.
|
|
10.34#
|
|
Employment
Agreement, between Innovus Pharmaceuticals, Inc. and Randy
Berholtz, dated January 9, 2017, filed as an exhibit to the
Registrant’s current report on Form 8-K, filed with the SEC
on January 6, 2017, and incorporated herein by
reference.
|
|
10.35#
|
|
Innovus
Pharmaceuticals, Inc. 2014 Equity Incentive Plan, filed as an
exhibit to the registration statement on Form S-8, filed with the
SEC on January 2, 2015, and incorporated herein by
reference.
|
|
10.36#
|
|
Amended
and Restated 2016 Equity Incentive Plan of the Registrant, filed as
an exhibit to the Registrant’s registration statement on Form
S-8, filed with the SEC on November 28, 2016, and incorporated
herein by reference.
|
|
14.1*
|
|
Code
of Ethics
|
|
21.1*
|
|
List
of Subsidiaries
|
|
23.1*
|
|
Consent
of Hall and Company, Independent Registered Public Accounting
Firm
|
|
24.1*
|
|
Power
of Attorney, included as part of signature page to this Annual
Report.
|
|
31.1*
|
|
Certification
of the Registrant’s Principal Executive Officer pursuant to
Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2*
|
|
Certification
of the Registrant’s Principal Financial Officer pursuant to
Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1**
|
|
Certification
of the Registrant’s Principal Executive Officer pursuant to
18 U.S.C. SS. 1350, as adopted pursuant to Section. 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2**
|
|
Certification
of the Registrant’s Principal Financial Officer pursuant to
18 U.S.C. SS. 1350, as adopted pursuant to Section. 906 of the
Sarbanes-Oxley Act of 2002.
|
|
101.INS*
|
|
XBRL
Instance Document
|
|
101.SCH*
|
|
XBRL
Taxonomy Extension Schema Document
|
|
101.CAL*
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF*
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
101.LAB*
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
101.PRE*
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
#
Management contract or compensatory plan or
arrangement
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
Innovus
Pharmaceuticals, Inc.
We have audited the
accompanying consolidated balance sheets of Innovus
Pharmaceuticals, Inc. and subsidiaries (the “Company”)
as of December 31, 2016 and 2015, and the related consolidated
statements of operations, stockholders’ equity (deficit), and
cash flows for each of the years in the two-year period ended
December 31, 2016. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of December 31, 2016 and 2015, and the results of its operations
and its cash flows for each of the years in the two-year period
ended December 31, 2016, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Hall & Company Certified Public Accountants &
Consultants, Inc.
Hall
& Company Certified Public Accountants & Consultants,
Inc.
Irvine,
CA
March
9, 2017
INNOVUS PHARMACEUTICALS, INC.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
Cash
|
$829,933
|
$55,901
|
|
|
Accounts
receivable, net
|
33,575
|
83,097
|
|
|
Prepaid
expense and other current assets
|
863,664
|
53,278
|
|
|
Inventories
|
599,856
|
254,443
|
|
|
Total
current assets
|
2,327,028
|
446,719
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
29,569
|
35,101
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
Deposits
|
14,958
|
14,958
|
|
|
Goodwill
|
952,576
|
549,368
|
|
|
Intangible
assets, net
|
4,903,247
|
5,300,859
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$8,227,378
|
$6,347,005
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Accounts
payable and accrued expense
|
$1,210,050
|
$155,503
|
|
|
Accrued
compensation
|
767,689
|
535,862
|
|
|
Deferred
revenue and customer deposits
|
11,000
|
24,079
|
|
|
Accrued
interest payable
|
47,782
|
79,113
|
|
|
Short-term
loans payable
|
-
|
230,351
|
|
|
Derivative
liabilities – embedded conversion features
|
319,674
|
301,779
|
|
|
Derivative
liabilities – warrants
|
164,070
|
432,793
|
|
|
Contingent
consideration
|
170,015
|
-
|
|
|
Current
portion of notes payable and non-convertible debenture, net
of debt
discount of $216,403 and $0, respectively
|
626,610
|
73,200
|
|
|
Line
of credit convertible debenture and non-convertible debenture
– related
parties, net of debt discount of $0 and $17,720,
respectively
|
-
|
391,472
|
|
|
Convertible
debentures, net of debt discount of $845,730 and $1,050,041,
respectively
|
714,192
|
407,459
|
|
|
Total
current liabilities
|
4,031,082
|
2,631,611
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
Accrued
compensation – less current portion
|
1,531,904
|
906,928
|
|
|
Notes
payable and non-convertible debenture, net of current portion
and debt
discount of $468 and $0, respectively
|
54,517
|
-
|
|
|
Line
of credit convertible debenture and non-convertible debenture
– related
parties, net of current portion
|
-
|
25,000
|
|
|
Contingent
consideration – less current portion
|
1,515,902
|
3,229,804
|
|
|
Total
non-current liabilities
|
3,102,323
|
4,161,732
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
7,133,405
|
6,793,343
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
|
Preferred
stock: 7,500,000 shares authorized, at $0.001 par value, no shares
issued and outstanding
at December 31, 2016 and 2015, respectively
|
-
|
-
|
|
|
Common
stock: 292,500,000 shares authorized, at $0.001 par value,
121,694,293 and 47,141,230 shares issued and outstanding at
December 31, 2016 and 2015, respectively
|
121,694
|
47,141
|
|
|
Additional
paid-in capital
|
30,108,028
|
14,941,116
|
|
|
Accumulated
deficit
|
(29,135,749)
|
(15,434,595)
|
|
|
Total
stockholders' equity (deficit)
|
1,093,973
|
(446,338)
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$8,227,378
|
$6,347,005
|
|
|
See
accompanying notes to these consolidated financial
statements.
|
INNOVUS PHARMACEUTICALS, INC.
Consolidated
Statements of Operations
|
|
For the Year Ended
December 31,
|
|
|
|
|
|
NET
REVENUE:
|
|
|
|
Product
sales, net
|
$4,817,603
|
$730,717
|
|
License
revenue
|
1,000
|
5,000
|
|
Net
revenue
|
4,818,603
|
735,717
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
Cost
of product sales
|
1,083,094
|
340,713
|
|
Research
and development
|
77,804
|
-
|
|
Sales
and marketing
|
3,621,045
|
82,079
|
|
General
and administrative
|
5,870,572
|
3,828,113
|
|
Impairment
of goodwill
|
-
|
759,428
|
|
Total
operating expense
|
10,652,515
|
5,010,333
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
(5,833,912)
|
(4,274,616)
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE):
|
|
|
|
Interest
expense
|
(6,661,694)
|
(1,153,376)
|
|
Change
in fair value of derivative liabilities
|
65,060
|
393,509
|
|
Other
income (expense), net
|
1,649
|
(8,495)
|
|
Fair
value adjustment for contingent consideration
|
(1,269,857)
|
115,822
|
|
Loss
on extinguishment of debt
|
-
|
(32,500)
|
|
Total
other expense, net
|
(7,864,842)
|
(685,040)
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR (BENEFIT FROM) INCOME
TAXES
|
(13,698,754)
|
(4,959,656)
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
2,400
|
(757,028)
|
|
|
|
|
|
NET
LOSS
|
$(13,701,154)
|
$(4,202,628)
|
|
|
|
|
|
NET
LOSS PER SHARE OF COMMON STOCK – BASIC AND
DILUTED
|
$(0.15)
|
$(0.08)
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
– BASIC AND DILUTED
|
94,106,382
|
52,517,530
|
See
accompanying notes to these consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Consolidated
Statements of Cash Flows
|
|
For the Year Ended
December 31,
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
NET
LOSS
|
$(13,701,154)
|
$(4,202,628)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
5,532
|
28,950
|
|
Allowance
for doubtful accounts
|
2,066
|
5,892
|
|
Common
stock, restricted stock units and stock options issued to
employees, board of
directors and consultants for compensation and
services
|
2,684,602
|
1,508,769
|
|
Gain
on purchase price adjustment to goodwill
|
-
|
(759,428)
|
|
Impairment
of goodwill
|
-
|
759,428
|
|
Loss
on extinguishment of debt
|
-
|
32,500
|
|
Change
in fair value of contingent consideration
|
1,449,857
|
(115,822)
|
|
Non-cash
gain on settlement of contingent consideration
|
(180,000)
|
-
|
|
Change
in fair value of derivative liabilities
|
(65,060)
|
(393,509)
|
|
Shares
of common stock issued for debt amendment
|
-
|
15,500
|
|
Fair
value of embedded conversion feature in
convertible
debentures in excess of allocated proceeds
|
2,756,899
|
71,224
|
|
Amortization
of debt discount
|
3,646,161
|
960,061
|
|
Amortization
of intangible assets
|
624,404
|
550,789
|
|
Changes
in operating assets and liabilities, net of acquisition
amounts:
|
|
|
|
Accounts
receivable
|
47,456
|
102,612
|
|
Prepaid
expense and other current assets
|
(279,786)
|
27,653
|
|
Deposits
|
-
|
6,961
|
|
Inventories
|
(345,413)
|
11,516
|
|
Accounts
payable and accrued expense
|
694,547
|
(206,657)
|
|
Accrued
compensation
|
856,803
|
535,862
|
|
Accrued
interest payable
|
31,907
|
29,745
|
|
Deferred
revenue and customer deposits
|
(13,079)
|
(1,145)
|
|
Net
cash used in operating activities
|
(1,784,258)
|
(1,031,727)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Purchase
of property and equipment
|
-
|
(9,540)
|
|
Purchase
of intangible assets
|
-
|
(3,276)
|
|
Payments
on contingent consideration
|
(172,103)
|
-
|
|
Net
cash used in investing activities
|
(172,103)
|
(12,816)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Repayments
of line of credit convertible debenture – related
party
|
(409,192)
|
(14,886)
|
|
Financing
costs in connection with issuance of convertible
debentures
|
(40,000)
|
(82,500)
|
|
Proceeds
from short-term loans payable
|
21,800
|
258,278
|
|
Payments
on short-term loans payable
|
(252,151)
|
(27,927)
|
|
Proceeds
from notes payable and convertible debentures
|
3,574,000
|
1,455,000
|
|
Payments
on notes payable
|
(449,204)
|
(440,000)
|
|
Proceeds
from warrant exercises
|
310,140
|
-
|
|
Proceeds
from non-convertible debentures – related party
|
-
|
50,000
|
|
Payments
on non-convertible debentures – related party
|
(25,000)
|
(105,000)
|
|
Net
cash provided by financing activities
|
2,730,393
|
1,092,965
|
|
|
|
|
|
NET
CHANGE IN CASH
|
774,032
|
48,422
|
|
|
|
|
|
CASH
AT BEGINNING OF YEAR
|
55,901
|
7,479
|
|
|
|
|
|
CASH
AT END OF YEAR
|
$829,933
|
$55,901
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION :
|
|
|
|
Cash
paid for income taxes
|
$-
|
$2,400
|
|
Cash
paid for interest
|
$229,046
|
$107,764
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
Common stock issued
for conversion of notes payable, convertible debentures and
accrued interest
|
$3,264,705
|
$167,000
|
|
Reclassification of
the fair value of the embedded conversion features from derivative
liability to additional
paid-in capital upon conversion
|
$3,111,828
|
$-
|
|
Cashless
exercise of warrants
|
$3,385
|
$-
|
|
Reclassification of the fair value of the
warrants from derivative liability to additional paid-in
capital
upon cashless exercise
|
$518,224
|
$-
|
|
Common
stock issued for acquisition
|
$-
|
$2,071,625
|
|
Relative fair value
of common stock issued in connection with notes payable recorded as
debt discount
|
$276,167
|
$-
|
|
Relative fair value
of warrants issued in connection with convertible debentures
recorded as debt discount
|
$445,603
|
$89,551
|
|
Relative fair value
of common stock issued in connection with convertible debentures
recorded as debt
discount
|
$1,127,225
|
$374,474
|
|
Fair value of
embedded conversion feature derivative liabilities recorded as debt
discount
|
$687,385
|
$830,560
|
|
Fair value of
warrants issued to placement agents in connection with convertible
debentures recorded as debt
discount
|
$357,286
|
$68,419
|
|
Fair value of the
contingent consideration for acquisition
|
$330,000
|
$2,905,425
|
|
Fair value of
warrant derivative liabilities recorded as debt
discount
|
$-
|
$226,297
|
|
Proceeds from note
payable paid to seller in connection with acquisition
|
$300,000
|
$-
|
|
Financing costs
paid with proceeds from note payable
|
$7,500
|
$-
|
|
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
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 to be issued to consultant included in
prepaid expense and other
current assets and accounts payable and accrued
expense
|
$360,000
|
$-
|
|
Issuance of shares
of common stock for vested restricted stock units
|
$19,316
|
$500
|
|
Return of shares of
common stock related to license agreement
|
$-
|
$38,000
|
|
Accrued interest
added to principal in connection with amendment of notes
payable
|
$-
|
$3,200
|
|
Fair value of
beneficial conversion feature on line of credit convertible
debenture – related party
|
$3,444
|
$8,321
|
|
See
accompanying notes to these consolidated financial
statements.
|
INNOVUS PHARMACEUTICALS, INC.
Consolidated
Statements of Stockholders’ Equity (Deficit)
For
the Years Ended December 31, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2015
|
27,112,263
|
$27,113
|
$10,778,807
|
$(11,231,967)
|
$(426,047)
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
1,780,625
|
1,780
|
208,749
|
-
|
210,529
|
|
Stock
compensation expense
|
-
|
-
|
1,298,240
|
-
|
1,298,240
|
|
Common
stock issued for product acquisition
|
12,947,657
|
12,948
|
2,058,677
|
-
|
2,071,625
|
|
Common
stock issued upon conversion of convertible
debentures, note payable and debentures
– related party
|
699,260
|
699
|
166,301
|
-
|
167,000
|
|
Common
stock issued for vested restricted stock units
|
500,000
|
500
|
(500)
|
-
|
-
|
|
Return
of shares of common stock from CRI license
transaction
|
(200,000)
|
(200)
|
(37,800)
|
-
|
(38,000)
|
|
Return
of shares of common stock from Semprae
merger transaction
|
(386,075)
|
(386)
|
(115,436)
|
-
|
(115,822)
|
|
Fair
value of beneficial conversion feature on line
of
credit convertible debenture – related
party
|
-
|
-
|
8,321
|
-
|
8,321
|
|
Shares
of common stock issued for extension of February
2014 convertible debentures
|
250,000
|
250
|
32,250
|
-
|
32,500
|
|
Shares
of common stock issued for amendment of January
2015 convertible debentures
|
100,000
|
100
|
15,400
|
-
|
15,500
|
|
Relative
fair value of shares of common stock issued
in connection with convertible debentures
|
4,337,500
|
4,337
|
370,137
|
-
|
374,474
|
|
Relative
fair value of warrants issued in connection with convertible
debentures
|
-
|
-
|
89,551
|
-
|
89,551
|
|
Fair value
of warrants issued to placement agents in
connection with convertible debentures
|
-
|
-
|
68,419
|
-
|
68,419
|
|
Net
loss for year ended December 31, 2015
|
-
|
-
|
-
|
(4,202,628)
|
(4,202,268)
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2015
|
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
|
See
accompanying notes to these consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Notes
to the Consolidated Financial Statements
December
31, 2016 and 2015
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 17 commercial products in the United States, including six of
these commercial products in multiple countries around the world
through our commercial partners. Our commercial product portfolio
includes (a) Beyond Human® Testosterone Booster, (b) Beyond
Human® Growth Agent, (c) Zestra® for female arousal, (d)
EjectDelay® for premature ejaculation, (e) Sensum+® for
reduced penile sensitivity, (f) Zestra Glide®, (g)
Vesele® for promoting sexual health, (h) Androferti® to
support overall male reproductive health and sperm quality, (i)
RecalMax™ for cognitive brain health (j) Beyond Human®
Green Coffee Extract (k) Beyond Human® Vision Formula, (l)
Beyond Human® Blood Sugar, (m) Beyond Human® Colon
Cleans, (n) Beyond Human® Ketones, (o) Beyond Human®
Krill Oil (p) Beyond Human® Omega 3 Fish Oil and (q)
Urivarx™ for overactive bladder and urinary incontinence.
While we generate revenue from the sale of our commercial products,
most revenue is currently generated by Vesele®, Zestra®,
Zestra® Glide, RecalMax™, Sensum +®, Urivarx™
and Beyond Human® Testosterone Booster.
Pipeline Products
Fluticare™
(fluticasone propionate nasal spray). Innovus acquired the worldwide
rights to market and sell the Fluticare™ brand
(fluticasone propionate nasal spray) and the related manufacturing
agreement from Novalere FP in February 2015. The Over-the-Counter
(“OTC”) Abbreviated New Drug Application
(“ANDA”) filed at the end of 2014 by the
manufacturer with the U.S. Food and Drug Administration
(“FDA”), subject to FDA approval, may allow us to
market and sell Fluticare™ OTC. An ANDA is an application for
a U.S. generic drug approval for an existing licensed medication or
approved drug.
AllerVarx™.
On December 15, 2016, we entered into an exclusive license and
distribution agreement with NTC S.r.l (Italy) to distribute and
commercialize AllerVarx™ in the U.S. and Canada.
AllerVarx™ is a
proprietary modified release bilayer tablet for the management of
allergic rhinitis. We expect to launch this product in the first
half of 2017.
Xyralid™.
Xyralid™ is an OTC FDA monograph compliant drug containing
the active drug ingredient lidocaine and indicated for the relief
of the pain and symptoms caused by hemorrhoids. We expect to launch
this product in the first half of 2017.
Urocis™
XR.
On October 27, 2015, we entered into an exclusive distribution
agreement with Laboratorios Q Pharma (Spain) to distribute and
commercialize Urocis™ XR in the U.S. and Canada.
Urocis™ XR is a proprietary extended release of
Vaccinium Marcocarpon (cranberry) shown to provide 24-hour coverage
in the body in connection with urinary tract infections in women. We
expect to launch this product in the second half of
2017.
AndroVit™.
On October 27, 2015, we entered into an exclusive distribution
agreement with Laboratorios Q Pharma (Spain) to distribute and
commercialize AndroVit™ in the U.S. and Canada.
AndroVit™ is a proprietary supplement to support overall
prostate and male sexual health currently marketed in
Europe. AndroVit™ was specifically formulated with
ingredients known to support normal prostate health and vitality
and male sexual health. We expect to launch this product in the
second half of 2017.
Change
in Accounting Principle
On January 1, 2016,
we retrospectively adopted Financial Accounting Standards Board
(“FASB”) Accounting Standards Update
(“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic
835-30): Simplifying the Presentation of Debt Issuance
Costs. This ASU requires that debt issuance costs be
presented as a direct reduction from the carrying amount of debt.
As a result of the adoption of this ASU, the consolidated balance
sheet at December 31, 2015 was adjusted to reflect the
reclassification of $97,577 from deferred financing costs, net to
convertible debentures, net. The adoption of this ASU
did not have an impact on our consolidated results of
operations.
Basis of Presentation and Principles of Consolidation
These
consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and include
all assets, liabilities, revenue and expense of us and our
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 revenue and expense 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 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, 2016, we
had an accumulated deficit of $29,135,749 and a working capital
deficit of $1,704,054.
We have raised funds through the issuance of debt
and the sale of common stock. We have also issued equity
instruments in certain circumstances to pay for services from
vendors and consultants. In December 2016, we raised $500,000 in
gross proceeds from the issuance of notes payable to three
investors and in June and July 2016, we raised $3,000,000 in
gross proceeds from the issuance of convertible debentures to eight
investors (see Note 5). In the event we do not pay the convertible
debentures upon their maturity, or after the remedy period, the
principal amount and accrued interest on the convertible debentures
is convertible at our option to common stock at the lower of the
fixed conversion price or 60% of the volume weighted average price
(“VWAP”) during the ten consecutive trading day period
preceding the date of conversion. In February 2016, we also raised
$550,000 in funds from a note payable with net proceeds of $242,500
to us, which was used to pay for the asset acquisition of Beyond
Human, LLC (see Note 5), a Texas limited liability company
(“Beyond Human®”) and for working capital
purposes.
As of December 31, 2016, we had $829,933 in cash
and $221,243 of cash collections held by our third-party merchant
service provider, which is included in prepaid expense and other
current assets in the accompanying consolidated balance sheet.
During the year ended December 31, 2016, we had net cash
used in operating activities of $1,784,258 primarily from
purchasing inventory to support our growing revenue and certain
prepayments of annual expenses. We expect that our existing capital
resources, revenue from sales of our products and upcoming sales
milestone payments from the commercial partners signed for our
products, and equity instruments available to pay certain vendors
and consultants, 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 payment of his salary earned thru June 30, 2016 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 Ex-U.S. 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
recorded fair value of the convertible debentures, net of debt
discount, is based upon the relative fair value calculation of the
common stock and warrants issued in connection with the convertible
debentures and the fair value of the embedded conversion feature.
The fair values of the warrant derivative liabilities and embedded
conversion feature derivative liabilities are based upon the Black
Scholes Option Pricing Model (“Black-Scholes”) and the
Path-Dependent Monte Carlo simulation model calculations,
respectively, and are a Level 3 measurement (see Note 9). The fair
value of the contingent acquisition consideration is based upon the
discounted future payments due 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 convertible debentures 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 and Cash Equivalents
Cash
and cash equivalents consist of cash and highly liquid investments
with remaining maturities of three months or less when
purchased.
Concentration of Credit Risk, Major Customers and Segment
Information
Financial instruments that potentially subject us
to significant concentrations of credit risk consist primarily of
cash and accounts receivable. Cash held with financial
institutions may exceed the amount of insurance provided by the
Federal Deposit Insurance Corporation on such
deposits. Accounts receivable consist primarily of
sales of Zestra® to U.S. based retailers and Ex-U.S. partners.
We also require a percentage of
payment in advance for product orders with our larger partners. We
perform ongoing credit evaluations of our customers and generally
do not require collateral.
Revenue consists
primarily of product sales and licensing rights to market and
commercialize our products. We had no customers that
accounted for 10% or greater of our total net revenue during the
year ended December 31, 2016. Three customers accounted for 62% of
total net accounts receivable as of December 31, 2016. We had three
customers that accounted for 43% of our total net revenue during
the year ended December 31, 2015 and two customers accounted for
73% of net accounts receivable as of December 31,
2015.
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. All long-lived assets at December 31, 2016 and
2015 are located in the U.S.
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 products including:
Sensum+®, EjectDelay®, Vesele®,
RecalMax™,
UriVarx™,
Androferti®, the Zestra® line of products and
Beyond Human® line of
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. 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. During the year
ended December 31, 2015, we recorded $759,428 of goodwill related
to the acquisition of Novalere as an income tax benefit and also
recorded an impairment of $759,428 against this benefit. There was
no impairment of goodwill for the year ended December 31,
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,
2016 and 2015, we did not recognize any impairment of our
long-lived assets.
Debt Issuance Costs
Debt issuance costs
represent costs incurred in connection with the issuance of the
convertible debentures during the third quarter of 2015 and the
note payable and convertible debentures during the year ended
December 31, 2016. Debt issuance costs related to the issuance of
the convertible debentures and note payable are recorded as a
reduction to the debt balances in the accompanying 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.
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
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, 2016 and 2015.
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 FASB Accounting Standards Codification
(“ASC”) 605, Revenue
Recognition. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales: We ship products
directly to consumers pursuant to phone or online orders and to our
wholesale and retail customers pursuant to purchase agreements or
sales orders. Revenue from sales transactions where the buyer
has the right to return the product is recognized at the time of
sale only if (1) the seller’s price to the buyer is
substantially fixed or determinable at the date of sale,
(2) the buyer has paid the seller, or the buyer is obligated
to pay the seller and the obligation is not contingent on resale of
the product, (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction
or damage of the product, (4) the buyer acquiring the product
for resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant obligations
for future performance to directly bring about resale of the
product by the buyer and (6) the amount of future returns can
be reasonably estimated.
License Revenue: The license agreements
we enter into normally generate three separate components of
revenue: 1) an initial payment due on signing or when certain
specific conditions are met; 2) royalties that are earned on an
ongoing basis as sales are made or a pre-agreed transfer price
and 3) sales-based milestone payments that are earned when
cumulative sales reach certain levels. Revenue from the initial
payments or licensing fee is recognized when all required
conditions are met. Royalties are recognized as earned based on the
licensee’s sales. Revenue from the sales-based milestone
payments is recognized when the cumulative revenue levels are
reached. The achievement of the sales-based milestone underlying
the payment to be received predominantly relates to the
licensee’s performance of future commercial activities. FASB
ASC 605-28, Milestone
Method, (“ASC 605-28”) is not used by us as
these milestones do not meet the definition of a milestone under
ASC 605-28 as they are sales-based and similar to a royalty and the
achievement of the sales levels is neither based, in whole or in
part, on our performance, a specific outcome resulting from our
performance, nor is it a research or development
deliverable.
Sales Allowances
We
accrue for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
Our
product returns accrual is primarily based on estimates of future
product returns over the period customers have a right of return,
which is in turn based in part on estimates of the remaining
shelf-life of products when sold to customers. Future product
returns are estimated primarily based on historical sales and
return rates. We estimate our volume rebates and promotional
discounts accrual based on its estimates of the level of inventory
of our products in the distribution channel that remain subject to
these discounts. The estimate of the level of products in the
distribution channel is based primarily on data provided by our
customers.
In
all cases, judgment is required in estimating these reserves.
Actual claims for rebates and returns and promotional discounts
could be materially different from the estimates.
We
provide a customer satisfaction warranty on all of our products to
customers for a specified amount of time after product
delivery. Estimated return costs are based on historical
experience and estimated and recorded when the related sales are
recognized. Any additional costs are recorded when incurred or
when they can reasonably be estimated.
The
estimated reserve for sales returns and allowances, which is
included in accounts payable and accrued expense, was approximately
$61,000 and $5,000 at December 31, 2016 and 2015,
respectively.
Cost of Product Sales
Cost
of product sales includes the cost of inventory, 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®.
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 $2.7 million and $3,000 for
the years ended December 31, 2016 and 2015,
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. Stock-based compensation for the
years ended December 31, 2016 and 2015 have been reduced for
estimated forfeitures. When estimating forfeitures, voluntary
termination behaviors, as well as trends of actual option
forfeitures, are considered. To the extent actual forfeitures
differ from our current estimates, cumulative adjustments to
stock-based compensation expense are recorded.
Except
for transactions with employees and directors that are within the
scope of FASB ASC 718, all transactions in which goods or services
are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Equity Instruments Issued to Non-Employees for
Services
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, 2016 and 2015, 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 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. Early adoption is permitted. 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 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 includes
provisions intended to simplify various aspects related to how
share-based payments are accounted for and presented in the
financial statements. 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. 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 February 2016, the FASB issued its new lease
accounting guidance in Accounting Standards Update
(“ASU”) No. 2016-02, Leases (Topic
842). Under the new guidance,
lessees will be required to recognize the following for all leases
(with the exception of short-term leases) at the commencement date:
A lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to
align, where necessary, lessor accounting with the lessee
accounting model and ASC 606, Revenue from Contracts with
Customers. The new lease
guidance simplified the accounting for sale and leaseback
transactions primarily because lessees must recognize lease assets
and lease liabilities. Lessees will no longer be provided with a
source of off-balance sheet financing. Public business entities
should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted. Lessees (for
capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the
consolidated financial statements. The modified retrospective
approach would not require any transition accounting for leases
that expired before the earliest comparative period presented.
Lessees may not apply a full retrospective transition
approach. 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 Accounting
Standards Update (ASU) No. 2015-17, Balance Sheet Classification
of Deferred Taxes. Current U.S.
GAAP requires an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts in a classified
statement of financial position. To simplify the presentation of
deferred income taxes, the amendments in this update require that
deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. The amendments in
this update apply to all entities that present a classified
statement of financial position. The current requirement that
deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected
by the amendments in this update. The amendments in this update
will align the presentation of deferred income tax assets and
liabilities with International Financial Reporting Standards (IFRS)
and are effective for fiscal years after December 15, 2016,
including interim periods within those annual periods. 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 September 2015,
the FASB issued ASU 2015-16, Simplifying the Accounting for
Measurement-Period Adjustments, which eliminates the
requirement to retrospectively adjust the consolidated financial
statements for measurement-period adjustments that occur in periods
after a business combination is consummated. Measurement period
adjustments are calculated as if they were known at the acquisition
date, but are recognized in the reporting period in which they are
determined. Additional disclosures are required about the impact on
current-period income statement line items of adjustments that
would have been recognized in prior periods if prior-period
information had been revised. The guidance is effective for annual
periods beginning after December 15, 2015 and is to be applied
prospectively to adjustments of provisional amounts that occur
after the effective date. Early application is permitted. The
adoption of this ASU during the year ended December 31, 2016 did
not have a material impact on our consolidated financial position
and results of operations.
In July 2015, the FASB issued ASU No.
2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory.
Topic 330. Inventory, currently
requires an entity to measure inventory at the lower of cost or
market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The amendments apply to all other inventory, which includes
inventory that is measured using first-in, first-out (FIFO) or
average cost. An entity should measure in scope inventory at the
lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. The amendments in this Update more closely align
the measurement of inventory in U.S. GAAP with the measurement of
inventory in IFRS. For public business entities, the amendments are
effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The amendments
should be applied prospectively with earlier application permitted
as of the beginning of an interim or annual reporting
period. 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 2014, the FASB issued ASU
2014-15, Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern. This ASU 2014-15
describes how an entity should assess its ability to meet
obligations and sets rules for how this information should be
disclosed in the consolidated financial statements. The standard
provides accounting guidance that will be used along with existing
auditing standards. The ASU 2014-15 is effective for the annual
period ending after December 15, 2016. Early application is
permitted. 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 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 have not yet determined whether we
will adopt the provisions of ASU 2014-09 on a retrospective basis
or through a cumulative adjustment to equity. 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.
NOTE 2 – 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
will be 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
($15,806 USD based on December 31, 2016 exchange rate) and cash
payments of up to €120,000
($126,448 USD based on December 31, 2016 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 and accounts payable and accrued expense in
the accompanying consolidated balance sheet at December 31,
2016.
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.
CRI In-License Agreement
On April 19, 2013, the Company and Centric
Research Institute (“CRI”) entered into an asset purchase agreement (the
“CRI Asset Purchase Agreement”) pursuant to which we
acquired:
●
All
of CRI’s rights in past, present and future Sensum+®
product formulations and presentations, and
●
An
exclusive, perpetual license to commercialize Sensum+®
products in all territories except for the United
States.
On June 9, 2016,
the Company and CRI amended the CRI Asset Purchase Agreement
(“Amended CRI Asset Purchase Agreement”) to provide us
commercialization rights for Sensum+® in the U.S. through our
Beyond Human® marketing platform through December 31, 2016. On
January 1, 2017, the Company and CRI agreed to extend the term of
the Amended CRI Asset Purchase Agreement to December 31, 2017,
subject to an automatic one-year extension to December 31, 2018
upon certain conditions (see Note 12).
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 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, 2016 and 2015.
In consideration
for the Amended CRI Asset Purchase Agreement, we are required to
pay CRI a percentage of the monthly net profit, as defined in the
agreement, from our sales of Sensum+® in the U.S. through our
Beyond Human® marketing platform. During the year ended
December 31, 2016, no amounts have been earned by CRI under the
Amended CRI Asset Purchase Agreement.
J&H Co. LTD 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 $2,000,000 at a
pre-negotiated transfer price per unit. The minimum annual order
quantities by J&H are to be made over a 12-month period
beginning upon the completion of the first shipment of product in
2017. During the year ended December 31, 2016, no revenue
was recognized related to this agreement.
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 up to approximately $171 million upon and
subject to the achievement of sales milestones based on cumulative
supplied units of the licensed products in the Territory, plus a
pre-negotiated transfer price per unit. We believe the amount of
the upfront payment received is reasonable compared to the amounts
to be received upon obtainment of future sales-based
milestones.
As the sales-based
milestones do not meet the definition of a milestone under ASC
605-28, we will recognize the revenue from the milestone payments
when the cumulative supplied units’ volume is met. During the
years ended December 31, 2016 and 2015, we recognized $16,056 and
$56,487, 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 up to approximately CN $94.5 million ($70.2
million USD based on December 31, 2016 exchange rate) upon and
subject to the achievement of sales milestones based on cumulative
gross sales in Canada by Orimed plus double-digit tiered royalties
based on Orimed’s cumulative net sales in Canada. We believe
the amount of the upfront payment received is reasonable compared
to the amounts to be received upon obtainment of future sales-based
milestones.
As the sales-based
milestones do not meet the definition of a milestone under ASC
605-28, 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, 2016 and 2015, under this agreement we
recognized $42,153 and $108,988, 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, 2016
and 2015, we recognized royalty payments of $1,252 and $0,
respectively.
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 up to
$35.5 million in 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, 2016 and
2015.
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 up to $2.35 million in 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 year ended December 31, 2016, no revenue was recognized
related to this agreement.
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. Under the
agreement the minimum orders for the first ten-year term of the
agreement are approximately $2.6 million. We did not
recognize any revenue from this agreement during the years ended
December 31, 2016 and 2015.
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
|
|
|
Website
|
|
$
|
171,788
|
|
|
|
5
years
|
|
|
Trade
name
|
|
|
50,274
|
|
|
|
10
years
|
|
|
Non-competition
covenant
|
|
|
3,230
|
|
|
|
3
years
|
|
|
Customer
list
|
|
|
1,500
|
|
|
|
1
year
|
|
|
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®’s 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 Beyond Human®’s 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. As a result of completing our
final valuation, the total purchase price increased by $15,521 and
goodwill increased by $403,208 compared to the initial allocation
of the purchase price during the first quarter of
2016.
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 change in fair value of 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 years ended
December 31, 2016 and 2015, assumes the asset acquisition of Beyond
Human® had occurred as of January 1, 2016 and 2015,
giving effect to purchase accounting adjustments such as
amortization of intangible assets. The pro forma data is for
informational purposes only and may not necessarily reflect the
actual results of operations had the assets of Beyond Human®
been operated as part of the Company since January 1, 2016 and
2015.
|
|
Year Ended
December 31, 2016
|
Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
Net
revenue
|
$4,818,603
|
$4,868,241
|
$735,717
|
$2,947,694
|
|
Net
loss
|
$(13,701,154)
|
$(13,700,702)
|
$(4,202,628)
|
$(3,901,770)
|
|
Net
loss per share of common stock – basic and
diluted
|
$(0.15)
|
$(0.15)
|
$(0.08)
|
$(0.07)
|
|
Weighted
average number of shares outstanding
– basic and diluted
|
94,106,382
|
94,106,382
|
52,517,530
|
52,517,530
|
We incurred
approximately $70,000 in expense related to the
Acquisition.
Acquisition of Novalere
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 manufacturing agreement from Novalere FP. We
currently anticipate that the Abbreviated New Drug Application
(“ANDA”) filed in November 2014 by the
manufacturer with the U.S. Food and Drug Administration
(“FDA”) may be approved in 2017, which, when and if
approved, may allow us to market and sell Fluticare™ over the
counter in the second half of 2017. An ANDA is an application for a
U.S. generic drug approval for an existing licensed medication or
approved drug.
Under
the terms of the Merger Agreement, at the Closing Date, the
Novalere Stockholders received 50% of the Consideration Shares (the
“Closing Consideration Shares”) and the remaining 50%
of the Consideration Shares (the “ANDA Consideration
Shares”) 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 million in Net Revenue (as defined
in the Merger Agreement) realized from the sales of
Fluticare™, the Novalere Stockholders will be entitled to
receive, on a pro rata basis, $500,000, subject to cumulative
maximum Earn-Out Payments of $2.5 million.
The
closing price of our common stock on the Closing Date was $0.20 per
share. We issued 12,947,657 Closing Consideration Shares of our
common stock at the Closing Date, the fair market value,
(‘FMV”) of the Closing Consideration Shares was
$2,071,625 as of the Closing Date.
The
fair value of the contingent consideration is based on preliminary
cash flow projections and other assumptions for the ANDA
Consideration shares and the Earn-Out Payments and future changes
in the estimate of such contingent consideration will be recognized
as a charge to other expense.
Issuance
of the 12,947,655 ANDA Consideration Shares was subject to
milestones, achievement of which was uncertain at the time of
acquisition. The FMV of the ANDA Consideration Shares was
established to account for the uncertainty in the future value of
the shares. The value of the shares as derived using the options
pricing model was then weighted based on the probability of
achieving the milestones to determine the FMV of the ANDA
Consideration Shares and estimated potential share prices at such
dates. Due to certain restrictions on the shares of common stock to
be issued, we applied a 20% discount for lack of marketability to
the FMV of the ANDA Consideration Shares. Based on the
aforementioned calculation the fair market value of the ANDA
Consideration shares was determined to be $1,657,300.
The
total fair market value of the considerations issued and to be
issued for the transaction are as follows:
|
|
|
|
|
Closing
Consideration Shares
|
12,947,657
|
$2,071,625
|
|
ANDA
Consideration Shares
|
12,947,655
|
1,657,300
|
|
Total
|
25,895,312
|
$3,728,925
|
Based
on the assumptions, the fair market value of the Earn-Out Payments
was determined to be $1,205,000. The preliminary fair values of
the future earn out payments was determined by applying
the income approach, using several significant unobservable inputs
for projected cash flows and a discount rate. These inputs are
considered Level 3 inputs under the fair value measurements and
disclosure guidance.
The
total purchase price is summarized as follows:
|
Cash
consideration
|
$43,124
|
|
Fair
value of common stock issued at closing
|
2,071,625
|
|
Fair
value of ANDA consideration shares
|
1,657,300
|
|
Fair
value of future earn out payments
|
1,205,000
|
|
Total
|
$4,977,049
|
The
fair values of acquired assets and liabilities are based on cash
flow projections and other assumptions. The fair values of acquired
intangible assets were determined using several significant
unobservable inputs for projected cash flows and a discount rate.
These inputs are considered Level 3 inputs under the fair value
measurements and disclosure guidance. The transaction has been
accounted for as a business combination under the acquisition
method of accounting. Accordingly, the tangible assets and
identifiable intangible assets acquired and liabilities assumed
have been recorded at fair value, with the remaining purchase price
recorded as goodwill.
The
fair values of assets acquired and liabilities assumed at the
transaction date are summarized below:
|
Cash
|
$43,124
|
|
Prepaid
expense
|
25,907
|
|
Total
tangible assets
|
69,031
|
|
|
|
|
Product
rights and related manufacturing agreement
|
4,681,000
|
|
Trademarks
|
150,000
|
|
Total
identifiable intangible assets
|
4,831,000
|
|
Goodwill
|
120,143
|
|
Total
acquired assets
|
5,020,174
|
|
|
|
|
Other
current liabilities
|
(43,125)
|
|
Total
assumed liabilities
|
(43,125)
|
|
|
|
|
Acquired
assets net of assumed liabilities
|
$4,977,049
|
We
recorded $759,428 of goodwill related to the acquisition of
Novalere as an income tax benefit and also recorded an impairment
of $759,428 against this benefit during the year ended December 31,
2015.
The
carrying value of current assets and liabilities in
Novalere’s financial statements are considered to be a proxy
for the fair value of those assets and liabilities. Novalere is a
pre-commercial organization specializing in selling and marketing
nasal steroid products; most of the value in Novalere is applicable
to the product rights and related manufacturing agreement.
Novalere holds a non-exclusive, worldwide, royalty-free license to
market, promote, sell, offer for sale, import and distribute the
product. This business relationship is contractual in nature and
meets the separability criterion and as a result is considered an
identifiable intangible asset recognized separately from goodwill.
The value of the business relationship is included in goodwill
under U.S. GAAP. Goodwill is calculated as the difference between
the fair value of the consideration transferred and the values
assigned to the identifiable tangible assets acquired and
liabilities assumed. The acquired goodwill presented in the above
table reflects the estimated goodwill from the preliminary purchase
price allocation. The cash acquired was used to pay amounts due to
shareholders and thus was received by us.
The
establishment of the fair value of the consideration for a Merger,
and the allocation to identifiable tangible and intangible assets
and liabilities, requires the extensive use of accounting estimates
and management judgment. The fair values assigned to the assets
acquired and liabilities assumed were based on estimates and
assumptions. During the year ended December 31, 2016, there was an
increase in the estimated fair value of the ANDA consideration
shares of $1,346,556 due to the amended agreement entered into with
Novalere Holdings (see below) which is included in change in fair
value of contingent consideration in the accompanying consolidated
statement of operations. There was no change to the estimated fair
value of the future earn-out payments of $1,248,125 during the year
ended December 31, 2016 and there was no change to the estimate
fair value of the contingent consideration during the year ended
December 31, 2015.
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
Fluticare™ by the FDA. Management agreed to issue the
Novalere Shares due to its confidence that FlutiCare™ would
be approved by the FDA in the near future and the obligation of us
to issue and register for resale the Novalere Shares and all other
shares of our common stock held by Novalere Holdings. In
connection with the issuance of the Novalere Shares, Novalere
Holdings also agreed to certain restrictions, and to an extension
in the date to register the Novalere Shares and all other shares of
our common stock held by Novalere Holdings until the second quarter
of 2017. In the event a registration statement to register the
Novalere Shares is not filed by February 1, 2017, and does not
become effective by May 15, 2017, the Company will be 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. Management believed that the issuance of the
Novalere Shares at that time was in our and our stockholders best
interest as it results in a restriction on the resale of all shares
of our common stock held by Novalere Holdings, including the
Novalere Shares, until after we have achieved certain milestones.
As a result of the issuance of the Novalere Shares, the fair value
of Novalere Shares on the date of issuance of $2,971,641 was
reclassified from liabilities to equity. The remaining 138,859 ANDA
consideration shares not issuable yet will be issued upon FDA
approval of Fluticare™ and the estimated fair value of such
remaining shares of $32,215 is included in contingent consideration
in the accompanying consolidated balance sheet at December 31,
2016.
Supplemental Pro Forma Information for Acquisition of Novalere
(unaudited)
The
following unaudited supplemental pro forma information for the year
ended December 31, 2015, assumes the acquisition of Novalere had
occurred as of January 1, 2015, giving effect to purchase
accounting adjustments such as amortization of intangible assets.
The pro forma data is for informational purposes only and may not
necessarily reflect the actual results of operations had Novalere
been operated as part of the Company since January 1,
2015.
|
|
Year Ended
December 31, 2015
|
|
|
|
|
|
Net
revenue
|
$735,717
|
$735,717
|
|
Net
loss
|
$(4,202,628)
|
$(4,578,521)
|
|
Net
loss per share of common stock – basic and
diluted
|
$(0.08)
|
$(0.09)
|
|
Weighted
average number of shares outstanding – basic and
diluted
|
52,517,530
|
53,794,559
|
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 fifteen percent (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. Also, we agreed to pay $343,500 to the New
Jersey Economic Development Authority (“NJEDA”) as
settlement-in full for an outstanding loan of approximately
$640,000 owed by the former stockholder’s of Semprae, in full
satisfaction of the obligation to the NJEDA. In addition, 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
fair market value of our common stock issued on the Closing Date
was $0.30 per share, which resulted in a fair market value of
$960,530 for the common stock issued to the shareholders of
Semprae. The fair value of the shares of common stock issued were
determined by quoted market prices that are considered to be Level
1 inputs under the fair value measurements and disclosure guidance.
A portion of the shares issued were held in escrow pending
reconciliation of assets received and liabilities assumed at the
acquisition date and were released on September 10,
2015. 386,075 shares of common stock were canceled based
on the terms of the agreement, reducing the total number of shares
issued to 2,815,701. We recorded income on the
cancellation of shares of $115,822, which is included in the change
in fair value of contingent consideration in the accompanying
consolidated statement of operations for the year ended December
31, 2015.
The
agreement to pay the annual Royalty resulted in the recognition of
a contingent consideration, which is recognized at the inception of
the transaction, and subsequent changes to estimate of the amounts
of contingent consideration to be paid will be recognized as
charges or credits in the consolidated statement of operations. The
fair value of the contingent consideration is based on preliminary
cash flow projections, growth in expected product sales and other
assumptions. Based on the assumptions, the fair value of the
Royalty was determined to be $308,273 at the date of acquisition.
The fair value of the Royalty was determined by applying the income
approach, using several significant unobservable inputs for
projected cash flows and a discount rate of 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 2016 and 2015, $22,103 and $0,
respectively, was paid under this arrangement. The fair
value of the expected royalties to be paid was increased by
$103,301 and $0 during the years ended December 31, 2016 and 2015,
respectively, which is included in the change in fair value of
contingent consideration in the accompanying consolidated
statements of operations. The fair value of the contingent
consideration was $405,577 and $324,379 at December 31, 2016 and
2015, based on the new estimated fair value of the consideration,
net of the amounts to be returned to us as discussed
above.
NOTE 4 – ASSETS AND LIABILITIES
Inventories
Inventories
consist of the following:
|
|
|
|
|
|
|
|
Raw
materials and supplies
|
$85,816
|
$77,649
|
|
Work
in process
|
48,530
|
90,540
|
|
Finished
goods
|
465,510
|
86,254
|
|
Total
|
$599,856
|
$254,443
|
Property and Equipment
Property
and equipment consists of the following:
|
|
|
|
|
|
|
|
Computer
equipment
|
$5,254
|
$5,254
|
|
Office
furniture and fixtures
|
33,376
|
33,376
|
|
Production
equipment
|
276,479
|
276,479
|
|
Software
|
338,976
|
338,976
|
|
Total
cost
|
654,085
|
654,085
|
|
Less
accumulated depreciation
|
(624,516)
|
(618,984)
|
|
Property
and equipment, net
|
$29,569
|
$35,101
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $5,532
and $28,950, respectively.
Intangible Assets
Amortizable
intangible assets consist of the following:
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Mfg. 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
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(57,593)
|
$360,004
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(127,316)
|
483,803
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(60,554)
|
173,991
|
10
|
|
Vesele®
Trademark
|
25,287
|
(3,886)
|
21,401
|
8
|
|
Novalere
Mfg. Contract
|
4,681,000
|
(419,340)
|
4,261,660
|
10
|
|
Total
|
$5,969,548
|
$(668,689)
|
$5,300,859
|
|
Amortization expense for the years ended December
31, 2016 and 2015 was $624,404 and $550,789, respectively.
The following table summarizes the approximate expected future
amortization expense as of December 31, 2016 for intangible
assets:
|
2017
|
$630,000
|
|
2018
|
630,000
|
|
2019
|
629,000
|
|
2020
|
629,000
|
|
2021
|
600,000
|
|
Thereafter
|
1,785,000
|
|
Total
|
$4,903,000
|
Prepaid
Expense and Other Current Assets
Prepaid expense and
other current assets consist of the following:
|
|
|
|
|
|
|
|
Prepaid
insurance
|
$69,976
|
$27,816
|
|
Prepaid
inventory
|
20,750
|
-
|
|
Merchant
net settlement reserve receivable (see Note 1)
|
221,243
|
-
|
|
Prepaid
consulting and other expense
|
21,094
|
25,462
|
|
Prepaid
consulting and other service stock-based compensation expense (see
Note 8)
|
530,601
|
-
|
|
Total
|
$863,664
|
$53,278
|
Accounts
Payable and Accrued Expense
Accounts payable
and accrued expense consists of the following:
|
|
|
|
|
|
|
|
Accounts
payable
|
$647,083
|
$63,826
|
|
Accrued
credit card balances
|
31,654
|
91,037
|
|
Accrued
royalties
|
73,675
|
-
|
|
Sales
returns and allowances
|
60,853
|
-
|
|
Accrual
for stock to be issued to consultants (see Note 8)
|
360,000
|
-
|
|
Accrued
other
|
36,785
|
640
|
|
Total
|
$1,210,050
|
$155,503
|
Goodwill
The
changes in the carrying value of our goodwill for the years ended
December 31, 2016 and 2015 is as follows:
|
Beginning
balance December 31, 2014
|
$429,225
|
|
Acquisition
of Novalere (see Note 3)
|
120,143
|
|
Release
of valuation allowance in connection with acquisition of Novalere
(see Note 10)
|
759,428
|
|
Impairment
of valuation allowance in connection with acquisition of Novalere
(see Note 10)
|
(759,428)
|
|
Ending
balance December 31, 2015
|
549,368
|
|
Asset acquisition of Beyond Human®
(see Note 3)
|
403,208
|
|
Ending
balance December 31, 2016
|
$952,576
|
NOTE 5 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Short-Term Loans Payable
The short-term
non-convertible financings were from three funding sources and all
balances were guaranteed by our CEO. We repaid these
amounts in full in July 2016.
Notes Payable and Non-Convertible Debenture
The
following table summarizes the outstanding notes payable and
non-convertible debenture at December 31, 2016 and
2015:
|
|
|
|
|
Notes
payable and non-convertible debenture:
|
|
|
|
February
2016 Note Payable
|
$347,998
|
$-
|
|
December
2016 Notes Payable
|
550,000
|
-
|
|
July
2015 Debenture (Amended August 2014 Debenture)
|
-
|
73,200
|
|
Total
notes payable and non-convertible debenture
|
897,998
|
73,200
|
|
Less:
Debt discount
|
(216,871)
|
-
|
|
Carrying
value
|
681,127
|
73,200
|
|
Less:
Current portion
|
(626,610)
|
(73,200)
|
|
Notes
payable and non-convertible debenture, net of current
portion
|
$54,517
|
$-
|
The following table summarizes the future
minimum payments as of December 31, 2016 for the notes payable and
non-convertible debenture:
|
2017
|
$843,013
|
|
2018
|
54,985
|
|
Total
|
$897,998
|
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.
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.
Pursuant to the
Finance Agreements, the principal amount of the February 2016 Note
Payable is $550,000 and the interest rate thereon is 20% per
annum. We began to pay principal and interest on the
February 2016 Note Payable on a monthly basis beginning on March
19, 2016 for a period of 24 months and the monthly mandatory
principal and interest payment amount thereunder is $28,209. The
monthly amount shall be paid by us through a deposit account
control agreement with a third-party bank in which SBI shall be
permitted to take the monthly mandatory payment amount from all
revenue received by us from the Beyond Human® assets in the
transaction. The maturity date for the February 2016
Note Payable is February 19, 2018.
The February 2016
Note Payable is secured by SBI through a first priority secured
interest in all of the Beyond Human® assets acquired by us in
the transaction including all revenue received by us from these
assets.
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.
December 2016 Notes Payable
On December 5,
2016, we entered into a securities purchase agreement with three
unrelated third party investors in which the investors loaned us
gross proceeds of $500,000 pursuant to a 5% promissory note
(“December 5, 2016 Notes
Payable”). The notes
have an Original Issue Discount (“OID”) of $50,000 and
requires payment of $550,000 in principal upon maturity. The
December 5, 2016 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.
In connection with
the December 5, 2016 Notes Payable, we issued the investors
restricted shares of common stock totaling
1,111,111. 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 5, 2016 Notes
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 $182,203. The
discount is being amortized to interest expense using the effective
interest method over the term of the December 5, 2016 Notes
Payable.
September 2014 Convertible Debenture
On
September 29, 2014, we issued a convertible promissory note (the
“Note”) to an unrelated third party accredited investor
for $50,000. The Note had a principal face amount of $92,000, did
not accrue interest and was due on March 28, 2016 (the
“Maturity Date”). The Note was converted into 230,000
shares common stock according to the terms of the note, by the
investor on March 30, 2015. As such, we recorded the conversion of
the note and the remaining debt discount was charged to interest
expense during the year ended December 31, 2015.
January 2015 Non-Convertible Debenture
On
January 21, 2015, we entered into securities purchase agreements
with Vista Capital Investments, LLC (“Vista”) whereby
we issued and sold to the Vista promissory notes (“January
2015 Non-Convertible Debenture”) and warrants (the
“Vista Warrants”) to purchase up to 500,000 shares of
the our common stock for gross proceeds of $100,000. The note has
an OID of $10,000 and requires payment of $110,000 in principal
upon maturity. On July 30, 2015, the Company and Vista entered into
an amendment to the $110,000 Promissory Note dated January 21, 2015
(“Vista Note Amendment”). In consideration for the
Vista Note Amendment, we issued 100,000 restricted shares of common
stock to Vista. The fair value of such shares totaling $15,500 was
recognized as interest expense during the year ended December 31,
2015. The principal note balance totaling $110,000 was paid off on
November 2, 2015.
The
Vista Warrants were exercisable for five years from the closing
date at an exercise price of $0.30 (see Note 8) per share of
common stock. The warrants contained anti-dilution protection,
including protection upon dilutive issuances.
The
Vista Warrants were measured at fair value and classified as a
liability because these warrants contained anti-dilution protection
and therefore could not be considered indexed to the our own stock
which was a requirement for the scope exception as outlined under
FASB ASC 815. The estimated fair value of the Vista Warrants was
determined using the Probability Weighted Black-Scholes Model,
resulting in a fair value of $99,999 on the date they were issued.
The allocation of the proceeds of the debt was initially recorded
using the residual method, at $1, net of a debt discount of
$109,999 for the fair value of the Vista Warrants and the OID. The
discount was being accreted as non-cash interest expense over the
expected term of the January 2015 Non-Convertible Debenture using
the effective interest method. During the year ended December 31,
2015, the full amount of debt discount has been accreted to
interest expense. The fair value of the Vista Warrants was affected
by changes in inputs to that model including our stock price,
expected stock price volatility, the contractual term and the
risk-free interest rate. We continued to classify the fair value of
the Vista Warrants as a liability until the warrants were exercised
in full during the year ended December 31, 2016 (see Notes 8 and
9).
February 2014 Convertible Debenture
On
February 13, 2014, we entered into a securities purchase agreement
with an unrelated third party accredited investor pursuant to which
we issued a convertible debenture in the aggregate principal amount
of $330,000 (issued at an OID of 10%) (“February 2014
Convertible Debenture”) and a warrant to purchase 250,000
shares of our common stock (“Warrant
Agreement”).
The
February 2014 Convertible Debenture bore interest at the rate of
10% per annum and the principal amount and interest were payable on
March 13, 2015. The Warrant Agreement provided the holder with the
right to acquire up to 250,000 shares of common stock at an
exercise price of $0.50 per share, subject to standard certain
adjustments as described in the Warrant Agreement, at any time
through the fifth anniversary of its issuance date.
On
March 12, 2015, we issued 250,000 shares of our common stock and
250,000 warrants to the holder of the February 2014
Convertible Debenture to extend the maturity date to September 13,
2015 which resulted in a debt extinguishment. The fair value of the
250,000 shares of common stock issued totaled $32,500 computed
based on the stock price on the date of issuance. The
terms of the warrants issued to the holder were amended to reduce
the exercise price of the total warrants outstanding to $0.30 per
share (see Note 8) and included certain anti-dilution protection,
including protection upon dilutive issuances. The warrants were
measured at fair value and classified as a liability because these
warrants 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
estimated fair value of the warrants was determined using the
Probability Weighted Black-Scholes Model, resulting in a fair value
of $76,299 on the date they were issued. The allocation of the
proceeds of the debt after modification which resulted in a debt
extinguishment was initially recorded using the residual method, at
$253,701, net of a debt discount of $76,299 for the fair value of
the warrants. The discount was being accreted as non-cash interest
expense over the expected term of the February 2014 Convertible
Debenture using the effective interest method. During the year
ended December 31, 2015, the full amount of debt discount has been
accreted to interest expense. The fair value of the
common stock issued of $32,500 was recorded as a loss on debt
extinguishment, based on the estimated fair value of the stock on
date of issuance, in the accompanying consolidated statement of
operations during the year ended December 31, 2015. This
convertible debenture was repaid in September 2015 and we continued
to classify the fair value of the warrants as a liability until the
warrants were exercised in full during the year ended December 31,
2016 (see Notes 8 and 9).
Interest Expense
We recognized
interest expense on the short-term loans payable and non-related
party notes payable and non-convertible debentures of $151,924 and
$102,105 for the years ended December 31, 2016 and 2015,
respectively. Amortization of the debt discount to
interest expense during the years ended December 31, 2016 and 2015
totaled $116,798 and $310,006, respectively.
Convertible Debentures
Third Quarter 2015 Financing
The
following table summarizes the outstanding Third Quarter 2015
Convertible Debentures at December 31, 2016 and
2015:
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
$-
|
$1,457,500
|
|
Less:
Debt discount
|
-
|
(1,050,041)
|
|
Carrying
value
|
-
|
407,459
|
|
Less:
Current portion
|
-
|
(407,459)
|
|
Convertible
debentures – long-term
|
$-
|
$-
|
In
the third quarter of 2015, 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.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default, as defined
in such Q3 2015 Note, 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 applied: the conversion price shall be the lower of: (i)
the fixed conversion price ($0.15) or (ii) 60% multiplied by the
volume weighted average price of 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. Certain
other conversion rates applied in the event of the sale or merger
of us, default and other defined events. The embedded
conversion feature of these notes contained anti-dilution
protection, therefore, were treated as derivative instruments (see
Note 9).
We could have
prepaid the Q3 2015 Notes at any time on the terms set forth in the
Q3 2015 Notes at the rate of 115% of the then outstanding balance
of the Q3 2015 Notes. Under the terms of the Q3 2015 Notes, we
could not effect certain corporate and business actions during the
term of the Q3 2015 Notes, although some could have been done with
proper notice. Pursuant to the Purchase Agreement, with certain
exceptions, the Q3 2015 Note holder had a right of participation
during the term of the Q3 2015 Notes; additionally, we granted the
Q3 2015 Note holder registration rights for the shares of common
stock underlying the Q3 2015 Notes pursuant to Registration Rights
Agreements.
In
addition, bundled with the convertible debt, we
sold:
1.
A common stock purchase warrant to each Buyer,
which allows the Buyers to purchase an aggregate of 1,325,000
shares of common stock and the placement agent to purchase 483,333
shares of common stock (aggregating 1,808,333 shares of our common
stock) at an exercise price of $0.30 per share (see Note 8);
and
2.
4,337,500 restricted shares of common stock to the
Buyers.
A Registration Rights Agreement was signed and, as
a result, we filed a Registration Statement on September 11, 2015
and filed an Amended Form S–1 on October 26, 2015,
November 12, 2015 and December 10, 2015 and the Amended Form S-1
became effective December 18, 2015.
We
allocated the proceeds from the Q3 2015 Notes to the convertible
debt, warrants and restricted shares of common stock issued based
on their relative fair values. We determined the fair
value of the warrants using Black-Scholes with the following range
of assumptions:
|
|
|
December 31,
2015
|
|
|
Expected
terms (in years)
|
|
5.00
|
|
|
Expected
volatility
|
|
101%
– 119%
|
|
|
Risk-free
interest rate
|
|
1.37%
– 1.58%
|
|
|
Dividend
yield
|
|
-
|
|
The
fair value of the restricted shares of common stock issued was
based on the market price of our common stock on the date of
issuance of the Q3 2015 Notes. The allocation of the
proceeds to the warrants and restricted shares of common stock
based on their relative fair values resulted in us recording a debt
discount of $89,551 and $374,474, respectively. The
remaining proceeds of $860,975 were initially allocated to the
debt. We determined that the embedded conversion
features in the Q3 2015 Notes were a derivative instrument which
was required to be bifurcated from the debt host contracts and
recorded at fair value as a derivative liability. The
fair value of the embedded conversion features at issuance was
determined using a Path-Dependent Monte Carlo Simulation (see Note
9 for assumptions used to calculate fair value). The
initial fair value of the embedded conversion features were
$901,784, of which, $830,560 is recorded as a debt
discount. The initial fair value of the embedded
conversion feature derivative liabilities in excess of the proceeds
allocated to the debt was $71,224, and was immediately
expensed and recorded as interest expense during the year ended
December 31, 2015 in the accompanying consolidated statement of
operations. The Q3 2015 Notes were also issued at an OID
of 10% and the OID of $132,500 was recorded as an addition to the
principal amount of the Q3 2015 Notes and a debt discount in the
accompanying consolidated balance sheet.
Total debt issuance
costs incurred in connection with the Q3 2015 Notes was $150,919,
of which, $68,419 is the fair value of the warrants to purchase
483,333 shares of common stock issued to the placement
agents. The debt issuance costs were recorded as a debt
discount and were being amortized to interest expense using the
effective interest method over the term of the Q3 2015
Notes.
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.
2016 Financing
The following table
summarizes the outstanding 2016 Convertible Debentures at December
31, 2016:
|
|
|
|
|
|
|
Convertible
debentures
|
$1,559,922
|
|
Less:
Debt discount
|
(845,730)
|
|
Carrying
value
|
714,192
|
|
Less:
Current portion
|
(714,192)
|
|
Convertible
debentures – long-term
|
$-
|
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 $3,000,000 (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 are convertible into shares of our common stock at a
conversion price of $0.25 per share, with certain adjustment
provisions noted below. The maturity date of the 2016 Notes issued
on June 30, 2016 and July 15, 2016 is July 30, 2017 and the
maturity date of the 2016 Notes issued on July 25, 2016 is August
25, 2017. The 2016 Notes bear interest on the unpaid principal
amount at the rate of 5% per annum from the date of issuance until
the same becomes due and payable, whether at maturity or upon
acceleration or by prepayment or otherwise.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default, as defined
in such 2016 Notes, a Default Amount is equal to the sum of (i) the
principal amount, together with accrued interest due thereon
through the date of payment payable at the holder’s option in
cash or common stock and (ii) an additional amount equal to the
principal amount payable at our option in cash or common stock. For
purposes of payments in common stock, the following conversion
formula shall apply: the conversion price shall be the lower of:
(i) the fixed conversion price ($0.25) or (ii) 75% multiplied by
the volume weighted average price of 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 are
unable to do so, the following conversion formula shall apply: the
conversion price shall be the lower of: (i) the fixed conversion
price ($0.25) or (ii) 60% multiplied by the lowest daily volume
weighted average price of our common stock during the ten
consecutive trading days immediately prior to the conversion.
Certain other conversion rates apply in the event of the sale or
merger of us, default and other defined events.
We may prepay the
2016 Notes at any time on the terms set forth in the 2016 Notes at
the rate of 110% of the then outstanding balance of the 2016 Notes.
Pursuant to the Securities Purchase Agreements, with certain
exceptions, the Investors have a right of participation during the
term of the 2016 Notes; additionally, we granted the 2016 Note
holders registration rights for the shares of common stock
underlying the 2016 Notes up to $1,000,000 pursuant to Registration
Rights Agreements. 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 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 condensed consolidated statement of
operations. The 2016 Notes were also issued at an OID of
10% and the OID of $303,889 was recorded as an addition to the
principal amount of the 2016 Notes and a debt discount in the
accompanying 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 year
ended December 31, 2016, certain of the 2016 Notes holders elected
to convert principal and interest outstanding of $1,749,070 into
6,996,280 shares of common stock at a conversion price of $0.25 per
share (see Note 8). As a result of the conversion of the
principal and interest balance into shares of common stock, the
fair value of the embedded conversion feature derivative
liabilities of $1,093,263 on the date of conversion was
reclassified to additional paid-in capital (see Note 9) and the
amortization of the debt discount was accelerated for the amount
converted and recorded to interest expense during the year ended
December 31, 2016.
Interest Expense
We recognized
interest expense on the Q3 2015 Notes and 2016 Notes for the year
ended December 31, 2016 and 2015 of $80,095 and $26,754,
respectively. The debt discount recorded for the 2016 Notes are
being amortized as interest expense over the term of the 2016 Notes
using the effective interest method. Total amortization
of the debt discount on the Q3 2015 Notes and 2016 Notes to
interest expense for the years ended December 31, 2016 and 2015 was
$3,508,199 and $527,964, respectively.
NOTE 6 – DEBENTURES – RELATED PARTIES
The following table
summarizes the outstanding debentures to a related party at
December 31, 2016 and 2015:
|
|
|
|
|
Line
of credit convertible debenture – related party
|
$-
|
$409,192
|
|
2014
non-convertible debenture – related party
|
-
|
25,000
|
|
Total
|
-
|
434,192
|
|
Less
: Debt discount
|
-
|
(17,720)
|
|
Carrying
value
|
-
|
416,472
|
|
Less:
Current portion
|
-
|
(391,472)
|
|
Total
long-term debentures – related party
|
$-
|
$25,000
|
Line of Credit Convertible Debenture
In
January 2013, 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 years
ended December 31, 2016 and 2015, we borrowed $0 and $114,
respectively, under the LOC Convertible Debenture and recorded a
beneficial conversion feature of $3,444 and $8,321, respectively,
for the amounts borrowed and accrued interest. We repaid the LOC
Convertible Debenture balance and accrued interest in full during
the year ended December 31, 2016.
January 2015 Non-Convertible Debenture - Former CFO
On
January 21, 2015, we entered into a securities purchase agreement
with our former Chief Financial Officer whereby we issued and sold
a promissory note in the principal face amount of $55,000 and
warrants to purchase up to 250,000 shares of our common stock for
gross proceeds of $50,000. We recorded an OID of $5,000
upon issuance.
The
note was due on July 31, 2015 and accrued a one-time interest
charge of 8% on the closing date. The warrants are exercisable for
five years from the closing date at an exercise price of $0.30 per
share of common stock. The warrants contain anti-dilution
protection, including protection upon dilutive issuances. The
principal and interest balance of $59,400 was repaid on July 31,
2015.
The
warrants issued in connection with the note, are measured at fair
value and classified as a liability because these warrants contain
anti-dilution protection and therefore, cannot be considered
indexed to 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 fair value of $49,999 on the
date they were issued.
The
allocation of the proceeds of the debt was initially recorded using
the residual method, at $1, net of a debt discount of $54,999 for
the fair value of the warrants and the OID. The discount was
accreted as non-cash interest expense over the expected term of the
note using the effective interest method and the unamortized
balance was expensed upon repayment. The fair value of the warrants
will be affected by changes in inputs to that model including our
stock price, expected stock price volatility, the contractual term
and the risk-free interest rate. 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 (see Note
9).
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.
On
May 30, 2014, we issued an 8% debenture, in the amount of $50,000,
to a member of our Board of Directors. The principal amount
and interest were payable on May 30, 2015 and the repayment date
had been extended to May 30, 2016. On August 5, 2015 the debenture
was converted into 313,177 shares of common stock.
On
June 17, 2014, we issued an 8% debenture, in the amount of $50,000,
to our former Chief Financial Officer. The principal and
interest were payable on June 16, 2015 and were repaid in July
2015.
On
August 25, 2014, we issued an 8% debenture, in the amount of
$25,000, to a member of our Board of Directors. The principal
amount and interest were payable on August 25, 2015. In July 2015,
the repayment date was extended to May 30, 2016. On August 5, 2015
the debenture was converted into 156,083 shares of common
stock.
Interest Expense
We recognized
interest expense on the outstanding debentures to related parties
totaling $17,430 and $69,634 during the years ended December 31,
2016 and 2015, respectively. Amortization of the debt discount to
interest expense during the years ended December 31, 2016 and 2015
totaled $21,164 and $122,092, respectively.
NOTE 7 – RELATED PARTY TRANSACTIONS
Related Party Borrowings
There were certain
related party borrowings that were repaid in full or converted into
shares of common stock during the years ended December 31, 2016 and
2015 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, 2016 and 2015 are as follows:
|
|
|
|
|
Wages
|
$1,455,886
|
$1,178,909
|
|
Vacation
|
261,325
|
170,371
|
|
Bonuses
|
449,038
|
-
|
|
Payroll
taxes on the above
|
133,344
|
93,510
|
|
Total
|
2,299,593
|
1,442,790
|
|
Classified
as long-term
|
(1,531,904)
|
(906,928)
|
|
Accrued
compensation
|
$767,689
|
$535,862
|
Accrued employee wages at December 31 2016 and
2015 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 CEO started to receive payment of salary in
July 2016. Under the third quarter 2015 financing agreement,
salaries prior to January 1, 2015 totaling $906,928 could
not be repaid until the debentures were repaid in full or otherwise
extinguished by conversion or other means and, accordingly, the
accrued compensation was shown as a long-term
liability. During
the year ended December 31, 2016, the Q3 2015 Notes were fully
converted into shares of common stock. We do not expect to pay the
accrued wages and related payroll tax amounts within the next 12
months and thus is classified as a long-term
liability.
NOTE 8 – STOCKHOLDERS’ EQUITY (DEFICIT)
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
2016 Issuances
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.
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).
In April, May,
August and October 2016, we issued an aggregate of 1,012,500 shares
of common stock for services and recorded an expense of $192,043,
which is included in general and administrative expense in the
accompanying consolidated statement of operations. The 1,012,500
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.
In May and December
2016, we issued an aggregate of 2,361,111 shares of restricted
common stock to certain note holders in connection with their notes
payable. The relative fair value of the shares of
restricted common stock issued was determined to be $276,167 and
was recorded as a debt discount (see Note 5).
In May and June
2016, the Buyers of the Q3 2015 Notes elected to convert $1,515,635
in principal and interest into 10,104,228 shares of common stock
(see Note 5). Upon conversion, the fair value of the embedded
conversion feature derivative liability on the date of conversion
was reclassified to additional paid-in capital (see Note
9).
On June 16, 2016,
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. During the
year ended December 31, 2016, we recognized $48,720 in general and
administrative expense in the accompanying consolidated statement
of operations and the remaining unamortized expense of $13,420 is
included in prepaid expense and other current assets in the
accompanying consolidated balance sheet at December 31,
2016.
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.
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 new service agreement with the same third party and
in connection with the new agreement issued 275,000 fully-vested
shares for services to be provided over the term of the new 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 year ended December 31, 2016, we
recognized $49,644 in general and administrative expense in the
accompanying consolidated statement of operations and the remaining
unamortized expense of $52,181 is included in prepaid expense and
other current assets in the accompanying consolidated balance sheet
at December 31, 2016.
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 ends on August 23,
2017. The shares were considered fully-vested and
non-refundable at the execution of the agreement. In September and
December 2016, we issued a total of 800,000 shares of common stock
under the agreement. The fair value of the shares issued of
$360,000 was based on the market price of our common stock on the
date of agreement. As a result of the shares being fully-vested at
the execution of the agreement but payable in equal installments,
we recorded a liability for the fair value of the remaining 800,000
shares of common stock to be issued of $360,000 which is included
in accounts payable and accrued expense in the accompanying
consolidated balance sheet at December 31, 2016. Upon issuance of
the remaining shares, we will reclassify the liability to common
stock and additional paid-in-capital. During the year ended
December 31, 2016, we recognized $255,000 in general and
administrative expense in the accompanying consolidated statement
of operations and the remaining unamortized expense of $465,000 is
included in prepaid expense and other current assets in the
accompanying consolidated balance sheet at December 31,
2016.
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. During the year ended December 31,
2016, we issued 1,330,000 shares under the agreement related to
services provided and recognized the fair value of the shares
issued of $332,970 in general and administrative expense in the
accompanying consolidated statement of operations. The 1,330,000
shares of common stock vested on the date of issuance and the fair
value of the shares of common stock was based on the market price
of our common stock on the date of vesting.
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, 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.
During the year
ended December 31, 2016, we issued 19,315,994 shares of common
stock in exchange for vested restricted stock units.
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 (see Note
5).
In the third and
fourth quarter of 2016, certain 2016 Notes holders elected to
convert $1,749,070 in principal and interest into 6,996,280 shares
of common stock (see Note 5). Upon conversion, the fair value of
the embedded conversion feature derivative liability on the date of
conversion was reclassified to additional paid-in capital (see Note
9).
During the 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.
2015 Issuances
On
January 17, 2013, we entered into a service agreement with a third
party pursuant to which we agreed to issue over the term of the
agreement 250,000 shares of our common stock in exchange for
services to be rendered. On September 18, 2013, we extended
the term of the agreement and agreed to issue an additional
aggregate of 300,000 shares of common stock in exchange for
services to be rendered. The term was further extended in April
2014 and we agreed to issue an additional 300,000 shares of common
stock in exchange for services to be rendered over the term of the
agreement. During the year ended December 31, 2015, we issued
140,000 and recognized $20,650 of services expense under this
agreement. This agreement was terminated in June 2015.
On
March 17, 2015, we entered into a consulting agreement for
services. In consideration of such services, we issued 28,125
shares of our common stock to the consultant on said date and
valued them at $3,938 based on the closing price of the stock on
the date of issuance. The fair value of such shares was
recognized in general and administrative expense in the
accompanying consolidated statement of operations.
On
August 27, 2014, we agreed to issue 200,000 shares of our common
stock pursuant to a consulting contract with a third party for
services. We extended the consulting contract in January 2015 and
agreed to issue an additional 200,000 shares. The issued shares
have been valued at the closing price of our common stock on the
date of issuance and are expensed over the period that the services
are rendered. We recognized expense of $38,000 during the year
ended December 31, 2015 related to services provided in general and
administrative expense in the accompanying consolidated statement
of operations.
On
January 23, 2015, we entered into a settlement agreement with CRI
whereby CRI returned 200,000 shares of common stock initially
issued for a product license acquired. The share return was in
consideration for us completing certain product development and
regulatory efforts relating to the sale of the product in foreign
territories and reduced the intangible asset value by the fair
value of such shares totaling $38,000.
On September 17,
2015, we issued 500,000 shares of common stock in exchange for
vested restricted stock units.
On
September 29, 2015 we issued 375,000 shares of common stock for
services and recorded an expense of $23,250, which is included in
general and administrative expense in the accompanying consolidated
statement of operations.
We
issued an additional 1,037,500 shares of common stock and expensed
$124,691 during the year ended December 31, 2015 to other
consultants for various services, which is included in general and
administrative expense in the accompanying consolidated statement
of operations. All issued shares have been valued at the closing
price of our common stock on the date of
issuance.
See
Note 5 for more details on the shares of common stock issued in
connection with the Q3 2015 Notes, shares of common stock issued
upon conversion of convertible debentures and note payable and
shares of common stock issued in connection with the extension and
amendment of certain convertible debentures during
2015. See Note 3 for more details on the shares of
common stock issued in connection with the Novalere acquisition
during 2015 and the return of shares of common stock during 2015 in
connection with the Semprae merger transaction.
2013 Equity 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, 2016, no
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, 2016, 146,314 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. 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, 2016,
15,837,500 shares were available under the 2016 Plan.
Stock-Based Compensation
The stock-based compensation expense for the years
ended December 31, 2016 and 2015 was $954,753 and $1,298,240,
respectively, for the issuance of restricted stock units and stock
options to management, directors and consultants. 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.
We calculate the fair value of each stock option award on the date
of grant using Black-Scholes. As of December 31, 2016, the
remaining unamortized stock-based compensation expense to be
recognized in the consolidated statement of operations was
approximately $1.0 million and will be recognized over a remaining
weighted-average term of 2.5 years.
Stock Options
For
the years ended December 31, 2016 and 2015, the following weighted
average assumptions were utilized for the stock options granted
during the period:
|
|
|
|
|
Expected
life (in years)
|
10.0
|
6.0
|
|
Expected
volatility
|
227.2%
|
228.8%
|
|
Average
risk-free interest rate
|
1.76%
|
2.16%
|
|
Dividend
yield
|
-
|
-
|
|
Grant
date fair value
|
$0.18
|
$0.10
|
The
dividend yield of zero is based on the fact that we have never paid
cash dividends and has no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of our common stock over the period commensurate with
the expected life of the stock options. Expected life in years
is based on the “simplified” method as permitted by ASC
Topic 718. We believe that all stock options issued under its
stock option plans meet the criteria of “plain vanilla”
stock options. We use a term equal to the term of the stock
options for all non-employee stock options. The risk-free
interest rate is based on average rates for treasury notes as
published by the Federal Reserve in which the term of the rates
correspond to the expected term of the stock options.
The
following table summarizes the number of stock options outstanding
and the weighted average exercise price:
|
|
|
Weighted average
exercise price
|
Weighted remaining
contractual life (years)
|
Aggregate
intrinsic value
|
|
Outstanding
at December 31, 2014
|
113,000
|
$0.37
|
9.5
|
-
|
|
Granted
|
83,000
|
$0.10
|
10.0
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Cancelled
|
-
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at December 31, 2015
|
196,000
|
$0.31
|
9.0
|
-
|
|
Granted
|
91,500
|
$0.17
|
10.0
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Cancelled
|
(50,000)
|
$0.31
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at December 31, 2016
|
237,500
|
$0.22
|
8.6
|
$14,293
|
|
|
|
|
|
|
|
Vested
at December 31, 2015
|
196,000
|
$0.31
|
9.0
|
$-
|
|
Vested
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, 2016. During the
years ended December 31, 2016 and 2015, we recognized stock-based
compensation from stock options of $20,390 and $8,564,
respectively.
Restricted Stock Units
The
following table summarizes the restricted stock unit activity
for the years ended December 31, 2016 and 2015:
|
|
|
|
Outstanding
at December 31, 2014
|
8,270,239
|
|
Granted
|
10,354,497
|
|
Exchanged
|
(500,000)
|
|
Cancelled
|
(570,000)
|
|
Outstanding
at December 31, 2015
|
17,554,736
|
|
Granted
|
14,636,106
|
|
Exchanged
|
(19,315,994)
|
|
Cancelled
|
-
|
|
Outstanding
at December 31, 2016
|
12,874,848
|
|
|
|
|
Vested
at December 31, 2015
|
14,398,487
|
|
Vested
at December 31, 2016
|
8,493,600
|
The vested
restricted stock units at December 31, 2016 and 2015 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.
During the years
ended December 31, 2016 and 2015, we issued 14,636,106 and
10,354,497 restricted stock units to employees, board members and
consultants. In 2016, 886,107 were from the 2013 Plan and vested
immediately, 9,999,999 were from the 2014 Plan and 3,750,000 were
from the 2016 Plan. A total of 6,000,001 of 9,999,999
restricted stock units issued under the 2014 Plan vested
immediately and the remaining 3,999,998 vested upon the closing of
the Beyond Human® asset acquisition. The restricted stock
units issued under the 2016 Plan vest as to 25% on the one year
anniversary from the date of grant and then in equal quarterly
installments for the next two years. In 2015, 9,370,000 were from the 2014 Plan and
vest one-third on the issuance date and then monthly for the next
two years. The remaining restricted stock units in 2015 were from
the 2014 Plan and vested immediately. The grant date
fair value of restricted stock units issued during the years ended
December 31, 2016 and 2015 was $1,499,268 and $1,363,413,
respectively. For the years ended December 31, 2016 and 2015, we
recognized $934,363 and $1,289,676, respectively, of stock-based
compensation expense for the vested units. As of December 31, 2016,
compensation expense related to unvested shares not yet recognized
in the consolidated statement of operations was approximately $1.0
million and will be recognized over a remaining weighted-average
term of 2.5 years.
Warrants
During the year ended December 31, 2014, we issued
380,973 warrants in connection with notes payable (which were
repaid in 2013). The warrants 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 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 expire
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.
In
January 2015, we issued 250,000 warrants with an exercise price of
$0.30 per share to our former Chief Financial Officer 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 Q3 2015
Notes, 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. The increase in the fair value of
the warrants from the additional warrants issued is included in the
change in fair value of derivative liabilities in the consolidated
statement of operations during the year ended December 31, 2015
(see Note 9).
In connection with
the Q3 2015 Notes, we issued 1,808,333 warrants with an exercise
price of $0.30 per share and expire in 2020 (see Note 5). 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.
In connection with
the 2016 Notes, we issued 4,220,000 warrants to the Investors and
placement agents with an exercise price of $0.40 per share and
expire in 2021 (see Note 5).
At December 31,
2016 and 2015, there are 5,967,054 and 6,372,831 fully vested
warrants outstanding, respectively. The weighted average exercise
price of outstanding warrants at December 31, 2016 is $0.34 per
share, the weighted average remaining contractual term is 4.2 years
and the aggregate intrinsic value of the outstanding warrants is
$104,160.
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, 2016 and 2015 was 85,436,145 and 41,359,779,
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, 2016 and
2015 was 8,670,237 and 11,157,751,
respectively.
The
total weighted average shares outstanding used in the basic and
diluted net loss per share calculation for the years ended December
31, 2016 and 2015 was 94,106,382 and 52,517,530,
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, 2016 and 2015:
|
|
|
|
|
|
|
|
Gross number of shares excluded:
|
|
|
|
Restricted
stock units - unvested
|
4,381,248
|
3,156,249
|
|
Stock
options
|
237,500
|
196,000
|
|
Convertible
debentures and accrued interest
|
6,414,132
|
12,751,512
|
|
Warrants
|
5,967,054
|
6,372,831
|
|
Total
|
16,999,934
|
22,476,592
|
The
above table does not include the ANDA Consideration Shares related
to the Novalere acquisition totaling 138,859 and 12,947,655 at
December 31, 2016 and 2015, respectively, 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, January 2015 Non-Convertible
Debenture to the former Chief Financial Officer 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, 2016 and 2015
are represented in the table below:
|
|
2016
|
|
2015
|
|
|
Expected
life (in years)
|
3.1
– 4.0
|
|
4.1
– 5.0
|
|
|
Expected
volatility
|
188%
– 230%
|
|
226%
|
|
|
Average
risk-free interest rate
|
0.86%
– 1.47%
|
|
1.15%
– 1.54%
|
|
|
Dividend
yield
|
-
|
|
-
|
|
We have determined
the embedded conversion features of the Q3 2015 Notes and 2016
Notes (see Note 5) to be derivative liabilities because the terms
of the embedded conversion features contain anti-dilution
protection and therefore, cannot be considered indexed to our own
stock which is a requirement for the scope exception as outlined
under FASB ASC 815. The embedded conversion features are
to be measured at fair value and classified as a liability with
subsequent changes in fair value recorded in earnings at the end of
each reporting period. We have determined the fair value
of the derivative liabilities using a Path-Dependent Monte Carlo
Simulation Model. The fair value of the derivative
liabilities using such model will be affected by changes in inputs
to that model and is based on the individual characteristics of the
embedded conversion features on the valuation date as well as
assumptions for volatility, remaining expected life, risk-free
interest rate, credit spread, probability of default by us and
acquisition of us. We will continue to classify the fair
value of the embedded conversion features as a liability until the
conversion features are exercised, expire or are amended in a way
that would no longer require these embedded conversion features to
be classified as a liability, whichever comes
first. During the year ended December 31, 2016, the Q3
2015 Notes were fully converted and certain 2016 Notes were
converted into shares of common stock which resulted in the fair
value of the embedded conversion feature derivative liability on
the dates of conversion of $3,111,828 to be reclassified to
additional paid-in capital (see Note 8). The
anti-dilution protection for the embedded conversion features
survive the life of the 2016 Notes which mature at July 30, 2017
and August 25, 2017.
The
derivative liabilities are a Level 3 fair value measure 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, 2016 and 2015 are as
follows:
|
|
|
2016
|
|
|
2015
|
|
|
Stock
price
|
$
|
0.05
– 0.50
|
|
$
|
0.07
– 0.16
|
|
|
Strike
price
|
$
|
0.15
– 0.25
|
|
$
|
0.15
|
|
|
Expected
life (in years)
|
|
0.3
– 1.1
|
|
|
0.7
– 1.1
|
|
|
Expected
volatility
|
|
121%
– 274%
|
|
|
101%
– 119%
|
|
|
Average
risk-free interest rate
|
|
0.28%
– 0.69%
|
|
|
0.28%
– 0.60%
|
|
At
December 31, 2016 and 2015, 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, 2016
|
|
|
|
|
|
|
|
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
|
At
December 31, 2015
|
|
|
|
|
|
|
|
Embedded
conversion feature derivative liabilities
|
$301,779
|
$-
|
$-
|
$301,779
|
$301,779
|
|
Warrant
derivative liabilities
|
432,793
|
-
|
-
|
432,793
|
432,793
|
|
Total
|
$734,572
|
$-
|
$-
|
$734,572
|
$734,572
|
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,
2016 and 2015:
|
Warrant derivative liabilities:
|
|
|
Beginning
balance December 31, 2014
|
$-
|
|
Initial
fair value of warrant derivative liability with January 2015
Non-Convertible Debenture
|
99,999
|
|
Initial
fair value of warrant derivative liability with January 2015
Non-Convertible Debenture
to Former Chief Financial Officer
|
49,999
|
|
Initial
fair value of warrant derivative liability with the February 2014
Convertible Debentures
|
76,299
|
|
Change
in fair value
|
206,496
|
|
Ending
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
|
|
|
|
|
Embedded conversion feature derivative liabilities:
|
|
|
Beginning
balance December 31, 2014
|
$-
|
|
Initial
fair value of embedded conversion feature derivative liabilities
with the Q3 2015 Notes
|
901,784
|
|
Change
in fair Value
|
(600,005)
|
|
Ending
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
|
NOTE 10 – INCOME TAXES
We
are subject to taxation in the United States and
California. The provision for (benefit
from) income taxes for the years ended December 31, 2016 and
2015 are summarized below:
|
|
|
|
|
Current:
|
|
|
|
Federal
|
$(800)
|
$(759,428)
|
|
State
|
3,200
|
2,400
|
|
Total
current
|
2,400
|
(757,028)
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
2,552,758
|
(525,815)
|
|
State
|
650,597
|
(96,157)
|
|
Change
in valuation allowance
|
(3,203,355)
|
621,972
|
|
Total
deferred
|
-
|
-
|
|
Income
tax provision (benefit)
|
$2,400
|
$(757,028)
|
As
a result of the Novalere acquisition and the intangible assets
acquired (see Note 3), we released $759,428 of its deferred tax
valuation allowance during the year ended December 31, 2015 which
is recorded as an increase in goodwill (see Note 4) and benefit
from income taxes in the accompanying consolidated statement of
operations. We also recorded an impairment against this goodwill of
$759,428. At December 31, 2016, we had federal net operating loss
carry forwards of approximately $20,890,000 which may be offset
against future taxable income through 2036, and a California net
operating loss carryforward of approximately
$19,736,000. No net deferred tax assets are recorded at
December 31, 2016 and 2015, as all deferred tax assets and
liabilities have been fully offset by a valuation allowance due to
the uncertainty of future utilization.
At
December 31, 2016 and 2015, the approximate deferred tax assets
(liabilities) consist of the following:
|
|
|
|
|
|
|
|
|
Net
operating loss carry-forwards
|
$8,108,000
|
$3,792,000
|
|
State
taxes
|
1,000
|
1,000
|
|
Equity
based instruments
|
374,000
|
1,585,000
|
|
Deferred
compensation
|
916,000
|
575,000
|
|
Intangibles
|
-
|
158,000
|
|
Derivative
liabilities
|
127,000
|
120,000
|
|
Other
|
125,000
|
106,000
|
|
Total
deferred tax assets
|
9,651,000
|
6,337,000
|
|
|
|
|
|
Intangibles
|
(1,572,000)
|
(1,687,000)
|
|
Warrants
|
(170,000)
|
(23,000)
|
|
Debt
discount
|
(252,000)
|
(172,000)
|
|
Other
|
(4,000)
|
(5,000)
|
|
Total
deferred tax liabilities
|
(1,998,000)
|
(1,887,000)
|
|
|
|
|
|
Less:
valuation allowance
|
(7,653,000)
|
(4,450,000)
|
|
|
|
|
|
Net
deferred tax assets
|
$-
|
$-
|
At
December 31, 2016 and 2015, we have recorded a full valuation
allowance against its net deferred tax assets of approximately
$7,653,000 and $4,450,000 respectively. The change in
the valuation allowance during the years ended December 31, 2016
and 2015 was an increase of approximately $3,203,000 and a decrease
of approximately $622,000, respectively, and a full valuation
allowance has been recorded since, in the judgement 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, 2016 and 2015 to the effective tax rate is
as follows:
|
|
|
|
|
Expected
federal tax
|
34.00%
|
34.00%
|
|
State
tax (net of federal benefit)
|
(0.02)%
|
(0.04)%
|
|
Contingent
consideration
|
(3.15)%
|
0.94%
|
|
Fair
value of embedded conversion feature in excess of allocated debt
proceeds
|
(5.01)%
|
-%
|
|
Restricted
stock
|
(7.34)%
|
-%
|
|
Release
of valuation allowance
|
-%
|
18.10%
|
|
Other
|
0.86%
|
0.57%
|
|
Valuation
allowance
|
(19.36)%
|
(35.49)%
|
|
|
|
|
|
Total
|
(0.02)%
|
18.08%
|
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, 2016 and 2015. 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 2016 and 2015. 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.
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.
Operating Lease
In December 2013,
we entered into a lease agreement for 2,578 square feet of office
space that commenced on December 10, 2013 and continues until
January 31, 2019. Monthly rent at December 31, 2016 is in the
amount of $7,347, with an approximate 4% increase in the base rent
amount on an annual basis.
Rent expense for
the years ended December 31, 2016 and 2015 was $88,513 and $86,931,
respectively. The following represents future annual minimum lease
payments as of December 31, 2016:
|
2017
|
$91,849
|
|
2018
|
95,880
|
|
2019
|
8,018
|
|
Total
|
$195,747
|
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
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
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
below.
In January and
February 2017, we issued 1,159,023 shares of common stock to
various consultants for services rendered. The fair value of the
common stock issued was approximately $321,000.
In March 2017,
certain 2016 Notes holders elected to convert principal and
interest of $350,610 into 1,402,440 shares of common
stock.
On January 1, 2017,
the Company and CRI agreed to extend the term of the Amended CRI
Asset Purchase Agreement to December 31, 2017 (see Note 2). 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 $45,000 as the number of shares of common
stock issued was based on the closing price of our common stock on
December 30, 2016. If CRI does not earn royalties larger than the
prepaid amount of $45,000 in 2017, the term of the Amended CRI
Asset Purchase Agreement is automatically extended one additional
year to December 31, 2018.
On
January 4, 2017, we signed an employment agreement with Randy
Berholtz, MBA, JD to become the Executive Vice President, Corporate
Development and General Counsel of the Company. He will also become
the Secretary of the Company. Mr. Berholtz began his position on
January 9, 2017. Mr. Berholtz had previously been a part-time
consultant for us from July 2013 to mid-May 2016. The Company and
Mr. Berholtz entered into an employment agreement, effective,
January 9, 2017 wherein Mr. Berholtz received RSUs covering
2,000,000 shares of our common stock; 666,666 of which will vest
after one year of employment. The remaining RSU’s will vest
in eight equal quarterly installments over two years of continued
service.
On January 19,
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
(“Q1 2017 Note Payable”). The note has an OID of $15,000 and requires
payment of $165,000 in principal upon maturity. The Q1 2017
Note Payable bears interest at the rate of 5% per annum and the
principal amount and interest are payable at maturity on November
18, 2017. In connection with the Q1 2017 Note Payable, we issued
the investor 330,000 restricted shares of common
stock.