10-K
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, 2017
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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8845 Rehco Road, San Diego, CA
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92121
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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 nonaccelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act (Check one):
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company ☒
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Emerging growth company ☐
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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 ☒
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
As of
June 30, 2017, 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 $11.7 million, based on the closing price of
$0.1126 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.
Indicate
the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of March 29, 2018, the registrant had 192,555,147 shares of
common stock outstanding.
Portions
of the registrant’s definitive proxy statement for its 2018
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®”, “Apeaz®”,
“ArthriVarx®”, “Diabasens™”,
“Musclin™”, and “Regenerum™”
and other trademarks and intellectual
property of ours appearing in this report are our property, unless
indicated otherwise. Can-C® is a registered trademark of
International AntiAging Systems that is licensed to the
Company. Amazon® is a registered trademark owned by
Amazon Technologies, Inc., eBay® is a registered trademark
owned by eBay, Inc., Wish.com is owned by Wish, Inc., Sears.com is
owned by Sears Brands, LLC, Walmart.com® is a registered
trademark owned by Wal-Mart Stores, Inc., and Walgreens.com is
owned by Walgreen Co. 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,
consumer care products, supplements and certain related devices to
improve men’s and women’s health and vitality, urology,
brain health, pain and respiratory diseases. We deliver
innovative and uniquely presented and packaged health solutions
through our (a) OTC medicines, devices, consumer and health
products, and clinical supplements, which we market directly, (b)
commercial retail and wholesale partners to primary care
physicians, urologists, gynecologists and therapists, and (c)
directly to consumers through our proprietary Beyond Human™
Sales & Marketing Platform including print media, on-line
channels, websites, retailers and wholesalers. We are dedicated to being a leader in developing
and marketing new OTC and branded Abbreviated New Drug Application
(“ANDA”) products, supplements and certain related
devices. 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 proprietary 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 our
Amazon®, eBay®, Wish.com, Sears.com, Walmart.com®,
and Walgreens.com on-line stores and other e-commerce business
platforms) channels to tap new markets and drive demand for such
products and to establish physician relationships. We currently
have 28 products marketed in the United States with 12 of those
being marketed and sold in multiple countries around the world
through some of our 18 international commercial partners. We
currently expect to launch an additional seven to ten products in
the U.S. in 2018 and we currently have approvals to launch certain
of our already marketed products in at least six 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).
Our Strategy
Our
corporate strategy focuses on two primary objectives:
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1.
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Developing a
diversified product portfolio of exclusive, unique and patented
non-prescription OTC and branded ANDA drugs, devices, consumer health
products, and clinical supplements through: (a) the introduction of
line extensions and reformulations of either our or third-party
currently marketed products; (b) the development of new proprietary
OTC products, supplements and devices and (c) the acquisition of
products or obtaining exclusive licensing rights to market such
products; and
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2.
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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®, eBay®, Wish.com, Sears.com, Walmart.com®
and Walgreens.com 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.
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We
believe that our proven ability to market, license, acquire and
develop brand name non-prescription pharmaceutical and consumer
health products and devices uniquely positions us to commercialize
our products and grow in this market in a differentiated way. The
following are additional details about our strategy:
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Focusing on acquisition and
licensing of commercial, non-prescription pharmaceutical and
consumer health products, supplements and certain related devices
that are well aligned with current therapeutic areas of male and
female sexual health, urology, pain, vitality and respiratory
diseases. In general, we seek non-prescription
pharmaceutical (OTC monograph, Rx to OTC ANDA switched drugs) and
consumer health products, supplements and certain related devices
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, (6) UriVarx® from
Seipel Group, (7) Can-C® eye drops and supplement from
International AntiAging Systems, (8) our 9 Beyond Human®
supplements from Beyond Human, LLC, (9) MZS™, melatonin from
International AntiAging Systems and (10) Musclin™ from the
University of Iowa;
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Increasing the number of
U.S. non-exclusive distribution channel partners for print media,
direct mailing 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 four-pronged approach. First, we are
seeking to increase our print media and direct to consumer mailings
for our products. Second, we are seeking to expand the number of
OTC direct selling partners, such as the larger in-store retail and
wholesale 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. Third, we are working to
expand our online presence through relationships with well-known
online sellers and the building of our own platforms such as
established Amazon®, eBay®, Wish.com, Sears.com,
Walmart.com® and Walgreens.com among other stores. Fourth, 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 strong scientific 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 18 commercial partnerships covering our products in
110 countries outside the U.S.;
●
Developing our own
proprietary products and a proprietary patent and trademark
portfolio to protect the therapeutic products and categories we
desire to enter. We have developed certain of our products
ourselves, such as Apeaz® for pain, Xyralid® for
hemorrhoids and Diabasens™ a diabetic foot cream. 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. To date, we have four issued U.S. patents,
seven U.S. patent applications, ten foreign patents, and four
foreign patent applications. We also currently have 23 U.S.
trademark registrations, 29 U.S. trademark applications, 25 foreign
trademark registrations and 25 foreign trademark applications;
and
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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.
Marketed Products
We
currently market and sell 28 products in the U.S. and 12 in
multiple countries around the world through our 18 international
commercial partners:
1.
Vesele® for
promoting sexual health (U.S. and U.K.);
2.
Zestra® for
female arousal (U.S., U.K., Denmark, Belgium, France, Malaysia,
India, Monaco, Canada, Morocco, the UAE, Hong Kong, South Africa
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® Eagle 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;
17.
UriVarx®
for overactive bladder and urinary incontinence;
18.
PEVarx® to
support peak sexual performance and stamina;
19.
ProstaGorx®
for prostate support;
20.
FlutiCare®
for allergy symptom relief;
21.
Apeaz® for
pain relief;
22.
AllerVarx®
for allergy relief;
23.
ArthriVarx®
for joint pain;
24.
Xyralid® a
hemorrhoid cream;
26.
Can-C®
capsules, an eye care supplement;
27.
MZS™, a
melatonin formula to stabilize circadian rhythms, improve hormonal
cyclicity and boost immunity; and
28.
Diabasens™,
a diabetic foot cream.
Below
is a more detailed description of each of our main products that we
currently market and sell:
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 U.S. 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.
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 arousal liquid market is estimated to
be around $500.0 million on a U.S. basis.
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).
EjectDelay® is our proprietary, clinical proven OTC FDA
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).
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 regular use
of Sensum+®.
(6)
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®.
(7)
Beyond Human® Ketones
Beyond
Human® Ketones is a proprietary blend of compounds and
antioxidants, including resveratrol, African Mango Seed Extract,
Green Tea Extract, Cayenne, Acai Fruit, Grapefruit and Kelp. It is
designed to provide customers with increased energy and a faster
metabolism to burn fat.
(8)
Beyond Human® Krill Oil
Beyond Human® Krill Oil is a supplement that delivers
Omega-3-6-9, an essential fatty acid that is not produced by your
body. It has been shown to help with the prevention of heart
disease, inflammation, and improves cardiovascular
health.
(9)
Beyond Human® Omega 3 Fish Oil
Beyond
Human® Omega 3 Fish Oil is a high quality formula with ingredients
in a natural balance. Omega-3 is a great way to maintain a healthy
immune system and improve brain function.
(10)
Beyond Human® Eagle Vision Formula
Beyond
Human® Eagle Vision Formula utilizes antioxidant power to keep
eyes safe from harmful free radicals.
(11)
Beyond Human® Blood Sugar
Beyond
Human® Blood Sugar contains Biotin (B7) a chemical that acts
similar to insulin in helping reduce blood sugar levels and risk of
bacterial infections.
(12)
Beyond Human® Colon Cleanse
Beyond
Human® Colon Cleanse is a supplement designed to promote colon
health.
(13)
Beyond Human® Green Coffee Extract
Beyond
Human® Green Coffee Extract contains the pure extract of
chlorogenic acid which is among the world's most popular weight
loss supplements.
(14)
Beyond Human® Growth Agent
Beyond
Human® Growth Agent contains hGH or Human Growth Hormone and is
designed to increase muscle mass, and bolster endurance
deeper among other effects.
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.
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, decrease the dynamics of sperm DNA fragmentation and
improves on the inventory of mobile
sperms.
UriVarx®
is a proprietary supplement clinically proven in a published Phase
2 clinical trial 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.
PEVArx®
is a proprietary supplement clinically proven to support peak
sexual performance and stamina in a multi-center,
non-interventional study in 665 men.
ProstaGorx® is a clinical strength, multi-response
prostate supplement, scientifically formulated to effectively
maintain good prostate health and help in preventing prostate
issues in the future.
(20)
FlutiCare® (Fluticasone propionate nasal spray)
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).
We developed our proprietary product Apeaz®, which is an OTC
FDA monograph compliant drug containing the active drug ingredient
methyl salicylate and indicated for the minor aches and pains of
muscles and joints associated with simple backaches, arthritis,
strains, bruises and sprains.
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.
This nutritional supplement is designed to relieve the pain
associated with arthritis.
Xyralid®
is a lidocaine based OTC FDA monograph compliant cream for the
relief of pain and symptoms caused by hemorrhoids.
Can-C®
is an eye drops lubricant containing the antioxidant
N-Acetylcarnosine molecule which we have licensed the rights to
sell on a worldwide basis from a third party.
Can-C®
Supplement is used with Can-C® Eye Drops and is thought to
help to enhance free
radical protection and reduce the oxidative environment inside the
eye. We have licensed the rights to sell the Can-C®
Supplement form a third party.
MZS™
Sleep Aid is a supplement containing melatonin, zinc and selenium
to help in improving sleep patterns in people.
Diabasens™
is a proprietary cream designed to increase blood flow in the
diabetic foot.
Pipeline Products
In
addition, we currently expect to launch in the U.S. the following
products in 2018 subject to the applicable regulatory approvals if
required:
(1)
UriVarx™ UTI Urine Strips
UriVarx™ UTI Urine
Strips are FDA cleared diagnostic strips for home use that a man or
woman can use to determine if they have a urinary tract infection.
They will be sold with our UriVarx® supplement product
described above as well as on their own as replacement strips. The
UriVarx™ UTI Urine
Strips are manufactured by our partner, ACON Laboratories, Inc. We
currently expect to launch the UriVarx™ UTI Urine Strips in the second
quarter of 2018.
(2)
Xyralid® Suppositories
Xyralid®
Suppositories are OTC FDA monograph suppositories indicated for the
relief of both internal and external hemorrhoidal symptoms. The
drug works by constricting or shrinking swollen hemorrhoidal
tissues and gives prompt soothing relief from painful burning,
itching and discomfort. We currently expect to launch this product
in the second quarter of 2018.
(3)
GlucoGorx™ Supplement, Glucometer, Lancing Device and
GlucoGorx™ Strips
GlucoGorx™
is a supplement made of a combination of herbs and
nutrients designed to balance and maintain healthy blood
sugar levels. The Glucometer, Lancing Device and
GlucoGorx™ Strips are part of an expected FDA cleared kit
that we will bundle with GlucoGorx™ to provide customers with
the ability to utilize the supplement’s benefits and to test
their blood sugar levels in their own homes in a quick and
efficient manner. The Glucometer, Lancing Device and
GlucoGorx™ Strips are manufactured by our partner ACON
Laboratories, Inc. We currently expect to launch this product and
the kit in the second half of 2018.
(4)
Vesele™ Nitric Oxide Strips
We have
developed the Vesele™
Nitric Oxide Strips to be used with our supplement product
Vesele® to measure saliva levels of nitric oxide and help
consumers monitor the effect of Vesele® real time on their blood flow
increase. We currently
expect to launch this product in the second quarter of
2018.
(5)
RecalMax™ Nitric Oxide Strips
We have
developed the RecalMax™ Nitric Oxide Strips to be used
with our product RecalMax™ to measure saliva levels of
nitric oxide and help consumers monitor the effect of
RecalMax™ real time
on their blood flow increase. We currently expect to launch
this product in the second quarter of 2018.
Musclin™
is a proprietary supplement made of two FDA Generally Recognized As Safe
(GRAS) approved ingredients designed to increase muscle
mass, endurance and activity. The main ingredient in
Musclin™ is a natural
activator of the transient
receptor potential cation channel, subfamily V, member 3
(TRPV3) channels on muscle fibers responsible to increase
fibers width resulting in larger muscles. We currently expect to
launch this product in the second half of 2018.
Regenerum™
is a proprietary product containing two natural molecules; one is
an activator of the TRPV3 channels resulting in the increase of
muscle fiber width, and the second targets a different unknown
receptor to build
the muscle's capacity for
energy production and increases physical endurance, allowing longer
and more intense exercise. Regenerum™ is being developed for patients
suffering from muscle wasting. We currently expect to launch
this product in 2019 pending successful clinical trials in patients
with muscle wasting or cachexia.
In
addition to the above product pipeline, the Company currently
intends to license and acquire other products that it may launch in
2018.
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, which in addition to the print includes extensive
on-line media channels through our Amazon®, eBay®,
Wish.com, Sears.com, Walgreens.com and Walmart.com® sites,
over 170 websites and over 2.5 million subscribers, (b) working
with direct retail and wholesale commercial channel partners in the
U.S. and also directly marketing the products ourselves to
physicians, urologists, gynecologists and therapists and to other
healthcare providers, and (c) working with exclusive commercial
partners outside of the U.S. that would be responsible for sales
and marketing in those territories. We have now fully integrated
most of our existing line of products such as Vesele®,
Sensum+®, UriVarx®, Zestra®, RecalMax™,
Xyralid®, FlutiCare®, Apeaz® and other
products into the Beyond
Human™
sales and marketing platform. We plan
to integrate other products upon their commercial launches in 2018.
We also market and distribute our products in the U.S. through
retailers, wholesalers and other online channels. Our strategy
outside the U.S. is to partner with companies who can effectively
market and sell our products in their countries through their
direct marketing and sales teams. The strategy of using our
partners to commercialize our products is designed to limit our
expenses and fix our cost structure, enabling us to increase our
reach while minimizing our incremental
spending.
Our
current OTC, Rx-to-OTC ANDA switch drugs and consumer care products
marketing strategy is to focus on four main U.S. markets, all of
which we 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;(4) Brain
health; and (5) Pain. 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, 2017 and 2016, we incurred research and
development costs totaling $38,811, and $77,804, respectively. This
decrease was a result of the cost of salary and the related health
benefits for an employee in 2016 compared to 2017 and the
conclusion of testing, non-human primate safety studies and
clinical studies for our products Zestra®, Zestra Glide®,
EjectDelay® and Sensum+® completed in 2016 compared to
2017. In addition, in 2016, we issued shares of common stock to CRI
with a fair value of $23,000 for certain clinical and regulatory
milestone payments due under the in-license agreement for
Sensum+®.
Employees
We
currently have twelve 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 ten patents registered
outside the U.S. We currently have seven patent applications
pending in the U.S. and four 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
23 trademark registrations in the U.S. and have 29 trademark
applications pending in the U.S. We also own 25 trademarks
registered outside of the U.S., with 25 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 8845 Rehco Road, San Diego,
California 92121 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, 2017, we had an accumulated deficit of
approximately $35.6 million.
In addition, we incurred net losses of approximately $6.5
million and $13.7 million for the years ended December 31, 2017 and
2016, 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, 2017, we had approximately $1.6 million in cash.
We had a net loss of approximately
$6.5 million and $13.7 million for the years ended December 31,
2017 and 2016, 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 and 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 April 1, 2019, no assurances can be given that we will not
need to raise additional capital to fund our business plan. 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.
U.S. federal income tax reform could adversely affect
us.
On
December 22, 2017, President Trump signed into law the “Tax
Cuts and Jobs Act” (TCJA) that significantly reforms the
Internal Revenue Code of 1986, as amended. The TCJA, among other
things, includes changes to U.S. federal tax rates, imposes
significant additional limitations on the deductibility of
interest, allows for the expensing of capital expenditures, and
puts into effect the migration from a “worldwide”
system of taxation to a territorial system. We do not expect tax
reform to have a material impact to our projection of minimal cash
taxes or to our net operating losses. Our net deferred tax assets
and liabilities will be revalued at the newly enacted U.S.
corporate rate, and the impact will be recognized in our tax
expense in the year of enactment. We continue to examine the impact
this tax reform legislation may have on our business. The impact of
this tax reform on holders of our common stock is uncertain and
could be adverse. This Annual Report does not discuss any such tax
legislation or the manner in which it might affect purchasers of
our common stock. We urge our stockholders, including purchasers of
common stock in this offering, to consult with their legal and tax
advisors with respect to such legislation and the potential tax
consequences of investing in our common stock.
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 only generated approximately $1.0 million in net
revenue in 2014, approximately $736,000 in 2015 and approximately
$8.8 million and $4.8 million in net revenue for the years ended
December 31, 2017 and 2016, respectively, 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 direct to consumer advertisements and third
parties to help us promote our products to physicians in the U.S.,
as well as, 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 $4.8 million in net revenue in 2016, and
approximately $8.8 million during the year ended December 31, 2017.
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 as a
result of the current U.S. presidential
administration.
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
appointed and employed 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 spend 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.
We may face additional litigation owing to the nature and sales
channels of our products.
Since
we currently have 28 products on the market in the U.S. and have
growing revenue, from time to time, we may face product liability
litigation and/or other litigation owing to the manner that we
market and sell certain of our products such as through nationwide
newspaper advertisements, direct mailing or other direct to
consumer campaigns. If we are unsuccessful in defending claims
brought against us, such as those brought in the case described in
Item 3 of this Annual Report on Form 10-K, the result could have a
material impact on the profit and losses of the
Company.
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.
The third-party manufacturer from
the Novalere acquisition may never receive ANDA approval to
manufacture FlutiCare®, which we are relying upon to generate future
revenue outside the U.S. and as a second source of supply within
the U.S.
Because of the unpredictability of the FDA review process for
generic drugs, the ANDA filed by the third-party manufacturer to
enable it to manufacture 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
outside of the U.S. unless we secure another manufacturing source
and we will not have a second source of supply for the
manufacturing of FlutiCare® in the
U.S.
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, 2017, we had 167,420,605 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.
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,
2017.
In
October 2017, we entered into a commercial lease agreement for
16,705 square feet of office and warehouse space in San Diego, CA
that commenced on December 1, 2017 and continues until April 30,
2023. The initial monthly base rent is $20,881 with an approximate
3% increase in the base rent amount on an annual basis, as well as,
rent abatement for rent due from January 2018 through May 2018. We
hold an option to extend the lease an additional 5 years at the end
of the initial term. Under the terms of the lease we are also
entitled to a tenant improvement allowance of $100,000 in which
completion of the tenant improvements and receipt of the allowance
was in 2018.
We believe that our existing facilities are suitable and adequate
to meet our current business requirements, but we may 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.
James L. Yeager, Ph.D., and Midwest Research Laboratories, LLC v.
Innovus Pharmaceuticals, Inc. On January 18, 2018, Dr.
Yeager and Midwest Research Laboratories (the
“Plaintiffs”) filed a complaint in the Illinois
Northern District Court in Chicago, Illinois, which Plaintiffs
amended on February 26, 2018 (“Amended
Complaint”). The Amended Complaint alleges that the
Company violated Dr. Yeager’s right of publicity and made
unauthorized use of his name, likeness and identity in advertising
materials for its product Sensum+®. Plaintiffs seek actual and
punitive damages, costs and attorney’s fees, an injunction
and corrective advertising. We intend to file a response to the
Amended Complaint by May 21, 2018. We believe that the
Plaintiffs’ allegations and claims are wholly without merit,
and we intend to defend the case vigorously and assert
counterclaims against the Plaintiffs. More specifically, we
believe that we secured and paid for all of the rights claimed by
Dr. Yeager from his company Centric Research Institute
(“CRI”) pursuant to agreements with CRI (the “CRI
Agreements”) and that CRI has indemnification obligations
under the CRI Agreements for all expenses and losses associated
with the claims made by the Plaintiffs.
From time to time, in addition to the matter identified above, we
may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. Litigation is subject to
inherent uncertainties, and an adverse result in the matter
identified above or other matters may harm our
business.
Not applicable.
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
|
$0.390
|
$0.100
|
$0.100
|
$0.028
|
|
Second
Quarter
|
$0.150
|
$0.082
|
$0.369
|
$0.049
|
|
Third
Quarter
|
$0.139
|
$0.087
|
$0.663
|
$0.205
|
|
Fourth
Quarter
|
$0.117
|
$0.078
|
$0.330
|
$0.161
|
As of March 29, 2018, we
had 564 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.
Equity Compensation Plan Information
The following table provides information as of December 31, 2017
regarding our equity compensation plans.
|
Plan
Category
|
Number of Securities to be Issued Upon Exercise of Outstanding
Options,
Warrants and Rights
|
Weighted-Average Exercise Price of Outstanding
Options,
Warrants and Rights
|
|
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans (excluding securities reflected
in column(a))
|
|
|
|
|
|
|
|
Equity Compensation
Plans Approved by Security Holders:
|
|
|
|
|
|
|
|
|
|
|
|
Amended and
Restated 2016 Equity Incentive Plan
|
4,168,987
|
$0.305
|
(1)
|
21,008,882
|
|
|
|
|
|
|
|
Equity Compensation
Plans Not Approved by Security Holders:
|
|
|
|
|
|
|
|
|
|
|
|
2013 Equity
Incentive Plan
|
1,036,849
|
$0.157
|
(1)
|
89,516
|
|
2014 Equity
Incentive Plan
|
8,073,999
|
$0.145
|
(1)
|
49,367
|
|
|
|
|
|
|
|
Total
|
13,279,835
|
$0.153
|
(1)
|
21,147,765
|
|
(1)
|
Excludes
outstanding RSUs, which have no associated exercise
price.
|
Recent Sales of Unregistered Securities
For the fourth quarter of 2017, we issued 669,328 restricted shares
of our common stock valued at $57,688 in exchange for services
under existing consulting and service agreements with third
parties.
For the fourth quarter of 2017, certain 2016 and 2017 Notes
Payable holders elected to exchange $515,546 in principal and
interest into 8,592,431 shares of common stock.
We entered into a private financing for $850,000 on December 4,
2017 and December 13, 2017 with three institutional investors. We
issued 1,600,000 restricted shares of common stock to the investors
in connection with the notes payable. In connection with this
financing, we issued 1,119,851 restricted shares of common stock to
a third-party consultant valued at $98,761.
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 additional 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.
Use of Proceeds from the Sale of Registered Securities
On March 15, 2017, our registration statement on Form S-1 (File
No. 333-215851) was declared effective by the SEC for our
public offering pursuant to which we sold an aggregate of
25,666,669 shares of our common stock at an offering price of $0.15
per share. There has been no material change in our use of
proceeds from our public offering as described in our final
prospectus filed with the SEC on March 17, 2017 pursuant to
Rule 424(b).
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,
consumer care products, supplements and certain related devices to
improve men’s and women’s health and vitality, urology,
brain health, pain and respiratory diseases. We deliver
innovative and uniquely presented and packaged health solutions
through our (a) OTC medicines, devices, consumer and health
products, and clinical supplements, which we market directly, (b)
commercial retail and wholesale partners to primary care
physicians, urologists, gynecologists and therapists, and (c)
directly to consumers through our proprietary Beyond Human™
Sales & Marketing Platform including print media, on-line
channels, websites, retailers and wholesalers. We are dedicated to being a leader in developing
and marketing new OTC and branded Abbreviated New Drug Application
(“ANDA”) products, supplements and certain related
devices. 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 proprietary 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 our
Amazon®, eBay®, Wish.com, Sears.com, Walmart.com®,
and Walgreens.com on-line stores and other e-commerce business
platforms) channels to tap new markets and drive demand for such
products and to establish physician relationships. We currently
have 28 products marketed in the United States with 12 of those
being marketed and sold in multiple countries around the world
through some of our 18 international commercial partners. We
currently expect to launch an additional seven to ten products in
the U.S. in 2018 and we currently have approvals to launch certain
of our already marketed products in at least six 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, devices, consumer health
products, and clinical supplements through: (a) the introduction of
line extensions and reformulations of either our or third-party
currently marketed products; (b) the development of new proprietary
OTC products, supplements and devices and (c) 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®, eBay®, Wish.com, Sears.com, Walmart.com®
and Walgreens.com 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 market and sell 28 products in the U.S. and 12 in
multiple countries around the world through our 18 international
commercial partners:
1.
Vesele® for
promoting sexual health (U.S. and U.K.);
2.
Zestra® for
female arousal (U.S., U.K., Denmark, Belgium, France, Malaysia,
India, Monaco, Canada, Morocco, the UAE, Hong Kong, South Africa
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® Eagle 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;
17.
UriVarx®
for overactive bladder and urinary incontinence;
18.
PEVarx® to
support peak sexual performance and stamina;
19.
ProstaGorx®
for prostate support;
20.
FlutiCare®
for allergy symptom relief;
21.
Apeaz® for
pain relief;
22.
AllerVarx®
for allergy relief;
23.
ArthriVarx®
for joint pain;
24.
Xyralid® a
hemorrhoid cream;
26.
Can-C®
Supplement, an eye care anti-oxidant supplement;
27.
MZS™ Sleep
Aid, a sleep aid supplement; and
28.
Diabasens™,
a cream to increase blood flow in the diabetic foot.
In
addition, we currently expect to launch in the U.S. the following
products in 2018, subject to the applicable regulatory approvals,
if required:
1.
UriVarx™ UTI Urine Strips are FDA
approved diagnostic strips that a man or woman can use to determine
if they have a urinary tract infection (second quarter of
2018);
2.
Xyralid®
Suppositories are designed to be rectal suppositories for the
relief of hemorrhoids (second quarter of 2018);
3.
Vesele™ Nitric Oxide Strips for
measurement of nitric oxide levels (second quarter of
2018);
4.
RecalMax™
Nitric Oxide Strips for measurement of nitric oxide levels (second
quarter of 2018);
5.
GlucoGorx™
Supplement, Glucometer, Lancing Device and GlucoGorx™ Strips.
GlucoGorx™ is a supplement designed to help diabetics and
others control their levels of blood sugar. The Glucometer, Lancing
Device and GlucoGorx™ Strips are part of an FDA approved kit
that we will bundle with GlucoGorx™ (second half of
2018);
6.
Musclin™ for
muscle growth (second half of 2018);and
7.
Regenerum™
for muscle wasting (2019).
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, which in addition to the print includes extensive
on-line media channels through our Amazon®, eBay®,
Wish.com, Sears.com, Walgreens.com and Walmart.com® sites,
over 170 websites and over 2.5 million subscribers, (b) working
with direct retail and wholesale commercial channel partners in the
U.S. and also directly marketing the products ourselves to
physicians, urologists, gynecologists and therapists and to other
healthcare providers, and (c) working with exclusive commercial
partners outside of the U.S. that would be responsible for sales
and marketing in those territories. We have now fully integrated
most of our existing line of products such as Vesele®,
Sensum+®, UriVarx®, Zestra®, RecalMax™,
Xyralid®, FlutiCare®, Apeaz® and other
products into the Beyond
Human™
sales and marketing platform. We plan
to integrate other products upon their commercial launches in 2018.
We also market and distribute our products in the U.S. through
retailers, wholesalers and other online channels. Our strategy
outside the U.S. is to partner with companies who can effectively
market and sell our products in their countries through their
direct marketing and sales teams. The strategy of using our
partners to commercialize our products is designed to limit our
expenses and fix our cost structure, enabling us to increase our
reach while minimizing our incremental
spending.
Our
current OTC, Rx-to-OTC ANDA switch drugs and consumer care products
marketing strategy is to focus on four main U.S. markets all of
which we 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; (4) Brain
health; and (5) Pain. 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
West-Ward Pharmaceuticals Commercial Agreement
In May 2017, we entered into a commercial agreement with West-Ward
Pharmaceuticals International Limited (“WWPIL”), a
wholly-owned subsidiary of Hikma Pharmaceuticals PLC
(“Hikma”) (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY).
Pursuant to the commercial agreement, WWPIL provided us with the
rights to launch our branded, fluticasone propionate nasal spray
USP, 50 mcg per spray (FlutiCare®), under WWPIL’s
FDA approved ANDA No. 207957 in the U.S. in mid-November 2017. The
initial term of the commercial agreement is for two years, and upon
expiration of the initial term, the agreement will automatically
renew for subsequent one-year terms unless either party notifies
the other party in writing of its desire not to renew at least 90
days prior to the end of the then current term. The agreement
requires us to meet certain minimum product batch purchase
requirements in order for the agreement to continue to be in
effect.
Ex-U.S. Product License Agreements
On January 18, 2018, we entered into
an exclusive ten-year license agreement with Lavasta Pharma FZ-LLC,
a Dubai company (“Lavasta”), under which we granted to
Lavasta an exclusive license to market and sell ProstaGorx® in
the Kingdom of Saudi Arabia, Algeria, Egypt, the United Arab
Emirates, Lebanon, Jordan, Kuwait, Morocco, Tunisia, Bahrain, Oman,
Qatar, and Turkey, among other countries. If any country in the
territory under this agreement is ever listed on the U.S.
Department of Treasury’s restricted OFAC List or other list
of countries that a U.S. OTC pharma company cannot do business
with, then such country shall be removed from the list of countries
included in the territory in this agreement for such applicable
restricted period. Under the agreement, we received a
non-refundable upfront payment and we
will sell products to Lavasta at an agreed-upon transfer price.
Lavasta also has minimum annual purchase requirements for the
products during the term of the
agreement.
On January 5, 2018, we entered into an exclusive ten-year license
agreement with Acerus Pharmaceuticals Corporation, a Canadian
company (“Acerus”), under which we granted to Acerus an
exclusive license to market and sell UriVarx® in
Canada. Under the agreement, we received a non-refundable
upfront payment, we will be eligible
to receive up to CAD$1.65 million (USD$1.31 million at December 31,
2017) in milestone payments based on Acerus achieving certain sales
targets and we will sell UriVarx® to Acerus at an agreed-upon
transfer price. Acerus also has minimum annual purchase
requirements for UriVarx® during the term of the
agreement.
On April 24, 2017, we entered into an exclusive ten-year license
agreement with Densmore Pharmaceutical International, a Monaco
company (“Densmore”), under which we granted to
Densmore an exclusive license to market and sell our topical
treatment for Female Sexual Interest/Arousal Disorder
(“FSI/AD”) Zestra® in France and Belgium.
Under the agreement, we received a non-refundable upfront payment
and Densmore is obligated to order
certain minimum annual quantities of Zestra® at a
pre-negotiated transfer price per unit during the term of the
agreement. In July 2017, we entered into an amendment to the
agreement with Densmore to expand the product territory to
Singapore and Vietnam.
2018 Warrant Exercises
In the
first quarter of 2018, eleven of our warrant holders exercised
their Series B Warrants to purchase shares of common stock totaling
18,925,002 at an exercise price of $0.15 per share. We received net
cash proceeds of approximately $2.7 million. The remaining Series B
Warrants totaling 6,741,667 expired on March 21, 2018.
2018 and 2017 Notes Payable Financing
In the
first quarter of 2018, we entered into a securities purchase
agreement with three unrelated third-party investors in which the
investors loaned us gross proceeds of $1,227,500. The promissory notes have an OID of $269,375
and bear interest at the rate of 0% per annum. The principal
amount of $1,496,875 is to be repaid in twelve equal monthly
installments. Monthly installments of $68,490 began in February
2018 and are due through January 2019, and monthly installments of
$56,250 begin in April 2018 and are due through March 2019. In
connection with the promissory notes, we issued 1,282,000
restricted shares of common stock to the investors. In connection
with this financing in the first quarter of 2018, we issued 936,054
restricted shares of common stock to a third-party
consultant.
In
February and March 2018, we entered into securities purchase
agreements with two unrelated third-party investors in which the
investors loaned us gross proceeds of $650,000 pursuant to 5%
promissory notes. The notes have
an OID of $70,000 and requires payment of $720,000 in
principal. The notes bear interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on October 28, 2018 for the note issued in February and in three
installments on October 1, 2018, January 1, 2019 and April 1, 2019
for the note issued in March. In connection with the notes, we
issued the investors restricted shares of common stock totaling
1,485,000.
In the
fourth quarter of 2017, we entered into a securities purchase
agreement with two unrelated third-party investors in which the
investors loaned us gross proceeds of $1,000,000 pursuant to a 0%
promissory note. The notes have
an OID of $200,000 and require nine payments of $66,667 in
principal per month through July 2018 and twelve payments of
$50,000 in principal per month through December 2018. The
notes bear no interest per annum. In connection with the notes, we
issued the investors restricted shares of common stock totaling
600,000. In connection with the financing, we issued 1,119,851
restricted shares of common stock to a third-party
consultant.
In
December 2017, we entered into a securities purchase agreement with
an unrelated third-party investor in which the investor loaned us
gross proceeds of $350,000 pursuant to a 5% promissory
note. The note has an OID
of $40,000, bears interest at 5% per annum and requires principal
and interest payments of $139,750, $133,250 and $131,625 on June
15, 2018, September 15, 2018 and December 15, 2018,
respectively. In connection with the note, we issued the
investor restricted shares of common stock totaling
1,000,000.
Results of Operations
Year Ended December 31, 2017 Compared to Year Ended December 31,
2016
|
|
Year Ended
December 31,
2017
|
Year Ended
December 31,
2016
|
|
|
|
NET
REVENUE:
|
|
|
|
|
|
Product
sales, net
|
$8,806,300
|
$4,817,603
|
$3,988,697
|
82.8%
|
|
License
revenue
|
10,000
|
1,000
|
9,000
|
900.0%
|
|
Net revenue
|
8,816,300
|
4,818,603
|
3,997,697
|
83.0%
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
Cost
of product sales
|
1,848,325
|
1,083,094
|
765,231
|
70.7%
|
|
Research
and development
|
38,811
|
77,804
|
(38,993)
|
(50.1)%
|
|
Sales
and marketing
|
6,853,559
|
3,621,045
|
3,232,514
|
89.3%
|
|
General
and administrative
|
5,174,827
|
5,870,572
|
(695,745)
|
(11.9)%
|
|
Total
operating expense
|
13,915,522
|
10,652,515
|
3,263,007
|
30.6%
|
|
LOSS
FROM OPERATIONS
|
(5,099,222)
|
(5,833,912)
|
(734,690)
|
(12.6)%
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
Interest
expense
|
(872,166)
|
(6,661,694)
|
(5,789,528)
|
(86.9)%
|
|
Loss
on extinguishment of debt
|
(700,060)
|
-
|
700,060
|
100.0%
|
|
Other
income (expense), net
|
(6,878)
|
1,649
|
(8,527)
|
(517.1)%
|
|
Fair
value adjustment for contingent consideration
|
194,034
|
(1,269,857)
|
(1,463,891)
|
(115.3)%
|
|
Change
in fair value of derivative liabilities
|
(16,596)
|
65,060
|
(81,656)
|
(125.5)%
|
|
Total
other expense, net
|
(1,401,666)
|
(7,864,842)
|
(6,463,176)
|
(82.2)%
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(6,500,888)
|
(13,698,754)
|
(7,197,866)
|
(52.5)%
|
|
Provision
for income taxes
|
3,200
|
2,400
|
800
|
33.6%
|
|
NET
LOSS
|
$(6,504,088)
|
$(13,701,154)
|
$(7,197,066)
|
(52.5)%
|
Net Revenue
We recognized net revenue of approximately $8.8 million and $4.8
million for the years ended December 31, 2017 and 2016,
respectively. The increase in net revenue in 2017 was
primarily the result of the product sales generated through the
sales and marketing platform acquired in the Beyond Human®
asset acquisition in March 2016. The increase was also due to the
launch of UriVarx® at the
end of the fourth quarter 2016 and the launch of
ProstaGorx® and Apeaz®
with ArthriVarx® in 2017.
These new product launches generated net revenue of approximately
$4.3 million during the year ended December 31, 2017. The increase
was also attributed to sales of Vesele® and
Sensum+®, which generated net revenue of approximately $2.5
million for Vesele®, and $0.9 million for Sensum+® during
the year ended December 31, 2017 compared to approximately $2.9
million for Vesele® and $0.6 million for Sensum+® during
the year ended December 31, 2016. The decrease of approximately
$0.4 million in Vesele® net revenue for the year ended
December 31, 2017 compared to 2016 is primarily due to the sales of
Vesele® being negatively impacted in the third quarter of 2017
by the natural disasters in Florida and Texas as these two states
have some of the largest populations of our target demographic for
Vesele® in the U.S. Further contributing to the overall
increase in net revenue was an increase in international product
sales as we signed an exclusive license and distribution agreement
in April 2017 for the sale of Zestra® in France and Belgium
and, in August 2017, we shipped the initial order under such
agreement resulting in net revenue of approximately $0.1 million
during the year ended December 31, 2017. In March 2017, we also
shipped the initial order under our South Korea license and
distribution agreement resulting in net revenue of $60,000 during
the year ended December 31, 2017. Due to the recent license and
distribution agreements entered into in 2017 and 2018, we expect
this will lead to an increase in product sales of UriVarx®,
ProstaGorx®, Zestra® and Zestra Glide® through our
Ex-U.S. sales channel in 2018. 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 the continued integration of 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
$0.1 million during the year ended December 31, 2017 when compared
to the same period in 2016.
Cost of Product Sales
We recognized cost of product sales of approximately $1.8 million
and $1.1 million for the years ended December 31, 2017 and 2016,
respectively. 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 79.0% in 2017 compared to 77.5% in 2016 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 2017 is also
due to fewer sales when compared to 2016 through our retail and
wholesale sales channels, which have lower
margins.
Research and Development
We recognized research and development expense of approximately
$39,000 and $78,000 for the years ended December 31, 2017 and 2016,
respectively. The research and development expense includes salary
and the related health benefits for an employee who was terminated
in January 2017, as well as costs for stability testing and other
development related costs for our products. The decrease in 2017 is
also attributed to the fair value of the shares of common stock
issued to CRI totaling $23,000 for 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 in 2016 that did not occur in
2017.
Sales and Marketing
We recognized sales and marketing
expense of approximately $6.9 million and $3.6 million for the
years ended December 31, 2017 and 2016, respectively. Sales
and marketing expense consists primarily of print advertisements
and sales and marketing support. The increase in sales and
marketing expense during the year ended December 31, 2017 when
compared to the same period in 2016 is due to the increase in the
number of products integrated into the Beyond Human™ sales and marketing platform,
as well as the costs of our third-party customer service call
center due to the higher volume of sales orders received as a
result of the Beyond Human® asset acquisition. Also, initial
product launches require larger advertising spends in an effort to
increase brand awareness. Total direct advertising costs for the
year ended December 31, 2017 was $5.4 million compared to $2.7
million in 2016.
General and Administrative
We recognized general and administrative expense of approximately
$5.2 million and $5.9 million for the years ended December 31, 2017
and 2016, respectively. 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 decrease is primarily
due to the decrease in stock-based compensation to employees,
directors and consultants of approximately $1.5 million during the
year ended December 31, 2017 compared to 2016. The decrease was offset by increases
in merchant processing fees due to increased credit card
sales volume and increased payroll and related costs due to the
increase in headcount when compared to
2016.
Other Income and Expense
We
recognized interest expense of approximately $0.9 million and $6.7
million for the years ended December 31, 2017 and 2016,
respectively. 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 decrease in
interest expense during the year ended December 31, 2017 is due to
the larger amount of debt discount amortization in 2016 compared to
2017 as a result of the convertible debt and note payable
financings completed in 2016 and 2015, as well as, the fair value
in excess of the allocated proceeds of the embedded conversion
feature in the convertible debt financings completed in June and
July 2016.
We
recognized a loss on extinguishment of debt of approximately $0.7
million during the year ended December 31, 2017. The loss on debt
extinguishment was the result of the securities exchange agreement
entered into with a certain 2016 and 2017 Notes Payable holder, as
well as, the required prepayment of the 2016 Notes from the cash
proceeds received through the public equity offering in March 2017.
In exchange for the settlement of approximately $0.7 million in
principal and interest, we issued 11,432,747 shares of common stock
with a fair value of $1.1 million. As a result, the remaining
unamortized debt discount of approximately $17,000 and the fair
value of the common stock issued in excess of the debt settled of
approximately $0.4 million were recorded as a loss on debt
extinguishment during the year ended December 31, 2017. Under the
terms of the 2016 Notes, we were required to prepay the outstanding
principal and interest of the convertible debentures with the cash
proceeds received from an equity offering with an offering price
less than the current conversion price of the debentures of $0.25
per share, as well as incur a 10% prepayment penalty. As a result
of the prepayment, the remaining unamortized debt discount of
approximately $0.4 million, the prepayment penalty of $0.1 million
and the extinguishment of the embedded conversion feature
derivative liability of $0.2 million were recorded as a loss on
debt extinguishment during the year ended December 31,
2017.
We
recognized a gain from the fair value adjustment for contingent
consideration of approximately $0.2 million for the year ended
December 31, 2017 compared to a loss of $1.3 million for the year
ended December 31, 2016. Fair value adjustment for contingent
consideration consists primarily of the change in the fair value of
the contingent ANDA shares of common stock issuable to individual
members of Novalere Holdings, LLC in connection with our
acquisition in 2015 and the royalty contingent consideration to
Semprae (see Note 3 to the accompanying consolidated financial
statements included elsewhere in this Annual Report).
We
recognized a gain (loss) from the change in fair value of
derivative liabilities of approximately $(17,000) and $65,000 for
the years ended December 31, 2017 and 2016, respectively. 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 loss on change in fair
value of derivative liabilities during the year ended December 31,
2017 is primarily due to the increase in our stock price from
December 31, 2016 through the date of conversion of certain of the
convertible debentures in 2017, which resulted in the fair value of
the embedded conversion features at the conversion date to be
higher than the fair value at December 31, 2016.
Income Taxes
We
recognized a provision for income taxes of $3,200 for the year
ended December 31, 2017 compared to $2,400 for the year ended
December 31, 2016. The change is due to the use of a tax
refund of $800 in 2016.
Net Loss
Net
loss for the year ended December 31, 2017 was approximately $(6.5
million), or $(0.04) basic and diluted net loss per share, compared
to a net loss for the same period in 2016 of $(13.7 million), or
$(0.15) 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 capital 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, 2017,
we had an accumulated deficit of $35.6 million and a working
capital deficit of $1.4 million.
As of March 29, 2018, we had approximately $4.6 million in
cash. 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, the proceeds received from the exercise of warrants and
issuance of notes payable in the first quarter of 2018 totaling
$4.5 million (see Note 12 in the accompanying consolidated
financial statements included elsewhere in this Annual Report),
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 CEO, who is also a significant
shareholder, has deferred the remaining payment of his salary
earned through June 30, 2016 totaling $1.5 million for at least the
next 12 months.
Our
principle debt instruments include the
following:
September, October and December 2017 Notes Payable
On
September 20, 2017, we entered into a securities purchase agreement
with an unrelated third-party investor in which the investor loaned
us gross proceeds of $150,000 pursuant to a 5% promissory
note. The note has an OID
of $15,000 and requires payment of $165,000 in principal upon
maturity. The note bears interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on May 20, 2018. In connection with the note, we issued the
investor restricted shares of common stock totaling 895,000. The
remaining principal balance under this note is $165,000 at December
31, 2017.
On
October 17, 2017, October 20, 2017 and December 4, 2017, we entered
into a securities purchase agreement with two unrelated third-party
investors in which the investors loaned us gross proceeds of
$500,000 in October 2017 and $500,000 in December 2017 pursuant to
0% promissory notes. The
notes have an OID of $200,000 and require nine payments of $66,667
in principal per month through July 2018 and twelve payments of
$50,000 in principal per month through December 2018. The
notes bear no interest per annum. In connection with the notes, we
issued the investors restricted shares of common stock totaling
600,000 in December 2017. In March 2018, we entered into a
securities exchange agreement with one of the note holders. In
connection with the securities exchange agreement, we issued a
total of 2,250,000 shares of common stock in exchange for the
settlement of principal due under the note payable totaling
$166,667. The remaining principal balance under these notes as of
December 31, 2017, inclusive of the March 2018 securities exchange
agreement, is $833,333.
On
December 13, 2017, we entered into a securities purchase agreement
with an unrelated third-party investor in which the investor loaned
us gross proceeds of $350,000 pursuant to a 5% promissory
note. The note has an OID of
$40,000, bears interest at 5% per annum and requires principal and
interest payments of $139,750, $133,250 and $131,625 on June 15,
2018, September 15, 2018 and December 15, 2018,
respectively. In connection with the note, we issued the
investor restricted shares of common stock totaling 1,000,000 in
December 2017. The remaining principal balance under this note is
$390,000 at December 31, 2017.
2018 Notes Payable
In the
first quarter of 2018, we entered into a securities purchase
agreement with three unrelated third-party investors in which the
investors loaned us gross proceeds of $1,227,500. The promissory notes have an OID of $269,375
and bear interest at the rate of 0% per annum. The principal
amount of $1,496,875 is to be repaid in twelve equal monthly
installments. Monthly installments of $68,490 began in February
2018 and are due through January 2019 and monthly installments of
$56,250 begin in April 2018 and are due through March 2019. In
connection with the promissory notes, we issued 1,282,000
restricted shares of common stock to the investors.
In
February and March 2018, we entered into securities purchase
agreements with two unrelated third-party investors in which the
investors loaned us gross proceeds of $650,000 pursuant to 5%
promissory notes. The notes have
an OID of $70,000 and requires payment of $720,000 in
principal. The notes bear interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on October 28, 2018 for the note issued in February and in three
installments on October 1, 2018, January 1, 2019 and April 1, 2019
for the note issued in March. In connection with the notes, we
issued the investors restricted shares of common stock totaling
1,485,000.
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”). Pursuant to
the Finance Agreements, the principal amount of the February 2016
Note Payable was $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 was February 19,
2018. The February 2016 Note Payable was secured by SBI through a
first priority secured interest in all of the Beyond Human®
assets acquired by us in the transaction including all revenue
received by us from these assets. The principal balance of the
February 2016 Note Payable as of December 31, 2017 was $54,985 and
was repaid in full in February 2018.
Net Cash Flows
|
|
For the Year Ended December 31, 2017
|
For the Year Ended December 31, 2016
|
|
|
|
|
|
Net
cash used in operating activities
|
$(2,361,723)
|
$(1,784,258)
|
|
Net
cash used in investing activities
|
(57,516)
|
(172,103)
|
|
Net
cash provided by financing activities
|
3,154,165
|
2,730,393
|
|
Net
change in cash
|
734,926
|
774,032
|
|
Cash
at beginning of the year
|
829,933
|
55,901
|
|
Cash
at the end of the year
|
$1,564,859
|
$829,933
|
Operating Activities
For the
year ended December 31, 2017, cash used in operating activities was
approximately $2.4 million, consisting primarily of the net loss
for the period of approximately $6.5 million, which was primarily
offset by non-cash common stock, restricted stock units and stock
options issued for services and compensation of approximately $1.1
million, amortization of debt discount of $0.8 million, loss on
debt extinguishment of $0.7 million, change in fair value of
derivative liabilities of $17,000, and amortization of intangible
assets of $0.6 million. The non-cash expense was offset with the
gain on change in fair value of contingent consideration of
approximately $0.2 million. Additionally, working capital changes
consisted of cash increases of approximately $1.1 million related
to a decrease in prepaid expense and other current assets of
approximately $0.1 million, $0.4 million related to an increase in
accrued compensation, $14,000 related to increase in deferred
revenue and customer deposits, and $1.8 million related to an
increase in accounts payable and accrued expense, partially offset
by a cash decrease related to accrued interest of $3,000, increase
in accounts receivable of $42,000, and increase in inventories of
$1.1 million. The increase in net cash used in operating activities
from 2016 was mainly due to expanding our operations, including
hiring additional personnel, commercialization and marketing
activities related to our newly launched products in 2017 and those
acquired in 2016, as well as, purchasing more finished goods
inventory to fulfill the forecasted increase in net revenue in
2018.
Investing Activities
For the year ended December 31, 2017, cash used in investing
activities was approximately $58,000, which consisted of the
purchase of property and equipment for our new corporate office
location in December 2017, as well as a contingent royalty payment
to Semprae for Zestra® product sales in 2016. Cash used in
investing activities in 2016 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.
Financing Activities
For the year ended December 31, 2017, cash provided by financing
activities was approximately $3.2 million, consisting primarily of
the net proceeds from the public equity offering of $3.3 million
and notes payable of $1.7 million, offset by the repayment of
convertible debentures of approximately $1.2 million, notes payable
and short-term loans payable of $0.5 million, and the prepayment
penalty on the repayment of the convertible debentures of $0.1
million. Cash provided by financing activities in 2016 was
primarily related to net proceeds from notes payable and
convertible debentures of approximately $3.6 million, proceeds from
warrant exercises of $0.3 million, and proceeds from short-term
loans payable of $22,000, offset by the repayment of notes payable
and short-term loans payable of $0.7 million, payment of financing
costs in connection with convertible debentures of $40,000, and the
repayment of the related-party line of credit convertible debenture
of $0.4 million.
Sources of Capital
Our operations have been financed
primarily through the sale of equity and issuance of debt
instruments and revenues 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, 2017, we had an
accumulated deficit of approximately $35.6 million and a working
capital deficit of $1.4 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, 2017, we raised approximately $5.0
million in funds, which included net proceeds of $3.3 million from
the public equity offering in March 2017 and $1.7 million from the
issuance of notes payable. The funds raised through the public
equity offering and issuance of the notes payable were primarily
used to pay off accounts payable, to increase inventory and for the
expanded operations in 2017. The proceeds from the public equity
offering were also required to be used to pay off the remaining
2016 convertible debentures in March 2017. The outstanding notes
payable principal and interest balance at December 31, 2017 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 be available 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,
revenues and expenses 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 our products.
We
recognize revenue in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification
(“ASC”) 605, Revenue
Recognition. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales: We ship products directly to consumers
pursuant to phone or online orders and to our wholesale and retail
customers pursuant to purchase agreements or sales
orders. Revenue from sales transactions where the buyer has
the right to return the product is recognized at the time of sale
only if (1) the seller’s price to the buyer is
substantially fixed or determinable at the date of sale,
(2) the buyer has paid the seller, or the buyer is obligated
to pay the seller and the obligation is not contingent on resale of
the product, (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction
or damage of the product, (4) the buyer acquiring the product
for resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant obligations
for future performance to directly bring about resale of the
product by the buyer and (6) the amount of future returns can
be reasonably estimated.
License Revenue: The license agreements we enter into
normally generate three separate components of revenue: 1) an
initial payment due on signing or when certain specific conditions
are met; 2) royalties that are earned on an ongoing basis as
sales are made or a pre-agreed transfer price and 3) sales-based
milestone payments that are earned when cumulative sales reach
certain levels. Revenue from the initial payments or licensing fee
is recognized when all required conditions are met. Royalties are
recognized as earned based on the licensee’s sales. Revenue
from the sales-based milestone payments is recognized when the
cumulative revenue levels are reached. The achievement of the
sales-based milestone underlying the payment to be received
predominantly relates to the licensee’s performance of future
commercial activities. FASB ASC 605-28, Milestone Method, (“ASC
605-28”) is not used by us as these milestones do not meet
the definition of a milestone under ASC 605-28 as they are
sales-based and similar to a royalty and the achievement of the
sales levels is neither based, in whole or in part, on our
performance, a specific outcome resulting from our performance, nor
is it a research or development deliverable.
Sales Allowances
We accrue for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
Our product returns accrual is primarily based on estimates of
future product returns over the period customers have a right of
return, which is in turn based in part on estimates of the
remaining shelf-life of products when sold to customers. Future
product returns are estimated primarily based on historical sales
and return rates. We estimate our volume rebates and promotional
discounts accrual based on its estimates of the level of inventory
of our products in the distribution channel that remain subject to
these discounts. The estimate of the level of products in the
distribution channel is based primarily on data provided by our
customers.
In all cases, judgment is required in estimating these reserves.
Actual claims for rebates and returns and promotional discounts
could be materially different from the estimates.
We provide a customer satisfaction warranty on all of our products
to customers for a specified amount of time after product
delivery. Estimated return costs are based on historical
experience and estimated and recorded when the related sales are
recognized. Any additional costs are recorded when incurred or
when they can reasonably be estimated.
Stock-Based Compensation
We account for stock-based
compensation in accordance with FASB ASC 718, Stock Based
Compensation. All
stock-based payments to employees and directors, including grants
of stock options, warrants, restricted stock units
(“RSUs”) and restricted stock, are recognized in the
consolidated financial statements based upon their estimated fair
values. We use Black-Scholes to estimate the fair value of
stock-based awards. The estimated fair value is determined at the
date of grant. FASB ASC 718 requires
that stock-based compensation expense be based on awards that are
ultimately expected to vest. Prior to the adoption of
ASU
No. 2016-09, Improvements
to Employee Share-Based Payment Accounting, on January 1,
2017, stock-based compensation
had been reduced for estimated forfeitures. When estimating
forfeitures, voluntary termination behaviors, as well as trends of
actual option forfeitures, were considered. To the extent
actual forfeitures differed from then current estimates, cumulative
adjustments to stock-based compensation expense were
recorded. As a result of the
adoption of ASU No. 2016-09 as of January 1, 2017, we have made an
entity-wide accounting policy election to account for forfeitures
when they occur. There is no cumulative-effect adjustment as a
result of the adoption of this ASU as our estimated forfeiture rate
prior to adoption of this ASU was
0%.
Except for transactions with employees and directors that are
within the scope of FASB ASC 718, all transactions in which goods
or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Equity Instruments Issued to Non-Employees for
Services
Our
accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows FASB guidance.
As such, the value of the applicable stock-based compensation is
periodically remeasured and income or expense is recognized during
the vesting terms of the equity instruments. The measurement date
for the estimated fair value of the equity instruments issued is
the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which
the consultant or vendor’s performance is complete. In the
case of equity instruments issued to consultants, the estimated
fair value of the equity instrument is primarily recognized over
the term of the consulting agreement. According to FASB guidance,
an asset acquired in exchange for the issuance of fully vested,
nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor’s balance
sheet once the equity instrument is granted for accounting
purposes. Accordingly, we record the estimated fair value of
nonforfeitable equity instruments issued for future consulting
services as prepaid expense and other current assets in our
consolidated balance sheets.
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
On January 1, 2017, the Company adopted FASB ASU No.
2016-15, Statement of Cash
Flows (Topic 230) – Classification of Certain Cash Receipts
and Cash Payments. We
elected to early adopt ASU 2016-15 and, as a result, the prepayment
penalty of $127,247 in connection with the extinguishment of the
2016 Notes (see Note 5 in the accompanying consolidated financial
statements included elsewhere in this Annual Report) in March 2017
is classified as a financing cash outflow in the accompanying
consolidated statement of cash flows for the year ended December
31, 2017. The adoption of this ASU did not have a material impact
on our consolidated financial position, results of operations and
related disclosures and had no other impact to the accompanying
consolidated statement of cash flows for the years ended December
31, 2017 and 2016.
See Note 1 to our consolidated financial statements for the years
ended December 31, 2017 and 2016 included elsewhere in this Annual
Report for additional recent accounting
pronouncements.
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, revenues or expenses,
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.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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 Vice President, Finance (“VP of
Finance”), our principal financial and accounting officer,
conducted an evaluation of the effectiveness of our disclosure
controls and procedures as of December 31, 2017, 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 VP of Finance
concluded that, as of December 31, 2017, 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 VP of Finance 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 VP
of Finance, 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,
2017.
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, 2017 that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
Inherent Limitations on Effectiveness of Controls
Our
management, including our CEO and VP of Finance, 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.
None.
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.
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.
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, 2017 and 2016
●
Consolidated
Statements of Operations for the Years Ended December 31, 2017 and
2016
●
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December 31, 2017 and 2016
●
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2017 and
2016
●
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.
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:
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Date:
April 2, 2018
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Innovus Pharmaceuticals, Inc.
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By:
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/s/
Bassam Damaj
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Bassam
Damaj, Ph.D.
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President
and Chief Executive Officer
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(Principal Executive Officer)
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KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Bassam Damaj and Rauly Gutierrez, 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.
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Signature
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Title
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Date
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/s/ Bassam Damaj
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Director, President and Chief Executive Officer
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April 2, 2018
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Bassam Damaj, Ph.D.
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(Principal Executive Officer)
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/s/ Rauly Gutierrez
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Vice President, Finance
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April 2, 2018
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Rauly Gutierrez, CPA
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(Principal Accounting and Financial Officer)
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/s/ Henry Esber
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Chairman of the Board of Directors
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April 2, 2018
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Henry Esber, Ph.D.
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/s/ Ziad Mirza
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Director
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April 2, 2018
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Ziad Mirza, M.D.
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/s/ Vivian Liu
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Director
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April 2, 2018
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Vivian Liu
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Exhibit No.
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Description
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Form
of Securities Purchase Agreement filed as Exhibit 4.1 to the
Registrant's report on Amendment No. 1 to Form S-1 filed with the
SEC on March 13, 2017 and incorporated herein by
reference.
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Form
of Series A and Series B Warrant filed as Exhibit 4.2 to the
Registrant's report on Amendment No. 1 to Form S-1 filed with the
SEC on March 13, 2017 and incorporated herein by
reference.
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Form of Placement Agent Warrant filed as Exhibit 4.3 to the
Registrant's report on Amendment No. 1 to Form S-1 filed with the
SEC on March 13, 2017 and incorporated herein by
reference.
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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.
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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.
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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.
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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.
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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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
20%
Secured Promissory Note, dated February 19, 2016 by and among the
Company ad 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.
|
|
|
Security
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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%
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
H.C.
Wainwright and Co., LLC Engagement Agreement, dated January 17,
2017, filed as an exhibit to the Registrant’s registration
statement on Form S-1, filed with the SEC on February 1, 2017, and
incorporated herein by reference.
|
|
|
Employment
Agreement, dated as of September 23, 2016 by and between Innovus
Pharmaceuticals, Inc. and Rauly Gutierrez (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed April 14, 2017)
|
|
|
Code
of Ethics
|
|
|
List
of Subsidiaries
|
|
|
Consent
of Hall and Company, Independent Registered Public Accounting
Firm
|
|
|
Power
of Attorney, included as part of signature page to this Annual
Report.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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
|
|
*
|
Filed herewith
|
|
**
|
Furnished herewith
|
|
#
|
Management
contract or compensatory plan or arrangement
|
Report of
Independent Registered Public Accounting
Firm
To the
shareholders and the board of directors of Innovus Pharmaceuticals,
Inc.
Opinion
on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Innovus
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of
December 31, 2017 and 2016, the related consolidated statements of
operations, stockholders’ equity and cash flows for each of
the two years in the period ended December 31, 2017, and the
related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its
operations and its cash flows for each of the two years in the
period ended December 31, 2017, in conformity with accounting
principles generally accepted in the United States of
America.
Basis
for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. As part of our audits we are required to
obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no
opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
Hall & Company
We have served as the Company’s auditor since
2016
Irvine,
CA
April
2, 2018
INNOVUS PHARMACEUTICALS, INC.
Consolidated Balance Sheets
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
Cash
|
$1,564,859
|
$829,933
|
|
Accounts receivable, net
|
68,259
|
33,575
|
|
Prepaid expense and other current assets
|
363,080
|
863,664
|
|
Inventories
|
1,725,698
|
599,856
|
|
Total
current assets
|
3,721,896
|
2,327,028
|
|
|
|
|
|
Property
and equipment, net
|
62,454
|
29,569
|
|
|
|
|
|
Deposits
|
20,881
|
14,958
|
|
Goodwill
|
952,576
|
952,576
|
|
Intangible
assets, net
|
4,273,099
|
4,903,247
|
|
Total
assets
|
$9,030,906
|
$8,227,378
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Accounts payable and accrued expense
|
$2,607,121
|
$1,210,050
|
|
Accrued compensation
|
1,118,293
|
767,689
|
|
Deferred revenue and customer deposits
|
24,690
|
11,000
|
|
Accrued interest payable
|
3,648
|
47,782
|
|
Derivative liabilities – embedded conversion
features
|
-
|
319,674
|
|
Derivative liabilities – warrants
|
58,609
|
164,070
|
|
Contingent consideration
|
28,573
|
170,015
|
|
Short-term loans payable
|
65,399
|
-
|
|
Current portion of notes payable, net of debt discount of $437,355
and $216,403, respectively
|
1,239,296
|
626,610
|
|
Convertible debentures, net of debt discount of $0 and $845,730,
respectively
|
-
|
714,192
|
|
Total
current liabilities
|
5,145,629
|
4,031,082
|
|
|
|
|
|
Accrued compensation – less current portion
|
1,531,904
|
1,531,904
|
|
Notes payable, net of current portion and debt discount of $0 and
$468, respectively
|
-
|
54,517
|
|
Contingent consideration – less current portion
|
1,450,430
|
1,515,902
|
|
Total
non-current liabilities
|
2,982,334
|
3,102,323
|
|
|
|
|
|
Total
liabilities
|
8,127,963
|
7,133,405
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
Preferred stock: 7,500,000 shares authorized, at $0.001 par value,
no shares issued and outstanding at December 31, 2017 and 2016,
respectively
|
-
|
-
|
|
Common stock: 292,500,000 shares authorized, at $0.001 par value,
167,420,605 and 121,694,293 shares issued and outstanding at
December 31, 2017 and 2016, respectively
|
167,421
|
121,694
|
|
Additional paid-in capital
|
36,375,359
|
30,108,028
|
|
Accumulated deficit
|
(35,639,837)
|
(29,135,749)
|
|
Total
stockholders' equity
|
902,943
|
1,093,973
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$9,030,906
|
$8,227,378
|
See accompanying notes to these consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Consolidated Statements of Operations
|
|
For the
Year Ended
December 31,
|
|
|
|
|
|
Net
revenue:
|
|
|
|
Product sales, net
|
$8,806,300
|
$4,817,603
|
|
License revenue
|
10,000
|
1,000
|
|
Net
revenue
|
8,816,300
|
4,818,603
|
|
|
|
|
|
Operating
expense:
|
|
|
|
Cost of product sales
|
1,848,325
|
1,083,094
|
|
Research and development
|
38,811
|
77,804
|
|
Sales and marketing
|
6,853,559
|
3,621,045
|
|
General and administrative
|
5,174,827
|
5,870,572
|
|
Total
operating expense
|
13,915,522
|
10,652,515
|
|
|
|
|
|
Loss
from operations
|
(5,099,222)
|
(5,833,912)
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
Interest expense
|
(872,166)
|
(6,661,694)
|
|
Loss on extinguishment of debt
|
(700,060)
|
-
|
|
Other income (expense), net
|
(6,878)
|
1,649
|
|
Fair value adjustment for contingent consideration
|
194,034
|
(1,269,857)
|
|
Change in fair value of derivative liabilities
|
(16,596)
|
65,060
|
|
Total
other expense, net
|
(1,401,666)
|
(7,864,842)
|
|
|
|
|
|
Loss
before provision for income taxes
|
(6,500,888)
|
(13,698,754)
|
|
|
|
|
|
Provision
for income taxes
|
3,200
|
2,400
|
|
|
|
|
|
Net
loss
|
$(6,504,088)
|
$(13,701,154)
|
|
|
|
|
|
Net
loss per share of common stock – basic and
diluted
|
$(0.04)
|
$(0.15)
|
|
|
|
|
|
Weighted
average number of shares of common stock outstanding – basic
and diluted
|
157,933,458
|
94,106,382
|
See accompanying notes to these consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2016
|
47,141,230
|
$47,141
|
$14,941,116
|
$(15,434,595)
|
$(446,338)
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
10,732,500
|
10,733
|
1,802,216
|
-
|
1,812,949
|
|
Stock-based
compensation
|
-
|
-
|
954,753
|
-
|
954,753
|
|
Common
stock issued to Novalere Holdings, LLC for
payment of contingent consideration
|
12,808,796
|
12,809
|
2,958,832
|
-
|
2,971,641
|
|
Common
stock issued upon conversion of convertible
debentures and accrued interest
|
17,100,508
|
17,100
|
3,247,605
|
-
|
3,264,705
|
|
Common
stock issued for vested restricted stock units
|
19,315,994
|
19,316
|
(19,316)
|
-
|
-
|
|
Fair
value of beneficial conversion feature on line
of
credit convertible debenture – related party
|
-
|
-
|
3,444
|
-
|
3,444
|
|
Relative
fair value of shares of common stock issued
in connection with notes payable and convertible
debentures
|
9,861,111
|
9,861
|
1,393,531
|
-
|
1,403,392
|
|
Relative
fair value of warrants issued in connection with convertible
debentures
|
-
|
-
|
445,603
|
-
|
445,603
|
|
Fair value
of warrants issued to placement agents in connection
with convertible debentures
|
-
|
-
|
357,286
|
-
|
357,286
|
|
Common
stock issued for legal costs from Semprae merger
transaction
|
215,000
|
215
|
64,285
|
-
|
64,500
|
|
Common
stock issued in connection with license agreement
|
100,000
|
100
|
22,900
|
-
|
23,000
|
|
Common
stock issued upon cashless exercise of warrants
|
3,385,354
|
3,385
|
(3,385)
|
-
|
-
|
|
Common
stock issued upon exercise of warrants
|
1,033,800
|
1,034
|
309,106
|
-
|
310,140
|
|
Reclassification
of embedded conversion feature derivative
liability upon conversion of convertible debentures
|
-
|
-
|
3,111,828
|
-
|
3,111,828
|
|
Reclassification
of warrant derivative liability upon cashless
exercise of warrants
|
-
|
-
|
518,224
|
-
|
518,224
|
|
Net
loss for year ended December 31, 2016
|
-
|
-
|
-
|
(13,701,154)
|
(13,701,154)
|
|
|
|
|
|
|
|
Balances
at December 31, 2016
|
121,694,293
|
121,694
|
30,108,028
|
(29,135,749)
|
1,093,973
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
2,891,105
|
2,891
|
626,112
|
-
|
629,003
|
|
Stock-based
compensation
|
-
|
-
|
336,007
|
-
|
336,007
|
|
Common
stock issued upon conversion of convertible
debentures, notes payable and accrued
interest
|
12,835,187
|
12,835
|
1,458,603
|
-
|
1,471,438
|
|
Common
stock issued for vested restricted stock units
|
92,000
|
92
|
(92)
|
-
|
-
|
|
Relative
fair value of shares of common stock issued
in connection with notes payable
|
2,825,000
|
2,825
|
214,080
|
-
|
216,905
|
|
Fair
value of shares of common stock issued as financing fees in
connection
with notes payable
|
1,119,851
|
1,120
|
97,641
|
-
|
98,761
|
|
Common
stock issued upon exercise of stock options
|
71,500
|
72
|
4,807
|
-
|
4,879
|
|
Sale
of common stock and warrants, net of offering costs
|
25,666,669
|
25,667
|
3,282,106
|
-
|
3,307,773
|
|
Reclassification
of embedded conversion feature derivative
liability upon conversion of convertible debentures
|
-
|
-
|
203,630
|
-
|
203,630
|
|
Common
stock issued for the prepayment of royalties
due under CRI License Agreement
|
225,000
|
225
|
44,437
|
-
|
44,662
|
|
Net
loss for year ended December 31, 2017
|
-
|
-
|
-
|
(6,504,088)
|
(6,504,088)
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2017
|
167,420,605
|
$167,421
|
$36,375,359
|
$(35,639,837)
|
$902,943
|
See accompanying notes to these consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
|
|
For the
Year Ended
December 31
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$(6,504,088)
|
$(13,701,154)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
11,751
|
5,532
|
|
Allowance
for doubtful accounts
|
7,067
|
2,066
|
|
Common
stock, restricted stock units and stock options issued to
employees, board of directors
and consultants for compensation and services
|
1,135,611
|
2,684,602
|
|
Loss
on extinguishment of debt
|
700,060
|
-
|
|
Fair
value of embedded conversion feature in convertible debentures in
excess of
allocated proceeds
|
-
|
2,756,899
|
|
Change
in fair value of contingent consideration
|
(194,034)
|
1,269,857
|
|
Change
in fair value of derivative liabilities
|
16,596
|
(65,060)
|
|
Amortization
of debt discount
|
778,054
|
3,646,161
|
|
Amortization
of intangible assets
|
630,148
|
624,404
|
|
Changes
in operating assets and liabilities, net of acquisition
amounts
|
|
|
|
Accounts
receivable
|
(41,751)
|
47,456
|
|
Prepaid
expense and other current assets
|
112,516
|
(279,786)
|
|
Inventories
|
(1,125,842)
|
(345,413)
|
|
Deposits
|
(5,923)
|
-
|
|
Accounts
payable and accrued expense
|
1,757,071
|
694,547
|
|
Accrued
compensation
|
350,604
|
856,803
|
|
Accrued
interest payable
|
(3,253)
|
31,907
|
|
Deferred
revenue and customer deposits
|
13,690
|
(13,079)
|
|
Net
cash used in operating activities
|
(2,361,723)
|
(1,784,258)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(44,636)
|
-
|
|
Payment
on contingent consideration
|
(12,880)
|
(172,103)
|
|
Net
cash used in investing activities
|
(57,516)
|
(172,103)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Repayments
of line of credit convertible debenture – related
party
|
-
|
(409,192)
|
|
Proceeds
from short-term loans payable
|
-
|
21,800
|
|
Payments
on short-term loans payable
|
(32,471)
|
(252,151)
|
|
Proceeds
from notes payable and convertible debentures
|
1,650,000
|
3,574,000
|
|
Payments
on notes payable
|
(426,347)
|
(449,204)
|
|
Proceeds
from stock option and warrant exercises
|
4,879
|
310,140
|
|
Financing
costs in connection with convertible debentures
|
-
|
(40,000)
|
|
Proceeds
from sale of common stock and warrants, net of offering
costs
|
3,307,773
|
-
|
|
Payments
on convertible debentures
|
(1,222,422)
|
(25,000)
|
|
Prepayment
penalty on extinguishment of convertible debentures
|
(127,247)
|
-
|
|
Net
cash provided by financing activities
|
3,124,165
|
2,730,393
|
|
|
|
|
|
Net
change in cash
|
734,926
|
774,032
|
|
|
|
|
|
Cash
at beginning of year
|
829,933
|
55,901
|
|
|
|
|
|
Cash
at end of year
|
$1,564,859
|
$829,933
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash
paid for income taxes
|
$5,600
|
$-
|
|
Cash
paid for interest
|
$89,931
|
$229,046
|
|
|
|
|
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
Common
stock issued for conversion of convertible debentures, notes
payable and accrued
interest
|
$1,093,381
|
$3,264,705
|
|
Reclassification
of the fair value of the embedded conversion features from
derivative liability
to additional paid-in capital upon conversion
|
$203,630
|
$3,111,828
|
|
Relative
fair value of common stock issued in connection with notes
payable recorded
as debt discount
|
$216,905
|
$276,167
|
|
Fair
value of common stock issued as financing fees in connection with
notes payable recorded
as debt discount
|
$98,761
|
$-
|
|
Proceeds
from note payable paid to seller in connection with
acquisition
|
$-
|
$300,000
|
|
Financing
costs paid with proceeds from note payable
|
$-
|
$7,500
|
|
Cashless
exercise of warrants
|
$-
|
$3,385
|
|
Fair
value of the contingent consideration for acquisition
|
$-
|
$330,000
|
|
Reclassification
of the fair value of the warrants from derivative liability to
additional paid-in
capital upon cashless exercise
|
$-
|
$518,224
|
|
Relative
fair value of warrants issued in connection with convertible
debentures recorded
as debt discount
|
$-
|
$445,603
|
|
Relative
fair value of common stock issued in connection with convertible
debentures recorded
as debt discount
|
$-
|
$1,127,225
|
|
Fair
value of embedded conversion feature derivative liabilities
recorded as debt
discount
|
$-
|
$687,385
|
|
Fair
value of warrants issued to placement agents in connection with
convertible debentures
recorded as debt discount
|
$-
|
$357,286
|
|
Fair
value of unamortized non-forfeitable common stock issued to
consultant included in prepaid
expense and other current assets
|
$-
|
$170,600
|
|
Fair
value of non-forfeitable common stock issued to consultant included
in accounts payable
and accrued expense
|
$360,000
|
$360,000
|
|
Issuance
of shares of common stock for vested restricted stock
units
|
$92
|
$19,316
|
|
Fair
value of common stock issued for prepayment of future royalties due
under the CRI License
Agreement included in prepaid expense and other current
assets
|
$44,662
|
$-
|
|
Proceeds
from short-term loans payable for payment of business insurance
premiums
|
$97,871
|
$-
|
|
Common
stock issued to Novalere Holdings for payment of the acquisition
contingent consideration
as a result of an amendment and supplement to the registration
rights and
stock
restriction agreement
|
$-
|
$2,971,641
|
|
Fair
value of beneficial conversion feature on line of credit
convertible debenture – related
party
|
$-
|
$3,444
|
See accompanying notes to these consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Innovus Pharmaceuticals, Inc., together with its subsidiaries
(collectively referred to as “Innovus”,
“we”, “our”, “us” or the
“Company”) is a Nevada formed, San Diego,
California-based emerging commercial stage pharmaceutical company
delivering over-the-counter medicines and consumer care products
for men’s and women’s health and respiratory
diseases.
We
generate revenue from 28 commercial products in the United States,
including 12 of these commercial products in multiple countries
around the world through our 18 international commercial partners.
Our commercial product portfolio includes (a) Beyond Human®
Testosterone Booster, (b) Beyond Human® Growth Agent, (c)
Zestra® to increase female arousal and desire, (d)
EjectDelay® for premature ejaculation, (e) Sensum+® for
reduced penile sensitivity, (f) Zestra Glide®, (g)
Vesele® for promoting sexual health, (h) Androferti® to
support overall male reproductive health and sperm quality, (i)
RecalMax™ for cognitive brain health, (j) Beyond Human®
Green Coffee Extract, (k) Beyond Human® Eagle Vision Formula,
(l) Beyond Human® Blood Sugar, (m) Beyond Human® Colon
Cleanse, (n) Beyond Human® Ketones, (o) Beyond Human®
Krill Oil, (p) Beyond Human® Omega 3 Fish Oil, (q)
UriVarx® for bladder health, (r) ProstaGorx® for prostate
health, (s) AllerVarx®
for management of allergy symptoms, (t) Apeaz® indicated for
arthritis pain relief, (u) ArthriVarx® for joint health, (v)
PEVarx® for extension of sexual intercourse time, (w)
FlutiCare® for allergy symptom relief, (x) Xyralid® for
relief of pain and symptoms caused by hemorrhoids, (y) Can-C®
eye drops and supplement for lubricating the eye and to
enhance free radical
protection and reduce the oxidative environment inside the
eye, (z) MZS™ melatonin for improved sleeping, and
(aa) Diabasens™ a cream designed to increase blood flow in
the diabetic foot. While we generate revenue from the sale of our
commercial products, most revenue is currently generated by
Vesele®, Zestra®, Zestra® Glide, RecalMax™,
Sensum+®, UriVarx®, ProstaGorx®, FlutiCare®,
AllerVarx®,
Apeaz®, ArthriVarx®, Xyralid®, PEVarx® and
Beyond Human® Testosterone Booster.
Pipeline Products
UriVarx™ UTI Urine Strips. UriVarx™ UTI Urine Strips are FDA
cleared diagnostic strips for home use that a man or woman can use
to determine if they have a urinary tract infection. They will be
sold with our UriVarx® supplement product as well as on their
own as replacement strips. The UriVarx™ UTI Urine Strips are
manufactured by our partner, ACON Laboratories, Inc. We currently
expect to launch the UriVarx™ UTI Urine Strips in the second
quarter of 2018.
Xyralid® Suppositories. Xyralid® Suppositories are
OTC FDA monograph suppositories indicated for the relief of both
internal & external hemorrhoidal symptoms. The drug works by
constricting or shrinking swollen hemorrhoidal tissues and gives
prompt soothing relief from painful burning, itching and
discomfort. We currently expect to launch this product in the
second quarter of 2018.
GlucoGorx™ Supplement, Glucometer, Lancing Device ad
GlucoGorx™ Strips. GlucoGorx™ is a
supplement made of a combination of herbs and
nutrients designed to balance and maintain healthy blood
sugar levels. The Glucometer, Lancing Device and
GlucoGorx™ Strips are part of an expected FDA cleared kit
that we will bundle with GlucoGorx™ to provide customers with
the ability to utilize the supplement’s benefits and to test
their blood sugar levels in their own homes in a quick and
efficient manner. The Glucometer, Lancing Device and
GlucoGorx™ Strips are manufactured by our partner ACON
Laboratories, Inc. We currently expect to launch this product and
the kit in the second half of 2018.
Vesele™ Nitric Oxide Strips. We have developed the
Vesele™ Nitric Oxide
Strips to be used with our supplement product Vesele® to
measure saliva levels of nitric oxide and help consumers monitor
the effect of Vesele®
real time on their blood flow increase. We currently expect to launch
this product in the second quarter of 2018.
RecalMax™ Nitric Oxide Strips. We have developed the
RecalMax™ Nitric Oxide Strips to be used with our product
RecalMax™ to measure saliva levels of nitric oxide and help
consumers monitor the effect of RecalMax™ real time on their
blood flow increase. We currently expect to launch
this product in the second quarter of 2018.
Musclin™. Musclin™ is a proprietary supplement
made of two FDA Generally
Recognized As Safe (GRAS) approved ingredients designed to
increase muscle mass, endurance and activity. The main ingredient
in Musclin™ is a
natural activator of the transient receptor potential cation
channel, subfamily V, member 3 (TRPV3) channels on muscle
fibers responsible to increase fibers width resulting in larger
muscles. We currently expect to launch this product in the second
half of 2018.
Regenerum™. Regenerum™ is a proprietary product
containing two natural molecules, one is an activator the TRPV3
channels resulting in the increase of muscle fiber width and the
second targeting a different unknown receptor to build the muscle's capacity
for energy production and increases physical endurance, allowing
longer and more intense exercise. Regenerum™ is being developed for patients
suffering from muscle wasting. We currently expect to launch
this product in 2019 pending successful clinical trials in patients
with muscle wasting or cachexia.
In
addition to the above listed product pipeline, we are continuously
looking to add additional drugs, supplements and medical devices to
our pipeline.
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared by
management in accordance with accounting principles generally
accepted in the United States (“U.S. GAAP”), and
include all assets, liabilities, revenues and expenses of the
Company and its wholly owned subsidiaries: FasTrack
Pharmaceuticals, Inc., Semprae Laboratories, Inc.
(“Semprae”) and Novalere, Inc.
(“Novalere”). All material intercompany transactions
and balances have been eliminated. Certain items have been
reclassified to conform to the current year
presentation.
Use of Estimates
The preparation of these consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting periods. Such management estimates include the allowance
for doubtful accounts, sales returns and chargebacks, realizability
of inventories, valuation of deferred tax assets, goodwill and
intangible assets, valuation of contingent acquisition
consideration, recoverability of long-lived assets and goodwill,
fair value of derivative liabilities and the valuation of
equity-based instruments and beneficial conversion
features. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under
the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
Liquidity
Our operations have been financed primarily through proceeds from
convertible debentures and notes payable, sales of our common stock
and revenue generated from our products domestically and
internationally by our partners. These funds have provided us
with the resources to operate our business, sell and support our
products, attract and retain key personnel and add new products to
our portfolio. We have experienced net losses and negative
cash flows from operations each year since our inception. As
of December 31, 2017, we had an accumulated deficit of $35,639,837
and a working capital deficit of $1,423,733.
In March 2017, we raised net cash proceeds of $3,307,773 from the
sale of common stock and warrants in a registered public offering
(see Note 8) and in the first quarter of 2018, we received net cash
proceeds of $2.7 million from the exercise of warrants (see Note
12). Additionally, during fiscal 2017 and the first quarter of 2018
we raised $1,650,000 and $1,877,500, respectively, in gross
proceeds from the issuance of notes payable to six investors
(see Notes 5 and 12). We have also
issued equity instruments in certain circumstances to pay for
services from vendors and consultants.
As of December 31, 2017, we had $1,564,859 in cash. During the year
ended December 31, 2017, we had net cash used in operating
activities of $2,361,723. We expect that our existing capital
resources, the proceeds received from the exercise of warrants and
issuance of notes payable in the first quarter of 2018 totaling
$4.5 million (see Note 12), revenue from sales of our products and
upcoming sales milestone payments from the commercial partners
signed for our products will be sufficient to allow us to continue
our operations, commence the product development process and launch
selected products through at least the next 12 months. In
addition, our CEO, who is also a significant shareholder, has
deferred the remaining payment of his salary earned through June
30, 2016 totaling $1,531,904 for at least the next 12 months. Our
actual needs will depend on numerous factors, including timing of
introducing our products to the marketplace, our ability to attract
additional international distributors for our products and our
ability to in-license in non-partnered territories and/or develop
new product candidates. Although no assurances can be given,
we currently intend to raise
additional capital through the sale of debt or equity securities to
provide additional working capital, pay for further expansion and
development of our business, and to meet current obligations. Such
capital may not be available to us when we need it or on terms
acceptable to us, if at all.
Fair Value Measurement
Our financial instruments are cash, accounts receivable, accounts
payable, accrued liabilities, derivative liabilities, contingent
consideration and debt. The recorded values of cash, accounts
receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The fair values
of the warrant derivative liabilities and embedded conversion
feature derivative liabilities are based upon the Black Scholes
Option Pricing Model (“Black-Scholes”) and the
Path-Dependent Monte Carlo Simulation Model calculations,
respectively, and are a Level 3 measurement (see Note 9). The fair
value of the contingent acquisition consideration is based upon the
present value of expected future payments under the terms of the
agreements and is a Level 3 measurement (see Note
3). Based on borrowing rates currently available to us,
the carrying values of the notes payable and short-term loans
payable approximate their respective fair
values.
We follow a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1) and
the lowest priority to measurements involving significant
unobservable inputs (Level 3). The three levels of the fair
value hierarchy are as follows:
●
Level 1 measurements are quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access at the measurement date.
●
Level 2 measurements are inputs other than quoted prices included
in Level 1 that are observable either directly or
indirectly.
●
Level 3 measurements are unobservable inputs.
Cash
Cash consists of cash held with financial institutions. Cash held
with financial institutions may exceed the amount of insurance
provided by the Federal Deposit Insurance Corporation on such
deposits.
Concentration of Credit Risk, Major Customers and Segment
Information
Financial instruments that potentially subject us to significant
concentrations of credit risk consist primarily of cash and
accounts receivable. Accounts receivable consist primarily of
sales of Zestra® to U.S. based retailers and Ex-U.S. partners.
We also require a percentage of payment in advance for product
orders with our larger partners. We perform ongoing credit
evaluations of our customers and generally do not require
collateral.
Revenues consist primarily of product sales and licensing rights to
market and commercialize our products. We have no
customers that accounted for 10% or more of our total net revenue
during the years ended December 31, 2017 and 2016. As of December
31, 2017 and 2016 four customers and three customers accounted for
72% and 62% of total net accounts receivable,
respectively.
We
categorize revenue by geographic area based on selling location.
All operations are currently located in the U.S.; therefore,
over 90% of our sales are currently
within the U.S. The balance of the sales are to various other
countries, none of which is 10% or greater.
We
operate our business on the basis of a single reportable segment,
which is the business of delivering over-the-counter medicines and
consumer care products for men’s and women’s health and
respiratory diseases. Our chief operating decision-maker is the
Chief Executive Officer, who evaluates us as a single operating
segment.
Concentration of Suppliers
We have manufacturing relationships with a number of vendors or
manufacturers for our various products. Pursuant to these
relationships, we purchase products through purchase orders with
our manufacturers.
Inventories
Inventories
are stated at the lower of cost or market (net realizable value).
Cost is determined on a first-in, first-out basis. We evaluate the
carrying value of inventories on a regular basis, based on the
price expected to be obtained for products in their respective
markets compared with historical cost. Write-downs of inventories
are considered to be permanent reductions in the cost basis of
inventories.
We also
regularly evaluate our inventories for excess quantities and
obsolescence (expiration), taking into account such factors as
historical and anticipated future sales or use in production
compared to quantities on hand and the remaining shelf life of
products and raw materials on hand. We establish reserves for
excess and obsolete inventories as required based on our
analyses.
Property and Equipment
Property and equipment, including software, are recorded at
historical cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful
lives of the assets which range from three to ten years. The
initial cost of property and equipment and software consists of its
purchase price and any directly attributable costs of bringing the
asset to its working condition and location for its intended
use.
Business Combinations
We account for business combinations by recognizing the assets
acquired, liabilities assumed, contractual contingencies, and
contingent consideration at their fair values on the acquisition
date. The final purchase price may be adjusted up to one year from
the date of the acquisition. Identifying the fair value of the
tangible and intangible assets and liabilities acquired requires
the use of estimates by management and was based upon
currently available data. Examples of critical estimates in
valuing certain of the intangible assets we have acquired or may
acquire in the future include but are not limited to future
expected cash flows from product sales, support agreements,
consulting contracts, other customer contracts, and acquired
developed technologies and patents and discount rates utilized in
valuation estimates.
Unanticipated events and circumstances may occur that may affect
the accuracy or validity of such assumptions, estimates or actual
results. Additionally, any change in the fair value of the
acquisition-related contingent consideration subsequent to the
acquisition date, including changes from events after the
acquisition date, such as changes in our estimate of relevant
revenue or other targets, will be recognized in earnings in the
period of the estimated fair value change. A change in fair value
of the acquisition-related contingent consideration or the
occurrence of events that cause results to differ from our
estimates or assumptions could have a material effect on the
consolidated statements of operations, financial position and cash
flows in the period of the change in the estimate.
Goodwill and Intangible Assets
We test our goodwill for impairment annually, or whenever events or
changes in circumstances indicates an impairment may have occurred,
by comparing our reporting unit's carrying value to its implied
fair value. The goodwill impairment test consists of a
two-step process as follows:
Step 1.
We compare the fair value of each reporting unit to its carrying
amount, including the existing goodwill. The fair value of each
reporting unit is determined using a discounted cash flow valuation
analysis. The carrying amount of each reporting unit is determined
by specifically identifying and allocating the assets and
liabilities to each reporting unit based on headcount, relative
revenue or other methods as deemed appropriate by management. If
the carrying amount of a reporting unit exceeds its fair value, an
indication exists that the reporting unit’s goodwill may be
impaired and we then perform the second step of the impairment
test. If the fair value of a reporting unit exceeds its carrying
amount, no further analysis is required.
Step 2.
If further analysis is required, we compare the implied fair value
of the reporting unit’s goodwill, determined by allocating
the reporting unit’s fair value to all of its assets and its
liabilities in a manner similar to a purchase price allocation, to
its carrying amount. If the carrying amount of the reporting
unit’s goodwill exceeds its fair value, an impairment loss
will be recognized in an amount equal to the excess.
Impairment may result from, among other things, deterioration in
the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations and a
variety of other circumstances. If we determine that an impairment
has occurred, it is required to record a write-down of the carrying
value and charge the impairment as an operating expense in the
period the determination is made. In evaluating the recoverability
of the carrying value of goodwill, we must make assumptions
regarding estimated future cash flows and other factors to
determine the fair value of the acquired assets. Changes in
strategy or market conditions could significantly impact those
judgments in the future and require an adjustment to the recorded
balances.
The goodwill was recorded as part of the acquisition of Semprae
that occurred on December 24, 2013, the acquisition of Novalere
that occurred on February 5, 2015, and the asset acquisition of
Beyond Human® that closed
on March 1, 2016. There was no impairment of goodwill for the years
ended December 31, 2017 and 2016.
Intangible assets with finite lives are amortized on a
straight-line basis over their estimated useful lives, which range
from one to fifteen years. The useful life of the intangible asset
is evaluated each reporting period to determine whether events and
circumstances warrant a revision to the remaining useful
life.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. We evaluate assets for
potential impairment by comparing estimated future undiscounted net
cash flows to the carrying amount of the assets. If the carrying
amount of the assets exceeds the estimated future undiscounted cash
flows, impairment is measured based on the difference between the
carrying amount of the assets and fair value. Assets to be
disposed of would be separately presented in the consolidated
balance sheet and reported at the lower of the carrying amount or
fair value less costs to sell and are no longer depreciated. The
assets and liabilities of a disposal group classified as
held-for-sale would be presented separately in the appropriate
asset and liability sections of the consolidated balance sheet, if
material. During the years ended December 31, 2017 and 2016, we did
not recognize any impairment of our long-lived assets.
Debt Issuance Costs
Debt
issuance costs represent costs incurred in connection with the
notes payable and convertible debentures during the years ended
December 31, 2017 and 2016. Debt issuance costs related to the
issuance of the convertible debentures and notes payable are
recorded as a reduction to the debt balances in the accompanying
consolidated balance sheets. The debt issuance costs are
being amortized to interest expense over the term of the financing
instruments using the effective interest method (see Note
5).
Beneficial Conversion Feature
If a conversion feature of convertible debt is not accounted for
separately as a derivative instrument and provides for a rate of
conversion that is below market value, this feature is
characterized as a beneficial conversion feature
(“BCF”). A BCF is recorded by us as a debt discount. We
amortize the discount to interest expense over the life of the debt
using the effective interest rate method.
Derivative Liabilities
Certain
of our embedded conversion features on debt and issued and
outstanding common stock purchase warrants, which have exercise
price reset features and other anti-dilution protection clauses,
are treated as derivatives for accounting purposes. The common
stock purchase warrants were not issued with the intent of
effectively hedging any future cash flow, fair value of any asset,
liability or any net investment in a foreign operation. The
warrants do not qualify for hedge accounting, and as such, all
future changes in the fair value of these warrants are recognized
currently in earnings until such time as the warrants are
exercised, expire or the related rights have been waived. These
common stock purchase warrants do not trade in an active securities
market, and as such, we estimate the fair value of these warrants
using a Probability Weighted Black-Scholes Model and the embedded
conversion features using a Path-Dependent Monte Carlo Simulation
Model (see Note 9).
Debt Extinguishment
Any gain or loss associated with debt extinguishment is recorded in
the consolidated statements of operations in the period in which
the debt is considered extinguished. Third party fees incurred in
connection with a debt restructuring accounted for as an
extinguishment are capitalized. Fees paid to third parties
associated with a term debt restructuring accounted for as a
modification are expensed as incurred. Third party and creditor
fees incurred in connection with a modification to a line of credit
or revolving debt arrangements are considered to be associated with
the new arrangement and are capitalized.
Income Taxes
Income taxes are provided for using the asset and liability method
whereby deferred tax assets and liabilities are recognized using
current tax rates on the difference between the financial statement
carrying amounts and the respective tax basis of the assets and
liabilities. We provide a valuation allowance on deferred tax
assets when it is more likely than not that such assets will not be
realized.
We recognize the benefit of a tax position only after determining
that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting
this standard, the amount recognized in the consolidated financial
statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the
relevant tax authority. There were no uncertain tax positions
at December 31, 2017 and 2016 (see Note 10).
Revenue Recognition and Deferred Revenue
We
generate revenue from product sales and the licensing of the rights
to market and commercialize our products.
We
recognize revenue in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification
(“ASC”) 605, Revenue
Recognition. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales: We ship products directly to consumers
pursuant to phone or online orders and to our wholesale and retail
customers pursuant to purchase agreements or sales
orders. Revenue from sales transactions where the buyer has
the right to return the product is recognized at the time of sale
only if (1) the seller’s price to the buyer is
substantially fixed or determinable at the date of sale,
(2) the buyer has paid the seller, or the buyer is obligated
to pay the seller and the obligation is not contingent on resale of
the product, (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction
or damage of the product, (4) the buyer acquiring the product
for resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant obligations
for future performance to directly bring about resale of the
product by the buyer and (6) the amount of future returns can
be reasonably estimated.
License Revenue: The license agreements we enter into
normally generate three separate components of revenue: 1) an
initial payment due on signing or when certain specific conditions
are met; 2) royalties that are earned on an ongoing basis as
sales are made or a pre-agreed transfer price and 3) sales-based
milestone payments that are earned when cumulative sales reach
certain levels. Revenue from the initial payments or licensing fee
is recognized when all required conditions are met. Royalties are
recognized as earned based on the licensee’s sales. Revenue
from the sales-based milestone payments is recognized when the
cumulative revenue levels are reached. The achievement of the
sales-based milestone underlying the payment to be received
predominantly relates to the licensee’s performance of future
commercial activities. FASB ASC 605-28, Milestone Method, (“ASC
605-28”) is not used by us as these milestones do not meet
the definition of a milestone under ASC 605-28 as they are
sales-based and similar to a royalty and the achievement of the
sales levels is neither based, in whole or in part, on our
performance, a specific outcome resulting from our performance, nor
is it a research or development deliverable.
Sales Allowances
We accrue for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
Our product returns accrual is primarily based on estimates of
future product returns over the period customers have a right of
return, which is in turn based in part on estimates of the
remaining shelf-life of products when sold to customers. Future
product returns are estimated primarily based on historical sales
and return rates. We estimate our volume rebates and promotional
discounts accrual based on its estimates of the level of inventory
of our products in the distribution channel that remain subject to
these discounts. The estimate of the level of products in the
distribution channel is based primarily on data provided by our
customers.
In all cases, judgment is required in estimating these reserves.
Actual claims for rebates and returns and promotional discounts
could be materially different from the estimates.
We provide a customer satisfaction warranty on all of our products
to customers for a specified amount of time after product
delivery. Estimated return costs are based on historical
experience and estimated and recorded when the related sales are
recognized. Any additional costs are recorded when incurred or
when they can reasonably be estimated.
The estimated reserve for sales returns and allowances, which is
included in accounts payable and accrued expense in the
accompanying consolidated balance sheets, was approximately $53,000
and $61,000 at December 31, 2017 and 2016,
respectively.
Cost of Product Sales
Cost of product sales includes the cost of inventories, shipping
costs, royalties and inventory reserves. We are required to make
royalty payments based upon the net sales of three of our marketed
products, Zestra®, Sensum+® and Vesele®. In October
2017, the royalty obligation for Vesele® ended (see Note
11).
Advertising Expense
Advertising costs, which primarily includes print and online media
advertisements, are expensed as incurred and are included in sales
and marketing expense in the accompanying consolidated statements
of operations. Advertising costs were approximately $5,388,000 and
$2,680,000 for the years ended December 31, 2017 and 2016,
respectively.
Research and Development Costs
Research and development (“R&D”) costs, including
research performed under contract by third parties, are expensed as
incurred. Major components of R&D expense consists of
salaries and benefits, testing, post marketing clinical trials,
material purchases and regulatory affairs.
Stock-Based Compensation
We account for stock-based compensation in accordance with FASB ASC
718, Stock
Based Compensation. All stock-based payments to
employees and directors, including grants of stock options,
warrants, restricted stock units (“RSUs”) and
restricted stock, are recognized in the consolidated financial
statements based upon their estimated fair values. We use
Black-Scholes to estimate the fair value of stock-based awards. The
estimated fair value is determined at the date of grant.
FASB ASC 718 requires that stock-based
compensation expense be based on awards that are ultimately
expected to vest. Prior to the adoption of Accounting
Standards Update (“ASU”) ASU No.
2016-09, Improvements
to Employee Share-Based Payment Accounting, on January 1,
2017, stock-based compensation
had been reduced for estimated forfeitures. When estimating
forfeitures, voluntary termination behaviors, as well as trends of
actual option forfeitures, were considered. To the extent
actual forfeitures differed from then current estimates, cumulative
adjustments to stock-based compensation expense were
recorded. As a result of the
adoption of ASU No. 2016-09 as of January 1, 2017, we have made an
entity-wide accounting policy election to account for forfeitures
when they occur. There is no cumulative-effect adjustment as a
result of the adoption of this ASU as our estimated forfeiture rate
prior to adoption of this ASU was 0%.
Except for transactions with employees and directors that are
within the scope of FASB ASC 718, all transactions in which goods
or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Equity Instruments Issued to Non-Employees for
Services
Our
accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows FASB guidance.
As such, the value of the applicable stock-based compensation is
periodically remeasured and income or expense is recognized during
the vesting terms of the equity instruments. The measurement date
for the estimated fair value of the equity instruments issued is
the earlier of (i) the date at which a commitment for performance
by the consultant or vendor is reached or (ii) the date at which
the consultant or vendor’s performance is complete. In the
case of equity instruments issued to consultants, the estimated
fair value of the equity instrument is primarily recognized over
the term of the consulting agreement. According to FASB guidance,
an asset acquired in exchange for the issuance of fully vested,
nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor’s balance
sheet once the equity instrument is granted for accounting
purposes. Accordingly, we record the estimated fair value of
nonforfeitable equity instruments issued for future consulting
services as prepaid expense and other current assets in our
consolidated balance sheets.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding and
vested but deferred RSUs during the period presented. Diluted net loss per share is computed
using the weighted average number of common shares
outstanding and vested but deferred RSUs during the periods plus the effect of dilutive
securities outstanding during the periods. For the years ended
December 31, 2017 and 2016, basic net loss per share is the same as
diluted net loss per share as a result of our common stock
equivalents being anti-dilutive. See Note 8 for more
details.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers. This updated
guidance supersedes the current revenue recognition guidance,
including industry-specific guidance. The updated guidance
introduces a five-step model to achieve its core principal of the
entity recognizing revenue to depict the transfer of goods or
services to customers at an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. In August 2015, the FASB issued ASU 2015-14
which deferred the effective date by one year for public entities
and others. The amendments in this ASU are effective for interim
and annual periods beginning after December 15, 2017 for public
business entities, certain not-for-profit entities, and certain
employee benefit plans. Earlier application is permitted only as of
annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting
period. In March 2016, the FASB issued ASU 2016-08 which
clarifies the implementation guidance on principal versus agent
considerations. In April 2016, the FASB issued ASU 2016-10 which
clarifies the principle for determining whether a good or service
is “separately identifiable” and, therefore, should be
accounted for separately. In May 2016 the FASB issued ASU 2016-12
which clarifies the objective of the collectability criterion. A
separate update issued in May 2016 clarifies the accounting for
shipping and handling fees and costs as well as accounting for
consideration given by a vendor to a customer. The guidance
includes indicators to assist an entity in determining whether it
controls a specified good or service before it is transferred to
the customers.
We
adopted the standard on January 1, 2018. Upon adoption of this
standard, we will use the modified retrospective approach. Under
the modified approach, an entity recognizes “the cumulative
effect of initially applying the ASU as an adjustment to the
opening balance of retained earnings of the annual reporting period
that includes the date of initial application” (revenue in
periods presented in the consolidated financial statements before
that date is reported under guidance in effect before the change).
Using this approach, an entity applies the guidance in the ASU to
existing contracts (those for which the entity has remaining
performance obligations) as of, and new contracts after, the date
of initial application. The ASU is not applied to contracts that
were completed before the effective date (i.e., an entity has no
remaining performance obligations to fulfill). Entities that elect
the modified approach must disclose an explanation of the impact of
adopting the ASU, including the consolidated financial statement
line items and respective amounts directly affected by the
standard’s application.
Our
revenue is primarily generated from the sale of finished product to
customers. Those sales predominantly contain a single delivery
element and revenue is recognized at a single point in time when
ownership, risks and rewards transfer. The timing of revenue
recognition for these product sales are not materially impacted by
the new standard. However, we utilized a comprehensive approach to
assess the impact of the guidance on our current contract portfolio
by reviewing our current accounting policies and practices to
identify potential differences that resulted from applying the new
requirements to our revenue contracts, including evaluation of
performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price,
allocating the transaction price to each separate performance
obligation and accounting treatment of costs to obtain and fulfill
contracts. We continue to make significant progress on the
potential impact on our accounting policies and internal control
processes including system readiness. In addition, we will update
certain disclosures, as applicable, included in our filings
pursuant to the Securities Exchange Act of 1934, as amended, to
meet the requirements of the new guidance in 2018.
In July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features. The amendments in Part I of this ASU
change the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments, a down
round feature no longer precludes equity classification when
assessing whether the instrument is indexed to an entity’s
own stock. As a result, a freestanding equity-linked financial
instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result
of the existence of a down round feature. For freestanding equity
classified financial instruments, the amendments require entities
that present earnings per share to recognize the effect of the down
round feature when it is triggered. That effect is treated as a
dividend and as a reduction of income available to common
shareholders in basic earnings per share. For public business entities, the amendments are
effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years.
Early
adoption is permitted in any interim or annual period, with any
adjustments reflected as of the beginning of the fiscal year of
adoption. The amendments should
be applied retrospectively to outstanding financial instruments
with down round features by means of either a cumulative-effect
adjustment to the consolidated statement of financial position as
of the beginning of the first fiscal year and interim period of
adoption or retrospectively to each prior reporting period
presented in accordance with the guidance on accounting
changes. We are currently in the process of evaluating the
effect this standard will have on our derivative liabilities and
the impact on our consolidated financial position and results of
operation.
In
January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. The update
simplifies how an entity is required to test goodwill for
impairment by eliminating Step 2 from the goodwill impairment test.
Step 2 measures a goodwill impairment loss by comparing the implied
fair value of a reporting unit’s goodwill with the carrying
amount. This update is effective for annual and interim periods
beginning after December 15, 2019, and interim periods within that
reporting period. While we are still in the process of completing
our analysis on the impact this guidance will have on the
consolidated financial statements and related disclosures, we do
not expect the impact to be material.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying
the Definition of a Business. The update provides that when
substantially all the fair value of the assets acquired is
concentrated in a single identifiable asset or a group of similar
identifiable assets, the set is not a business. This update is
effective for annual and interim periods beginning after December
15, 2017, and interim periods within that reporting period. While
we are still in the process of completing our analysis on the
impact this guidance will have on the consolidated financial
statements and related disclosures, we do not expect the impact to
be material.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) –
Classification of Certain Cash Receipts and Cash Payments.
This ASU provides clarification regarding how certain cash receipts
and cash payments are presented and classified in the statement of
cash flows. This ASU addresses eight specific cash flow issues with
the objective of reducing the existing diversity in practice. The
issues addressed in this ASU that will affect us is classifying
debt prepayments or debt extinguishment costs and contingent
consideration payments made after a business combination. This
update is effective for annual and interim periods beginning after
December 15, 2017, and interim periods within that reporting period
and is to be applied using a retrospective transition method to
each period presented. Early adoption is permitted. We have elected
to early adopt ASU 2016-15 as of January 1, 2017 and, as a result,
the prepayment penalty of $127,247 in connection with the
extinguishment of the 2016 Notes (see Note 5) in March 2017 is
classified as a financing cash outflow in the accompanying
consolidated statement of cash flows for the year ended December
31, 2017. The adoption of this ASU did not have a material impact
on our consolidated financial position, results of operations and
related disclosures and had no other impact to the accompanying
consolidated statement of cash flows for the years ended December
31, 2017 and 2016.
In March 2016, the FASB issued ASU No.
2016-09, Improvements
to Employee Share-Based Payment Accounting, which amends ASC
Topic 718, Compensation
- Stock Compensation. The ASU
involves several aspects of the accounting for share-based payment
transactions, including the income tax consequences, forfeitures,
classification of awards as either equity or liabilities and
classification on the statement of cash flows. Certain of these
changes are required to be applied retrospectively, while other
changes are required to be applied prospectively. ASU 2016-09 is
effective for public business entities for annual reporting periods
beginning after December 15, 2016, and interim periods within that
reporting period. Early adoption will be permitted in any interim
or annual period, with any adjustments reflected as of the
beginning of the fiscal year of adoption. As a result of the
adoption of this ASU as of January 1, 2017, we have made an
entity-wide accounting policy election to account for forfeitures
when they occur. There is no cumulative-effect adjustment as a
result of the adoption of this ASU as our estimated forfeiture rate
prior to adoption of this ASU was 0%. The adoption of this ASU did
not have a material impact on our consolidated financial statements
and related disclosures.
In February 2016, the FASB issued its new lease accounting guidance
in ASU No. 2016-02, Leases (Topic
842). Under the new guidance,
lessees will be required to recognize the following for all leases
(with the exception of short-term leases) at the commencement date:
A lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to
align, where necessary, lessor accounting with the lessee
accounting model and ASC 606, Revenue from Contracts with
Customers. The new lease
guidance simplified the accounting for sale and leaseback
transactions primarily because lessees must recognize lease assets
and lease liabilities. Lessees will no longer be provided with a
source of off-balance sheet financing. Public business entities
should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted. Lessees (for
capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the
consolidated financial statements. The modified retrospective
approach would not require any transition accounting for leases
that expired before the earliest comparative period presented.
Lessees may not apply a full retrospective transition
approach. While we are currently assessing the
impact ASU 2016-02 will have on the consolidated financial
statements, we expect the primary impact to the consolidated
financial position upon adoption will be the recognition, on a
discounted basis, of the minimum commitments on the consolidated
balance sheet under our sole noncancelable operating lease for our
facility in San Diego resulting in the recording of a right of use
asset and lease obligation. The current minimum commitment under
the noncancelable operating lease is disclosed in Note
11.
In November 2015, the FASB issued ASU No.
2015-17, Balance Sheet Classification
of Deferred Taxes. Current U.S.
GAAP requires an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts in a classified
statement of financial position. To simplify the presentation of
deferred income taxes, the amendments in this update require that
deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. The amendments in
this update apply to all entities that present a classified
statement of financial position. The current requirement that
deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected
by the amendments in this update. The amendments in this update
will align the presentation of deferred income tax assets and
liabilities with International Financial Reporting Standards (IFRS)
and are effective for fiscal years after December 15, 2016,
including interim periods within those annual
periods. The adoption of this
ASU as of January 1, 2017 did not have a material impact on our
consolidated financial statements and related
disclosures.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330):
Simplifying the Measurement of Inventory. Topic
330. Inventory, currently
requires an entity to measure inventory at the lower of cost or
market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The amendments apply to all other inventory, which includes
inventory that is measured using first-in, first-out (FIFO) or
average cost. An entity should measure in scope inventory at the
lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. The amendments in this ASU more closely align the
measurement of inventory in U.S. GAAP with the measurement of
inventory in IFRS. For public business entities, the amendments are
effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The amendments
should be applied prospectively with earlier application permitted
as of the beginning of an interim or annual reporting
period. The adoption of this
ASU as of January 1, 2017 did not have a material impact on our
consolidated financial statements and related
disclosures.
In August 2014, the FASB issued ASU
2014-15, Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern. This ASU 2014-15
describes how an entity should assess its ability to meet
obligations and sets rules for how this information should be
disclosed in the condensed consolidated financial statements. The
standard provides accounting guidance that will be used along with
existing auditing standards. The ASU 2014-15 is effective for the
annual period ending after December 15, 2016. Early application is
permitted. The adoption of this
ASU as of January 1, 2017 did not have a material impact on our
consolidated financial statements and related
disclosures.
NOTE 2 – LICENSE AGREEMENTS
In-License Agreements
NTC S.r.l. In-License Agreement
On
December 15, 2016, the Company and NTC S.r.l (“NTC”)
entered into a license and distribution agreement (“NTC
License Agreement”) pursuant to which we acquired the rights
to use, market and sell NTC’s proprietary modified release
bilayer tablet formerly known as LERTAL® for the management of
allergic rhinitis in the U.S. and Canada. Such licensed product is
sold by us under the name AllerVarx® in the U.S. and Canada. Under
this agreement, we are obligated to pay a non-refundable upfront
license fee of €15,000,
or $15,684 USD, and cash payments of up to €120,000
($143,743 USD based on December 31, 2017 exchange rate) upon the
achievement of certain sales milestones. The non-refundable upfront
license is included in sales and marketing expense in the
accompanying consolidated statement of operations for the year
ended December 31, 2016. No other amounts have been paid under this
agreement.
Seipel Group Pty Ltd. In-License Agreement
On
September 29, 2016, the Company and Seipel Group Pty Ltd.
(“SG”) entered into a license and purchase agreement
(“SG License Purchase Agreement”) pursuant to which we
acquired the exclusive rights to use, market and sell SG’s
proprietary dietary supplement formula known as Urox® for
bladder support in the U.S. and worldwide. Under this agreement, we
have agreed to minimum purchase order requirements of 25,000 units
per calendar quarter beginning 12 months after our initial order to
retain our exclusivity (see Note 11) and paid a brokerage fee of
$200,000 which is included in sales and marketing expense in the
accompanying consolidated statement of operations for the year
ended December 31, 2016. We have met the quarterly minimum purchase
order requirements under this agreement as of December 31,
2017.
CRI In-License Agreement
On April 19, 2013, the Company and Centric Research
Institute (“CRI”) entered
into an asset purchase agreement (the “CRI Asset Purchase
Agreement”) pursuant to which we
acquired:
●
All of CRI’s rights in past, present and future Sensum+®
product formulations and presentations, and
●
An exclusive, perpetual license to commercialize Sensum+®
products in all territories except for the United
States.
On June
9, 2016, the Company and CRI amended the CRI Asset Purchase
Agreement (“Amended CRI Asset Purchase Agreement”) to
provide us commercialization rights for Sensum+® in the U.S.
through our Beyond Human™ sales and marketing platform
through December 31, 2016. On January 1, 2017, the Company and CRI
agreed to extend the term of the Amended CRI Asset Purchase
Agreement to December 31, 2017. In connection with the extension,
we issued restricted shares of common stock totaling 225,000 to CRI
as a prepayment of royalties due on net profit of Sensum+® in
the U.S. in 2017. The royalty prepayment amount is $44,662 as the
number of shares of common stock issued was based on the closing
price of our common stock on December 30, 2016. Since CRI did not
earn royalties larger than the prepaid amount of $44,662 in 2017,
the term of the Amended CRI Asset Purchase Agreement is
automatically extended one additional year to December 31,
2018.
In
consideration for the CRI Asset Purchase Agreement, we issued
631,313 shares of common stock to CRI in 2013. We recorded an
asset totaling $250,000 related to the CRI Asset Purchase Agreement
and are amortizing this amount over its estimated useful life of 10
years. Under the CRI Asset Purchase Agreement, we were
required to issue to CRI shares of our common stock valued at an
aggregate of $200,000 for milestones relating to additional
clinical data to be received. As a result of the Amended CRI Asset
Purchase Agreement, the Company and CRI agreed to settle the
clinical milestone payments with a payment of 100,000 shares of
restricted common stock. The fair value of the restricted shares of
common stock of $23,000 was based on the market price of our common
stock on the date of issuance and is included in research and
development expense in the accompanying consolidated statement of
operations for the year ended December 31, 2016.
The CRI
Asset Purchase Agreement also requires us to pay to CRI up to $7.0
million in cash milestone payments based on first achievement of
annual Ex-U.S. net sales targets plus a royalty based on annual
Ex-U.S. net sales. The obligation for these payments expires
on April 19, 2023 or the expiration of the last of CRI’s
patent claims covering the product or its use outside the U.S.,
whichever is sooner. No sales milestone obligations have been
met and no royalties are owed to CRI under this agreement during
the years ended December 31, 2017 and 2016.
In
consideration for the Amended CRI Asset Purchase Agreement, we are
required to pay CRI a percentage of the monthly net profit, as
defined in the agreement, from our sales of Sensum+® in the
U.S. through our Beyond Human™ sales and marketing platform.
During the years ended December 31, 2017 and 2016, no amounts have
been earned by CRI under the Amended CRI Asset Purchase
Agreement.
Out-License Agreements
Densmore Pharmaceutical International Agreement
On April 24, 2017, we entered into an exclusive ten-year license
agreement with Densmore Pharmaceutical International, a Monaco
company (“Densmore”), under which we granted to
Densmore an exclusive license to market and sell our topical
treatment for Female Sexual Interest/Arousal Disorder
(“FSI/AD”) Zestra® in France and Belgium.
Under the agreement, we received a non-refundable upfront payment
of $7,500 which was recognized as revenue in the accompanying
consolidated statement of operations for the year ended December
31, 2017. We believe the amount of the upfront payment received is
reasonable compared to the amounts to be received upon obtainment
of future minimum order quantities. Densmore is obligated to order certain minimum
annual quantities of Zestra® at a pre-negotiated transfer
price per unit during the term of the agreement. During the
year ended December 31, 2017, we recognized revenue for the sale of
products related to this agreement of $100,341.
In July
2017, we entered into an amendment to the agreement with Densmore
to expand the product territory to Singapore and
Vietnam.
Luminarie Pty Ltd. Agreement
On May 16, 2017, we entered into an exclusive ten-year license
agreement with Luminarie Pty Ltd., a Australia company
(“Luminarie”), under which we granted to Luminarie an
exclusive license to market and sell our topical treatment for
FSI/AD Zestra® and Zestra Glide® in Australia, New
Zealand and the Philippines. Luminarie received approval for
Zestra® as a Class I Medical Device in Australia in July 2017
and New Zealand in September 2017. Luminarie is obligated to order certain minimum
annual quantities of Zestra® and Zestra Glide® at a
pre-negotiated transfer price per unit during the term of the
agreement. During the year ended December 31, 2017, we did
not recognize any revenue for the sale of products related to this
agreement.
LI USA Co. Agreement
On November 9, 2016, we entered into an exclusive ten-year license
agreement with J&H Co. LTD, a South Korea company
(“J&H”), under which we granted to J&H an
exclusive license to market and sell our topical treatment for
Female Sexual Interest/Arousal Disorder (“FSI/AD”)
Zestra® and Zestra Glide® in South Korea. Under the
agreement, J&H is obligated to order minimum annual quantities
of Zestra® and Zestra Glide® totaling $2.0 million at a
pre-negotiated transfer price per unit through March 2018. The
minimum annual order quantities by J&H are to be made over a
12-month period following the approval of the product by local
authorities and beginning upon the completion of the first shipment
of product. Our partner recently received the approval to
import the product and placed its first order in March 2017. During
the years ended December 31, 2017 and 2016, we recognized $60,000
and $0 in revenue for the sale of products related to this
agreement.
On
October 26, 2017, the exclusive license and distributor rights
under this agreement were assigned to LI USA Co., a U.S. company
(“LI USA”), from J&H and LI USA is now the
distributor under this agreement. LI USA is controlled by the same
original owners as J&H. All terms and conditions of the
original agreement remain intact.
Sothema Laboratories Agreement
On
September 23, 2014, we entered into an exclusive license agreement
with Sothema Laboratories, SARL, a Moroccan publicly traded company
(“Sothema”), under which we granted to Sothema an
exclusive license to market and sell Zestra® (based on the latest Canadian
approval of the indication) and Zestra Glide® in several
Middle Eastern and African countries (collectively the
“Territory”).
Under
the agreement, we received an upfront payment of $200,000 and are
eligible to receive additional consideration upon and subject to
the achievement of sales milestones based on cumulative supplied
units of the licensed products in the Territory, plus a
pre-negotiated transfer price per unit. We believe the amount of
the upfront payment received is reasonable compared to the amounts
to be received upon obtainment of future sales-based
milestones.
As the
sales-based milestones do not meet the definition of a milestone
under ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative supplied units’ volume is met.
During the years ended December 31, 2017 and 2016, we recognized $0
and $16,056, respectively, in net revenue for the sales of products
related to this agreement, and no revenue was recognized for the
sales-based milestones of the agreement.
Orimed Pharma Agreement
On
September 18, 2014, we entered into a twenty-year exclusive license
agreement with Orimed Pharma (“Orimed”), an affiliate
of JAMP Pharma, under which we granted to Orimed an exclusive
license to market and sell in Canada Zestra®, Zestra
Glide®, our topical treatment for premature ejaculation
EjectDelay® and our product Sensum+® to increase penile
sensitivity.
Under
the agreement, we received an upfront payment of $100,000 and are
eligible to receive additional consideration upon and subject to
the achievement of sales milestones based on cumulative gross sales
in Canada by Orimed plus double-digit tiered royalties based on
Orimed’s cumulative net sales in Canada. We believe the
amount of the upfront payment received is reasonable compared to
the amounts to be received upon obtainment of future sales-based
milestones.
As the
sales-based milestones do not meet the definition of a milestone
under ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative gross sales volume is met. We will
recognize the revenue from the royalty payments on a quarterly
basis when the cumulative net sales have been
met. During the years ended December 31, 2017 and 2016,
under this agreement we recognized $31,015 and $42,153,
respectively, in net revenue for the sales of products and no
revenue was recognized for the sales-based milestones. During the
years ended December 31, 2017 and 2016, we recognized royalty
payments of $4,112 and $1,252, respectively.
Khandelwal Laboratories Agreement
On September 9, 2015, we entered into an exclusive license and
distribution agreement with Khandelwal Laboratories, an Indian
company (“KLabs”) under which we have granted to KLabs
an exclusive ten-year distribution right to market and sell in the
Indian Subcontinent, which is defined as India, Nepal, Bhutan,
Bangladesh and Sri Lanka our products including Zestra®,
EjectDelay®, Sensum+® and Zestra
Glide®. If KLabs exceeds its minimum yearly orders,
the agreement has two five-year term extensions. During the
years ended December 31, 2017 and 2016, we recognized $5,371 and
$0, respectively, in net revenue for the sales of products related
to this agreement.
Elis Pharmaceuticals Agreements
On July 4, 2015, we announced that we had entered into an exclusive
license and distribution agreement with Elis Pharmaceuticals, an
emirates company (“Elis”), under which we granted to
Elis an exclusive ten-year distribution right to market and sell
Zestra® EjectDelay®, Sensum+® and Zestra Glide®
in Turkey and select African and gulf countries. If Elis exceeds
its minimum yearly orders, the agreement has a ten-year term
extension. Under the agreement, we are eligible to receive certain
sales milestone payments plus an agreed-upon transfer price upon
sale of products. We had preliminary listed Syria, Yemen and
Somalia as countries in the definition of licensed territories, but
these countries were removed by the agreement of both parties
from the agreement effective the date of signing of the
agreement. As the sales-based milestones are not
considered a milestone under ASC 605-28, we will recognize the
revenue from the milestone payments when the cumulative gross sales
volume is met. We did not recognize any revenue from this agreement
during the years ended December 31, 2017 and 2016.
On October 31, 2016, we entered into another exclusive license and
distribution agreement with Elis under which we granted to Elis an
exclusive ten-year distribution right to market and sell
Zestra® in Lebanon. Under the agreement, we are eligible to
receive certain sales milestone payments plus an agreed-upon
transfer price upon sale of products. As the sales-based milestones
are not considered a milestone under ASC 605-28, we will recognize
the revenue from the milestone payments when the cumulative gross
sales volume is met. During the years ended December 31,
2017 and 2016, no revenue was recognized related to this
agreement.
NOTE 3 – BUSINESS AND ASSET ACQUISITIONS
Acquisition of Assets of Beyond Human® in 2016
On
February 8, 2016, we entered into an Asset Purchase Agreement
(“APA”), pursuant to which we agreed to purchase
substantially all of the assets of Beyond Human® (the
“Acquisition”) for a total cash payment of up to
$662,500 (the “Purchase Price”). The Purchase Price was
payable in the following manner: (1) $300,000 in cash at
the closing of the Acquisition (the “Initial Payment”),
(2) $100,000 in cash four months from the closing upon the
occurrence of certain milestones as described in the APA, (3)
$100,000 in cash eight months from the closing upon the occurrence
of certain milestones as described in the APA, and (4) $130,000 in
cash in twelve months from the closing upon the occurrence of
certain milestones as described in the APA. An
additional $32,500 in cash is due if certain milestones occur
twelve months from closing. The transaction closed on
March 1, 2016.
The
fair value of the contingent consideration is based on cash flow
projections and other assumptions for the milestone payments and
future changes in the estimate of such contingent consideration
will be recognized as a charge to fair value adjustment for
contingent consideration.
The total purchase price is summarized as follows:
|
Cash
consideration
|
$300,000
|
|
Fair
value of future earn out payments
|
330,000
|
|
Total
|
$630,000
|
We
accounted for such asset acquisition as a business combination
under ASC 805, Business
Combinations. We did not acquire any identifiable tangible
assets and did not assume any liabilities as a result of the asset
acquisition. The excess of the acquisition date fair value of
consideration transferred of $630,000 over the estimated fair value
of the intangible assets acquired was recorded as goodwill. The
establishment of the fair value of the contingent consideration,
and the allocation to identifiable intangible assets requires the
extensive use of accounting estimates and management judgment. The
fair values assigned to the assets acquired are based on estimates
and assumptions from data currently available.
In
determining the fair value of the intangible assets, we considered,
among other factors, the best use of acquired assets such as the
Beyond Human® website, analyses of historical financial
performance of the Beyond Human® products and estimates of
future performance of the Beyond Human® products and website
acquired. The fair values of the identified intangible assets
related to Beyond Human®’s website, trade name,
non-competition covenant and customer list. The fair value of the
website, customer list and the non-competition covenant were
calculated using an income approach. The fair value of the trade
name was calculated using a cost approach. The following table sets
forth the components of identified intangible assets associated
with the Acquisition and their estimated useful lives:
|
|
|
|
|
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® products. Customer list
represents the expected benefit from customer contracts that, at
the date of acquisition, were reasonably anticipated to continue
given the history and operating practices of Beyond Human®.
The non-competition covenant represents the contractual period and
expected degree of adverse economic impact that would exist in its
absence.
Of the
total estimated purchase price, $403,208 was allocated to goodwill
and is attributable to expected synergies the acquired assets will
bring to our existing business, including access for us to market
and sell our existing products through the Beyond Human™ sales and marketing platform.
Goodwill represents the excess of the purchase price of the
acquired business over the estimated fair value of the underlying
intangible assets acquired. Goodwill resulting from the Acquisition
will be tested for impairment at least annually and more frequently
if certain indicators of impairment are present. In the event we
determine that the value of goodwill has become impaired, we will
incur an accounting charge for the amount of the impairment during
the fiscal quarter in which the determination is made. All of the
goodwill is expected to be deductible for income tax
purposes.
On
September 6, 2016, the Company and the sellers entered into an
agreement in which we agreed to pay the sellers $150,000 to settle
the contingent consideration payments totaling up to $362,500 under
the APA. The settlement agreement was not contemplated at the time
of the acquisition and the fair value of the contingent
consideration on the date of settlement was $330,000. As a result,
we recorded a non-cash gain on contingent consideration of
$180,000, which is included in fair value adjustment for contingent
consideration in the accompanying consolidated statement of
operations for the year ended December 31, 2016.
Supplemental Pro Forma Information for Acquisition of Assets of
Beyond Human® (unaudited)
The
following unaudited supplemental pro forma information for the year
ended December 31, 2016 assumes the asset acquisition of Beyond
Human® had occurred as of January 1, 2016, giving effect
to purchase accounting adjustments such as amortization of
intangible assets. The pro forma data is for informational purposes
only and may not necessarily reflect the actual results of
operations had the assets of Beyond Human® been operated as
part of the Company since January 1, 2016.
|
|
Year Ended
December 31, 2016
|
|
|
|
|
|
Net
revenues
|
$4,818,603
|
$4,868,241
|
|
Net
loss
|
$(13,701,154)
|
$(13,700,702)
|
|
Net
loss per share of common stock – basic and
diluted
|
$(0.15)
|
$(0.15)
|
|
Weighted
average number of shares outstanding
– basic and diluted
|
94,106,382
|
94,106,382
|
We
incurred approximately $70,000 in expense related to the
Acquisition.
Acquisition of Novalere in 2015
On February 5, 2015 (the “Closing Date”), Innovus,
Innovus Pharma Acquisition Corporation, a Delaware corporation and
a wholly-owned subsidiary of Innovus (“Merger Subsidiary
I”), Innovus Pharma Acquisition Corporation II, a Delaware
corporation and a wholly-owned subsidiary of Innovus (“Merger
Subsidiary II”), Novalere FP, Inc., a Delaware corporation
(“Novalere FP”) and Novalere Holdings, LLC, a Delaware
limited liability company (“Novalere Holdings”), as
representative of the shareholders of Novalere (the “Novalere
Stockholders”), entered into an Agreement and Plan of Merger
(the “Merger Agreement”), pursuant to which Merger
Subsidiary I merged into Novalere and then Novalere merged with and
into Merger Subsidiary II (the “Merger”), with Merger
Subsidiary II surviving as a wholly-owned subsidiary of Innovus.
Pursuant to the articles of merger effectuating the Merger, Merger
Subsidiary II changed its name to Novalere, Inc.
With the Merger, we acquired the worldwide rights to market and
sell the FlutiCare® brand (fluticasone propionate nasal
spray) and the related third-party manufacturing agreement for the
manufacturing of FlutiCare® (“Acquisition Manufacturer”) from
Novalere FP. The OTC Abbreviated New Drug Application
(“ANDA”) for fluticasone propionate nasal spray was
filed at the end of 2014 by our third-party manufacturer and
partner, who is currently selling the prescription version of the
drug, with the FDA and the OTC ANDA is still subject to FDA
approval. An ANDA is an application for a U.S. generic drug
approval for an existing licensed medication or approved drug. A
prescription ANDA (“RX ANDA”) is for a generic version
of a prescription pharmaceutical and an OTC ANDA is for a generic
version of an OTC pharmaceutical.
Due to the delay in approval of the Acquisition
Manufacturer’s OTC ANDA by the FDA, in May 2017, we
announced a commercial relationship with a different third-party
manufacturer (West-Ward Pharmaceuticals International Limited or
“WWPIL”) who has an
FDA approved OTC ANDA for fluticasone propionate nasal spray under
which they have agreed to manufacture our FlutiCare® OTC
product for sale in the U.S. (see Note 11). We currently still anticipate that the OTC ANDA
filed in November 2014 by the Acquisition Manufacturer with
the FDA may be approved in 2018. As we hold the worldwide rights to
market and sell FlutiCare® under the manufacturing agreement with the
Acquisition Manufacturer, we believe the agreement with the
Acquisition Manufacturer will still provide us with the opportunity
to market and sell FlutiCare® ex-U.S. and, if the OTC ANDA is approved by the
FDA, a second source of supply within the U.S., if ever
needed.
Under the terms of the Merger Agreement, at the Closing Date, the
Novalere Stockholders received 50% of the Consideration Shares (the
“Closing Consideration Shares”) and the remaining 50%
of the Consideration Shares (the “ANDA Consideration
Shares”) were to be delivered only if an ANDA of Fluticasone
Propionate Nasal Spray of Novalere Manufacturing Partners (the
“Target Product”) was approved by the FDA (the
“ANDA Approval”). A portion of the Closing
Consideration Shares and, if ANDA Approval was obtained prior to
the 18 month anniversary of the Closing Date, a
portion of the ANDA Consideration Shares, would have been held
in escrow for a period of 18 months from the Closing Date to be
applied towards any indemnification claims by us pursuant to the
Merger Agreement.
In addition, the Novalere Stockholders are entitled to receive, if
and when earned, earn-out payments (the “Earn-Out
Payments”). For every $5.0 million in Net Revenue (as defined
in the Merger Agreement) realized from the sales of FlutiCare®
through the manufacturing agreement with the Acquisition
Manufacturer, the Novalere Stockholders will be entitled to
receive, on a pro rata basis, $500,000, subject to cumulative
maximum Earn-Out Payments of $2.5 million. The Novalere
Stockholders are only entitled to the Earn-Out Payments from the
Acquisition Manufacturer’s OTC ANDA under review by the FDA
and have no earn-out rights to the sales of FlutiCare®
supplied by WWPIL under the commercial agreement entered into in
May 2017.
On November 12, 2016, we entered into an Amendment and Supplement
to a Registration Rights and Stock Restriction Agreement (the
"Agreement") with Novalere Holdings pursuant to which we
agreed to issue 12,808,796 shares of our common stock (the
“Novalere Shares”) that were
issuable pursuant to agreement upon the approval of the
Acquisition Manufacturer’s OTC ANDA for fluticasone
propionate nasal spray by the FDA. In connection with the
issuance of the Novalere Shares, Novalere Holdings also agreed to
certain restrictions, and to an extension in the date to register
the Novalere Shares and all other shares of our common stock held
by Novalere Holdings until the second quarter of 2017. In the event
a registration statement to register the Novalere Shares was not
filed by February 1, 2017, and did not become effective by May 15,
2017, we would have been required to issue additional shares of
common stock as a penalty to Novalere Holdings equal to 10% of the
total shares to be registered of 25,617,592. We filed a
Registration Statement on Form S-1 on February 1, 2017 to register
the 25,617,592 shares of common stock issued to Novalere Holdings
and the Form S-1 was declared effective on March 15, 2017. As
a result of the issuance of the Novalere Shares, the fair value of
the Novalere Shares on the date of issuance of $2,971,641 was
reclassified from liabilities to equity. During the year ended
December 31, 2016, there was an increase in the estimated fair
value of the Novalere Shares of $1,332,670 due to the amended
agreement entered into with Novalere Holdings (see above) which is
included in fair value adjustment for contingent consideration in
the accompanying consolidated statement of operations. The
remaining 138,859 ANDA consideration shares not issuable yet will
be issued upon FDA approval of the ANDA filed by the Acquisition
Manufacturer and the estimated fair value of such remaining shares
of $9,275 and $32,215 is included in contingent consideration in
the accompanying consolidated balance sheets at December 31, 2017
and 2016, respectively. During the years ended December 31, 2017
and 2016, there was an increase/(decrease) in the estimated fair
value of the remaining 138,859 ANDA consideration shares totaling
$(22,940) and $13,886, respectively, which is included in fair
value adjustment for contingent consideration in the accompanying
consolidated statements of operations.
There was no change to the estimated fair value of the future
earn-out payments of $1,248,126 during the years ended December 31,
2017 and 2016.
Purchase of Semprae Laboratories, Inc. in 2013
On December 24, 2013 (the “Semprae Closing Date”), we,
through Merger Sub, obtained 100% of the outstanding shares of
Semprae in exchange for the issuance of 3,201,776 shares of our
common stock, which shares represented 15% of our total issued and
outstanding shares as of the close of business on the Closing Date,
whereupon Merger Sub was renamed Semprae Laboratories, Inc. We
agreed to pay the former shareholders an annual royalty
(“Royalty”) equal to 5% of the net sales from
Zestra® and Zestra Glide® and any second generation
products derived primarily therefrom (“Target
Products”) up until the time that a generic version of such
Target Product is introduced worldwide by a third
party.
The agreement to pay the annual Royalty resulted in the recognition
of a contingent consideration, which is recognized at the inception
of the transaction, and subsequent changes to estimate of the
amounts of contingent consideration to be paid will be recognized
as charges or credits in the consolidated statement of operations.
The fair value of the contingent consideration is based on
preliminary cash flow projections, growth in expected product sales
and other assumptions. The fair value of the Royalty was determined
by applying the income approach, using several significant
unobservable inputs for projected cash flows and a discount rate of
approximately 22% commensurate with our cost of capital and
expectation of the revenue growth for products at their life cycle
stage. These inputs are considered Level 3 inputs under the fair
value measurements and disclosure guidance. During the years ended
December 31, 2017 and 2016, $12,881 and $22,103 have been paid
under this arrangement, respectively. The fair value of
the expected royalties to be paid was increased/(decreased) by
$(171,094) and $103,301 during the years ended December 31, 2017
and 2016, respectively, which is included in the fair value
adjustment for contingent consideration in the accompanying
consolidated statements of operations. The fair value of the
contingent consideration was $221,602 and $405,577 at December 31,
2017 and December 31, 2016, respectively, based on the new
estimated fair value of the consideration.
NOTE 4 – ASSETS AND LIABILITIES
Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
Raw
materials and supplies
|
$164,469
|
$85,816
|
|
Work
in process
|
152,935
|
48,530
|
|
Finished
goods
|
1,408,294
|
465,510
|
|
Total
|
$1,725,698
|
$599,856
|
Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
Computer
equipment
|
$22,473
|
$5,254
|
|
Office
furniture and fixtures
|
34,249
|
33,376
|
|
Leasehold
improvements
|
24,658
|
-
|
|
Production
equipment
|
278,365
|
276,479
|
|
Software
|
338,976
|
338,976
|
|
Total
cost
|
698,721
|
654,085
|
|
Less
accumulated depreciation
|
(636,267)
|
(624,516)
|
|
Property
and equipment, net
|
$62,454
|
$29,569
|
Depreciation expense for the years ended December 31, 2017 and 2016
was $11,751 and $5,532, respectively.
Intangible Assets
Amortizable intangible assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(124,809)
|
$292,788
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(249,540)
|
361,579
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(107,464)
|
127,081
|
10
|
|
Vesele®
Trademark
|
25,287
|
(10,208)
|
15,079
|
8
|
|
Beyond
Human® Website and Trade Name
|
222,062
|
(72,206)
|
149,856
|
5 – 10
|
|
Novalere
Manufacturing Contract
|
4,681,000
|
(1,355,540)
|
3,325,460
|
10
|
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(3,474)
|
1,256
|
1 – 3
|
|
Total
|
$$6,196,340
|
$(1,923,241)
|
$4,273,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(91,201)
|
$326,396
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(188,428)
|
422,691
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(84,009)
|
150,536
|
10
|
|
Vesele®
Trademark
|
25,287
|
(7,047)
|
18,240
|
8
|
|
Beyond
Human® Website and Trade Name
|
222,062
|
(32,821)
|
189,241
|
5 – 10
|
|
Novalere
Manufacturing Contract
|
4,681,000
|
(887,440)
|
3,793,560
|
10
|
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(2,147)
|
2,583
|
1 – 3
|
|
Total
|
$6,196,340
|
$(1,293,093)
|
$4,903,247
|
|
Amortization expense for the years ended December 31, 2017 and 2016
was $630,148 and $624,404, respectively. The following table
summarizes the approximate expected future amortization expense as
of December 31, 2017 for intangible assets:
|
2018
|
$630,000
|
|
2019
|
629,000
|
|
2020
|
629,000
|
|
2021
|
600,000
|
|
2022
|
592,000
|
|
Thereafter
|
1,193,000
|
|
|
$4,273,000
|
Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the
following:
|
|
|
|
|
|
|
|
Prepaid
insurance
|
$109,990
|
$69,976
|
|
Prepaid
inventory
|
124,871
|
20,750
|
|
Merchant
net settlement reserve receivable
|
-
|
221,243
|
|
Prepaid
consulting and other expense
|
83,557
|
21,094
|
|
Prepaid
CRI royalties (see Note 2)
|
44,662
|
-
|
|
Prepaid
consulting and other service stock-based compensation expense (see
Note 8)
|
-
|
530,601
|
|
Total
|
$363,080
|
$863,664
|
Goodwill
The change in the carrying value of our goodwill for the year ended
December 31, 2016 is as follows:
|
Beginning
balance December 31, 2015
|
$549,368
|
|
Asset acquisition of Beyond Human®
(see Note 3)
|
403,208
|
|
Ending
balance December 31, 2016
|
$952,576
|
There was no change in the carrying value of our goodwill during
the year ended December 31, 2017.
Accounts Payable and Accrued Expense
Accounts payable and accrued expense consist of the
following:
|
|
|
|
|
|
|
|
Accounts
payable
|
$2,305,884
|
$647,083
|
|
Accrued
credit card balances
|
72,719
|
31,654
|
|
Accrued
royalties
|
132,326
|
73,675
|
|
Sales
returns and allowances
|
52,904
|
60,853
|
|
Accrual
for stock to be issued to consultants (see Note 7)
|
-
|
360,000
|
|
Accrued
other
|
43,288
|
36,785
|
|
Total
|
$2,607,121
|
$1,210,050
|
NOTE 5 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Short-Term Loan Payable
The short-term loan payable consists of the financing of our
business insurance premiums with a third party totaling
$97,871. Under the financing agreements we are required
to make nine monthly installment payments of $11,155. The balance
outstanding as of December 31, 2017 is $65,399.
Notes Payable
The following table summarizes the outstanding notes payable at
December 31, 2017 and 2016:
|
|
|
|
|
Notes
payable:
|
|
|
|
February
2016 Note Payable
|
$54,984
|
$347,998
|
|
December
2016 and September 2017 Notes Payable
|
165,000
|
550,000
|
|
October
and December 2017 Notes Payable
|
1,066,667
|
-
|
|
December
2017 Note Payable
|
390,000
|
-
|
|
Total notes payable
|
1,676,651
|
897,998
|
|
Less:
Debt discount
|
(437,355)
|
(216,871)
|
|
Carrying value
|
1,239,296
|
681,127
|
|
Less:
Current portion
|
(1,239,296)
|
(626,610)
|
|
Notes payable, net of current portion
|
$-
|
$54,517
|
The following table summarizes the future minimum payments as of
December 31, 2017 for the notes payable:
February 2016 Note Payable
On
February 24, 2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered into an agreement in which SBI loaned
us gross proceeds of $550,000 pursuant to a purchase agreement, 20%
secured promissory note and security agreement (“February
2016 Note Payable”), all dated February 19, 2016
(collectively, the “Finance Agreements”), to purchase
substantially all of the assets of Beyond Human® (see Note 3).
Of the $550,000 gross proceeds, $300,000 was paid into an escrow
account held by a third party bank and was released to Beyond
Human® upon closing of the transaction, $242,500 was provided
directly to us for use in building the Beyond Human® business
and $7,500 was provided for attorneys’ fees. The
attorneys’ fees were recorded as a discount to the carrying
value of the February 2016 Note Payable in accordance with ASU
2015-03.
We
began to pay principal and interest on the February 2016 Note
Payable on a monthly basis beginning on March 19, 2016 for a period
of 24 months and the monthly mandatory principal and interest
payment amount thereunder was $28,209. The monthly amount was to be
paid by us through a deposit account control agreement with a
third-party bank in which SBI was permitted to take the monthly
mandatory payment amount from all revenue received by us from the
Beyond Human® assets in the transaction. The
February 2016 Note Payable was secured by SBI through a first
priority secured interest in all of the Beyond Human® assets
acquired by us in the transaction including all revenue received by
us from these assets. The maturity date for the February 2016 Note
Payable was February 19, 2018. In February 2018, the February 2016
Notes Payable was repaid in full.
December 2016, January 2017 and September 2017 Notes
Payable
On
December 5, 2016, January 19, 2017 and September 20, 2017, we
entered into a securities purchase agreement with three unrelated
third-party investors in which the investors loaned us gross
proceeds of $500,000 in December 2016, $150,000 in January 2017 and
$150,000 in September 2017 pursuant to a 5% promissory note
(“2016 and 2017 Notes
Payable”). The notes
have an Original Issue Discount (“OID”) of $80,000 and
require payment of $880,000 in principal upon maturity. The
2016 and 2017 Notes Payable bear interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on October 4, 2017, November 18, 2017 and May 20, 2018 for those
received in December 2016, January 2017 and September 2017,
respectively.
In
connection with the 2016 and 2017 Notes Payable, we issued the
investors restricted shares of common stock totaling 1,111,111 in
December 2016, 330,000 in January 2017 and 895,000 in September
2017. The fair value of the restricted shares of common
stock issued was based on the market price of our common stock on
the date of issuance of the 2016 and 2017 Notes Payable (see Note
8). The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value and the OID resulted in us recording a debt discount of
$232,203 in December 2016, $59,217 in January 2017 and $70,169 in
September 2017. The discount is being amortized to interest expense
using the effective interest method over the term of the 2016 and
2017 Notes Payable.
In
August, September and October 2017, we entered into a securities
exchange agreement with certain of the 2016 and 2017 Notes Payable
holders. In connection with the securities exchange agreements, we
issued a total of 11,432,747 shares of common stock in exchange for
the settlement of principal and interest due under the 2016 and
2017 Notes Payable totaling $742,771. The fair value of
the shares of common stock issued was based on the market price of
our common stock on the date of the securities exchange agreements
(see Note 8). Due to the settlement of the principal and interest
balance of $742,771 into shares of common stock, the transaction
was recorded as a debt extinguishment and the fair value of the
shares of common stock issued in excess of the settled principal
and interest balance totaling $378,057 and the remaining
unamortized debt discount as of the date of settlement of $17,175
were recorded as a loss on debt extinguishment in the accompanying
consolidated statement of operations for the year ended December
31, 2017.
The
remaining principal balance of $165,000 under the 2016 and 2017
Notes Payable is due on May 20, 2018.
October and December 2017 Notes Payable
On
October 17, 2017, October 20, 2017 and December 4, 2017, we entered
into a securities purchase agreement with two unrelated third-party
investors in which the investors loaned us gross proceeds of
$500,000 in October 2017 and $500,000 in December 2017 pursuant to
a 0% promissory note (“October and December 2017 Notes
Payable”). The notes
have an OID of $200,000 and require nine payments of $66,667 in
principal per month through July 2018 and twelve payments of
$50,000 in principal per month through December 2018. The
October and December 2017 Notes Payable bear no interest per annum.
The effective interest rate is 27% per annum for the notes issued
in October and 20% per annum for the notes issued in
December.
In
connection with the October and December 2017 Notes Payable, we
issued the investors restricted shares of common stock totaling
600,000 in December 2017. The fair value of the
restricted shares of common stock issued was based on the market
price of our common stock on the date of issuance of the October
and December 2017 Notes Payable (see Note 8). The
allocation of the proceeds received to the restricted shares of
common stock based on their relative fair value and the OID
resulted in us recording a debt discount of $100,000 in October
2017 and $149,712 in December 2017. In connection with the
financing, we issued 576,373 restricted shares of common stock in
October 2017 and 543,478 restricted shares of common stock in
December 2017 to a third-party consultant. The fair value of the
restricted shares of common stock issued of $48,761 in October 2017
and $50,000 in December 2017 were recorded as a debt discount to
the carrying value of the notes payable. The discount is being
amortized to interest expense using the effective interest method
over the term of the October and December 2017 Notes
Payable.
In
March 2018, we entered into a securities exchange agreement with
one of the October and December 2017 Notes Payable holders. In
connection with the securities exchange agreement, we issued a
total of 2,250,000 shares of common stock in exchange for the
settlement of principal due under the note payable totaling
$166,667 (see Note 12).
December 2017 Note Payable
On
December 13, 2017, we entered into a securities purchase agreement
with an unrelated third-party investor in which the investor loaned
us gross proceeds of $350,000 pursuant to a 5% promissory note
(“December 2017 Note Payable”). The note has an OID of $40,000, bears interest at
5% per annum and requires principal and interest payments of
$139,750, $133,250 and $131,625 on June 15, 2018, September 15,
2018 and December 15, 2018, respectively.
In
connection with the December 2017 Note Payable, we issued the
investor restricted shares of common stock totaling 1,000,000 in
December 2017. The fair value of the restricted shares
of common stock issued was based on the market price of our common
stock on the date of issuance of the December 2017 Note Payable
(see Note 8). The allocation of the proceeds received to
the restricted shares of common stock based on their relative fair
value and the OID resulted in us recording a debt discount of
$107,807 in December 2017. The discount is being amortized to
interest expense using the effective interest method over the term
of the December 2017 Note Payable.
July 2015 Debenture (Amended August 2014 Debenture)
On
August 30, 2014, we issued an 8% debenture to an unrelated third
party investor in the principal amount of $40,000 (the
“August 2014 Debenture”). The August 2014 Debenture
bore interest at the rate of 8% per annum. The principal amount and
interest were payable on August 29, 2015. On July 21, 2015, we
received an additional $30,000 from the investor and amended and
restated this agreement to a new principal balance of $73,200
(including accrued interest of $3,200 added to principal) and a new
maturity date of July 21, 2016. The note was repaid in
full in July 2016.
May 2016 Debenture
On May
4, 2016, we issued a 10% non-convertible debenture to an unrelated
third party investor in the principal amount of $24,000 (the
“May 2016 Debenture”). The May 2016 Debenture bore
interest at the rate of 10% per annum. The principal amount and
interest were payable on May 4, 2017. The note was repaid in full
in July 2016.
May 2016 Notes Payable
On May
6, 2016, we entered into a securities purchase agreement with an
unrelated third party investor in which the investor loaned us
gross proceeds of $50,000 pursuant to a 3% promissory note
(“May 6, 2016 Note Payable”). The May 6,
2016 Note Payable bore interest at the rate of 3% per annum. The
principal amount and interest were payable on November 6, 2016. The
note was repaid in full in June 2016.
In
connection with the May 6, 2016 Note Payable, we issued the
investor restricted shares of common stock totaling
500,000. The fair value of the restricted shares of
common stock issued was based on the market price of our common
stock on the date of issuance of the May 6, 2016 Note
Payable. The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value resulted in us recording a debt discount of $23,684. The
discount was amortized in full to interest expense during the year
ended December 31, 2016.
On May
20, 2016, we entered into a securities purchase agreement with an
unrelated third party investor in which the investor loaned us
gross proceeds of $100,000 pursuant to a 3% promissory note
(“May 20, 2016 Note Payable”). The May 20,
2016 Note Payable bore interest at the rate of 3% per annum. The
principal amount and interest were payable on February 21, 2017.
The note was repaid in full in June 2016.
In
connection with the May 20, 2016 Note Payable, we issued the
investor restricted shares of common stock totaling
750,000. The fair value of the restricted shares of
common stock issued was based on the market price of our common
stock on the date of issuance of the May 20, 2016 Note
Payable. The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value resulted in us recording a debt discount of $70,280. The
discount was amortized in full to interest expense during the year
ended December 31, 2016.
Interest Expense
We
recognized interest expense on notes payable of $72,747 and
$151,924 for the years ended December 31, 2017 and 2016,
respectively. Amortization of the debt discount to
interest expense during the years ended December, 2017 and 2016
totaled $348,006 and $116,798, respectively.
Convertible Debentures
2016 Financing
The following table summarizes the outstanding 2016 convertible
debentures at December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
$-
|
$1,559,922
|
|
Less:
Debt discount
|
-
|
(845,730)
|
|
Carrying value
|
-
|
714,192
|
|
Less:
Current portion
|
-
|
(714,192)
|
|
Convertible debentures, net of current portion
|
$-
|
$-
|
In the
second and third quarter of 2016, we entered into Securities
Purchase Agreements with eight accredited investors (the
“Investors”), pursuant to which we received aggregate
gross proceeds of $3.0 million (net of OID) pursuant to which we
sold:
Nine
convertible promissory notes of the Company totaling $3,303,889
(each a “2016 Note” and collectively the “2016
Notes”) (the 2016 Notes were sold at a 10% OID and we
received an aggregate total of $2,657,500 in funds thereunder after
debt issuance costs of $342,500). The 2016 Notes and accrued
interest were convertible into shares of our common stock at a
conversion price of $0.25 per share, with certain adjustment
provisions. The maturity date of the 2016 Notes issued on June 30,
2016 and July 15, 2016 was July 30, 2017 and the maturity date of
the 2016 Notes issued on July 25, 2016 was August 25, 2017. The
2016 Notes bore interest on the unpaid principal amount at the rate
of 5% per annum from the date of issuance until the same became due
and payable, whether at maturity or upon acceleration or by
prepayment or otherwise.
Notwithstanding
the foregoing, upon the occurrence of an Event of Default, as
defined in such 2016 Notes, a Default Amount was equal to the sum
of (i) the principal amount, together with accrued interest due
thereon through the date of payment payable at the holder’s
option in cash or common stock and (ii) an additional amount equal
to the principal amount payable at our option in cash or common
stock. For purposes of payments in common stock, the following
conversion formula shall have applied: the conversion price shall
have been the lower of: (i) the fixed conversion price ($0.25) or
(ii) 75% multiplied by the volume weighted average price of our
common stock during the ten consecutive trading days immediately
prior to the later of the Event of Default or the end of the
applicable cure period. For purposes of the Investors request of
repayment in cash but we were unable to do so, the following
conversion formula shall have applied: the conversion price shall
have been the lower of: (i) the fixed conversion price ($0.25) or
(ii) 60% multiplied by the lowest daily volume weighted average
price of our common stock during the ten consecutive trading days
immediately prior to the conversion. Certain other conversion rates
applied in the event of the sale or merger of us, default and
other defined events.
We
could have prepaid the 2016 Notes at any time on the terms set
forth in the 2016 Notes at the rate of 110% of the then outstanding
balance of the 2016 Notes. Pursuant to the Securities Purchase
Agreements, with certain exceptions, the Investors had a right of
participation during the term of the 2016 Notes; additionally, we
granted the 2016 Notes holders registration rights for the shares
of common stock underlying the 2016 Notes up to $1,000,000 pursuant
to Registration Rights Agreements. We filed a Form S-1 Registration
Statement on August 9, 2016, filed an Amended Form S–1 on
August 23, 2016 and August 24, 2016 and the Amended Form S-1 became
effective August 25, 2016.
In addition, bundled with the convertible debt, we
sold:
1.
A
common stock purchase warrant to each Investor, which allows the
Investors to purchase an aggregate of 3,000,000 shares of common
stock and the placement agent to purchase 1,220,000 shares of
common stock (aggregating 4,220,000 shares of our common stock) at
an exercise price of $0.40 per share (see Note 8); and
2.
7,500,000 restricted shares of common stock to the
Investors.
We
allocated the proceeds from the 2016 Notes to the convertible
debenture, warrants and restricted shares of common stock issued
based on their relative fair values. We determined the
fair value of the warrants using Black-Scholes with the following range of
assumptions:
|
|
December 31,
2016
|
|
Expected terms (in years)
|
5.00
|
|
Expected volatility
|
229%
|
|
Risk-free interest rate
|
1.01% – 1.15%
|
|
Dividend yield
|
-
|
The
fair value of the restricted shares of common stock issued to
Investors in 2016 was based on the market price of our common stock
on the date of issuance of the 2016 Notes. The
allocation of the proceeds to the warrants and restricted shares of
common stock based on their relative fair values resulted in us
recording a debt discount of $445,603 and $1,127,225,
respectively. The remaining proceeds of $1,427,172 were
initially allocated to the debt. We determined that the embedded
conversion features in the 2016 Notes were a derivative instrument
which was required to be bifurcated from the debt host contract and
recorded at fair value as a derivative liability. The
fair value of the embedded conversion features at issuance was
determined using a Path-Dependent Monte Carlo Simulation Model (see
Note 9 for assumptions used to calculate fair
value). The initial fair value of the embedded
conversion features were $3,444,284, of which, $687,385 is recorded
as a debt discount. The initial fair value of the
embedded conversion feature derivative liabilities in excess of the
proceeds allocated to the debt, after the allocation of debt
proceeds to the debt issuance costs, was $2,756,899, and was
immediately expensed and recorded as interest expense during the
year ended December 31, 2016 in the accompanying consolidated
statement of operations. The 2016 Notes were also issued
at an OID of 10% and the OID of $303,889 was recorded as an
addition to the principal amount of the 2016 Notes and a debt
discount in the accompanying consolidated balance sheet.
Total
debt issuance costs incurred in connection with the 2016 Notes was
$739,787, of which, $357,286 is the fair value of the warrants to
purchase 1,220,000 shares of common stock issued to the placement
agents. The debt issuance costs have been recorded as a
debt discount and are being amortized to interest expense using the
effective interest method over the term of the 2016
Notes.
During
the years ended December 31, 2017 and 2016, certain of the 2016
Notes holders elected to convert principal and interest outstanding
of $350,610 and $1,749,070 into 1,402,440 and 6,996,280 shares of
common stock, respectively, at a conversion price of $0.25 per
share (see Note 8). As a result of the conversion of the
principal and interest balance into shares of common stock, the
fair value of the embedded conversion feature derivative
liabilities of $203,630 and $1,093,263 on the date of conversion
was reclassified to additional paid-in capital (see Note 8) and the
amortization of the debt discount was accelerated for the amount
converted and recorded to interest expense during the years ended
December 31, 2017 and 2016, respectively.
As a
result of the completion of a public equity offering in March 2017
(see Note 8), we were required to prepay the outstanding principal
and accrued interest balance of the 2016 Notes with the cash
proceeds received from such offering. The outstanding principal and
accrued interest balance of $1,272,469 was repaid in March 2017, as
well as, a 10% prepayment penalty of $127,247. Due to the
acceleration of repayment of the 2016 Notes as a result of the
public equity offering, the transaction was recorded as a debt
extinguishment and the 10% prepayment penalty of $127,247 and the
remaining unamortized debt discount as of the date of repayment of
$415,682 were recorded as a loss on debt extinguishment in the
accompanying consolidated statement of operations for the year
ended December 31, 2017. The repayment of the outstanding principal
and accrued interest balance of the 2016 Notes resulted in the
extinguishment of the embedded conversion feature derivative
liability and thus the fair value as of the date of repayment of
$238,101 was recorded as a reduction to the loss on debt
extinguishment in the accompanying consolidated statement of
operations for the year ended December 31, 2017.
2015 Financing
In the third quarter of 2015, we entered into Securities Purchase
Agreements with three accredited investors (the
“Buyers”), pursuant to which we received aggregate
gross proceeds of $1,325,000 (net of OID) pursuant to which we
sold:
Six
convertible promissory notes of the Company totaling $1,457,500
(each a “Q3 2015 Note” and collectively the “Q3
2015 Notes”) (the Q3 2015 Notes were sold at a 10% OID and we
received an aggregate total of $1,242,500 in funds thereunder after
debt issuance costs of $82,500). The principal amount due under the
Q3 2015 Notes was $1,457,500. The Q3
2015 Notes and accrued interest were convertible into shares of our
common stock (the “Common Stock”) beginning six months
from the date of execution, at a conversion price of $0.15 per
share, with certain adjustment provisions noted below. The maturity
date of the first and second Q3 2015 Note was August 26, 2016. The
third Q3 2015 Note had a maturity date of September 24, 2016, the
fourth had a maturity date of September 26, 2016, the fifth was
October 20, 2016 and the sixth was October 29, 2016. The Q3 2015
Notes bore interest on the unpaid principal amount at the rate of
5% per annum from the date of issuance until the same became due
and payable, whether at maturity or upon acceleration or by
prepayment or otherwise.
During
the year ended December 31, 2016, the Q3 2015 Notes holders elected
to convert all principal and interest outstanding of $1,515,635
into 10,104,228 shares of common stock at a conversion price of
$0.15 per share (see Note 8). As a result of the
conversion of the outstanding principal and interest balance into
shares of common stock, the fair value of the embedded conversion
feature derivative liabilities of $2,018,565 on the date of
conversion was reclassified to additional paid-in capital (see Note
9) and the remaining unamortized debt discount was amortized to
interest expense during the year ended December 31,
2016.
Interest Expense
We
recognized interest expense on the Q3 2015 Notes and 2016 Notes for
the years ended December 31, 2017 and 2016 of $19,544 and $80,095,
respectively. Total amortization of the debt discount on the Q3
2015 Notes and 2016 Notes to interest expense for the years ended
December 31, 2017 and 2016 was $430,048 and $3,508,199,
respectively.
NOTE 6 – DEBENTURES – RELATED PARTIES
Line of Credit Convertible Debenture
In January 2013, we entered into a line of credit convertible
debenture with our President and Chief Executive Officer (the
“LOC Convertible Debenture”). Under the terms of its
original issuance: (1) we could request to borrow up to a maximum
principal amount of $250,000 from time to time; (2) amounts
borrowed bore an annual interest rate of 8%; (3) the amounts
borrowed plus accrued interest were payable in cash at the earlier
of January 14, 2014 or when we complete a Financing, as defined,
and (4) the holder had sole discretion to determine whether or not
to make an advance upon our request.
During 2013, the LOC Convertible Debenture was further amended to:
(1) increase the maximum principal amount available for borrowing
to $1 million plus any amounts of salary or related payments paid
to Dr. Damaj prior to the termination of the funding commitment;
and (2) change the holder’s funding commitment to
automatically terminate on the earlier of either (a) when we
complete a financing with minimum net proceeds of at least $4
million, or (b) July 1, 2016. The securities to be issued upon
automatic conversion would have been either our securities that
were issued to the investors in a Qualified Financing or, if the
financing did not occur by July 1, 2016, shares of the our common
stock based on a conversion price of $0.312 per share, 80% times
the quoted market price of our common stock on the date of the
amendment. The LOC Convertible Debenture bore interest at a rate of
8% per annum. The other material terms of the LOC Convertible
Debenture were not changed. We recorded a debt discount for the
intrinsic value of the BCF with an offsetting increase to
additional paid-in-capital. The BCF was being accreted as non-cash
interest expense over the expected term of the LOC debenture to its
stated maturity date using the effective interest rate
method.
On July 22, 2014, we agreed with our CEO to increase the principal
amount that may be borrowed from $1,000,000 to
$1,500,000. All other terms of the LOC Convertible
Debenture remained the same.
On
August 12, 2015, the principal amount that may be borrowed was
increased to $2,000,000 and the automatic termination date
described above was extended to October 1, 2016. The LOC
Convertible Debenture was not renewed upon expiration. The
conversion price was $0.16 per share, 80% times the quoted market
price of our common stock on the date of the
amendment.
During
the year ended December 31, 2016 no amounts were borrowed under the
LOC Convertible Debenture and we recorded a beneficial conversion
feature of $3,444 for accrued interest. We repaid the LOC
Convertible Debenture balance and accrued interest in full during
the year ended December 31, 2016.
2014 Non-Convertible Notes – Related Parties
On
January 29, 2014, we issued an 8% note, in the amount of $25,000,
to our President and Chief Executive Officer. The principal amount
and interest were payable on January 22, 2015. This note was
amended to extend the maturity date until January 22, 2017. We
repaid the principal note balance and accrued interest in full in
August 2016.
Interest Expense
We
recognized interest expense on the outstanding debentures to
related parties totaling $17,430 during the year ended December 31,
2016. Amortization of the debt discount to interest expense during
the year ended December 31, 2016 totaled $21,164.
NOTE 7 – RELATED PARTY TRANSACTIONS
Related Party Borrowings
There
were certain related party borrowings that were repaid in full
during the year ended December 31, 2016 which are described in more
detail in Note 6.
Accrued Compensation – Related Party
Accrued compensation includes accruals for employee wages, vacation
pay and target-based bonuses. The components of accrued
compensation as of December 31, 2017 and 2016 are as
follows:
|
|
|
|
|
|
|
|
Wages
|
$1,431,686
|
$1,455,886
|
|
Vacation
|
342,284
|
261,325
|
|
Bonus
|
742,481
|
449,038
|
|
Payroll
taxes on the above
|
133,746
|
133,344
|
|
Total
|
2,650,197
|
2,299,593
|
|
Classified
as long-term
|
(1,531,904)
|
(1,531,904)
|
|
Accrued
compensation
|
$1,118,293
|
$767,689
|
Accrued employee wages at December 31, 2017 and 2016 are entirely
related to wages owed to our President and Chief Executive
Officer. Under the terms of his employment agreement, wages
are to be accrued but no payment made for, so long as payment of
such salary would jeopardize our ability to continue as a going
concern. The President and Chief Executive Officer started to
receive payment of salary in July 2016. Our President and
Chief Executive Officer has agreed to not receive payment on his
remaining accrued wages and related payroll tax amounts within the
next 12 months and thus the remaining balance is classified as a
long-term liability. In April 2017, our Board of Directors approved
for payment the accrued fiscal year 2016 bonus of $33,442 to our
former Executive Vice President and Chief Financial Officer in
accordance with his employment agreement and the bonus amount was
paid upon his departure. The fiscal year 2017 and 2016 bonus for
our President and Chief Executive Officer has not yet been approved
by our Board of Directors but is included in accrued compensation
in the accompanying consolidated balance sheets as of December 31,
2017 and 2016 in accordance with the terms of his employment
agreement.
NOTE 8 – STOCKHOLDERS’ EQUITY
Capital Stock
We have 292,500,000 authorized shares of common stock with a par
value of $0.001 per share which were increased in November 2016
upon approval from our stockholders from 150,000,000 authorized
shares. In November 2016, our stockholders approved the Amended and
Restated Articles of Incorporation to authorize a class of
undesignated or "blank check" preferred stock, consisting of
7,500,000 shares at $0.001 par value per share. Shares of preferred
stock may be issued in one or more series, with such rights,
preferences, privileges and restrictions to be fixed by the Board
of Directors.
Issuances of Common Stock
Public Equity Offering
On March 21, 2017, we completed a sale of common stock and warrants
under a registered public offering. The gross proceeds to us from
the offering were $3,850,000, before underwriting discounts and
commissions and other offering expenses ($3,307,773 after
underwriting discounts, commissions and expenses).
The public offering price per share of common stock sold was $0.15.
Each investor who purchased a share of common stock in the offering
received a five-year warrant to purchase one share of common stock
at an exercise price of $0.15 per share (“Series A
Warrants”) and a one-year warrant to purchase one share of
common stock at an exercise price of $0.15 per share (“Series
B Warrants”). Under the terms of the offering, we issued
25,666,669 shares of common stock, Series A Warrants to purchase up
to an aggregate of 25,666,669 shares of common stock and Series B
Warrants to purchase up to an aggregate of 25,666,669 shares of
common stock. The Series A Warrants and Series B Warrants are
exercisable immediately. We allocated the net proceeds received of
$3,307,773 to the shares of common stock, Series A Warrants and
Series B Warrants sold in the offering based on their relative fair
values. The fair value of the Series A Warrants and Series B
Warrants was determined using Black-Scholes. Based on their
relative fair values, we allocated net of proceeds of $1,593,233 to
the shares of common stock, $1,075,995 to the Series A Warrants and
$638,545 to the Series B Warrants.
In connection with this offering, we issued to H.C. Wainwright
& Co. (“HCW”), the underwriter in the offering, a
warrant to purchase up to 1,283,333 shares of common stock and HCW
received total cash consideration, including the reimbursement of
public offering-related expenses, of $443,000. If such warrant is
exercised, each share of common stock may be purchased at $0.1875
per share (125% of the price of the common stock sold in the
offering), commencing on March 21, 2017 and expiring March 21,
2022. The fair value of the warrants issued to HCW totaled $129,755
and was determined using Black-Scholes. The fair value of the
warrants was recorded as an offering cost but has no net impact to
additional paid-in capital in stockholders’ equity in the
accompanying consolidated balance sheet.
In connection with this offering, we incurred $99,227 in other
offering costs that have been offset against the proceeds from this
offering.
Other Stock Issuances and Related Stock-Based
Compensation
On
October 10, 2017, we entered into a service agreement with a third
party pursuant to which we agreed to issue, over the term of the
agreement, 2,000,000 shares of common stock in exchange for
services to be rendered. We have terminated this agreement
effective January 30, 2018. During the year ended December 31,
2017, we issued 333,332 shares of restricted common stock under the
agreement related to services provided and recognized the fair
value of the shares issued of $28,767 in general and administrative
expense in the accompanying consolidated statement of operations.
The shares of common stock vested on the date of issuance and the
fair value of the shares of common stock was based on the market
price of our common stock on the date of vesting. There were
1,666,668 shares of restricted common stock remaining to be issued
under this service agreement as of December 31, 2017, of which we
issued 166,666 prior to termination.
On
September 1, 2016, we entered into a service agreement with a third
party pursuant to which we agreed to issue, over the term of the
agreement, 2,000,000 shares of common stock in exchange for
services to be rendered. The agreement was extended on July
20, 2017 through December 31, 2017. In connection with the
extension, we agreed to issue 1,200,000 shares of common stock in
exchange for services to be rendered. We have terminated this
agreement effective November 9, 2017. During the years ended
December 31, 2017 and 2016, we issued 1,489,512 shares and
1,330,000 shares, respectively, under the agreement related to
services provided and recognized the fair value of the shares
issued of $206,276 and $332,970, respectively, in general and
administrative expense in the accompanying consolidated statements
of operations. The shares of common stock vested on the date of
issuance and the fair value of the shares of common stock was based
on the market price of our common stock on the date of vesting.
There are no shares of common stock to be issued under this service
agreement as of December 31, 2017.
On
August 23, 2016, we entered into a consulting agreement with a
third party pursuant to which we agreed to issue 1,600,000
restricted shares of common stock, payable in four equal
installments, in exchange for services to be rendered over the
agreement which ended on August 23, 2017. The shares were
considered fully-vested and non-refundable at the execution of the
agreement. In 2016, we issued 800,000 shares of common stock and
during the year ended December 31, 2017, we issued a total of
800,000 shares of common stock under the agreement. The fair value
of the shares issued during 2017 of $360,000 was based on the
market price of our common stock on the date of agreement. During
the years ended December 31, 2017 and 2016, we recognized $465,000
and $255,000, respectively, in general and administrative expense
in the accompanying consolidated statements of
operations.
On
August 3, 2016, we entered into a service agreement with a third
party pursuant to which we issued 75,000 fully-vested restricted
shares of common stock in exchange for services to be rendered over
the term of the agreement which ended on November 10, 2016. The
fair value of the shares issued of $32,250 was based on the market
price of our common stock on the date of vesting. On November 17,
2016, we entered into a service agreement with the same third party
and in connection with the agreement issued 275,000 fully-vested
shares for services to be provided over the term of the service
agreement through May 17, 2017. The fair value of the shares issued
of $69,575 was based on the market price of our common stock on the
date of vesting. During the years ended December 31, 2017 and 2016,
we recognized $52,181 and $49,644, respectively, in general and
administrative expense in the accompanying consolidated statements
of operations.
In July
2016, we issued 100,000 shares of common stock to CRI pursuant to
the Amended CRI Asset Purchase Agreement (see Note
2). The fair value of the restricted shares of common
stock of $23,000 was based on the market price of our common stock
on the date of issuance and is included in research and development
expense in the accompanying consolidated statement of operations
during the year ended December 31, 2016. Additionally, in January
2017, we issued 225,000 shares of common stock to CRI pursuant to
the Amended CRI Asset Purchase Agreement for the prepayment of
future royalties due on net profit of Sensum+® in the U.S. in
2017. The fair value of the restricted shares of common
stock of $44,662 was based on the market price of our common stock
on the date of issuance and is included in prepaid expense and
other current assets in the accompanying consolidated balance sheet
at December 31, 2017.
On June
16, 2016, we entered into a consulting agreement with a third party
pursuant to which we agreed to issue 250,000 restricted shares of
common stock in exchange for services to be rendered. In July
2016, we issued 250,000 fully-vested shares under the agreement
related to services to be provided over the term of the agreement
which ended on December 16, 2016. The fair value of the shares
issued of $47,500 was based on the market price of our common stock
on the date of vesting. On December 16, 2016, we amended the
consulting agreement to extend the term to June 16, 2017 and in
connection with the amendment issued 80,000 fully-vested shares for
services to be provided over the remaining term of the amended
agreement. The fair value of the shares issued of $14,640 was based
on the market price of our common stock on the date of vesting. On
January 19, 2017, we further amended the agreement to expand the
scope of service performed by the consultant and as a result issued
an additional 78,947 shares of fully vested common stock for
services to be provided through June 16, 2017. The fair value of
the shares issued of $15,000 was based on the market price of our
common stock on the date of vesting. During the years ended
December 31, 2017 and 2016, we recognized $28,420 and $48,720,
respectively, in general and administrative expense in the
accompanying consolidated statements of operations.
In 2017
and 2016, we issued a total of 189,314 shares and 1,012,500 shares
of common stock, respectively, for services and recorded an expense
of $18,960 and $192,043 for the years ended December 31, 2017 and
2016, respectively, which is included in general and administrative
expense in the accompanying consolidated statements of operations.
The shares of common stock vested on the date of issuance and the
fair value of the shares of common stock was based on the market
price of our common stock on the date of vesting.
In 2017
and 2016, we issued 2,825,000 shares and 2,361,111 shares of
restricted common stock, respectively, to note holders in
connection with their notes payable. The relative fair
value of the shares of restricted common stock issued was
determined to be $216,905 and $276,167, respectively, and was
recorded as a debt discount during the years ended December 31,
2017 and 2016 (see Note 5).
In
connection with the October and December 2017 Notes, we issued
576,373 restricted shares of common stock in October 2017 and
543,478 restricted shares of common stock in December 2017 to a
third-party consultant. The fair value of the restricted shares of
common stock issued of $48,761 in October 2017 and $50,000 in
December 2017 was recorded as a debt discount to the carrying value
of the notes payable during the year ended December 31, 2017 (see
Note 5).
In 2017
and 2016, certain 2016 Notes holders elected to convert $350,610
and $1,749,070 in principal and interest into 1,402,440 shares and
6,996,280 shares of common stock, respectively (see Note 5). Upon
conversion, the fair value of the embedded conversion feature
derivative liability on the date of conversion was reclassified to
additional paid-in capital (see Note 9).
In
September and October 2017, certain 2016 and 2017 Notes Payable
holders elected to exchange $742,771 in principal and interest for
11,432,747 shares of common stock (see Note 5). The fair value of
the shares of common stock of $1,120,828 was based on the market
price of our common stock on the date of issuance.
In
March 2017 and July 2017, we issued shares of common stock totaling
71,500 upon the exercise of stock options for total cash proceeds
of $4,879.
In 2017
and 2016, we issued 92,000 shares
and 19,315,994 shares of common stock, respectively, in exchange
for vested restricted stock units.
2016 Issuances
In
connection with the issuance of the 2016 Notes, we issued
restricted shares of common stock totaling 7,500,000 to the
Investors. The relative fair value of the restricted shares of
common stock totaling $1,127,225 was recorded as a debt discount
during the year ended December 31, 2016 (see Note 5).
During
the year ended December 31, 2016, five of our warrant holders
exercised their warrants to purchase shares of common stock
totaling 1,033,800 at an exercise price of $0.30 per
share. We received gross cash proceeds of
$310,140.
In
April and August 2016, we issued an aggregate of 3,385,354 shares
of common stock upon the cashless exercise of warrants to purchase
5,042,881 shares of common stock. Upon exercise of
certain warrants in April 2016, the fair value of the warrant
derivative liability on the date of exercise was reclassified to
additional paid-in capital (see Note 9).
During
the year ended December 31, 2016, we issued 215,000 shares of
common stock for legal fees in connection with the Semprae merger
transaction and recognized the fair value of the shares issued of
$64,500 in general and administrative expense in the accompanying
consolidated statement of operations.
In
November 2016, we issued 12,808,796 shares of common stock to
Novalere Holdings in connection with the Amendment and Supplement
to a Registration Rights and Stock Restriction Agreement and
$2,971,641 of the acquisition contingent consideration was
reclassified from liabilities to equity (see Note 3).
During
the year ended December 31, 2016, the Q3 2015 Notes holders elected
to convert all principal and interest outstanding of $1,515,635
into 10,104,228 shares of common stock at a conversion price of
$0.15 per share (see Note 8). As a result of the
conversion of the outstanding principal and interest balance into
shares of common stock, the fair value of the embedded conversion
feature derivative liabilities of $2,018,565 on the date of
conversion was reclassified to additional paid-in capital (see Note
9) and the remaining unamortized debt discount was amortized to
interest expense during the year ended December 31,
2016.
On
January 6, 2016 and April 5, 2016, we entered into a consulting
agreement with a third party pursuant to which we agreed to issue,
over the term of the agreements, an aggregate of 1,560,000 shares
of common stock in exchange for services to be
rendered. During the year ended December 31, 2016, we issued
1,560,000 shares under the agreement related to services provided
and recognized the fair value of the shares issued of $184,958 in
general and administrative expense in the accompanying consolidated
statement of operations. The 1,560,000 shares of common
stock vested on the date of issuance and the fair value of the
shares of common stock was based on the market price of our common
stock on the date of vesting.
In
January 2016, we issued 300,000 shares of common stock for services
and recorded an expense of $17,000, which is included in general
and administrative expense in the accompanying consolidated
statement of operations. The 300,000 shares of common stock vested
on the date of issuance and the fair value of the shares of common
stock was based on the market price of our common stock on the date
of vesting.
On
February 10, 2016, we entered into a service agreement with a third
party pursuant to which we agreed to issue, over the term of the
agreement, 3,000,000 shares of common stock in exchange for
services to be rendered. During the year ended December 31,
2016, we issued 3,000,000 shares under the agreement related to
services provided and recognized the fair value of the shares
issued of $352,500 in general and administrative expense in the
accompanying consolidated statement of operations. The 3,000,000
shares of common stock vested on the date of issuance and the fair
value of the shares of common stock was based on the market price
of our common stock on the date of vesting.
On
February 19, 2016, we entered into a consulting agreement with a
third party, pursuant to which we agreed to issue, over the term of
the agreement, 1,750,000 shares of common stock in exchange for
services to be rendered. During the year ended December 31,
2016, we issued 1,750,000 shares under the agreement related to
services provided in connection with the acquisition of Beyond
Human® (see Note 3) and recognized the fair value of the
shares issued of $181,013 in general and administrative expense in
the accompanying consolidated statement of operations. The
1,750,000 shares of common stock vested on the date of issuance and
the fair value of the shares of common stock was based on the
market price of our common stock on the date of
vesting.
On
April 27, 2016, we entered into a service agreement with a third
party pursuant to which we agreed to issue 300,000 shares of common
stock in exchange for services to be rendered over the 3 month term
of the agreement. The shares of common stock issued were
non-forfeitable and the fair value of $28,500 was based on the
market price of our common stock on the date of vesting. During the
year ended December 31, 2016, we recognized $28,500 in general and
administrative expense in the accompanying consolidated statement
of operations.
2013 Equity Incentive Plan
We have
issued common stock, restricted stock units and stock option awards
to employees, non-executive directors and outside consultants under
the 2013 Equity Incentive Plan (“2013 Plan”), which was
approved by our Board of Directors in February of 2013. The
2013 Plan allows for the issuance of up to 10,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. The exercise price for
all equity awards issued under the 2013 Plan is based on the fair
market value of the common stock. Currently, because our
common stock is quoted on the OTCQB, the fair market value of the
common stock is equal to the last-sale price reported by the OTCQB
as of the date of determination, or if there were no sales on such
date, on the last date preceding such date on which a sale was
reported. Generally, each vested stock unit entitles the
recipient to receive one share of our common stock which is
eligible for settlement at the earliest of their termination, a
change in control of us or a specified date. Restricted stock
units can vest according to a schedule or immediately upon
award. Stock options generally vest over a three-year period,
first year cliff vesting with quarterly vesting thereafter on the
three-year awards, and have a ten-year life. Stock options
outstanding are subject to time-based vesting as described above
and thus are not performance-based. As of December 31, 2017, 89,516
shares were available under the 2013 Plan.
2014 Equity Incentive Plan
We have
issued common stock, restricted stock units and stock options to
employees, non-executive directors and outside consultants under
the 2014 Equity Incentive Plan (“2014 Plan”), which was
approved by our Board of Directors in November 2014. The 2014
Plan allows for the issuance of up to 20,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. The exercise price for
all equity awards issued under the 2014 Plan is based on the fair
market value of the common stock. Generally, each vested stock
unit entitles the recipient to receive one share of our common
stock which is eligible for settlement at the earliest of their
termination, a change in control of us or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of December 31, 2017, 49,367 shares were available under the 2014
Plan.
2016 Equity Incentive Plan
On
March 21, 2016, our Board of Directors approved the adoption of the
2016 Equity Incentive Plan and on October 20, 2016 adopted the
Amended and Restated 2016 Equity Incentive Plan (“2016
Plan”). The 2016 Plan was then approved by our
stockholders in November 2016. The 2016 Plan allows for the
issuance of up to 20,000,000 shares of our common stock to be
issued in the form of stock options, stock awards, stock unit
awards, stock appreciation rights, performance shares and other
share-based awards. The 2016 Plan includes an evergreen
provision in which the number of
shares of common stock authorized for issuance and available for
future grants under the 2016 Plan will be increased each January 1
after the effective date of the 2016 Plan by a number of shares of
common stock equal to the lesser of: (a) 4% of the number of shares
of common stock issued and outstanding on a fully-diluted basis as
of the close of business on the immediately preceding December 31,
or (b) a number of shares of common stock set by our Board of
Directors. In March 2017, our Board of Directors approved an
increase of 5,663,199 shares of common stock to the shares
authorized under the 2016 Plan in accordance with the evergreen
provision in the 2016 Plan. The exercise price for all equity
awards issued under the 2016 Plan is based on the fair market value
of the common stock. Generally, each vested stock unit
entitles the recipient to receive one share of our common stock
which is eligible for settlement at the earliest of their
termination, a change in control of the us or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of December 31, 2017, 21,008,882 shares were available under the
2016 Plan.
Stock Options
For the years ended December 31, 2017 and 2016, the following
weighted average assumptions were utilized for the calculation of
the fair value of the stock options granted during the period using
Black-Scholes:
|
|
|
|
|
Expected
life (in years)
|
9.1
|
10.0
|
|
Expected
volatility
|
213.6%
|
227.2%
|
|
Average
risk-free interest rate
|
2.30%
|
1.76%
|
|
Dividend
yield
|
0%
|
0%
|
|
Grant
date fair value
|
$0.15
|
$0.18
|
The dividend yield of zero is based on the fact that we have never
paid cash dividends and has no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of our common stock over the period commensurate with
the expected life of the stock options. Expected life in years
is based on the “simplified” method as permitted by ASC
Topic 718. We believe that all stock options issued under its
stock option plans meet the criteria of “plain vanilla”
stock options. We use a term equal to the term of the stock
options for all non-employee stock options. The risk-free
interest rate is based on average rates for treasury notes as
published by the Federal Reserve in which the term of the rates
correspond to the expected term of the stock options.
The following table summarizes the number of stock options
outstanding and the weighted average exercise price:
|
|
|
Weighted average exercise price
|
Weighted remaining contractual life (years)
|
Aggregate intrinsic value
|
|
Outstanding
at December 31, 2015
|
196,000
|
$0.31
|
9.0
|
$-
|
|
Granted
|
91,500
|
$0.17
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Cancelled
|
(50,000)
|
$0.31
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at December 31, 2016
|
237,500
|
$0.22
|
8.6
|
14,293
|
|
Granted
|
46,000
|
0.15
|
-
|
-
|
|
Exercised
|
(71,500)
|
0.07
|
-
|
-
|
|
Cancelled
|
(124,000)
|
0.31
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at December 31, 2017
|
88,000
|
$0.17
|
9.0
|
$377
|
|
|
|
|
|
|
|
Vested
and Expected to Vest at December 31, 2017
|
88,000
|
$0.17
|
9.0
|
$377
|
|
Vested
and Expected to Vest at December 31, 2016
|
237,500
|
$0.22
|
8.6
|
$14,293
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of all outstanding stock options and the
quoted price of our common stock at December 31, 2017 and
2016. During the years ended December 31, 2017 and 2016,
the Company recognized stock-based compensation from stock options
of $7,078 and $20,390, respectively. The intrinsic value of the
stock options exercised during the year ended December 31, 2017 on
the dates of exercise was $7,133.
Restricted Stock Units
The following table summarizes the restricted stock
unit activity for the years ended December 31, 2017 and
2016:
|
|
|
|
Outstanding
at December 31, 2015
|
17,554,736
|
|
Granted
|
14,636,106
|
|
Exchanged
|
(19,315,994)
|
|
Outstanding
at December 31, 2016
|
12,874,848
|
|
Granted
|
2,908,987
|
|
Exchanged
|
(92,000)
|
|
Cancelled
|
(2,500,000)
|
|
Outstanding
at December 31, 2017
|
13,191,835
|
|
|
|
|
Vested
at December 31, 2017
|
9,871,523
|
|
Vested
at December 31, 2016
|
8,493,600
|
The
vested restricted stock units at December 31, 2017 and 2016 have
not settled and are not showing as issued and outstanding shares of
ours but are considered outstanding for earnings per share
calculations. Settlement of these vested restricted stock
units will occur on the earliest of (i) the date of termination of
service of the employee or consultant, (ii) change of control of
us, or (iii) 10 years from date of issuance. Settlement of
vested restricted stock units may be made in the form of (i) cash,
(ii) shares, or (iii) any combination of both, as determined by the
board of directors and is subject to certain criteria having been
fulfilled by the recipient.
We calculate the fair value of the restricted stock units based
upon the quoted market value of the common stock at the date of
grant. The grant date fair value of restricted stock units issued
during the years ended December 31, 2017 and 2016 was $515,500 and
$1,499,268, respectively. For the years ended December 31, 2017 and
2016, we recognized $328,929 and $934,363, respectively, of
stock-based compensation expense for the vested units. As of
December 31, 2017, compensation expense related to unvested shares
not yet recognized in the consolidated statement of operations was
approximately $518,000 and will be recognized over a remaining
weighted-average term of 1.9 years.
Warrants
Outstanding Warrants
During the year ended December 31, 2014, we issued warrants in
connection with notes payable (which were repaid in 2013). The
remaining warrants of 135,816 have an exercise price of $0.10 and
expire December 6, 2018. Warrants to purchase 245,157 shares
of common stock were exercised under the cashless exercise
provisions of the warrant agreement in July 2016, which resulted in
the issuance of 191,908 shares of common stock. The intrinsic value
of the warrants on the date of exercise was $86,359.
In January 2015, we issued 250,000 warrants with an exercise price
of $0.30 per share to a former executive in connection with the
January 2015 debenture. The warrants expire on January 21, 2020.
The warrants contain anti-dilution protection, including protection
upon dilutive issuances. In connection with the convertible
debentures issued in 2015, the exercise price of these warrants was
reduced to $0.0896 per share and an additional 586,705 warrants
were issued per the anti-dilution protection afforded in the
warrant agreement during the year ended December 31,
2015.
In connection with the Q3 2015 Notes, we issued warrants to
purchase 1,808,333 shares of common stock with an exercise price of
$0.30 per share and expire in 2020 to investors and placement
agents. Warrants to purchase 1,033,800 shares of common
stock were exercised during the year ended December 31, 2016. The
intrinsic value of the warrants on the dates of exercise was
$150,200. Warrants to purchase 774,533
shares of common stock remain outstanding as of December 31,
2017.
In connection with the 2016 Notes, we issued warrants to the
Investors and placement agents with an exercise price of $0.40 per
share and expire in 2021. Warrants to purchase 4,220,000 shares of
common stock remain outstanding as of December 31,
2017.
In connection with the public equity offering in March 2017, we
issued Series A Warrants to purchase 25,666,669 shares of common
stock at $0.15 per share and Series B Warrants to purchase
25,666,669 shares of common stock at $0.15 per share. The Series A
Warrants expire in 2022 and the Series B Warrants expire in 2018.
We also issued warrants to purchase 1,283,333 shares of common
stock to our placement agent with an exercise price of $0.1875 per
share and expire in 2022.
For the year ended December 31, 2017, the following weighted
average assumptions were utilized for the calculation of the fair
value of the warrants issued during the period using
Black-Scholes:
|
|
|
|
Expected
life (in years)
|
3.1
|
|
Expected
volatility
|
203.3%
|
|
Average
risk-free interest rate
|
1.49%
|
|
Dividend
yield
|
0%
|
At
December 31, 2017, there are 58,583,725 fully vested warrants
outstanding. The weighted average exercise price of outstanding
warrants at December 31, 2017 is $0.17 per share, the weighted
average remaining contractual term is 2.4 years and the aggregate
intrinsic value of the outstanding warrants is $0.
2016 Activity
In February 2014, we issued 250,000 warrants in connection with the
February 2014 Convertible Debentures. The warrants had an exercise
price of $0.50 per share and expired February 13, 2019. On
March 6, 2015, we entered into an agreement with the note holder to
extend the February 2014 Convertible Debentures for six
months. As consideration for the extension, we issued the
note holder an additional 250,000 warrants, reduced the exercise
price of the warrants from $0.50 to $0.30 per share and extended
the expiration date to March 12, 2020. The warrants were also
amended to include certain anti-dilution protection, including
protection upon dilutive issuances. In connection with the Q3 2015
Notes, the exercise price of these warrants was reduced to $0.0896
per share and an additional 1,173,410 warrants were issued per the
anti-dilution protection afforded in the warrant agreement during
the year ended December 31, 2015. These warrants were exercised
under the cashless exercise provisions of the warrant agreement in
April 2016. In connection with the exercise of the
warrants, we agreed to reduce the exercise price of these warrants
to $0.07 per share which resulted in an additional 469,447 warrants
being issued in April 2016 prior to exercise. The
warrants exercised were classified as derivative liabilities and,
upon exercise, the fair value of the warrant derivative liability
was reclassified to additional paid-in capital (see Note 9). The
intrinsic value of the warrants on the date of exercise was
$53,629.
In January, 2015, we issued 500,000 warrants in connection with the
January 2015 Non-Convertible Debentures. The warrants were
exercisable for five years from the closing date at an exercise
price of $0.30 per share of common stock or January 21, 2020. The
warrants contained anti-dilution protection, including protection
upon dilutive issuances. In connection with the Q3 2015
Notes, the exercise price of these warrants was reduced to $0.0896
per share and an additional 1,173,410 warrants were issued per the
anti-dilution protection afforded in the warrant agreement during
the year ended December 31, 2015. These warrants were exercised
under the cashless exercise provisions of the warrant agreement in
April 2016. In connection with the exercise of the
warrants, we agreed to reduce the exercise price of these warrants
to $0.0565 per share which resulted in an additional 981,457
warrants being issued in April 2016 prior to
exercise. The warrants exercised were classified as
derivative liabilities and, upon exercise, the fair value of the
warrant derivative liability was reclassified to additional paid-in
capital (see Note 9). The intrinsic value of the warrants on the
date of exercise was $99,121.
Net Loss per Share
Restricted stock units that are vested but the issuance and
delivery of the shares are deferred until the employee or director
resigns are included in the basic and diluted net loss per share
calculations.
The weighted average shares of common stock outstanding used in the
basic and diluted net loss per share calculation for the years
ended December 31, 2017 and 2016 was 148,640,929 and 85,436,145,
respectively.
The
weighted average restricted stock units vested but issuance of the
common stock is deferred until there is a change in control, a
specified date in the agreement or the employee or director resigns
used in the basic and diluted net loss per share calculation for
the years ended December 31, 2017 and
2016 was 9,292,529 and 8,670,237, respectively.
The total weighted average shares outstanding used in the basic and
diluted net loss per share calculation for the years ended December
31, 2017 and 2016 was 157,933,458 and 94,106,382,
respectively.
The following table shows the anti-dilutive shares excluded from
the calculation of basic and diluted net loss per common share as
of December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
Gross number of shares excluded:
|
|
|
|
Restricted
stock units – unvested
|
3,320,312
|
4,381,248
|
|
Stock
options
|
88,000
|
237,500
|
|
Convertible
debentures and accrued interest
|
-
|
6,414,132
|
|
Warrants
|
58,583,725
|
5,967,054
|
|
Total
|
61,992,037
|
16,999,934
|
The above table does not include the ANDA Consideration Shares
related to the Novalere acquisition totaling 138,859 at December
31, 2017 and 2016 as they are considered contingently issuable (see
Note 3).
NOTE 9 – DERIVATIVE LIABILITIES
The warrants issued in connection with the January 2015
Non-Convertible Debenture to a former executive and the February
2014 Convertible Debenture are measured at fair value and
classified as a liability because these warrants contain
anti-dilution protection and therefore, cannot be considered
indexed to our own stock which is a requirement for the scope
exception as outlined under FASB ASC 815. The estimated fair value
of the warrants was determined using the Probability Weighted
Black-Scholes Model, resulting in a value of $226,297 at the date
of issuance. The fair value will be affected by changes in inputs
to that model including our stock price, expected stock price
volatility, the contractual term and the risk-free interest rate.
We will continue to classify the fair value of the warrants as a
liability until the warrants are exercised, expire or are amended
in a way that would no longer require these warrants to be
classified as a liability, whichever comes first. The anti-dilution
protection for the warrants survives for the life of the warrants
which ends in January 2020. Certain of these warrants were
exercised under the cashless exercise provisions of the warrant
agreement in April 2016 and, as a result, the fair value of the
warrant derivative liability on the date of exercise totaling
$518,224 was reclassified to additional paid-in capital (see Note
8).
The derivative liabilities are a Level 3 fair value measure in the
fair value hierarchy and the assumptions for the Probability
Weighted Black-Scholes Option-Pricing Model for the years ended
December 31, 2017 and 2016 are represented in the table
below:
|
|
|
|
|
Expected life (in years)
|
2.1 – 3.0
|
3.1 – 4.0
|
|
Expected volatility
|
167% – 187%
|
188% – 230%
|
|
Average risk-free interest rate
|
1.33% – 1.89%
|
0.86% – 1.47%
|
|
Dividend yield
|
0%
|
0%
|
We had
determined the embedded conversion features of the Q3 2015 Notes
and 2016 Notes (see Note 5) to be derivative liabilities because
the terms of the embedded conversion features contained
anti-dilution protection and therefore, could not be considered
indexed to our own stock which was a requirement for the scope
exception as outlined under FASB ASC 815. The embedded
conversion features were to be measured at fair value and
classified as a liability with subsequent changes in fair value
recorded in earnings at the end of each reporting
period. We had determined the fair value of the
derivative liabilities using a Path-Dependent Monte Carlo
Simulation Model. The fair value of the derivative
liabilities using such model was affected by changes in inputs to
that model and was based on the individual characteristics of the
embedded conversion features on the valuation date as well as
assumptions for volatility, remaining expected life, risk-free
interest rate, credit spread, probability of default by us and
acquisition of us. During the years ended December 31,
2017 and 2016, the Q3 2015 Notes and 2016 Notes were either
converted into shares of common stock or repaid in full. The
conversion of the Q3 2015 and 2016 Notes during the years ended
December 31, 2017 and 2016 resulted in the fair value of the
embedded conversion feature derivative liability on the dates of
conversion of $203,630 and $3,111,828, respectively, to be
reclassified to additional paid-in capital (see Note
8). Upon repayment of the remaining 2016 Notes in March
2017 (see Note 5), the fair value of the embedded conversion
features on date of repayment of $238,101 was extinguished and
included in loss on debt extinguishment in the accompanying
consolidated statement of operations during the year ended December
31, 2017.
The derivative liabilities are a Level 3 fair value measurement in
the fair value hierarchy and a summary of quantitative information
with respect to valuation methodology and significant unobservable
inputs used for our embedded conversion feature derivative
liabilities that are categorized within Level 3 of the fair value
hierarchy during the years ended December 31, 2017 and 2016 is as
follows:
|
|
|
|
|
2016
|
|
Stock price
|
$
|
0.10 – 0.31
|
$
|
0.05 – 0.50
|
|
Strike price
|
$
|
0.25
|
$
|
0.15 – 0.25
|
|
Expected life (in years)
|
|
0.4
|
|
0.3 – 1.1
|
|
Expected volatility
|
|
130% – 168%
|
|
121% – 274%
|
|
Average risk-free interest rate
|
|
0.78% – 0.87%
|
|
0.28% – 0.69%
|
|
Dividend yield
|
|
0%
|
|
0%
|
At December 31, 2017 and 2016, the estimated Level 3 fair values of
the embedded conversion feature and warrant derivative liabilities
measured on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
derivative liabilities
|
$58,609
|
$-
|
$-
|
$58,609
|
$58,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion feature derivative liabilities
|
$319,674
|
$-
|
$-
|
$319,674
|
$319,674
|
|
Warrant
derivative liabilities
|
164,070
|
-
|
-
|
164,070
|
164,070
|
|
Total
|
$483,744
|
$-
|
$-
|
$483,744
|
$483,744
|
The following table presents the activity for the Level 3 embedded
conversion feature and warrant derivative liabilities measured at
fair value on a recurring basis for the years ended December 31,
2017 and 2016:
Fair
Value Measurements Using Level 3 Inputs
|
Warrant derivative liabilities:
|
|
|
Beginning
balance December 31, 2015
|
$432,793
|
|
Reclassification of
fair value of warrant derivative liability to additional paid-in
capital upon cashless exercise of
warrants
|
(518,224)
|
|
Change
in fair value
|
249,501
|
|
Ending
balance December 31, 2016
|
164,070
|
|
Change
in fair value
|
(105,461)
|
|
Ending
balance December 31, 2017
|
$58,609
|
|
|
|
|
Embedded conversion feature derivative liabilities:
|
|
|
Beginning
balance December 31, 2015
|
$301,779
|
|
Initial fair value of embedded conversion feature derivative liabilities
with the 2016 Notes
|
3,444,284
|
|
Reclassification of fair value of embedded
conversion feature derivative liability to additional
paid-in capital upon
conversions of Q3 2015 Notes
|
(2,018,565)
|
|
Reclassification of fair value of embedded
conversion feature derivative liability to additional
paid-in capital upon
conversions of 2016 Notes
|
(1,093,263)
|
|
Change
in fair value
|
(314,561)
|
|
Ending
balance December 31, 2016
|
319,674
|
|
Reclassification
of fair value of embedded conversion feature derivative liability
to
additional paid-in capital upon conversions of 2016
Notes
|
(203,630)
|
|
Extinguishment
of embedded conversion feature upon repayment of 2016
Notes
|
(238,101)
|
|
Change
in fair value
|
122,057
|
|
Ending
balance December 31, 2017
|
$-
|
NOTE 10 – INCOME TAXES
We are subject to taxation in the United States and California,
Colorado and South Carolina. The provision for
income taxes for the years ended December 31, 2017 and 2016 are
summarized below:
|
|
|
|
|
Current:
|
|
|
|
Federal
|
$-
|
$(800)
|
|
State
|
3,200
|
3,200
|
|
Total
current
|
3,200
|
2,400
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
1,055,730
|
(2,552,758)
|
|
State
|
(614,230)
|
(650,597)
|
|
Change
in valuation allowance
|
(441,500)
|
3,203,355
|
|
Total
deferred
|
-
|
-
|
|
Income
tax provision
|
$3,200
|
$2,400
|
At December 31, 2017, we had federal net operating loss carry
forwards of approximately $24,259,000 which may be offset against
future taxable income through 2037, and a California net operating
loss carryforward of approximately $23,419,000. No net
deferred tax assets are recorded at December 31, 2017 and 2016, as
all deferred tax assets and liabilities have been fully offset by a
valuation allowance due to the uncertainty of future
utilization.
On December 22, 2017, the President of the United States signed
into law the Tax Cuts and Jobs Act (the "Act"). The Act amends the
Internal Revenue Code to reduce tax rates and modify policies,
credits, and deductions for individuals and businesses. For
businesses, the Act reduces the corporate tax rate from a maximum
of 35% to a flat 21% rate. The rate reduction is effective on
January 1, 2018. As a result of the rate reduction, we have reduced
the deferred tax asset balance as of December 31, 2017 by $3.1
million. Due to our full valuation allowance position, there was no
net impact on our income tax provision during the year ended
December 31, 2017 as the reduction in the deferred tax asset
balance was fully offset by a corresponding decrease in the
valuation allowance.
In conjunction with the Act, the SEC staff issued Staff Accounting
Bulletin No. 118 ("SAB 118") to address the application of U.S.
GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for
certain income tax effects of the Act. We have recognized the
provisional tax impacts related to the revaluation of deferred tax
assets and liabilities at December 31, 2017. There was no net
impact on our consolidated financial statements as of and for the
year ended December 31, 2017 as the corresponding adjustment was
made to the valuation allowance. The ultimate impact may differ
from these provisional amounts, possibly materially, due to, among
other things, additional analysis, changes in interpretations and
assumptions we have made, additional regulatory guidance that may
be issued, and actions we may take as a result of the
Act.
At December 31, 2017 and 2016, the approximate deferred tax assets
(liabilities) consist of the following:
|
|
|
|
|
|
|
|
|
Net
operating loss carry-forwards
|
$6,730,000
|
$8,108,000
|
|
State
taxes
|
1,000
|
1,000
|
|
Equity
based instruments
|
324,000
|
374,000
|
|
Deferred
compensation
|
813,000
|
916,000
|
|
Intangibles
|
-
|
-
|
|
Derivative
liabilities
|
-
|
127,000
|
|
Other
|
191,000
|
125,000
|
|
Total
deferred tax assets
|
8,059,000
|
9,651,000
|
|
|
|
|
|
Intangibles
|
(825,000)
|
(1,572,000)
|
|
Derivative
liabilities
|
(5,000)
|
-
|
|
Warrants
|
(2,000)
|
(170,000)
|
|
Debt
discount
|
(16,000)
|
(252,000)
|
|
Other
|
-
|
(4,000)
|
|
Total
deferred tax liabilities
|
(848,000)
|
(1,998,000)
|
|
|
|
|
|
Less:
valuation allowance
|
(7,211,000)
|
(7,653,000)
|
|
|
|
|
|
Net
deferred tax assets
|
$-
|
$-
|
At December 31, 2017 and 2016, we have recorded a full valuation
allowance against its net deferred tax assets of approximately
$7,211,000 and $7,653,000 respectively. The change in
the valuation allowance during the years ended December 31, 2017
and 2016 was a decrease of approximately $442,000 and an increase
of approximately $3,203,000, respectively, and a full valuation
allowance has been recorded since, in the judgment of management,
these net deferred tax assets are not more likely than not to be
realized. The ultimate realization of deferred tax
assets and liabilities is dependent upon the generation of future
taxable income during periods in which those temporary differences
and carryforwards become deductible or are utilized.
Pursuant to Section 382 of the Internal Revenue Code of 1986, the
annual utilization of a company's net operating loss carryforwards
could be limited if we experience a change in ownership of more
than 50 percentage points within a three-year period. An ownership
change occurs with respect to a corporation if it is a loss
corporation on a testing date and, immediately after the close of
the testing date, the percentage of stock of the corporation owned
by one or more five-percent shareholders has increased by more than
50 percentage points over the lowest percentage of stock of such
corporation owned by such shareholders at any time during the
testing period. We do not believe such an ownership change occurred
subsequent to the reverse merger transaction.
We have experienced an ownership change with regard to Semprae
operating losses. Out of approximately $19,482,000 of Federal and
California NOLs as of December 24, 2013, only approximately $44,000
per year can be used going forward for a total of approximately
$844,000 each.
We have experienced an ownership change with regard to Novalere
operating losses. A study has not been completed to
evaluate the impact on the utilization of those
losses.
A reconciliation of the statutory federal income tax rate for the
years ended December 31, 2017 and 2016 to the effective tax rate is
as follows:
|
|
|
|
|
Expected
federal tax
|
34.00%
|
34.00%
|
|
State
tax (net of federal benefit)
|
(0.03)%
|
(0.02)%
|
|
Contingent
consideration
|
0.86%
|
(3.15)%
|
|
Fair
value of embedded conversion feature in excess of allocated debt
proceeds
|
-%
|
(5.01)%
|
|
Loss
on extinguishment of debt
|
(3.52)%
|
-%
|
|
Restricted
stock units
|
(0.18)%
|
(7.34)%
|
|
Stock
options
|
(0.21)%
|
-%
|
|
Change
in federal tax rate
|
(45.59)%
|
-%
|
|
Release
of valuation allowance
|
45.59%
|
-%
|
|
Other
|
(0.12)%
|
0.86%
|
|
Valuation
allowance
|
(30.85)%
|
(19.36)%
|
|
|
|
|
|
Total
|
(0.05)%
|
(0.02)%
|
We follow FASB ASC 740-10, Uncertainty in Income
Taxes. We recognize interest
and penalties associated with uncertain tax positions as a
component of income tax expense. We do not have any unrecognized
tax benefits or a liability for uncertain tax positions at December
31, 2017 and 2016. We do not expect to have any unrecognized tax
benefits within the next twelve months. We recognize accrued
interest and penalties associated with uncertain tax positions, if
any, as part of income tax expense. There were no tax related
interest and penalties recorded for 2017 and 2016. Since we
incurred net operating losses in every tax year since inception,
all of its income tax returns are subject to examination and
adjustments by the IRS for at least three years following the year
in which the tax attributes are utilized.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Royalties and Other Obligations
As described more fully in Note 2, we have several licensing
agreements which could result in substantial payments for royalties
and upon the obtainment of contractual milestones, as well as,
certain minimum purchase order requirements. In October 2017, the
royalty obligation due for net product sales of Vesele® ended
as the royalty term was for three years from October 2014. The
outstanding royalty obligation under such arrangement is $132,316
and $73,675 as of December 31, 2017 and 2016 and is included in
accounts payable and accrued expense in the accompanying
consolidated balance sheets.
As described more fully in Note 3, the Novalere Stockholders are
entitled to receive earn-out payments.
We have annual royalty payments in connection with the Semprae
acquisition discussed in Note 3.
In May 2017, we entered into a commercial agreement with West-Ward
Pharmaceuticals International Limited (“WWPIL”), a
wholly-owned subsidiary of Hikma Pharmaceuticals PLC
(“Hikma”) (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY).
Pursuant to the commercial agreement, WWPIL provided us with the
rights to launch our branded, fluticasone propionate nasal spray
USP, 50 mcg per spray (FlutiCare®), under WWPIL’s
FDA approved ANDA No. 207957 in the U.S. in mid-November 2017. The
initial term of the commercial agreement is for two years, and upon
expiration of the initial term, the agreement will automatically
renew for subsequent one-year terms unless either party notifies
the other party in writing of its desire not to renew at least 90
days prior to the end of the then current term. The agreement
requires us to meet certain minimum product batch purchase
requirements in order for the agreement to continue to be in
effect. We have met the minimum product batch purchase requirements
through May 2018.
Operating Lease
In
December 2013, we entered into a lease agreement for 2,578 square
feet of office space in San Diego, CA that commenced on December
10, 2013 and continued until January 31, 2019. Monthly rent was in
the amount of $7,347, with an approximate 4% increase in the base
rent amount on an annual basis. In August 2017, we entered into a
lease termination agreement with the landlord in which we were
released from any future commitments under the lease, were not
subject to any penalties and were to vacate the office space by
November 1, 2017. In connection with the termination agreement, we
received reimbursement of our lease deposit of $14,958, as well as,
a moving expense reimbursement of $22,000 which was recorded as a
reduction in general and administrative expense during the year
ended December 31, 2017.
In
October 2017, we entered into a commercial lease agreement for
16,705 square feet of office and warehouse space in San Diego, CA
that commenced on December 1, 2017 and continues until April 30,
2023. The initial monthly base rent is $20,881 with an approximate
3% increase in the base rent amount on an annual basis, as well as,
rent abatement for rent due from January 2018 through May 2018. We
hold an option to extend the lease an additional 5 years at the end
of the initial term. Under the terms of the lease we are also
entitled to a tenant improvement allowance of $100,000 in which
completion of the tenant improvements and receipt of the allowance
was in 2018.
Rent
expense for the years ended December 31, 2017 and 2016 was $77,983
and $88,513, respectively. The following represents future annual
minimum lease payments as of December 31, 2017:
|
2018
|
$146,794
|
|
2019
|
258,741
|
|
2020
|
266,501
|
|
2021
|
274,500
|
|
2022
|
282,024
|
|
Thereafter
|
94,008
|
|
Total
|
$1,322,568
|
Employment Agreements
We have entered into employment agreements with certain of our
officers and employees which payment and benefits would become
payable in the event of termination by us for any reason other than
cause, or upon change in control of our Company, or by the employee
for good reason.
Litigation
James L. Yeager, Ph.D., and Midwest Research Laboratories, LLC v.
Innovus Pharmaceuticals, Inc. On January 18, 2018, Dr.
Yeager and Midwest Research Laboratories (the
“Plaintiffs”) filed a complaint in the Illinois
Northern District Court in Chicago, Illinois, which Plaintiffs
amended on February 26, 2018 (“Amended
Complaint”). The Amended Complaint alleges that the
Company violated Dr. Yeager’s right of publicity and made
unauthorized use of his name, likeness and identity in advertising
materials for its product Sensum+®. Plaintiffs seek actual and
punitive damages, costs and attorney’s fees, an injunction
and corrective advertising. We intend to file a response to the
Amended Complaint by May 21, 2018. We believe that the
Plaintiffs’ allegations and claims are wholly without merit,
and we intend to defend the case vigorously and assert
counterclaims against the Plaintiffs. More specifically, we
believe that we secured and paid for all of the rights claimed by
Dr. Yeager from his company Centric Research Institute
(“CRI”) pursuant to agreements with CRI (the “CRI
Agreements”) and that CRI has indemnification obligations
under the CRI Agreements for all expenses and losses associated
with the claims made by the Plaintiffs.
In the
ordinary course of business, we may face various claims brought by
third parties and we may, from time to time, make claims or take
legal actions to assert our rights, including intellectual property
disputes, contractual disputes and other commercial disputes. Any
of these claims could subject us to litigation. Management believes
the outcomes of currently pending claims are not likely to have a
material effect on our consolidated financial position and results
of operations.
Indemnities
In
addition to the indemnification provisions contained in our
directors and officers. These agreements require us, among other
things, to indemnify the director or officer against specified
expenses and liabilities, such as attorneys’ fees, judgments,
fines and settlements, paid by the individual in connection with
any action, suit or proceeding arising out of the
individual’s status or service as our director or officer,
other than liabilities arising from willful misconduct or conduct
that is knowingly fraudulent or deliberately dishonest, and to
advance expenses incurred by the individual in connection with any
proceeding against the individual with respect to which the
individual may be entitled to indemnification by us. We also
indemnify our lessor in connection with our facility lease for
certain claims arising from the use of the facilities. These
indemnities do not provide for any limitation of the maximum
potential future payments we could be obligated to make.
Historically, we have not incurred any payments for these
obligations and, therefore, no liabilities have been recorded for
these indemnities in the accompanying consolidated balance
sheets.
NOTE 12 – SUBSEQUENT EVENTS
On January 5, 2018, we entered into an exclusive ten-year license
agreement with Acerus Pharmaceuticals Corporation, a Canadian
company (“Acerus”), under which we granted to Acerus an
exclusive license to market and sell UriVarx® in
Canada. Under the agreement, we received a non-refundable
upfront payment, we will be eligible
to receive up to CAD$1.65 million (USD$1.31 million at December 31,
2017) in milestone payments based on Acerus achieving certain sales
targets and we will sell UriVarx® to Acerus at an agreed-upon
transfer price. Acerus also has minimum annual purchase
requirements for UriVarx® during the term of the
agreement.
On January 18, 2018, we entered into an exclusive ten-year license
agreement with Lavasta Pharma FZ-LLC, a Dubai company
(“Lavasta”), under which we granted to Lavasta an
exclusive license to market and sell Zestra® and Zestra
Glide® in Iran and ProstaGorx® in the Kingdom of Saudi
Arabia, Algeria, Egypt, the United Arab Emirates, Lebanon, Jordan,
Kuwait, Morocco, Tunisia, Bahrain, Oman, Qatar, and Turkey, among
other countries. If any country in the territory under this
agreement is ever listed on the U.S. Department of Treasury’s
restricted OFAC List or other list of countries that a U.S. OTC
pharma company cannot do business with, then such country shall be
removed from the list of countries included in the territory in
this agreement for such applicable restricted period. Under
the agreement, we received a non-refundable upfront payment
and we will sell products to Lavasta
at an agreed-upon transfer price. Lavasta also has minimum annual
purchase requirements for the products during the term of the
agreement.
In the
first quarter of 2018, eleven of our warrant holders exercised
their Series B Warrants to purchase shares of common stock totaling
18,925,002 at an exercise price of $0.15 per share. We received net
cash proceeds of approximately $2.7 million. The remaining Series B
Warrants totaling 6,741,667 expired on March 21, 2018. Per the terms of the engagement letter with HCW in
connection with the public offering in March 2017 and as a result
of the Series B Warrant exercises, we paid HCW approximately
$181,000 and issued a warrant to purchase 862,917 shares of common
stock at an exercise price of $0.1875 per share (125% of the price
of the common stock sold in the public offering in March 2017)
which expires on March 21, 2023.
In
January 2018, we issued 256,486 shares of common stock to
consultants for services rendered. The fair value of the common
stock issued was approximately $21,000.
On
March 1, 2018, we entered into a securities exchange agreement with
certain of the October and December 2017 Notes Payable holders. In
connection with the securities exchange agreement, we issued a
total of 2,250,000 shares of common stock in exchange for the
settlement of principal due under the October and December 2017
Notes Payable totaling $166,667. The fair value of the
shares of common stock issued was based on the market price of our
common stock on the date of the securities exchange agreements. Due
to the settlement of the principal balance of $166,667 into shares
of common stock, the transaction was recorded as a debt
extinguishment and the fair value of the shares of common stock
issued in excess of the settled principal and interest balance
totaling approximately $218,000 was recorded as a loss on debt
extinguishment.
In the
first quarter of 2018, we entered into a securities purchase
agreement with three unrelated third-party investors in which the
investors loaned us gross proceeds of
$1,227,500. The promissory
notes have an OID of $269,375 and bear interest at the rate
of 0% per annum. The principal amount of $1,496,875 is to be repaid
in twelve equal monthly installments. Monthly installments of
$68,490 began in February 2018 and are due through January 2019 and
monthly installments of $56,250 begin in April 2018 and are due
through March 2019. In connection with the promissory notes, we
issued 1,282,000 restricted shares of common stock to the
investors. The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value and the OID resulted in us recording a debt discount of
approximately $409,000. In connection with this financing in the
first quarter of 2018, we issued 936,054 restricted shares of
common stock to a third-party consultant. The fair value of the
restricted shares of common stock issued of $122,500 was recorded
as a debt discount to the carrying value of the notes payable. The
discount is being amortized to interest expense using the effective
interest method over the term of the promissory notes.
In
February and March 2018, we entered into securities purchase
agreements with two unrelated third-party investors in which the
investors loaned us gross proceeds of $650,000 pursuant to 5%
promissory notes. The notes have
an OID of $70,000 and requires payment of $720,000 in
principal. The notes bear interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on October 28, 2018 for the note issued in February and in three
installments on October 1, 2018, January 1, 2019 and April 1, 2019
for the note issued in March. In connection with the notes, we
issued the investors restricted shares of common stock totaling
1,485,000. The fair value of the restricted shares of common stock
issued was based on the market price of our common stock on the
date of issuance of the note. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value and the OID resulted in us recording a debt
discount of approximately $222,000. The discount is being amortized
to interest expense using the effective interest method over the
term of note.
We have
evaluated subsequent events through the filing date of this Form
10-K and determined that no subsequent events have occurred that
would require recognition in the consolidated financial statements
or disclosures in the notes thereto other than as disclosed in the
accompanying notes to the consolidated financial
statements.