SEC Connect
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period ended March 31, 2017
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Exchange Act.
For the transition period from ___ to ____.
Commission File Number: 000-52991
INNOVUS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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90-0814124
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(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer
Identification No.)
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9171 Towne Centre Drive, Suite 440,
San Diego, CA
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92122
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(Address of Principal Executive Offices)
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(Zip Code)
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858-964-5123
(Registrant’s telephone number, including area
code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a nonaccelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act (Check one):
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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. ☐
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable
date:
As of May 10, 2017, the registrant had 150,535,774 shares of
common stock outstanding.
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32
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INNOVUS PHARMACEUTICALS, INC.
Condensed Consolidated Balance Sheets
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ASSETS
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Assets:
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Cash
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$2,375,352
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$829,933
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Accounts receivable, net
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15,075
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33,575
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Prepaid expense and other current assets
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592,644
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863,664
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Inventories
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536,640
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599,856
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Total
current assets
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3,519,711
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2,327,028
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Property
and equipment, net
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29,003
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29,569
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Deposits
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14,958
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14,958
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Goodwill
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952,576
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952,576
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Intangible assets, net
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4,745,522
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4,903,247
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Total
assets
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$9,261,770
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$8,227,378
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Liabilities:
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Accounts payable and accrued expense
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$1,149,752
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$1,210,050
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Accrued compensation
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1,450,196
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767,689
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Deferred revenue and customer deposits
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11,000
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11,000
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Accrued interest payable
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12,289
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47,782
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Derivative liabilities – embedded conversion
features
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-
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319,674
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Derivative liabilities – warrants
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93,669
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164,070
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Contingent consideration
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138,399
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170,015
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Current portion of notes payable, net of debt discount of $193,262
and $216,403, respectively
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802,048
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626,610
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Convertible debentures, net of debt discount of $0 and $845,730,
respectively
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-
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714,192
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Total
current liabilities
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3,657,353
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4,031,082
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Accrued compensation – less current portion
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1,036,315
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1,531,904
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Notes payable, net of current portion and debt discount of $0 and
$468, respectively
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-
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54,517
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Contingent consideration – less current portion
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1,520,343
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1,515,902
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Total
non-current liabilities
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2,556,658
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3,102,323
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Total
liabilities
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6,214,011
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7,133,405
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Commitments
and contingencies
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Stockholders’
equity:
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Preferred stock: 7,500,000
shares authorized, at $0.001 par value, no shares issued and
outstanding at March 31, 2017 and
December 31, 2016, respectively
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-
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-
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Common stock: 292,500,000 shares authorized, at $0.001 par value,
150,517,425 and 121,694,293 shares issued and outstanding at March
31, 2017 and December 31, 2016, respectively
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150,517
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121,694
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Additional paid-in capital
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34,578,778
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30,108,028
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Accumulated deficit
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(31,681,536)
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(29,135,749)
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Total
stockholders' equity
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3,047,759
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1,093,973
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Total
liabilities and stockholders’ equity
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$9,261,770
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$8,227,378
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See accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS,
INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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For the
Three Months Ended
March 31,
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Net
revenue:
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Product sales, net
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$2,177,290
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$224,463
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License revenue
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-
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1,000
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Net
revenue
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2,177,290
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225,463
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Operating
expense:
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Cost of product sales
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440,476
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120,123
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Research and development
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3,183
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-
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Sales and marketing
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1,687,351
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35,496
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General and administrative
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1,704,663
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1,287,737
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Total
operating expense
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3,835,673
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1,443,356
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Loss
from operations
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(1,658,383)
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(1,217,893)
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Other
income and (expense):
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Interest expense
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(557,479)
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(390,851)
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Loss on extinguishment of debt
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(304,828)
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-
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Other income (expense), net
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(616)
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1,765
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Fair value adjustment for contingent consideration
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27,175
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(5,584)
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Change in fair value of derivative liabilities
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(51,656)
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57,594
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Total
other expense, net
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(887,404)
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(337,076)
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Net
loss
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$(2,545,787)
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$(1,554,969)
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Net
loss per share of common stock – basic and
diluted
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$(0.02)
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$(0.02)
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Weighted
average number of shares of common stock outstanding – basic
and diluted
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135,099,173
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68,373,226
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See accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS,
INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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For the
Three Months Ended
March 31,
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Cash
flows from operating activities:
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Net
loss
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$(2,545,787)
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$(1,554,969)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
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2,822
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3,686
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Allowance
for doubtful accounts
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2,578
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5,708
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Common
stock, restricted stock units and stock options issued to
employees, board of
directors
and consultants for compensation and services
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580,394
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739,646
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Loss
on extinguishment of debt
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304,828
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-
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Change
in fair value of contingent consideration
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(27,175)
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5,584
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Change
in fair value of derivative liabilities
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51,656
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(57,594)
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Amortization
of debt discount
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512,874
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370,760
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Amortization
of intangible assets
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157,725
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157,602
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Changes
in operating assets and liabilities, net of acquisition
amounts:
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Accounts receivable
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15,922
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32,208
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Prepaid expense and other current assets
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101,075
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25,108
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Inventories
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63,216
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(17,987)
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Accounts payable and accrued expense
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119,702
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24,313
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Accrued compensation
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186,918
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146,094
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Accrued interest payable
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(22,383)
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30,677
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Deferred revenue and customer deposits
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-
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(16,325)
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Net
cash used in operating activities
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(495,635)
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(105,489)
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Cash
flows used in investing activities:
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Purchase of property and equipment
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(2,256)
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(6,565)
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Cash
flows from financing activities:
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Repayments
of line of credit convertible debenture – related
party
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-
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(42,500)
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Proceeds
from short-term loans payable
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-
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10,300
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Payments
on short-term loans payable
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-
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(102,920)
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Proceeds
from notes payable
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150,000
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242,500
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Payments
on notes payable
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(67,688)
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(18,674)
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Proceeds
from stock option exercises
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2,894
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-
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Proceeds
from sale of common stock and warrants, net of offering
costs
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3,307,773
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-
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Payments
on convertible debentures
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(1,222,422)
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-
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Prepayment
penalty on extinguishment of convertible debentures
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(127,247)
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-
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Net
cash provided by financing activities
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2,043,310
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88,706
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Net
change in cash
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1,545,419
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(23,348)
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Cash
at beginning of period
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829,933
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55,901
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Cash
at end of period
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$2,375,352
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$32,553
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Supplemental
disclosures of cash flow information:
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Cash paid for income taxes
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$2,400
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$-
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Cash paid for interest
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$66,719
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$-
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Supplement
disclosures of non-cash investing and financing
activities:
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Common stock issued for conversion of convertible debentures and
accrued interest
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$350,610
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$-
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Reclassification of the fair value of the embedded conversion
features from derivative
liability to additional paid-in capital upon
conversion
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$203,630
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$-
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Relative fair value of common stock issued in connection with notes
payable
recorded as debt discount
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$44,217
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$-
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Fair value of the contingent consideration for
acquisition
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$-
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$314,479
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Proceeds from note payable paid to seller in connection with
acquisition
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$-
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$300,000
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Financing costs paid with proceeds from note payable
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$-
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$7,500
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Fair value of non-forfeitable common stock issued to consultant
recorded as
prepaid expense and other current assets
|
$15,000
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$-
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Fair value of non-forfeitable common stock issued to consultant
included in
accounts payable and accrued expense as of December 31,
2016
|
$180,000
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$-
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Issuance of shares of common stock for vested restricted stock
units
|
$-
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$17,297
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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
|
$-
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Fair
value of beneficial conversion feature on line of credit
convertible debenture –
related
party
|
$-
|
$1,833
|
See accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS,
INC.
Notes to Condensed Consolidated Financial Statements
March 31, 2017
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Innovus Pharmaceuticals, Inc., together with its subsidiaries
(collectively referred to as “Innovus”,
“we”, “our”, “us” or the
“Company”) is a Nevada formed, San Diego,
California-based emerging commercial stage pharmaceutical company
delivering over-the-counter medicines and consumer care products
for men’s and women’s health and respiratory
diseases.
We
generate revenue from 18 commercial products in the United States,
including six of these commercial products in multiple countries
around the world through our commercial partners. Our commercial
product portfolio includes (a) Beyond Human® Testosterone
Booster, (b) Beyond Human® Growth Agent, (c) Zestra® for
female arousal, (d) EjectDelay® for premature ejaculation, (e)
Sensum+® for reduced penile sensitivity, (f) Zestra
Glide®, (g) Vesele® for promoting sexual health, (h)
Androferti® to support overall male reproductive health and
sperm quality, (i) RecalMax™ for cognitive brain health, (j)
Beyond Human® Green Coffee Extract, (k) Beyond Human®
Vision Formula, (l) Beyond Human® Blood Sugar, (m) Beyond
Human® Colon Cleanse, (n) Beyond Human® Ketones, (o)
Beyond Human® Krill Oil, (p) Beyond Human® Omega 3 Fish
Oil, (q) UriVarx™ for bladder health and (r)
ProstaGorx™ for prostate health. While we generate revenue
from the sale of our commercial products, most revenue is currently
generated by Vesele®, Zestra®, Zestra® Glide,
RecalMax™, Sensum +®, UriVarx™ and Beyond
Human® Testosterone Booster.
Pipeline Products
ProstaGorx™. 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. We recently launched this product in
May 2017.
AllerVarx™. On December 15, 2016, we
entered into an exclusive license and distribution agreement with
NTC S.r.l (Italy) to distribute and commercialize
AllerVarx™ in the
U.S. and Canada. AllerVarx™ is a proprietary modified
release bilayer tablet for the management of allergy symptoms. We
expect to launch this product in the first half of
2017.
FlutiCare™
(fluticasone propionate nasal spray). Innovus 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™ from Novalere
FP, Inc. in February 2015 (see Note 3). The Over-the-Counter
(“OTC”) Abbreviated New Drug Application
(“ANDA”) filed at the end of 2014 by the third-party
manufacturer, who is currently selling the prescription version of
the drug, with the U.S. Food and Drug Administration
(“FDA”), subject to FDA approval, may allow us to
market and sell FlutiCare™ OTC in the U.S. 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 third-party 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 9). We expect to launch our FlutiCare™ OTC product
in the U.S. in the second half of 2017.
Xyralid™. Xyralid™ is an OTC FDA
monograph compliant drug containing the active drug ingredient
lidocaine and indicated for the relief of the pain and symptoms
caused by hemorrhoids. We expect to launch this product in the
second half of 2017.
Urocis™ XR.
On October 27, 2015, we entered into an exclusive distribution
agreement with Laboratorios Q Pharma (Spain) to distribute and
commercialize Urocis™ XR in the U.S. and Canada.
Urocis™ XR is a proprietary extended release of
Vaccinium Marcocarpon (cranberry) shown to provide 24-hour coverage
in the body in connection with urinary
tract infections in women. We expect to launch this product
in the second half of 2017.
AndroVit™. On October 27, 2015,
we entered into an exclusive distribution agreement with
Laboratorios Q Pharma (Spain) to distribute and commercialize
AndroVit™ in the U.S. and Canada. AndroVit™ is a
proprietary supplement to support overall prostate and male sexual
health currently marketed in Europe. AndroVit™ was
specifically formulated with ingredients known to support normal
prostate health and vitality and male sexual health. We expect to
launch this product in the second half of 2017.
Apeaz™. 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. We expect to launch this product in the second half of
2017.
ArthriVarx™. This nutritional supplement is
designed to relieve the pain associated with arthritis. We expect
to launch this product in the second half of 2017.
PEVarx™. This
product is designed and tested in several hundred men to extend the
length of sexual intercourse. We expect to launch this product in
the second half of 2017.
Basis of Presentation and Principles of Consolidation
The condensed consolidated balance sheet as of December 31, 2016,
which has been derived from audited consolidated financial
statements, and these unaudited condensed consolidated financial
statements have been prepared by management in accordance with
accounting principles generally accepted in the United States
(“U.S. GAAP”), and include all assets, liabilities,
revenues and expenses of the Company and its wholly owned
subsidiaries: FasTrack Pharmaceuticals, Inc., Semprae Laboratories,
Inc. (“Semprae”) and Novalere, Inc.
(“Novalere”). All material intercompany transactions
and balances have been eliminated. These interim unaudited
condensed consolidated financial statements and notes thereto
should be read in conjunction with Management’s Discussion
and Analysis of Financial Condition and Results of Operations and
the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2016. Certain information required by U.S.
GAAP has been condensed or omitted in accordance with the rules and
regulations of the U.S. Securities and Exchange Commission
(“SEC”). The results for the period ended March 31,
2017, are not necessarily indicative of the results to be expected
for the entire fiscal year ending December 31, 2017 or for any
future period. Certain items have been reclassified to
conform to the current year presentation.
Use of Estimates
The preparation of these condensed consolidated financial
statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Such management estimates include the
allowance for doubtful accounts, sales returns and chargebacks,
realizability of inventories, valuation of deferred tax assets,
goodwill and intangible assets, valuation of contingent acquisition
consideration, recoverability of long-lived assets and goodwill,
fair value of derivative liabilities and the valuation of
equity-based instruments and beneficial conversion
features. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under
the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
Liquidity
Our operations have been financed primarily through proceeds from
convertible debentures and notes payable, sales of our common stock
and revenue generated from our products domestically and
internationally by our partners. These funds have provided us
with the resources to operate our business, sell and support our
products, attract and retain key personnel and add new products to
our portfolio. We have experienced net losses and negative
cash flows from operations each year since our inception. As
of March 31, 2017, we had an accumulated deficit of $31,681,536 and
a working capital deficit of $137,642.
In March 2017, we raised net cash
proceeds of $3,307,773 from the sale of common stock and warrants
in a registered public offering (see Note 7) and, in January 2017
and December 2016, we raised $650,000 in gross proceeds from the
issuance of notes payable to three investors (see Note 5).
We have also issued equity instruments
in certain circumstances to pay for services from vendors and
consultants.
As of March 31, 2017, we had
$2,375,352 in cash and $75,000 of cash collections held by our
third-party merchant service provider, which is included in prepaid
expense and other current assets in the accompanying condensed
consolidated balance sheet. During the three months ended March 31,
2017, we had net cash used in operating activities of
$495,635. We expect that our existing capital resources, revenue
from sales of our products and upcoming sales milestone payments
from the commercial partners signed for our products 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 thru June 30, 2016 totaling $1,036,315 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 may raise additional
capital through the sale of debt or equity securities to provide
additional working capital, pay for further expansion and
development of our business, and to meet current obligations. Such
capital may not be available to us when we need it or on terms
acceptable to us, if at all.
Fair Value Measurement
Our financial instruments are cash, accounts receivable, accounts
payable, accrued liabilities, derivative liabilities, contingent
consideration and debt. The recorded values of cash, accounts
receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The fair values
of the warrant derivative liabilities and embedded conversion
feature derivative liabilities are based upon the Black Scholes
Option Pricing Model (“Black-Scholes”) and the
Path-Dependent Monte Carlo Simulation Model calculations,
respectively, and are a Level 3 measurement (see Note 8). The fair
value of the contingent acquisition consideration is based upon the
present value of expected future payments under the terms of the
agreements and is a Level 3 measurement (see Note
3). Based on borrowing rates currently available to us,
the carrying values of the notes payable approximate their
respective fair values.
We follow a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1) and
the lowest
priority to measurements involving significant unobservable inputs
(Level 3). The three levels of the fair value hierarchy are as
follows:
●
Level 1 measurements are quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access at the measurement date.
●
Level 2 measurements are inputs other than quoted prices included
in Level 1 that are observable either directly or
indirectly.
●
Level 3 measurements are unobservable inputs.
Concentration of Credit Risk, Major Customers and Segment
Information
Financial instruments that potentially subject us to significant
concentrations of credit risk consist primarily of cash and
accounts receivable. Cash held with financial institutions may
exceed the amount of insurance provided by the Federal Deposit
Insurance Corporation on such deposits. Accounts receivable
consist primarily of sales of Zestra® to U.S. based retailers
and Ex-U.S. partners. We also require a percentage of payment in
advance for product orders with our larger partners. We perform
ongoing credit evaluations of our customers and generally do not
require collateral.
Revenues consist primarily of product sales and licensing rights to
market and commercialize our products. We have no
customers that accounted for 10% or more of our total net revenue
during the three months ended March 31, 2017 and four customers
accounted for 78% of total net accounts receivable as of March 31,
2017. We had one customer that accounted for 10% of our total net
revenue during the three months ended March 31, 2016 and three
customers accounted for 62% of total net accounts receivable as of
December 31, 2016.
Over 95% of our sales are currently within the United States and
Canada. The balance of the sales are to various other countries,
none of which is 10% or greater.
We
operate our business on the basis of a single reportable segment,
which is the business of delivering over-the-counter medicines and
consumer care products for men’s and women’s health and
respiratory diseases. Our chief operating decision-maker is the
Chief Executive Officer, who evaluates us as a single operating
segment.
Revenue Recognition and Deferred Revenue
We
generate revenue from product sales and the licensing of the rights
to market and commercialize our products.
We
recognize revenue in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification
(“ASC”) 605, Revenue
Recognition. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales: We ship products directly to consumers
pursuant to phone or online orders and to our wholesale and retail
customers pursuant to purchase agreements or sales
orders. Revenue from sales transactions where the buyer has
the right to return the product is recognized at the time of sale
only if (1) the seller’s price to the buyer is
substantially fixed or determinable at the date of sale,
(2) the buyer has paid the seller, or the buyer is obligated
to pay the seller and the obligation is not contingent on resale of
the product, (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction
or damage of the product, (4) the buyer acquiring the product
for resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant obligations
for future performance to directly bring about resale of the
product by the buyer and (6) the amount of future returns can
be reasonably estimated.
License Revenue: The license agreements we enter into
normally generate three separate components of revenue: 1) an
initial payment due on signing or when certain specific conditions
are met; 2) royalties that are earned on an ongoing basis as
sales are made or a pre-agreed transfer price and 3) sales-based
milestone payments that are earned when cumulative sales reach
certain levels. Revenue from the initial payments or licensing fee
is recognized when all required conditions are met. Royalties are
recognized as earned based on the licensee’s sales. Revenue
from the sales-based milestone payments is recognized when the
cumulative revenue levels are reached. The achievement of the
sales-based milestone underlying the payment to be received
predominantly relates to the licensee’s performance of future
commercial activities. FASB ASC 605-28, Milestone Method, (“ASC
605-28”) is not used by us as these milestones do not meet
the definition of a milestone under ASC 605-28 as they are
sales-based and similar to a royalty and the achievement of the
sales levels is neither based, in whole or in part, on our
performance, a specific outcome resulting from our performance, nor
is it a research or development deliverable.
Sales Allowances
We accrue for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
Our product returns accrual is primarily based on estimates of
future product returns over the period customers have a right of
return, which is in turn based in part on estimates of the
remaining shelf-life of products when sold to customers. Future
product returns are estimated primarily based on historical sales
and return rates. We estimate our volume rebates and promotional
discounts accrual based on its estimates of the level of inventory
of our products in the distribution channel that remain subject to
these discounts. The estimate of the level of products in the
distribution channel is based primarily on data provided by our
customers.
In all cases, judgment is required in estimating these reserves.
Actual claims for rebates and returns and promotional discounts
could be materially different from the estimates.
We provide a customer satisfaction warranty on all of our products
to customers for a specified amount of time after product
delivery. Estimated return costs are based on historical
experience and estimated and recorded when the related sales are
recognized. Any additional costs are recorded when incurred or
when they can reasonably be estimated.
The estimated reserve for sales returns and allowances, which is
included in accounts payable and accrued expense, was approximately
$57,000 and $61,000 at March 31, 2017 and December 31, 2016,
respectively.
Advertising Expense
Advertising costs, which primarily includes print and online media
advertisements, are expensed as incurred and are included in sales
and marketing expense in the accompanying condensed consolidated
statements of operations. Advertising costs were approximately
$1,358,000 and $11,000 for the three months ended March 31, 2017
and 2016, respectively.
Debt Extinguishment
Any gain or loss associated with debt extinguishment is recorded in
the period in which the debt is considered extinguished. Third
party fees incurred in connection with a debt restructuring
accounted for as an extinguishment are capitalized. Fees paid to
third parties associated with a term debt restructuring accounted
for as a modification are expensed as incurred. Third party and
creditor fees incurred in connection with a modification to a line
of credit or revolving debt arrangements are considered to be
associated with the new arrangement and are
capitalized.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding and
vested but deferred RSUs during the period presented. Diluted net loss per share is computed
using the weighted average number of common shares
outstanding and vested but deferred RSUs during the periods plus the effect of dilutive
securities outstanding during the periods. For the three
months ended March 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 7 for
more details.
Recent Accounting Pronouncements
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) –
Classification of Certain Cash Receipts and Cash Payments.
This ASU provides clarification regarding how certain cash receipts
and cash payments are presented and classified in the statement of
cash flows. This ASU addresses eight specific cash flow issues with
the objective of reducing the existing diversity in practice. The
issues addressed in this ASU that will affect us is classifying
debt prepayments or debt extinguishment costs and contingent
consideration payments made after a business combination. This
update is effective for annual and interim periods beginning after
December 15, 2017, and interim periods within that reporting period
and is to be applied using a retrospective transition method to
each period presented. Early adoption is permitted. We have elected
to early adopt ASU 2016-15 as of January 1, 2017 and, as a result,
the prepayment penalty of $127,247 in connection with the
extinguishment of the 2016 Notes (see Note 5) in March 2017 is
classified as a financing cash outflow in the accompanying
condensed consolidated statement of cash flows for the three months
ended March 31, 2017. The adoption of this ASU did not have a
material impact on our condensed consolidated financial position,
results of operations and related disclosures and had no other
impact to the accompanying condensed consolidated statement of cash
flows for the three months ended March 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 condensed consolidated financial
statements and related disclosures.
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
condensed 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
condensed 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
condensed consolidated financial statements and related
disclosures.
NOTE 2 – LICENSE AGREEMENTS
CRI In-License Agreement
On April 19, 2013, the Company and Centric Research
Institute (“CRI”) entered
into an asset purchase agreement (the “CRI Asset Purchase
Agreement”) pursuant to which we
acquired:
●
All of CRI’s rights in past, present and future Sensum+®
product formulations and presentations, and
●
An exclusive, perpetual license to commercialize Sensum+®
products in all territories except for the United
States.
On June
9, 2016, the Company and CRI amended the CRI Asset Purchase
Agreement (“Amended CRI Asset Purchase Agreement”) to
provide us commercialization rights for Sensum+® in the U.S.
through our Beyond Human® marketing platform through December
31, 2016. On January 1, 2017, the Company and CRI agreed to extend
the term of the Amended CRI Asset Purchase Agreement to December
31, 2017. In connection with the extension, we issued restricted
shares of common stock totaling 225,000 to CRI as a prepayment of
royalties due on net profit of Sensum+® in the U.S. in 2017.
The royalty prepayment amount is $44,662 as the number of shares of
common stock issued was based on the closing price of our common
stock on December 30, 2016. If CRI does not earn royalties larger
than the prepaid amount of $44,662 in 2017, the term of the Amended
CRI Asset Purchase Agreement is automatically extended one
additional year to December 31, 2018.
The CRI
Asset Purchase Agreement also requires us to pay to CRI up to $7.0
million in cash milestone payments based on first achievement of
annual Ex-U.S. net sales targets plus a royalty based on annual
Ex-U.S. net sales. The obligation for these payments expires
on April 19, 2023 or the expiration of the last of CRI’s
patent claims covering the product or its use outside the U.S.,
whichever is sooner. No sales milestone obligations have been
met and no royalties are owed to CRI under this agreement during
the three months ended March 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® marketing platform. During the
three months ended March 31, 2017 and 2016, no amounts have been
earned by CRI under the Amended CRI Asset Purchase
Agreement.
J&H Co. LTD Agreement
On November 9, 2016, we entered into
an exclusive ten-year license agreement with J&H Co. LTD, a
South Korea company (“J&H”), under which we granted
to J&H an exclusive license to market and sell our topical
treatment for Female Sexual Interest/Arousal Disorder
(“FSI/AD”) Zestra® and Zestra Glide® in South
Korea. Under the agreement, J&H is obligated to order minimum
annual quantities of Zestra® and Zestra Glide® totaling
$2.0 million at a pre-negotiated transfer price per unit. The
minimum annual order quantities by J&H are to be made over a
12-month period following the approval of the product by local
authorities and beginning upon the completion of the first shipment
of product. Our partner recently received the approval to
import the product and placed its first order in March 2017. During
the three months ended March 31, 2017, we recognized $60,000 in
revenue for the sale of products related to this
agreement.
Sothema Laboratories Agreement
On
September 23, 2014, we entered into an exclusive license agreement
with Sothema Laboratories, SARL, a Moroccan publicly traded company
(“Sothema”), under which we granted to Sothema an
exclusive license to market and sell Zestra® (based on the latest Canadian
approval of the indication) and Zestra Glide® in several
Middle Eastern and African countries (collectively the
“Territory”).
Under
the agreement, we received an upfront payment of $200,000 and are
eligible to receive additional consideration upon and subject to
the achievement of sales milestones based on cumulative supplied
units of the licensed products in the Territory, plus a
pre-negotiated transfer price per unit. We believe the amount of
the upfront payment received is reasonable compared to the amounts
to be received upon obtainment of future sales-based
milestones.
As the
sales-based milestones do not meet the definition of a milestone
under ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative supplied units’ volume is met.
During the three months ended March 31, 2017 and 2016, we
recognized $0 and $9,000, respectively, in net revenue for the
sales of products related to this agreement, and no revenue was
recognized for the sales-based milestones of the
agreement.
Orimed Pharma Agreement
On
September 18, 2014, we entered into a twenty-year exclusive license
agreement with Orimed Pharma (“Orimed”), an affiliate
of JAMP Pharma, under which we granted to Orimed an exclusive
license to market and sell in Canada Zestra®, Zestra
Glide®, our topical treatment for premature ejaculation
EjectDelay® and our product Sensum+® to increase penile
sensitivity.
Under
the agreement, we received an upfront payment of $100,000 and are
eligible to receive additional consideration upon and subject to
the achievement of sales milestones based on cumulative gross sales
in Canada by Orimed plus double-digit tiered royalties based on
Orimed’s cumulative net sales in Canada. We believe the
amount of the upfront payment received is reasonable compared to
the amounts to be received upon obtainment of future sales-based
milestones.
As the
sales-based milestones do not meet the definition of a milestone
under ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative gross sales volume is met. We will
recognize the revenue from the royalty payments on a quarterly
basis when the cumulative net sales have been
met. During the three months ended March 31, 2017 and
2016, under this agreement we recognized $0 and $56,103,
respectively, in net revenue for the sales of products and no
revenue was recognized for the sales-based milestones.
NOTE 3 – BUSINESS AND ASSET ACQUISITIONS
Acquisition of 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. 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 during 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
three months ended March 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.
|
|
Three Months Ended
March 31, 2016
|
|
|
|
|
|
Net
revenue
|
$225,463
|
$275,101
|
|
Net
loss
|
$(1,554,969)
|
$(1,554,517)
|
|
Net
loss per share of common stock – basic and
diluted
|
$(0.02)
|
$(0.02)
|
|
Weighted
average number of shares of common stock outstanding – basic
and diluted
|
68,373,226
|
68,373,226
|
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. 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 WWPIL who has an FDA approved OTC ANDA for
fluticasone propionate nasal spray under which they have agreed to
manufacture our FlutiCare™ OTC product for sale in the U.S.
(see Note 9). We currently still
anticipate that the OTC ANDA filed in November 2014 by the
Acquisition Manufacturer with the FDA may be approved in 2017.
As we hold the worldwide rights to market and sell
FlutiCare™ under the
manufacturing agreement with the Acquisition Manufacturer, we
believe the agreement with the Acquisition Manufacturer will still
provide us with the opportunity to market and sell
FlutiCare™ ex-U.S. and,
if the OTC ANDA is approved by the FDA, a second source of supply
within the U.S., if ever needed.
The Novalere Stockholders are entitled to receive, if and when
earned, earn-out payments (the “Earn-Out Payments”).
For every $5.0 million in Net Revenue (as defined in the Merger
Agreement) realized from the sales of FlutiCare™ through the
manufacturing agreement with the Acquisition Manufacturer, the
Novalere Stockholders will be entitled to receive, on a pro rata
basis, $500,000, subject to cumulative maximum Earn-Out Payments of
$2.5 million. The Novalere Stockholders are only entitled to the
Earn-Out Payments from the Acquisition Manufacturer’s OTC
ANDA under review by the FDA and have no earn-out rights to the
sales of FlutiCare™ supplied by WWPIL under the commercial
agreement entered into in May 2017.
During the three months ended March 31, 2017, there was a decrease
in the estimated fair value of the remaining 138,859 ANDA
consideration shares totaling $20,107 (see below) which is included
in fair value adjustment for contingent consideration in the
accompanying condensed consolidated statement of operations. There
was no change to the estimated fair value of the future earn-out
payments of $1,248,125 during the three months ended March 31, 2017
and there was no change to the estimate fair value of the
contingent consideration during the three months ended March 31,
2016.
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. 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 $12,108 is included in contingent
consideration in the accompanying condensed consolidated balance
sheet at March 31, 2017.
Purchase of Semprae Laboratories, Inc. in 2013
On December 24, 2013 (the “Semprae Closing Date”), we,
through Merger Sub, obtained 100% of the outstanding shares of
Semprae in exchange for the issuance of 3,201,776 shares of our
common stock, which shares represented 15% of our total issued and
outstanding shares as of the close of business on the Closing Date,
whereupon Merger Sub was renamed Semprae Laboratories, Inc. We
agreed to pay the former shareholders an annual royalty
(“Royalty”) equal to 5% of the net sales from
Zestra® and Zestra Glide® and any second generation
products derived primarily therefrom (“Target
Products”) up until the time that a generic version of such
Target Product is introduced worldwide by a third
party.
The agreement to pay the annual Royalty resulted in the recognition
of a contingent consideration, which is recognized at the inception
of the transaction, and subsequent changes to estimate of the
amounts of contingent consideration to be paid will be recognized
as charges or credits in the consolidated statement of operations.
The fair value of the contingent consideration is based on
preliminary cash flow projections, growth in expected product sales
and other assumptions. During the three months ended March 31, 2017
and 2016, no amounts have been paid under this
arrangement. The fair value of the expected royalties to
be paid was decreased by $7,067 and $0 during the three months
ended March 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 $398,509 and $405,577 at March
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
|
$98,806
|
$85,816
|
|
Work
in process
|
93,086
|
48,530
|
|
Finished
goods
|
344,748
|
465,510
|
|
Total
|
$536,640
|
$599,856
|
Intangible Assets
Amortizable intangible assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(99,604)
|
$317,993
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(203,706)
|
407,413
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(89,873)
|
144,672
|
10
|
|
Vesele®
trademark
|
25,287
|
(7,837)
|
17,450
|
8
|
|
Beyond
Human® Website and Trade Name
|
222,062
|
(42,667)
|
179,395
|
5 – 10
|
|
Novalere
Mfg. Contract
|
4,681,000
|
(1,004,465)
|
3,676,535
|
10
|
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(2,666)
|
2,064
|
1 – 3
|
|
Total
|
$6,196,340
|
$(1,450,818)
|
$4,745,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(91,201)
|
$326,396
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(188,428)
|
422,691
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(84,009)
|
150,536
|
10
|
|
Vesele®
trademark
|
25,287
|
(7,047)
|
18,240
|
8
|
|
Beyond
Human® Website and Trade Name
|
222,062
|
(32,821)
|
189,241
|
5 – 10
|
|
Novalere
Mfg. Contract
|
4,681,000
|
(887,440)
|
3,793,560
|
10
|
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(2,147)
|
2,583
|
1 – 3
|
|
Total
|
$6,196,340
|
$(1,293,093)
|
$4,903,247
|
|
Amortization expense for the three months ended March 31, 2017 and
2016 was $157,725 and $157,602, respectively. The following table
summarizes the approximate expected future amortization expense as
of March 31, 2017 for intangible assets:
|
Remainder
of 2017
|
$472,000
|
|
2018
|
630,000
|
|
2019
|
629,000
|
|
2020
|
629,000
|
|
2021
|
600,000
|
|
2022
|
592,000
|
|
Thereafter
|
1,194,000
|
|
|
$4,746,000
|
Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the
following:
|
|
|
|
|
|
|
|
|
Prepaid
insurance
|
$43,223
|
$69,976
|
|
Prepaid
inventory
|
73,372
|
20,750
|
|
Merchant
net settlement reserve receivable (see Note 1)
|
75,000
|
221,243
|
|
Prepaid
consulting and other expense
|
40,393
|
21,094
|
|
Prepaid
CRI royalties (see Note 2)
|
44,662
|
-
|
|
Prepaid
consulting and other service stock-based compensation expense (see
Note 7)
|
315,994
|
530,601
|
|
Total
|
$592,644
|
$863,664
|
Accounts Payable and Accrued Expense
Accounts payable and accrued expense consist of the
following:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
$736,165
|
$647,083
|
|
Accrued
credit card balances
|
21,979
|
31,654
|
|
Accrued
royalties
|
99,228
|
73,675
|
|
Sales
returns and allowances
|
57,233
|
60,853
|
|
Accrual
for stock to be issued to consultants (see Note 7)
|
180,000
|
360,000
|
|
Accrued
other
|
55,147
|
36,785
|
|
Total
|
$1,149,752
|
$1,210,050
|
NOTE 5 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Notes Payable
The following table summarizes the outstanding notes payable at
March 31, 2017 and December 31, 2016:
|
|
|
|
|
Notes
payable:
|
|
|
|
February
2016 Note Payable
|
$280,310
|
$347,998
|
|
December
2016 and January 2017 Notes Payable
|
715,000
|
550,000
|
|
Total notes payable
|
995,310
|
897,998
|
|
Less:
Debt discount
|
(193,262)
|
(216,871)
|
|
Carrying value
|
802,048
|
681,127
|
|
Less:
Current portion
|
(802,048)
|
(626,610)
|
|
Notes payable, net of current portion
|
$-
|
$54,517
|
The following table summarizes the future minimum payments as of
March 31, 2017 for the notes payable:
|
Remainder
of 2017
|
$940,325
|
|
2018
|
54,985
|
|
|
$995,310
|
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.
Pursuant
to the Finance Agreements, the principal amount of the February
2016 Note Payable is $550,000 and the interest rate thereon is 20%
per annum. We began to pay principal and interest on the
February 2016 Note Payable on a monthly basis beginning on March
19, 2016 for a period of 24 months and the monthly mandatory
principal and interest payment amount thereunder is $28,209. The
monthly amount shall be paid by us through a deposit account
control agreement with a third-party bank in which SBI shall be
permitted to take the monthly mandatory payment amount from all
revenue received by us from the Beyond Human® assets in the
transaction. The maturity date for the February 2016
Note Payable is February 19, 2018.
The
February 2016 Note Payable is secured by SBI through a first
priority secured interest in all of the Beyond Human® assets
acquired by us in the transaction including all revenue received by
us from these assets
December 2016 and January 2017 Notes Payable
On
December 5, 2016 and January 19, 2017, we entered into a securities
purchase agreement with three unrelated third-party investors in
which the investors loaned us gross proceeds of $500,000 in
December 2016 and $150,000 in January 2017 pursuant to a 5%
promissory note (“December 2016 & January 2017 Notes
Payable”). The notes
have an Original Issue Discount (“OID”) of $65,000 and
require payment of $715,000 in principal upon maturity. The
December 2016 & January 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 and November 18, 2017 for
those received in December 2016 and January 2017,
respectively.
In connection with the December 2016 & January 2017 Notes
Payable, we issued the investors restricted shares of common stock
totaling 1,111,111 in December 2016 and 330,000 in January
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 2016 & January 2017 Notes
Payable. The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value and the OID resulted in us recording a debt discount of
$182,203 in December 2016 and $44,217 in January 2017. The discount
is being amortized to interest expense using the effective interest
method over the term of the December 2016 & January 2017 Notes
Payable.
Interest Expense
We
recognized interest expense on notes payable of $25,057 and $11,365
for the three months ended March 31, 2017 and 2016,
respectively. Amortization of the debt discount to
interest expense during the three months ended March 31, 2017 and
2016 totaled $82,826 and $469, respectively.
Convertible Debentures
2016 Financing
The following table summarizes the outstanding 2016 convertible
debentures at March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
Convertible
debentures
|
$-
|
$1,559,922
|
|
Less:
Debt discount
|
-
|
(845,730)
|
|
Carrying value
|
-
|
714,192
|
|
Less:
Current portion
|
-
|
(714,192)
|
|
Convertible debentures, net of current portion
|
$-
|
$-
|
In the second and
third quarter of 2016, we entered into Securities Purchase
Agreements with eight accredited investors (the
“Investors”), pursuant to which we received aggregate
gross proceeds of $3.0 million (net of OID) pursuant to which we
sold:
Nine
convertible promissory notes of the Company totaling $3,303,889
(each a “2016 Note” and collectively the “2016
Notes”) (the 2016 Notes were sold at a 10% OID and we
received an aggregate total of $2,657,500 in funds thereunder after
debt issuance costs of $342,500). The 2016 Notes and accrued
interest were convertible into shares of our common stock at a
conversion price of $0.25 per share, with certain adjustment
provisions. The maturity date of the 2016 Notes issued on June 30,
2016 and July 15, 2016 was July 30, 2017 and the maturity date of
the 2016 Notes issued on July 25, 2016 was August 25, 2017. The
2016 Notes bore interest on the unpaid principal amount at the rate
of 5% per annum from the date of issuance until the same became due
and payable, whether at maturity or upon acceleration or by
prepayment or otherwise. We had the ability to prepay the 2016
Notes at any time on the terms set forth in the 2016 Notes at the
rate of 110% of the then outstanding balance of the 2016
Notes.
The
fair value of the restricted shares of common stock issued to
Investors in 2016 was based on the market price of our common stock
on the date of issuance of the 2016 Notes. The
allocation of the proceeds to the warrants and restricted shares of
common stock based on their relative fair values resulted in us
recording a debt discount. We also determined that the embedded
conversion features in the 2016 Notes were a derivative instrument
which was required to be bifurcated from the debt host contract and
recorded at fair value as a derivative liability. The
fair value of the embedded conversion features was determined using
a Path-Dependent Monte Carlo Simulation Model (see Note 8 for
assumptions used to calculate fair value). The initial fair value
of the embedded conversion features was recorded as a debt discount
with the amount in excess of the proceeds allocated to the debt,
after the allocation of debt proceeds to the debt issuance costs,
being immediately expensed and recorded as interest expense in
2016.
During
the three months ended March 31, 2017, certain of the 2016 Notes
holders elected to convert principal and interest outstanding of
$350,610 into 1,402,440 shares of common stock at a conversion
price of $0.25 per share (see Note 7). As a result of
the conversion of the principal and interest balance into shares of
common stock, the fair value of the embedded conversion feature
derivative liabilities of $203,630 on the date of conversion was
reclassified to additional paid-in capital (see Note 8) and the
amortization of the debt discount was accelerated for the amount
converted and recorded to interest expense during the three months
ended March 31, 2017.
As a
result of the completion of a public equity offering in March 2017
(see Note 7), we were required to prepay the outstanding principal
and accrued interest balance of the 2016 Notes with the cash
proceeds received from such offering. The outstanding principal and
accrued interest balance of $1,272,469 was repaid in March 2017, as
well as, a 10% prepayment penalty of $127,247. Due to the
acceleration of repayment of the 2016 Notes as a result of the
public equity offering, the transaction was recorded as a debt
extinguishment and the 10% prepayment penalty of $127,247 and the
remaining unamortized debt discount as of the date of repayment of
$415,682 were recorded as a loss on debt extinguishment in the
accompanying condensed consolidated statement of operations for the
three months ended March 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 condensed consolidated statement
of operations for the three months ended March 31,
2017.
Interest Expense
We
recognized interest expense on the 2016 Notes for the three months
ended March 31, 2017 of $19,544. The debt discount recorded for the
2016 Notes were being amortized as interest expense over the term
of the 2016 Notes using the effective interest
method. Total amortization of the debt discount on the
2016 Notes to interest expense for the three months ended March 31,
2017 was $430,048.
NOTE 6 – RELATED PARTY TRANSACTIONS
Related Party Borrowings
There were certain related party borrowings to our current
President and Chief Executive Officer that were repaid in full
during 2016. During the three months ended March 31, 2016,
we recorded a beneficial conversion feature of $1,833 for accrued
interest on the then outstanding line of credit convertible
debenture balance with our current President and Chief Executive Officer and
repaid $42,500 of principal. We recognized interest
expense on the outstanding debentures to a related party totaling
$8,362 during the three months ended March 31, 2016. Amortization
of the debt discount to interest expense during the three months
ended March 31, 2016 totaled $10,271.
Accrued Compensation – Related Party
Accrued compensation includes accruals for employee wages, vacation
pay and target-based bonuses. The components of accrued
compensation as of March 31, 2017 and December 31, 2016 are as
follows:
|
|
|
|
|
Wages
|
$1,431,686
|
$1,455,886
|
|
Vacation
|
307,454
|
261,325
|
|
Bonuses
|
647,153
|
449,038
|
|
Payroll
taxes on the above
|
100,218
|
133,344
|
|
Total
|
2,486,511
|
2,299,593
|
|
Classified
as long-term
|
(1,036,315)
|
(1,531,904)
|
|
Accrued
compensation
|
$1,450,196
|
$767,689
|
Accrued employee wages at March 31, 2017 and December 31, 2016 are
entirely related to wages owed to our President and Chief Executive
Officer. Under the terms of his employment agreement, wages
are to be accrued but no payment made for so long as payment of
such salary would jeopardize our ability to continue as a going
concern. The President and Chief Executive Officer started to
receive payment of salary in July 2016. It was determined by our
Board of Directors that deferred salary of $463,167 would be paid
to our current President and Chief Executive Officer in the
second quarter of 2017 to assist in paying the statutory personal
tax withholding on the shares of common stock he received in 2016
for his vested restricted stock units. As a result, the deferred
salary amount and related employer taxes totaling $495,589 has been
classified as current. The payment of such deferred salary would
not jeopardize our ability to continue as a going concern. Our
President and Chief Executive Officer has agreed to not receive
payment on the 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 the second quarter of 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.
NOTE 7 – 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 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 common
stock, $1,075,995 to the Series A Warrants and $638,545 to the
Series B Warrants.
In connection with this offering, we issued to H.C. Wainwright
& Co. (“HCW”), the underwriter in the offering, a
warrant to purchase up to 1,283,333 shares of common stock and HCW
received total cash consideration, including the reimbursement of
public offering-related expenses, of $443,000. If such warrant is
exercised, each share of common stock may be purchased at $0.1875
per share (125% of the price of the common stock sold in the
offering), commencing on March 21, 2017 and expiring March 21,
2022. The fair value of the warrants issued to HCW totaled $129,755
and was determined using Black-Scholes. The fair value of the
warrants was recorded as an offering cost but has no net impact to
additional paid-in capital in stockholders’ equity in the
accompanying condensed consolidated balance
sheet.
In connection with this offering, the Company incurred $99,227 in
other offering costs that have been offset against the proceeds
from this offering.
Other Stock Issuances and Related Stock-Based
Compensation
On
August 23, 2016, we entered into a consulting agreement with a
third party pursuant to which we agreed to issue 1,600,000
restricted shares of common stock, payable in four equal
installments, in exchange for services to be rendered over the
agreement which ends 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 in
February 2017 we issued a total of 400,000 shares of common stock
under the agreement. The fair value of the shares issued in
February 2017 of $180,000 was based on the market price of our
common stock on the date of agreement. As a result of the shares
being fully-vested at the execution of the agreement but payable in
equal installments, we have recorded a liability for the fair value
of the remaining 400,000 shares of common stock to be issued of
$180,000 which is included in accounts payable and accrued expense
in the accompanying condensed consolidated balance sheet at March
31, 2017. Upon issuance of the remaining shares, we will reclassify
the liability to common stock and additional paid-in-capital.
During the three months ended March 31, 2017, we recognized
$180,000 in general and administrative expense in the accompanying
condensed consolidated statement of operations and the remaining
unamortized expense of $285,000 is included in prepaid expense and
other current assets in the accompanying condensed consolidated
balance sheet at March 31, 2017.
On September 1, 2016, we entered into a service agreement with a
third party pursuant to which we agreed to issue, over the term of
the agreement, 2,000,000 shares of common stock in exchange for
services to be rendered. During the three months ended March
31, 2017, we issued 670,000 shares under the agreement related to
services provided and recognized the fair value of the shares
issued of $123,615 in general and administrative expense in the
accompanying condensed consolidated statement of operations. The
670,000 shares of common stock vested on the date of issuance and
the fair value of the shares of common stock was based on the
market price of our common stock on the date of vesting. There are
no more shares of common stock to be issued under this service
agreement as of March 31, 2017.
On
November 17, 2016, we entered into a service agreement with a third
party and in connection with the new agreement issued 275,000
fully-vested shares for services to be provided over the term of
the new service agreement through May 17, 2017. The fair value of
the shares issued of $69,575 was based on the market price of our
common stock on the date of vesting. During the three months ended
March 31, 2017, we recognized $34,787 in general and administrative
expense in the accompanying condensed consolidated statement of
operations and the remaining unamortized expense of $17,394 is
included in prepaid expense and other current assets in the
accompanying condensed consolidated balance sheet at March 31,
2017.
On
December 16, 2016, we amended a consulting agreement with a third
party to extend the term of the agreement to June 16, 2017 and in
connection with the amendment issued 80,000 fully-vested shares for
services to be provided over the remaining term of the amended
agreement. The fair value of the shares issued of $14,640 was based
on the market price of our common stock on the date of vesting. On
January 19, 2017, we further amended the agreement to expand the
scope of service performed by the consultant and as a result issued
an additional 78,947 shares of fully vested common stock for
services to be provided through June 16, 2017. The fair value of
the shares issued of $15,000 was based on the market price of our
common stock on the date of vesting. During the three months ended
March 31, 2017, we recognized $14,820 in general and administrative
expense in the accompanying condensed consolidated statement of
operations and the remaining unamortized expense of $13,600 is
included in prepaid expense and other current assets in the
accompanying condensed consolidated balance sheet at March 31,
2017.
In
January 2017, we issued 10,076 shares of common stock for services
and recorded an expense of $2,000, which is included in general and
administrative expense in the accompanying condensed consolidated
statement of operations. The 10,076 shares of common stock vested
on the date of issuance and the fair value of the shares of common
stock was based on the market price of our common stock on the date
of vesting.
In
January 2017, we issued 225,000 shares of common stock to CRI
pursuant to the Amended CRI Asset Purchase Agreement (see Note 2)
for the prepayment of future royalties due on net profit of
Sensum+® in the U.S. in 2017. The fair value of the
restricted shares of common stock of $44,662 was based on the
market price of our common stock on the date of issuance and is
included in prepaid expense and other current assets in the
accompanying condensed consolidated balance sheet at March 31,
2017.
In
January 2017, we issued 330,000 shares of restricted common stock
to a note holder in connection with their note
payable. The relative fair value of the shares of
restricted common stock issued was determined to be $44,217 and was
recorded as a debt discount (see Note 5).
In
March 2017, certain 2016 Notes holders elected to convert $350,610
in principal and interest into 1,402,440 shares of common stock
(see Note 5). Upon conversion, the fair value of the embedded
conversion feature derivative liability on the date of conversion
was reclassified to additional paid-in capital (see Note
8).
In
March 2017, we issued shares of common stock totaling 40,000 upon
the exercise of stock options for total cash proceeds of
$2,894.
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 March 31, 2017, no shares
were available under the 2013 Plan.
2014 Equity Incentive Plan
We have
issued common stock, restricted stock units and stock options to
employees, non-executive directors and outside consultants under
the 2014 Equity Incentive Plan (“2014 Plan”), which was
approved by our Board of Directors in November 2014. The 2014
Plan allows for the issuance of up to 20,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. The exercise price for
all equity awards issued under the 2014 Plan is based on the fair
market value of the common stock. Generally, each vested stock
unit entitles the recipient to receive one share of our common
stock which is eligible for settlement at the earliest of their
termination, a change in control of us or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of March 31, 2017, 58,367 shares were available under the 2014
Plan.
2016 Equity Incentive Plan
On
March 21, 2016, our Board of Directors approved the adoption of the
2016 Equity Incentive Plan and on October 20, 2016 adopted the
Amended and Restated 2016 Equity Incentive Plan (“2016
Plan”). The 2016 Plan was then approved by our
stockholders in November 2016. The 2016 Plan allows for the
issuance of up to 20,000,000 shares of our common stock to be
issued in the form of stock options, stock awards, stock unit
awards, stock appreciation rights, performance shares and other
share-based awards. The 2016 Plan includes an evergreen
provision in which the number of
shares of common stock authorized for issuance and available for
future grants under the 2016 Plan will be increased each January 1
after the effective date of the 2016 Plan by a number of shares of
common stock equal to the lesser of: (a) 4% of the number of shares
of common stock issued and outstanding on a fully-diluted basis as
of the close of business on the immediately preceding December 31,
or (b) a number of shares of common stock set by our Board of
Directors. In March 2017, our Board of Directors approved an
increase of 5,663,199 shares of common stock to the shares
authorized under the 2016 Plan in accordance with the evergreen
provision in the 2016 Plan. 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 March 31, 2017, 19,420,168 shares were available under the 2016
Plan.
Stock-Based Compensation
The stock-based compensation expense for the three months ended
March 31, 2017 and 2016 was $225,172 and $524,633, respectively,
for the issuance of restricted stock units and stock options to
management, directors and consultants. We calculate the fair
value of the restricted stock units based upon the quoted market
value of the common stock at the date of grant. We calculate the
fair value of each stock option award on the date of grant using
Black-Scholes. As of March 31, 2017, the remaining
unamortized stock-based compensation expense to be recognized in
the condensed consolidated statement of operations was
approximately $1.2 million and will be recognized over a remaining
weighted-average term of 2.6 years.
Stock Options
For the three months ended March 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)
|
7.9
|
10.0
|
|
Expected
volatility
|
217.9%
|
226.72%
|
|
Average
risk-free interest rate
|
2.28%
|
1.81%
|
|
Dividend
yield
|
0%
|
0%
|
|
Grant
date fair value
|
$0.23
|
$0.16
|
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, 2016
|
237,500
|
$0.22
|
8.6
|
-
|
|
Granted
|
19,000
|
$0.23
|
-
|
-
|
|
Exercised
|
(40,000)
|
$0.07
|
-
|
-
|
|
Cancelled
|
-
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at March 31, 2017
|
216,500
|
$0.24
|
8.4
|
$2,209
|
|
|
|
|
|
|
|
Vested
at March 31, 2017
|
216,500
|
$0.24
|
8.4
|
$2,209
|
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 March 31,
2017. During the three months ended March 31, 2017 and
2016, the Company recognized stock-based compensation from stock
options of $4,378 and $5,500, respectively. The intrinsic value of
the stock options exercised during the three months ended March 31,
2017 on the date of exercise was $5,306.
Restricted Stock Units
The following table summarizes the restricted stock
unit activity for the three months ended March 31,
2017:
|
|
|
|
Outstanding
at December 31, 2016
|
12,874,848
|
|
Granted
|
2,060,455
|
|
Exchanged
|
-
|
|
Cancelled
|
-
|
|
Outstanding
at March 31, 2017
|
14,935,303
|
|
|
|
|
Vested
at March 31, 2017
|
9,185,303
|
The
vested restricted stock units at March 31, 2017 have not settled
and are not showing as issued and outstanding shares of ours but
are considered outstanding for earnings per share
calculations. Settlement of these vested restricted stock
units will occur on the earliest of (i) the date of termination of
service of the employee or consultant, (ii) change of control of
us, or (iii) 10 years from date of issuance. Settlement of
vested restricted stock units may be made in the form of (i) cash,
(ii) shares, or (iii) any combination of both, as determined by the
board of directors and is subject to certain criteria having been
fulfilled by the recipient.
The grant date fair value of restricted stock units issued during
the three months ended March 31, 2017 was $432,000. For the three
months ended March 31, 2017 and 2016, we recognized $220,794 and
$519,133, respectively, of stock-based compensation expense for the
vested units. As of March 31, 2017, compensation expense related to
unvested shares not yet recognized in the condensed consolidated
statement of operations was approximately $1.2 million and will be
recognized over a remaining weighted-average term of 2.6
years.
Warrants
During the year ended December 31, 2014, we issued warrants in
connection with notes payable (which were repaid in 2013). The
remaining warrants of 135,816 have an exercise price of $0.10 and
expire December 6, 2018.
In January 2015, we issued 250,000 warrants with an exercise price
of $0.30 per share to a former executive in connection with the
January 2015 debenture. The warrants expire on January 21, 2020.
The warrants contain anti-dilution protection, including protection
upon dilutive issuances. In connection with the convertible
debentures issued in 2015, the exercise price of these warrants was
reduced to $0.0896 per share and an additional 586,705 warrants
were issued per the anti-dilution protection afforded in the
warrant agreement during the year ended December 31,
2015.
In connection with the convertible debentures in 2015, we issued
warrants with an exercise price of $0.30 per share and expire in
2020 to investors and placement agents. Warrants to purchase
774,533 shares of common stock remain outstanding as of March 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 March 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 three months ended March 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
March 31, 2017, there are 58,583,725 fully vested warrants
outstanding. The weighted average exercise price of outstanding
warrants at March 31, 2017 is $0.17 per share, the weighted average
remaining contractual term is 3.1 years and the aggregate intrinsic
value of the outstanding warrants is $17,119.
Net Loss per Share
Restricted stock units that are vested but the issuance and
delivery of the shares are deferred until the employee or director
resigns are included in the basic and diluted net loss per share
calculations.
The weighted average shares of common stock outstanding used in the
basic and diluted net loss per share calculation for the three
months ended March 31, 2017 and 2016 was 126,327,687 and
60,491,409, respectively.
The
weighted average restricted stock units vested but issuance of the
common stock is deferred until there is a change in control, a
specified date in the agreement or the employee or director resigns
used in the basic and diluted net loss per share calculation for
the three months ended March 31, 2017
and 2016 was 8,771,486 and 7,881,817,
respectively.
The total weighted average shares outstanding used in the basic and
diluted net loss per share calculation for the three months ended
March 31, 2017 and 2016 was 135,099,173 and 68,373,226,
respectively.
The following table shows the anti-dilutive shares excluded from
the calculation of basic and diluted net loss per common share as
of March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
Gross number of shares excluded:
|
|
|
|
Restricted
stock units – unvested
|
5,750,000
|
2,524,998
|
|
Stock
options
|
216,500
|
230,500
|
|
Convertible
debentures and accrued interest
|
-
|
12,652,384
|
|
Warrants
|
58,583,725
|
6,372,831
|
|
Total
|
64,550,225
|
21,780,713
|
The above table does not include the ANDA Consideration Shares
related to the Novalere acquisition totaling 138,859 and 12,947,655
at March 31, 2017 and 2016, respectively, as they are considered
contingently issuable (see Note 3).
NOTE 8 – DERIVATIVE LIABILITIES
The warrants issued in connection with the January 2015
Non-Convertible Debenture to a former executive are measured at
fair value and classified as a liability because these warrants
contain anti-dilution protection and therefore, cannot be
considered indexed to our own stock which is a requirement for the
scope exception as outlined under FASB ASC 815. The estimated fair
value of the warrants was determined using the Probability Weighted
Black-Scholes Model. The fair value will be affected by changes in
inputs to that model including our stock price, expected stock
price volatility, the contractual term and the risk-free interest
rate. We will continue to classify the fair value of the warrants
as a liability until the warrants are exercised, expire or are
amended in a way that would no longer require these warrants to be
classified as a liability, whichever comes first. The anti-dilution
protection for the warrants survives for the life of the warrants
which ends in January 2020.
The derivative liabilities are a Level 3 fair value measure in the
fair value hierarchy and the assumptions for the Probability
Weighted Black-Scholes Option-Pricing Model for the three months
ended March 31, 2017 are represented in the table
below:
|
|
|
March 31,
2017
|
|
|
|
Expected life (in years)
|
|
|
|
|
|
Expected volatility
|
|
|
|
|
|
Average risk-free interest rate
|
|
|
|
|
|
Dividend yield
|
|
|
|
|
We have
determined the embedded conversion features of the 2016 Notes (see
Note 5) to be derivative liabilities because the terms of the
embedded conversion features contained anti-dilution protection and
therefore, could not be considered indexed to our own stock which
was a requirement for the scope exception as outlined under FASB
ASC 815. The embedded conversion features were to be
measured at fair value and classified as a liability with
subsequent changes in fair value recorded in earnings at the end of
each reporting period. We have determined the fair value
of the derivative liabilities using a Path-Dependent Monte Carlo
Simulation Model. The fair value of the derivative
liabilities using such model was affected by changes in inputs to
that model and was based on the individual characteristics of the
embedded conversion features on the valuation date as well as
assumptions for volatility, remaining expected life, risk-free
interest rate, credit spread, probability of default by us and
acquisition of us. During the three months ended March
31, 2017, the 2016 Notes were either converted into shares of
common stock or repaid in full. The conversion of the 2016 Notes
during the three months ended March 31, 2017 resulted in the fair
value of the embedded conversion feature derivative liability on
the dates of conversion of $203,630 to be reclassified to
additional paid-in capital (see Note 7). Upon repayment
of the remaining 2016 Notes in March 2017 (see Note 5), the fair
value of the embedded conversion features on date of repayment of
$238,101 was extinguished and included in loss on debt
extinguishment in the accompanying condensed consolidated statement
of operations.
The derivative liabilities are a Level 3 fair value measurement in
the fair value hierarchy and a summary of quantitative information
with respect to valuation methodology and significant unobservable
inputs used for our embedded conversion feature derivative
liabilities that are categorized within Level 3 of the fair value
hierarchy during the three months ended March 31, 2017 is as
follows:
|
|
|
March 31,
2017
|
|
|
Stock price
|
|
|
$0.103 – $0.305
|
|
|
Strike price
|
|
|
$0.25
|
|
|
Expected life (in years)
|
|
|
0.36 – 0.43
|
|
|
Expected volatility
|
|
|
130% – 168%
|
|
|
Average risk-free interest rate
|
|
|
0.78% – 0.87%
|
|
|
Dividend yield
|
|
|
–
|
|
At March 31, 2017, the estimated Level 3 fair value of the warrant
derivative liabilities measured on a recurring basis is as
follows:
|
|
|
|
|
|
|
|
Warrant
derivative liabilities
|
$93,669
|
$-
|
$-
|
$93,669
|
$93,669
|
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 three months ended March
31, 2017:
Fair
Value Measurements Using Level 3 Inputs
|
Warrant derivative
liabilities:
|
|
|
Beginning
balance December 31, 2016
|
$164,070
|
|
Change
in fair value
|
(70,401)
|
|
Ending
balance March 31, 2017
|
$93,669
|
|
|
|
|
Embedded conversion feature
derivative liabilities:
|
|
|
Beginning
balance December 31, 2016
|
$319,674
|
|
Reclassification
of fair value of embedded conversion feature derivative liability
to
additional paid-in capital upon conversions of 2016
Notes
|
(203,630)
|
|
Extinguishment
of embedded conversion feature upon repayment of 2016
Notes
|
(238,101)
|
|
Change
in fair value
|
122,057
|
|
Ending
balance March 31, 2017
|
$-
|
NOTE 9 – SUBSEQUENT EVENTS
In
April 2017, we issued 18,349 shares of common stock to a consultant
for services rendered. The fair value of the common stock issued
was approximately $2,000.
In May 2017, we entered into a commercial agreement with West-Ward
Pharmaceuticals International Limited (“WWPIL”), a
wholly-owned subsidiary of Hikma Pharmaceuticals PLC
(“Hikma”) (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY).
Pursuant to the commercial agreement, WWPIL will provide the
Company 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 the second half of 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.
We have evaluated subsequent events through the filing date of this
Form 10-Q and determined that no subsequent events have occurred
that would require recognition in the condensed consolidated
financial statements or disclosures in the notes thereto other than
as disclosed in the accompanying notes to the condensed
consolidated financial statements.
|
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
Innovus Pharmaceuticals, Inc., together with its subsidiaries, are
collectively referred to as “Innovus”, the
“Company”, “us”, “we”, or
“our”. The following information should be read in
conjunction with the condensed consolidated financial statements
and notes thereto appearing elsewhere in this report. For
additional context with which to understand our financial condition
and results of operations, see the discussion and analysis included
in Part II, Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2016, filed with the Securities and Exchange
Commission (“SEC”) on March 9, 2017, as well as the
consolidated financial statements and related notes contained
therein.
Forward Looking Statements
Certain statements in this report, including information
incorporated by reference, are “forward-looking
statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, Section 21E of the Securities
Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, as amended. Forward-looking
statements reflect current views about future events and financial
performance based on certain assumptions. They include opinions,
forecasts, intentions, plans, goals, projections, guidance,
expectations, beliefs or other statements that are not statements
of historical fact. Words such as “may,”
“should,” “could,” “would,”
“expects,” “plans,” “believes,”
“anticipates,” “intends,”
“estimates,” “approximates,”
“predicts,” or “projects,” or the negative
or other variation of such words, and similar expressions may
identify a statement as a forward-looking statement. Any statements
that refer to projections of our future financial performance, our
anticipated growth and trends in our business, our goals,
strategies, focus and plans, and other characterizations of future
events or circumstances, including statements expressing general
optimism about future operating results and the development of our
products, are forward-looking statements.
Although forward-looking statements in this Quarterly Report on
Form 10-Q reflect the good faith judgment of our management, such
statements can only be based on facts and factors currently known
by us. Consequently, forward-looking statements are inherently
subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could
cause or contribute to such differences in results and outcomes
include, without limitation, those specifically addressed under the
heading “Risks Factors” below, as well as those
discussed elsewhere in this Quarterly Report on Form 10-Q. Readers
are urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Quarterly
Report on Form 10-Q. We file reports with the SEC. You can read and
copy any materials we file with the SEC at the SEC's Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You can
obtain additional information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (www.sec.gov) that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including
us.
Overview
We are an emerging over-the-counter ("OTC") consumer goods and
specialty pharmaceutical company engaged in the
commercialization, licensing and development of safe and effective
non-prescription medicine and consumer care products to improve
men’s and women’s health and vitality and respiratory
diseases. We deliver innovative and uniquely presented
and packaged health solutions through our (a) OTC medicines and
consumer and health products, which we market directly, (b)
commercial partners to primary care physicians,
urologists, gynecologists and therapists, and (c) directly to
consumers through our on-line channels, retailers and wholesalers.
We are dedicated to being a leader in
developing and marketing new OTC and branded Abbreviated New Drug
Application (“ANDA”) products. We are actively pursuing
opportunities where existing prescription drugs have recently, or
are expected to, change from prescription (or Rx) to OTC. These
“Rx-to-OTC switches” require Food and Drug
Administration (“FDA”) approval through a process
initiated by the New Drug Application (“NDA”)
holder.
Our
business model leverages our ability to (a) develop and build our
current pipeline of products and (b) to also acquire outright or
in-license commercial products that are supported by scientific
and/or clinical evidence, place them through our existing supply
chain, retail and on-line (including Amazon®-based
business platform) channels to tap new markets and drive demand for
such products and to establish physician relationships. We
currently have 18 products marketed in the U.S. with six of those
being marketed and sold in multiple countries around the world
through some of our 14 commercial partners. We currently expect to
launch an additional six products in the U.S. in 2017 and we
currently have approvals to launch certain of our already marketed
products in 31 additional countries.
Our Strategy
Our
corporate strategy focuses on two primary objectives:
1.
Developing a
diversified product portfolio of exclusive, unique and patented
non-prescription OTC and branded ANDA drugs and consumer health
products through: (a) the introduction of line extensions and
reformulations of either our or third-party currently marketed
products; and (b) the acquisition of products or obtaining
exclusive licensing rights to market such products;
and
2.
Building an
innovative, U.S. and global sales and marketing model through
direct to consumer approaches such as our proprietary Beyond
Human® sales and marketing platform, the addition of new
online platforms such as Amazon® and commercial partnerships
with established international complimentary partners that: (a)
generates revenue, and (b) requires a lower cost structure compared
to traditional pharmaceutical companies thereby increasing our
gross margins.
Our Products
We
currently generate revenue from 18 products in the U.S. and six in
international countries, as follows:
1.
Vesele® for
promoting sexual and health (U.S. and U.K.);
2.
Zestra® for
female arousal (U.S., U.K., Denmark, Canada, Morocco, the UAE and
South Korea);
3.
Zestra
Glide® (U.S, Canada and the MENA countries);
4.
EjectDelay®
indicated for the treatment of premature ejaculation (U.S. and
Canada);
5.
Sensum+® to
alleviate reduced penile sensitivity (U.S., U.K. and
Morocco);
6.
Beyond
Human® Testosterone Booster;
7.
Beyond
Human® Ketones;
8.
Beyond
Human® Krill Oil;
9.
Beyond
Human® Omega 3 Fish Oil;
10.
Beyond
Human® Vision Formula;
11.
Beyond
Human® Blood Sugar;
12.
Beyond
Human® Colon Cleanse;
13.
Beyond
Human® Green Coffee Extract;
14.
Beyond
Human® Growth Agent;
15.
RecalMax™
for brain health;
16.
Androferti®
(U.S. and Canada) for the support of overall male reproductive
health and sperm quality;
17.
UriVarx™ for
bladder health; and
18.
ProstaGorx™
for prostate health.
In
addition, we currently expect to launch in the U.S. the following
products in 2017, subject to the applicable regulatory approvals,
if required:
1.
AllerVarx™
for the management of allergy symptoms (first half of
2017);
2.
FlutiCare™
for allergic rhinitis (second half of 2017);
3.
Xyralid™ for
the relief of the pain and symptoms caused by hemorrhoids (second
half of 2017);
4.
AndroVit™
for men's health (second half of 2017);
5.
Urocis™ XR
for urinary tract infections (second half of 2017);
6.
Apeaz™ for
arthritis related pain (second half of 2017);
7.
ArthriVarx™
for joint health (second half of 2017); and
8.
PEVarx™ for
extension of sexual intercourse time (second half of
2017).
Sales and Marketing Strategy U.S. and Internationally
Our sales and marketing strategy is
based on (a) the use of direct to consumer advertisements in print
and online media through our proprietary Beyond Human®
sales and marketing infrastructure
acquired in March 2016, (b) working with direct commercial channel
partners in the U.S. and also directly marketing the products
ourselves to physicians, urologists, gynecologists and therapists
and to other healthcare providers, and (c) working with exclusive
commercial partners outside of the U.S. that would be responsible
for sales and marketing in those territories. We have now fully
integrated most of our existing line of products such as
Vesele®, Sensum+®, UriVarx™, Zestra®, and
RecalMax™ into the Beyond
Human® sales and marketing
platform. We plan to integrate ProstaGorx™,
Xyralid™, AllerVarx™,
AndroVit™,
Urocis™ XR; and
FlutiCare™, subject to regulatory approvals, upon their
expected commercial launches in 2017. We also market and distribute
our products in the U.S. through retailers, wholesalers and other
online channels. Our strategy outside the U.S. is to partner with
companies who can effectively market and sell our products in their
countries through their direct marketing and sales teams. The
strategy of using our partners to commercialize our products is
designed to limit our expenses and fix our cost structure, enabling
us to increase our reach while minimizing our incremental
spending.
Our current OTC monograph, Rx-to-OTC ANDA switch drugs and consumer
care products marketing strategy is to focus on four main U.S.
markets: (1) sexual health (male sexual dysfunction and health);
(2) urology (bladder and prostate health); (3) respiratory disease;
and (4) brain health. We will focus our current efforts on these
four markets and will seek to develop, acquire or license products
that we can sell through our sales channels in these
fields.
Results of Operations for the Three Months Ended March 31, 2017
Compared with the Three Months Ended March 31, 2016
|
|
Three Months Ended
March 31,
2017
|
Three Months Ended
March 31,
2016
|
|
|
|
NET
REVENUE:
|
|
|
|
|
|
Product
sales, net
|
$2,177,290
|
$224,463
|
$1,952,827
|
870.0%
|
|
License
revenue
|
-
|
1,000
|
(1,000)
|
(100.0)%
|
|
Net revenue
|
2,177,290
|
225,463
|
1,951,827
|
865.7%
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
Cost
of product sales
|
440,476
|
120,123
|
320,353
|
266.7%
|
|
Research
and development
|
3,183
|
-
|
3,183
|
100.0%
|
|
Sales
and marketing
|
1,687,351
|
35,496
|
1,651,855
|
4,653.6%
|
|
General
and administrative
|
1,704,663
|
1,287,737
|
416,926
|
32.4%
|
|
Total
operating expense
|
3,835,673
|
1,443,356
|
2,392,317
|
165.7%
|
|
LOSS
FROM OPERATIONS
|
(1,658,383)
|
(1,217,893)
|
(440,490)
|
36.2%
|
|
|
|
|
|
|
|
Interest
expense
|
(557,479)
|
(390,851)
|
(166,628)
|
42.6%
|
|
Loss
on extinguishment of debt
|
(304,828)
|
-
|
(304,828)
|
100.0%
|
|
Other
income (expense), net
|
(616)
|
1,765
|
(2,381)
|
(134.9)%
|
|
Fair
value adjustment for contingent consideration
|
27,175
|
(5,584)
|
32,759
|
(586.7)%
|
|
Change
in fair value of derivative liabilities
|
(51,656)
|
57,594
|
(109,250)
|
(189.7)%
|
|
NET
LOSS
|
$(2,545,787)
|
$(1,554,969)
|
(990,818)
|
63.7%
|
Net Revenue
We
recognized net revenue of approximately $2.2 million for the three
months ended March 31, 2017 compared to $225,000 for the three
months ended March 31, 2016. The increase in 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 an increase in sales of
Vesele® and Sensum+® which generated net revenue of
approximately $527,000, $982,000 and $372,000 during the three
months ended March 31, 2017, respectively, compared to
approximately $0, $1,000 and $8,000 during the three months ended
March 31, 2016, respectively. The increase in net revenue from the
sale of products through the Beyond Human® sales and marketing
platform was offset by decreases in our other existing product
sales channels to major retailers and wholesalers as we
concentrated our sales efforts and resources on integrating our
existing products into the Beyond Human® sales and marketing
platform. The decreases in existing product sales channels resulted
in net revenue from the Zestra® products decreasing
approximately $50,000 during the three months ended March 31, 2017
when compared to the same period in 2016. We signed an exclusive
license and distribution agreement in November 2016 for the sale of
Zestra® and Zestra Glide® in South Korea and, in March
2017, we shipped the initial order under such agreement resulting
in net revenue of $60,000 during the three months ended March 31,
2017. This agreement is expected to lead to an increase in product
sales of Zestra® and Zestra Glide® through that sales
channel in 2017.
Cost of Product Sales
We
recognized cost of product sales of approximately $440,000 for the
three months ended March 31, 2017 compared to $120,000 for the
three months ended March 31, 2016. 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 80% in 2017
compared to 47% 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 $3,000
for the three months ended March 31, 2017 compared to no expense
for the three months ended March 31, 2016. The research and
development expense includes salary and the related health benefits
for an employee who was terminated in January 2017.
Sales and Marketing
We recognized sales and marketing expense of approximately $1.7
million for the three months ended March 31, 2017 compared to
$35,000 for the three months ended March 31,
2016. Sales and marketing
expense of $1.7 million during the three months ended March 31,
2017 consist primarily of print advertisements and sales and
marketing support. The increase in sales and marketing expense
during the three months ended March 31, 2017 when compared to the
same period in 2016 is due to the increase in the number of print
and online media advertisements of our existing products through
the Beyond Human® 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.
General and Administrative
We
recognized general and administrative expense of approximately $1.7
million for the three months ended March 31, 2017 compared to $1.3
million for the three months ended March 31, 2016. General and
administrative expense consists primarily of investor relation
expense, legal, accounting, public reporting costs and other
infrastructure expense related to the launch of our products.
Additionally, our general and administrative expense includes
professional fees, insurance premiums and general corporate
expense. The increase is primarily due to the increase in 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. The increase was offset by a
decrease in stock-based compensation to employees, directors and
consultants of approximately $159,000 during the three months ended
March 31, 2017 compared to 2016.
Other Income and Expense
We
recognized interest expense of approximately $557,000 for the three
months ended March 31, 2017 compared to $391,000 for the three
months ended March 31, 2016. Interest expense primarily includes
interest related to our debt and amortization of debt discounts
(see Note 5 to the accompanying condensed consolidated financial
statements included elsewhere in this Quarterly Report). Due to the
shares, warrants and cash discounts provided to our lenders, the
effective interest rate is significantly higher than the coupon
rate. The increase in interest expense reflects the larger
amount of debt discount amortization of approximately $142,000 when
compared to 2016 due to the convertible debt and note payable
financings completed in 2016.
We
recognized a loss on extinguishment of debt of approximately
$305,000 during the three months ended March 31, 2017. The loss on
debt extinguishment was the result of the required prepayment of
the 2016 Notes from the cash proceeds received through the public
equity offering in March 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 $416,000, the
prepayment penalty of $127,000 and the extinguishment of the
embedded conversion feature derivative liability of $238,000 were
recorded as a loss on debt extinguishment during the three months
ended March 31, 2017.
We
recognized a gain from the fair value adjustment for contingent
consideration of approximately $27,000 for the three months ended
March 31, 2017 compared to a loss of $6,000 for the three months
ended March 31, 2016. Fair value adjustment for contingent
consideration consists primarily of the decrease in the fair value
of the remaining contingent ANDA shares of common stock issuable to
individual members of Novalere Holdings, LLC in connection with our
acquisition in 2015 totaling approximately $20,000 and the decrease
in the royalty contingent consideration to Semprae of approximately
$7,000 (see Note 3 to the accompanying condensed consolidated
financial statements included elsewhere in this Quarterly
Report).
We
recognized a loss from the change in fair value of derivative
liabilities of approximately $52,000 for the three months ended
March 31, 2017 compared a gain from the change in fair value of
derivative liabilities of $58,000 for the three months ended March
31, 2016. 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 three
months ended March 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.
Net Loss
Net loss for the three months ended March 31, 2017 was
approximately $(2.5 million) or $(0.02) basic and diluted net loss
per share compared to a net loss for the same period in 2016 of
$(1.6 million) or $(0.02) basic and diluted net loss per
share.
Liquidity and Capital Resources
Historically,
we have funded losses from operations through the sale of equity
and issuance of debt instruments. Combined with revenue, these
funds have provided us with the resources to operate our business,
to sell and support our products, attract and retain key personnel,
and add new products to our portfolio. To date, we have experienced
net losses each year since our inception. As of March 31, 2017, we
had an accumulated deficit of approximately $31.7 million and a
working capital deficit of $138,000.
As of
April 30, 2017, we had approximately $2.0 million in cash and
$25,000 of cash collections held by our third-party merchant
service provider, which is expected to be remitted to us in May
2017. Although no assurances can be given, we may raise additional
capital through the sale of equity or debt securities. We expect,
however, that our existing capital resources, revenue from sales of
our products and upcoming new product launches and sales milestone
payments from the commercial partners signed for our products, and
equity instruments available to pay certain vendors and
consultants, will be sufficient to allow us to continue our
operations, commence the product development process and launch
selected products through at least the next 12 months. In
addition, our CEO, who is also a significant shareholder, has
deferred the remaining payment of his salary earned thru June 30,
2016 totaling $1,036,315 for at least the next 12
months.
Our actual needs will depend on numerous factors, including timing
of introducing our products to the marketplace, our ability to
attract additional Ex-U.S. distributors for our products and our
ability to in-license in non-partnered territories and/or develop
new product candidates. 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 may 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.
The Company’s principle debt instruments include the
following:
February 2016 Note Payable
On February 24, 2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered into an agreement in which SBI loaned
us gross proceeds of $550,000 pursuant to a purchase agreement, 20%
secured promissory note and security agreement (“February
2016 Note Payable”), all dated February 19, 2016
(collectively, the “Finance Agreements”). 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 is February 19, 2018. The February 2016 Note Payable
is secured by SBI through a first priority secured interest in all
of the Beyond Human® assets acquired by us in the transaction
including all revenue received by us from these assets. The
principal balance of the February 2016 Note Payable as of March 31,
2017 is $280,310.
December 2016 and January 2017 Notes Payable
On
December 5, 2016 and January 19, 2017, we entered into a securities
purchase agreement with three unrelated third-party investors in
which the investors loaned us gross proceeds of $650,000 pursuant
to 5% promissory notes. The
notes have an OID of $65,000 and requires payment of $715,000 in
principal upon maturity. The notes bear interest at the rate
of 5% per annum and the principal amount and interest are payable
at maturity on October 4, 2017 and November 18, 2017. In connection
with the notes, we issued the investors restricted shares of common
stock totaling 1,441,111. The fair value of the
restricted shares of common stock issued was based on the market
price of our common stock on the date of issuance of the
notes.
Net Cash Flows
|
|
Three Months Ended
March 31,
2017
|
Three Months Ended
March 31,
2016
|
|
|
|
|
|
Net
cash used in operating activities
|
$(495,635)
|
$(105,489)
|
|
Net
cash used in investing activities
|
(2,256)
|
(6,565)
|
|
Net
cash provided by financing activities
|
2,043,310
|
88,706
|
|
Net
change in cash
|
1,545,419
|
(23,348)
|
|
Cash
at beginning of period
|
829,933
|
55,901
|
|
Cash
at end of period
|
$2,375,352
|
$32,553
|
Operating Activities
For the
three months ended March 31, 2017, cash used in operating
activities was approximately $496,000, consisting primarily of the
net loss for the period of approximately $2.5 million, which was
primarily offset by non-cash common stock, restricted stock units
and stock options issued for services and compensation of
approximately $580,000, amortization of debt discount of $513,000,
loss on debt extinguishment of $305,000, change in fair value of
derivative liabilities of $52,000 and amortization of intangible
assets of $158,000. The non-cash expense was offset with the gain
on change in fair value of contingent consideration of
approximately $27,000. Additionally, working capital changes
consisted of cash increases of approximately $465,000 related to a
decrease in accounts receivable from cash collections from
customers of approximately $16,000, $187,000 related to an increase
in accrued compensation, $120,000 related to an increase in
accounts payable and accrued expense, $101,000 related to a
decrease in prepaid expense and other current assets, and $63,000
related to a decrease in inventories, partially offset by a cash
decrease related to accrued interest of $22,000. 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 existing
products and those acquired in 2016.
Investing Activities
For the
three months ended March 31, 2017, cash used in investing
activities was approximately $2,000 which consisted of the purchase
of property and equipment compared to $7,000 for 2016.
Financing Activities
For the
three months ended March 31, 2017, cash provided by financing
activities was approximately $2.0 million, consisting primarily of
the net proceeds from the public equity offering of $3.3 million
and notes payable of $150,000, offset by the repayment of
convertible debentures of approximately $1.2 million, notes payable
of $68,000 and the prepayment penalty on the repayment of the
convertible debentures of $127,000. Cash provided by
financing activities in 2016 was primarily related to net proceeds
from notes payable and convertible debentures of approximately
$243,000 and proceeds from short-term loans payable of $10,000,
offset by the repayment of notes payable and short-term loans
payable of $122,000 and related-party line of credit convertible
debenture of $43,000.
Critical Accounting Policies and Estimates
On January 1, 2017, the Company adopted Financial Accounting
Standards Board (“FASB”) Accounting Standards Update
(“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 condensed consolidated financial
statements) in March 2017 is classified as a financing cash outflow
in the accompanying condensed consolidated statement of cash flows
for the three months ended March 31, 2017. The adoption of this ASU
did not have a material impact on our condensed consolidated
financial position, results of operations and related disclosures
and had no other impact to the accompanying condensed consolidated
statement of cash flows for the three months ended March 31, 2017
and 2016.
For the three months ended March 31, 2017, there were no other
material changes to the “Critical Accounting Policies”
discussed in Part II, Item 7 (Management’s Discussion and
Analysis of Financial Condition and Results of Operations) of our
Annual Report on Form 10-K for the year ended December 31
2016.
Off- Balance Sheet Arrangements
None.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements
included in this Quarterly Report.
|
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
Evaluation of disclosure controls and procedures.
As of March 31, 2017, we evaluated, with the participation of our
principal executive officer and principal financial officer, the
effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")).
Based on that evaluation, our principal executive officer and
principal financial officer concluded that, as of March 31, 2017,
our disclosure controls and procedures are designed at a reasonable
assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms, and that such information is accumulated and
communicated to our management, including chief executive officer
and vice president, finance, as appropriate to allow timely
decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, but not
absolute, assurance that the objectives of the disclosure controls
and procedures are met. The design of any disclosure control and
procedure also is based in part upon 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.
Changes in internal control over financial reporting.
During the quarter ended March 31, 2017, there were no changes in
our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II—OTHER
INFORMATION
In the normal course of business, the Company may be a party to
legal proceedings. The Company is not currently a party to any
material legal proceedings.
The risks described in Part I, Item 1A, Risk
Factors, in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2016, could
materially and adversely affect our business, financial condition
and results of operations. These risk factors do not identify all
of the risks that we face. Our business, financial condition and
results of operations could also be affected by factors that are
not presently known to us or that we currently consider to be
immaterial. There have been no material changes to the “Risk
Factors” section included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2016.
|
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
Unregistered Sales of Equity Securities
For the three months ended March 31, 2017, we issued 1,159,023
shares of our common stock valued at $320,615 in exchange for
services under existing consulting and service agreements with
third parties.
For the three months ended March 31, 2017, we issued 225,000 shares
of our common stock valued at $44,662 in connection with the
amendment to the in-license agreement for
Sensum+®.
For the three months ended March 31, 2017, we issued 40,000 shares
of our common stock upon the exercise of stock options for cash
proceeds of $2,894.
For the
three months ended March 31, 2017, certain 2016 Notes holders elected to convert
$350,610 in principal and interest into 1,402,440 shares of common
stock.
We entered into a private financing for $150,000 on January 19,
2017 with an institutional investor. We issued 330,000 restricted
shares of common stock to the investors in connection with the note
payable.
Each of the securities were offered and sold in transactions exempt
from registration under the Securities Act, in reliance on Section
4(a)(2) thereof and Rule 506 of Regulation D thereunder and/or
Section 3(a)(9) of the Securities Act. Each of the investors
represented that it was an "accredited investor" as defined in
Regulation D under the Securities Act.
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).
|
ITEM 3.
|
DEFAULTS UPON SENIOR
SECURITIES
|
None.
Not applicable.
None.
See the Exhibit Index immediately following the signature page of
this report.
Pursuant to the requirements 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.
|
|
Innovus Pharmaceuticals, Inc.
|
|
|
(Registrant)
|
|
|
|
|
Dated: May 15, 2017
|
/s/ Bassam Damaj
|
|
|
Bassam Damaj, Ph.D.
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
|
|
/s/
Rauly Gutierrez
|
|
|
Rauly
Gutierrez, CPA
Vice President, Finance
(Principal Financial Officer)
|
|
Exhibit No.
|
|
Description
|
|
|
4.1
|
|
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.
|
|
|
4.2
|
|
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.
|
|
|
4.3
|
|
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.
|
|
|
10.1
|
|
Employment Agreement, dated as of January 8, 2017 by and between
Innovus Pharmaceuticals, Inc. and Randy Berholtz (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed January 6, 2017).
|
|
|
31.1*
|
|
Certification of Bassam Damaj, Ph.D., principal executive officer,
pursuant to Rule 13-a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
|
Certification of Rauly Gutierrez, CPA, principal financial officer,
pursuant to Rule 13-a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1**
|
|
Certification of Bassam Damaj, Ph.D., principal executive officer,
and Rauly Gutierrez, CPA, principal financial officer, pursuant to
18 U.S.C. Section 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.
**
This
certification is being furnished solely to accompany this report
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and is not being filed for
purposes of Section 18 of the Securities Exchange Act of 1934 and
is not to be incorporated by reference into any filing of the
Registrant, whether made before or after the date hereof,
regardless of any general incorporation by reference language of
such filing.