Filed
pursuant to Rule 424(b)(1)
Registration
Statement No. 333-215851
PROSPECTUS
25,666,669 Shares of Common
Stock
Series A Warrants to Purchase 25,666,669
Shares of Common Stock
Series B Warrants to Purchase 25,666,669 Shares of Common
Stock
Innovus Pharmaceuticals, Inc. (the
“Company”) is offering 25,666,669 shares of common
stock, five-year warrants to purchase up to 25,666,669 shares of
our common stock (“Series A
Warrants”), one-year
warrants to purchase up to 25,666,669 shares of our common stock
(“Series B
Warrants” and, together
with the Series A Warrants, the “Warrants”), as well as an aggregate of 51,333,338
shares of common stock issuable upon the exercise of the Warrants
to purchasers in this offering. Each share of common
stock will be sold at a price of $0.15 per share, and will be
accompanied by Series A Warrant(s), each to purchase one share of
common stock at an exercise price of $0.15 per share, and Series B
Warrant(s), each to purchase one share of common stock at an
exercise price of $0.15 per share. The common stock, Series A
Warrants and Series B Warrants are immediately separable but can
only be purchased together in this offering. The Warrants are
exercisable immediately and are each exercisable for one share of
common stock.
The offering price
of our common stock and related Warrants was negotiated between us
and the investors, in consultation with the placement agent based
on the trading of our common stock prior to the offering, among
other factors. See "Prospectus
Summary" - "The Offering" - "Determination of offering
price" for a more complete discussion of the factors
considered in determining the offering
price.
Our common stock is quoted on the OTCQB
Marketplace under the symbol “INNV”. The last reported
bid price of our common stock on March 15, 2017 was
approximately $0.18 per share.
We do not intend to apply for listing
of the Warrants on any securities exchange or other nationally
recognized trading system and we do not expect such a market to
develop. There is no market through which the Warrants may
be sold and purchasers may not be able to resell the Warrants
purchased under this prospectus. This may affect the pricing of the
Warrants in the secondary market, the transparency and availability
of trading prices, the liquidity of such Warrants.
An investment in our securities involves a high degree of
risk. We urge you to read carefully
the “Risk Factors” section beginning on page 8 where we
describe specific risks associated with an investment in Innovus
Pharmaceuticals, Inc. and our securities before you make your
investment decision. You should purchase our securities only if you
can afford a complete loss of your purchase.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities,
or determined if this prospectus is truthful or
complete. Any representation to the contrary is a
criminal offense.
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Per share and
related
warrants
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Total
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Public offering
price
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$0.15
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$3,850,000.35
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Placement
agent’s fees (1)
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$0.0105
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$269,500.02
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Offering proceeds,
before expenses, to us
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$0.1395
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$3,580,500.33
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(1) We
estimate the total expenses of this offering payable by us,
excluding the placement agent’s fees, will be approximately
$273,000. See “Plan of
Distribution” on page 64 of this prospectus for a
description of the compensation payable to the placement
agent.
We
have retained H.C. Wainwright & Co., LLC as our exclusive
placement agent to use its reasonable best efforts to solicit
offers to purchase the securities in this offering. The placement
agent has no obligation to buy any of the securities from us or to
arrange for the purchase or sale of any specific number or dollar
amount of the securities.
We
anticipate that delivery of the shares of common stock and Warrants
against payment will be made on or about March 21,
2017.
Rodman & Renshaw
a unit of H.C. Wainwright & Co.
The date of this prospectus is March 15, 2017.
TABLE OF CONTENTS
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We
have not, and the placement agent has not, authorized anyone to
provide any information or to make any representations other than
those contained in this prospectus or in any prospectus supplement
or free writing prospectuses prepared by or on behalf of us or to
which we have referred you. We take no responsibility for, and can
provide no assurance as to the reliability of, any other
information that others may give you. This prospectus is an offer
to sell only the shares offered hereby, and only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus or in any applicable
prospectus supplement or free writing prospectus is current only as
of its date, regardless of its time of delivery or any sale of our
securities. Our business, financial condition, results of
operations and prospects may have changed since that
date.
For investors outside the
United States: We have not, and
the placement agent has not, done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other than
in the United States. Persons outside the United States who come
into possession of this prospectus must inform themselves about,
and observe any restrictions relating to, the offering of the
securities and the distribution of this prospectus outside the
United States.
-i-
ABOUT THIS PROSPECTUS
You
should rely only on the information contained in or incorporated by
reference into this prospectus and any prospectus supplement or
free writing prospectus authorized by us. To the extent the
information contained in this prospectus differs or varies from the
information contained in any document filed prior to the date of
this prospectus and incorporated by reference, the information in
this prospectus will control. We have not authorized any other
person to provide you with different information. If anyone
provides you with different or inconsistent information, you should
not rely on it. The information in this prospectus is accurate only
as of the date it is presented. You should read this prospectus,
and any prospectus supplement or free writing prospectus that we
have authorized for use in connection with this offering, in their
entirety before investing in our securities.
We
are offering to sell, and seeking offers to buy, the securities
offered by this prospectus only in jurisdictions where offers and
sales are permitted. The distribution of this prospectus and the
offering of the securities offered by this prospectus in certain
jurisdictions may be restricted by law. This prospectus does not
constitute, and may not be used in connection with, an offer to
sell, or a solicitation of an offer to buy, any securities offered
by this prospectus in any jurisdiction in which it is unlawful for
such person to make such an offer or solicitation.
Unless the
context otherwise requires, the words “Innovus
Pharmaceuticals, Inc.,”
“Innovus
Pharma,”
“Innovus,”
“we,”
“the
Company,”
“us”
and “our”
refer to Innovus Pharmaceuticals, Inc., a Nevada
corporation.
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PROSPECTUS
SUMMARY
The following summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision in our
securities. Before investing in our securities, you should
carefully read this entire prospectus, including our financial
statements and the related notes included in this prospectus and
the information set forth under the headings “Risk
Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.”
Our Company
We are an emerging over-the-counter
("OTC") consumer goods and specialty pharmaceutical
company engaged in the commercialization, licensing and
development of safe and effective non-prescription medicine and
consumer care products to improve men’s and women’s
health and vitality and respiratory diseases. We deliver
innovative and uniquely presented and packaged health solutions
through our (a) OTC medicines and consumer and health products,
which we market directly, (b) commercial partners to primary care
physicians, urologists, gynecologists and therapists, and (c)
directly to consumers through our on-line channels, retailers and
wholesalers. We are dedicated to being
a leader in developing and marketing new OTC and branded
Abbreviated New Drug Application (“ANDA”) products. We are actively pursuing
opportunities where existing prescription drugs have recently, or
are expected to, change from prescription (or Rx) to OTC. These
“Rx-to-OTC switches” require Food and Drug
Administration (“FDA”) approval through a process initiated by
the New Drug Application (“NDA”) holder.
Our
business model leverages our ability to (a) develop and build our
current pipeline of products, and (b) to also acquire outright or
in-license commercial products that are supported by scientific
and/or clinical evidence, place them through our existing supply
chain, retail and on-line (including Amazon®-based
business platform) channels to tap new markets and drive demand for
such products and to establish physician relationships. We
currently have 17 products marketed in the United States with six
of those being marketed and sold in multiple countries around the
world through some of our 14 commercial partners. We currently
expect to launch an additional five products in the U.S. in 2017
and we currently have approvals to launch certain of our already
marketed products in 31 additional countries.
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.
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Our Products
We
currently generate revenue from 17 products in the U.S. and six in
international countries, as follows:
1.
Vesele® for promoting
sexual and health (U.S. and U.K.);
2.
Zestra® for female
arousal (U.S., U.K., Denmark, Canada, Morocco, the UAE and South
Korea);
3.
Zestra
Glide® (U.S, Canada
and the MENA countries);
4.
EjectDelay® indicated
for the treatment of premature ejaculation (U.S. and
Canada);
5.
Sensum+® to
alleviate reduced penile sensitivity (U.S., U.K. and
Morocco);
6.
Beyond
Human® Testosterone
Booster;
7.
Beyond
Human®
Ketones;
8.
Beyond
Human® Krill
Oil;
9.
Beyond
Human® Omega 3
Fish Oil;
10.
Beyond
Human® Vision
Formula;
11.
Beyond
Human® Blood
Sugar;
12.
Beyond
Human® Colon
Cleanse;
13.
Beyond
Human® Green Coffee
Extract;
14.
Beyond
Human® Growth
Agent;
15.
RecalMax™
for brain health;
16.
Androferti®
(U.S. and Canada) for the support of overall male reproductive
health and sperm quality; and
17.
UriVarx™ for overactive
bladder and urinary incontinence.
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In
addition, we currently expect to launch in the U.S. the following
products in 2017, subject to the applicable regulatory approvals,
if required:
1.
Xyralid™ for the relief of the pain and symptoms caused by
hemorrhoids (first half of 2017);
2.
AllerVarx™ for allergic
rhinitis symptoms (first half of 2017);
3.
AndroVit™ for prostate and sexual health (second half of
2017);
4.
Urocis™ XR for urinary tract infections in women (second half
of 2017); and
5.
FlutiCare™ for allergic
rhinitis subject to FDA ANDA approval (second half of
2017).
Sales and Marketing Strategy U.S. and Internationally
Our sales and marketing strategy is based on (a)
the use of direct to consumer advertisements in print and online
media through our proprietary Beyond Human®
sales and marketing infrastructure
acquired in March 2016; (b) working with direct commercial channel
partners in the U.S. and also directly marketing the products
ourselves to physicians, urologists, gynecologists and therapists
and to other healthcare providers; and (c) working with exclusive
commercial partners outside of the U.S. that would be responsible
for sales and marketing in those territories. We have now fully
integrated most of our existing line of products such as
Vesele®,
Sensum+®,
UriVarx™,
Zestra®,
and RecalMax™
into the Beyond Human®
sales and marketing platform. We plan
to integrate Xyralid™, AllerVarx™,
AndroVit™, Urocis™ XR; and FlutiCare™,
subject to regulatory approvals, upon their commercial launches in
2017. We also market and distribute our products in the U.S.
through retailers, wholesalers and other online channels. Our
strategy outside the U.S. is to partner with companies who can
effectively market and sell our products in their countries through
their direct marketing and sales teams. The strategy of using our
partners to commercialize our products is designed to limit our
expenses and fix our cost structure, enabling us to increase our
reach while minimizing our incremental
spending.
Our
current OTC monograph, Rx-to-OTC ANDA switch drugs and consumer
care products marketing strategy is to focus on four main U.S.
markets which we believe each to be in excess of $1.0 billion: (1)
Sexual health (female and male sexual dysfunction and health); (2)
Urology (bladder and prostate health); (3) Respiratory disease; and
(4) Brain health. We will focus our current efforts on these four
markets and will seek to develop, acquire or license products that
we can sell through our sales channels in these
fields.
Acquisition and Licensing Strategy
Our
acquisition and licensing strategy is to acquire or in-license
products that fit our commercialization strategy that are branded,
with growing market shares, that can be sold direct to consumers
and through our on-line partnerships and that can then be sold
internationally through our commercial partnerships.
The
following represents products and product candidates we have
successfully acquired:
1.
Zestra®
and Zestra Glide®
(acquired Semprae Laboratories, Inc.
in 2013 - current Innovus subsidiary);
2.
Vesele®
(from Trophikos, Inc. in
2014);
3.
Sensum+®
(from Centric Research Institute in
2013);
4.
FlutiCare™
(acquired Novalere, Inc. in 2015,
current Innovus Pharma subsidiary); and
5.
Beyond
Human® Testosterone
Booster; Beyond Human® Human Growth
Agent; Beyond Human® Ketones; Beyond
Human® Krill Oil;
Beyond Human® Omega 3 Fish
Oil; Beyond Human® Vision Formula;
Beyond Human® Blood Sugar;
and Beyond Human® Colon Cleanse
(acquired Beyond Human™ assets in
2016).
The
following represents the products we have in-licensed from third
parties:
1.
Androferti®
(from Q Pharma in
2015);
2.
AllerVarx™
(from NTC Pharma in
2016);
3.
AndroVit™
(from Q Pharma in
2015);
4.
Urocis™ XR
(from Q Pharma in 2015);
and
5.
In addition, we have developed and repurposed
Xyralid™
for the relief of the pain and
symptoms caused by hemorrhoids.
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We
currently have 14 partnerships that have the rights to sell certain
of our current products in approximately 65 countries. Our
international partners include the following
companies:
1.
Orimed
Pharma, the OTC subsidiary of Jamp Pharma (Canada);
2.
DanaLife
ApS (Denmark and in alternative markets);
3.
Tramorgan
(U.K);
4.
Sothema
Laboratories (MENA);
5.
Ovation
Pharma (Morocco);
6.
Tabuk
Pharmaceuticals (MENA);
7.
BroadMed
(Lebanon);
8.
Elis
Pharmaceuticals (Turkey and Lebanon);
9.
BioTask
(Malaysia);
10.
Oz
Biogenics (Myanmar and Vietnam);
11.
Khandelwal
Laboratories (India);
12.
PT
Resources (Select Asian Countries);
13.
Q
Pharma (US and Canada); and
14.
J&H Co. LTD
(South Korea).
Risks Related to our Business
Our ability to implement our business strategy is subject to
numerous risks, as more fully described in the section entitled
“Risk Factors” immediately following this prospectus
summary. These risks include, among others:
●
We have a short operating history and have not produced significant
revenue from our operations;
●
We have a history of operating losses, including an accumulated
deficit of approximately $29.1 million at December 31, 2016, which
will likely continue in the future;
●
The success of our
business currently depends on market acceptance of all 17 of our
products, but also on our top five products:
Vesele®,
Sensum+®,
Zestra®,
Beyond Human® Testosterone Booster
and RecalMax™
that
accounted for approximately 92% of our annual net revenue during
the year ended December 31, 2016. No customer accounted for more
than 10% of total net revenue for the year ended December 31,
2016;
●
We have no commercial manufacturing capacity and rely on
third-party contract manufacturers to produce commercial quantities
of our products;
●
We face significant competition and have limited resources compared
to many of our competitors;
●
We may never receive
approval of our ANDA from the FDA for Fluticare™,
which we are relying upon to generate significant future
revenue;
●
If
we fail to protect our intellectual property rights, such as
patents and trademarks, our ability to pursue the development of
our technologies and products would be negatively
affected;
●
We
may not be able to raise the levels of financing required to market
and sell many of our products;
●
We
may not be able to grow effectively and retain or hire the
necessary talent to increase our sales;
●
We
may not be able to grow internationally as we would like due to
regulatory, political, or economic changes in such
countries;
●
We
are currently very reliant on the experience, knowledge, skills and
actions of our President and Chief Executive Officer, Dr. Bassam
Damaj;
●
We
may not be able to acquire or license the necessary products
required for us to grow effectively and increase our product
revenue;
●
We
may face an uncertain U.S. regulatory, political and economic
environment with the ascendancy of a new U.S. presidential
administration; and
●
Our
liquidity.
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The
Offering
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Common stock we are offering
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25,666,669 shares
of common stock
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Warrants we are offering
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Series
A Warrants to purchase up to 25,666,669 shares of common stock and
Series B Warrants to purchase up to 25,666,669 shares of common
stock. Each
share of common stock sold in this offering will be accompanied by
a five-year Series A Warrant to purchase one share of our common
stock, at an exercise price of $0.15 per share (100% of the public
offering price of our common stock) and a one-year Series B Warrant
to purchase one share of our common stock, at an exercise price of
$0.15 per share (100% of the public offering price of our common
stock). The Warrants will be immediately exercisable. This
prospectus also covers the shares of common stock issuable upon
exercise of the Warrants offered hereby.
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Common stock outstanding after this offering
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150,477,425 shares of common stock
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Use of proceeds
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We
estimate that the net proceeds to us from this offering, after
deducting the estimated offering expenses payable by us, and based
on the combined public offering price of $0.15 per share of common
stock and related Warrants will be approximately $3.3 million,
excluding any proceeds we may receive upon exercise of the
Warrants, if any. We intend to use the net proceeds of this
offering for the commercial launch of FlutiCare™, if approved
by the FDA, working capital and general corporate purposes,
including sales and marketing activities, product development,
capital expenditures, the potential repayment of certain debt of
the Company and product acquisitions and product licenses. See
“Use of
Proceeds” for a more complete description of the
intended use of proceeds from this offering.
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Determination of offering
price
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The offering price
of our common stock and related Warrants was negotiated between us
and the investors, in consultation with the placement agent based
on the trading of our common stock prior to the offering, among
other things. Other factors considered in determining the offering
price of the common stock and related Warrants we are offering
include our history and prospects, the stage of development of our
business, our business plans for the future and the extent to which
they have been implemented, an assessment of our management,
general conditions of the securities markets at the time of the
offering and such other factors as were deemed
relevant.
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Risk factors
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You
should read the “Risk
Factors” section of this prospectus and the other
information in this prospectus for a discussion of factors to
consider carefully before deciding to invest in shares of our
common stock.
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OTCQB Marketplace Symbol
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“INNV.”
We do not intend to apply for listing of the Warrants on any
securities exchange or other nationally recognized trading system
and we do not expect such a market to develop.
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The number of
shares of our common stock to be outstanding after this offering is
based on 124,810,756 shares of our common stock outstanding as of
March 15, 2017 and excludes the following, in each case as of such
date:
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253,500
shares of common stock issuable upon the exercise of stock options
outstanding as of March 15, 2017, at a weighted average exercise
price of $0.21 per share;
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13,818,336
unallocated shares of common stock reserved for future issuance
under our stock-based compensation plans, consisting of no shares
of common stock reserved for future issuance under our 2013 Equity
Incentive Plan ("2013
Plan"), 61,367 shares of common stock reserved for future
issuance under our 2014 Equity Incentive Plan ("2014 Plan"), and 13,756,969 shares of
common stock reserved for future issuance under our 2016 Equity
Incentive Plan ("2016
Plan") (together, the “Incentive Plans ”), and such
additional shares that become available under our Incentive Plans
pursuant to provisions thereof that automatically increase the
share reserves under the Incentive Plans each
year;
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14,935,303 shares
of common stock reserved for issuance of outstanding restricted
stock units as of March 15, 2017;
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5,082,504 shares of common stock
issuable upon conversion of the 2016 convertible notes payable as
of March 15, 2017; (“2016
Notes”)
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5,967,054 shares
of common stock issuable upon the exercise of warrants outstanding
as of March 15, 2017, at a weighted average exercise price of $0.34
per share; and
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51,333,338 shares of common stock issuable
upon exercise of the Warrants to be issued in connection with this
offering, and 1,283,333 shares of our common stock issuable upon
the exercise of the warrants issuable to the placement
agents.
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Although the
foregoing includes common stock issuable upon conversion of
outstanding 2016 Notes, as a result of the offering, the holders
(i) may elect to convert all principal and accrued interest into
shares of common stock at a conversion price equal to $0.135, which
represents a 10% discount to the public offering price of the
shares of common stock in this offering; or (ii) shall receive a
prepayment of 110% of outstanding principal and 110% of all accrued
unpaid interest directly from the proceeds of this offering. As a
result, in the event all holders of 2016 Notes elect to convert
into common stock, an additional 4,329,540 shares of common stock
will be issued and outstanding.
Except as
otherwise indicated, all information in this prospectus assumes no
exercise of the outstanding options and warrants or the conversion
of convertible notes payable and restricted stock units into common
shares described above.
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SUMMARY
CONSOLIDATED FINANCIAL DATA
The
summary consolidated statements of operations data presented below
for the years ended December 31, 2015 and 2016 are derived
from our audited consolidated financial statements included
elsewhere in this prospectus. The summary consolidated balance
sheet data as of December 31, 2016 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The following summary consolidated financial data
should be read with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our
consolidated financial statements and related notes included
elsewhere in this prospectus. Our historical results are not
necessarily indicative of the results that may be expected in any
future period. The summary financial data in this section are not
intended to replace the consolidated financial statements and are
qualified in their entirety by the consolidated financial
statements and related notes included elsewhere in this
prospectus.
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Year Ended December
31,
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2015
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2016
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Consolidated
Statements of Operations Data:
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Net
Revenue:
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License
revenue
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$ 5,000
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$ 1,000
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Product sales,
net
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730,717
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4,817,603
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Net
Revenue
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735,717
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4,818,603
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Operating
expense:
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Cost of product
sales
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340,713
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1,083,094
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Research and
development
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—
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77,804
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Sales and
marketing
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82,079
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3,621,045
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General and
administrative
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3,828,113
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5,870,572
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Impairment of
goodwill
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759,428
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—
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Total operating
expense
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5,010,333
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10,652,515
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Loss from
operations
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(4,274,616)
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(5,833,912)
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|
Other income
(expense):
|
|
|
|
|
|
Interest
expense
|
(1,153,376)
|
(6,661,694)
|
|
|
|
Change in fair
value of derivative liabilities
|
393,509
|
65,060
|
|
|
|
Other income
(expense), net
|
(8,495)
|
1,649
|
|
|
|
Fair value
adjustment for contingent consideration
|
115,822
|
(1,269,857)
|
|
|
|
Loss on
extinguishment of debt
|
(32,500)
|
—
|
|
|
|
|
|
|
|
|
|
Total other
expense, net
|
(685,040)
|
(7,864,842)
|
|
|
|
|
|
|
|
|
|
Loss before
provision for (benefit from) income taxes
|
(4,959,656)
|
(13,698,754)
|
|
|
|
Provision for
(benefit from) income taxes
|
(757,028)
|
2,400
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$ (4,202,628)
|
$ (13,701,154)
|
|
|
|
Net loss per common
share:(1)
|
|
|
|
|
|
Basic and
diluted
|
$ (0.08)
|
$ (0.15)
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of shares outstanding:(1)
|
|
|
|
|
|
Basic
|
52,517,530
|
94,106,382
|
|
|
|
Diluted
|
52,517,530
|
94,106,382
|
|
|
|
|
|
||
|
(1)
|
See
Note 1
to our audited consolidated financial statements for an explanation
of the method used to calculate basic and diluted net loss per
common share and the weighted-average number of shares used in the
computation of the per share amounts.
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
Actual
|
As Adjusted
(1)
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
Cash
|
$829,933
|
4,137,508
|
|
|
|
Total assets
|
8,227,378
|
11,534,953
|
|
|
|
Notes payable and non-convertible
debenture, net of debt discount
|
681,127
|
681,127
|
|
|
|
Convertible debentures, net of debt
discount
|
714,192
|
714,192
|
|
|
|
Contingent
consideration
|
1,685,917
|
1,685,917
|
|
|
|
Derivative liabilities –
embedded conversion features
|
319,674
|
319,674
|
|
|
|
Derivative liabilities –
warrants
|
164,070
|
164,070
|
|
|
|
Total stockholders’
equity
|
1,093,973
|
4,401,548
|
|
|
|
|
|
|
|
|
(1)
|
The as adjusted
balance sheet data gives effect to the sale of 25,666,669 shares of
common stock by us in this offering based on the combined public
offering of $0.15 per share of common stock and related warrants
and after deducting the placement agent fees and estimated offering
expenses payable by us.
|
|
||
|
|
|
|
|
|
RISK FACTORS
Investing in our common stock involves a high degree of risk. You
should carefully consider the risks described below, as well as the
other information in this prospectus, including our consolidated
financial statements and the related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” before deciding whether
to invest in our securities. The occurrence of any of the events or
developments described below could harm our business, financial
condition, operating results, and growth prospects. In such an
event, the market price of our common stock could decline, and you
may lose all or part of your investment. Additional risks and
uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations.
Risks Associated with Our Financial Condition
We have a history
of significant recurring losses and these losses may continue in
the future, therefore negatively impacting our ability to achieve
our business objectives.
As of December 31, 2016, we had an accumulated
deficit of approximately $29.1 million.
In addition, we incurred net losses of approximately $4.2
million and $13.7 million for the years ended December 31, 2015 and
2016, respectively. These losses may
continue in the future. We expect to continue to incur significant
sales and marketing, research and development, and general and
administrative expense. As a result, we will need to generate
significant revenue to achieve profitability, and we may never
achieve profitability. Revenue and profit, if any, will
depend upon various factors, including (1) growing the current
sales of our products, (2) the successful acquisition of additional
commercial products, (3) raising capital to implement our growth
strategy, (4) obtaining any applicable regulatory approvals of our
proposed product candidates, (5) the successful licensing and
commercialization of our proposed product candidates, and (6)
growth and development of our operations. We may not achieve our
business objectives and the failure to achieve such goals would
have an adverse impact on us.
We may require additional
financing to satisfy our current contractual obligations and
execute our business plan.
We have not been profitable since
inception. As of December 31, 2016, we had approximately
$0.8 million in cash. We had a
net loss of approximately $4.2 million and $13.7 million for the
years ended December 31, 2015 and 2016, respectively.
Additionally, sales of our existing
products are significantly below the levels necessary to achieve
positive cash flow. Although we expect that our existing
capital resources, revenue from sales of our products will be
sufficient to allow us to continue our operations, commence the
product development process and launch selected products through at
least January 1, 2018, no assurances can be given that we will not
need to raise additional capital to fund our business plan.
Although no assurances can be given, we currently plan to raise
additional capital through the sale of equity or debt securities.
If we are not able to raise sufficient capital, our continued
operations may be in jeopardy and we may be forced to cease
operations and sell or otherwise transfer all or substantially all
of our remaining assets.
If we issue
additional shares of common stock in the future, it will result in
the dilution of our existing shareholders.
Our Articles of Incorporation authorize the issuance of up to 292.5
million shares of common stock and up to 7.5 million shares of
preferred stock. The issuance of any such shares of common
stock may result in a
decrease in value of your investment. If we do issue any such
additional shares of common stock, such issuance also will cause a
reduction in the proportionate ownership and voting power of all
other shareholders. Further, any such issuance may result in a
change of control of our corporation.
If we issue additional debt securities, our operations could be
materially and negatively affected.
We have
historically funded our operations partly through the issuance of
debt securities. If we obtain additional debt financing, a
substantial portion of our operating cash flow may be dedicated to
the payment of principal and interest on such indebtedness, thus
limiting funds available for our business activities. If adequate
funds are not available, we may be required to delay, reduce the
scope of or eliminate our research and development programs, reduce
our commercialization efforts or curtail our operations. In
addition, we may be required to obtain funds through arrangements
with collaborative partners or others that may require us to
relinquish rights to technologies or products that we would
otherwise seek to develop or commercialize ourselves or license
rights to technologies or products on terms that are less favorable
to us than might otherwise be available.
Our ability to use our net operating loss carry-forwards and
certain other tax attributes may be limited.
We
have incurred substantial losses during our history. To the extent
that we continue to generate taxable losses, unused losses will
carry forward to offset future taxable income, if any, until such
unused losses expire. Under Sections 382 and 383 of the Internal
Revenue Code of 1986, as amended, if a corporation undergoes an
“ownership change,” generally defined as a greater than
50% change (by value) in its equity ownership over a three-year
period, the corporation’s ability to use its pre-change net
operating loss carry-forwards, or NOLs, and other pre-change tax
attributes (such as research tax credits) to offset its post-change
income may be limited. We may experience ownership changes in the
future as a result of subsequent shifts in our stock ownership. As
a result, if we earn net taxable income, our ability to use our
pre-change net operating loss carry-forwards to offset U.S. federal
taxable income may be subject to limitations, which could
potentially result in increased future tax liability to us. In
addition, at the state level, there may be periods during which the
use of NOLs is suspended or otherwise limited, which could
accelerate or permanently increase state taxes owed.
Risks Associated with Our Business Model
We have a short operating history and have not produced significant
revenue over a period of time. This makes it difficult
to evaluate our future prospects and increases the risk that we
will not be successful.
We have
a short operating history with our current business model, which
involves the commercialization, licensing and development of
over-the-counter healthcare products. While we have been
in existence for years, we only began our current business model in
2013 and have only generated approximately $1.0 million in net
revenue in 2014, approximately $736,000 in 2015 and approximately
$4.8 million in net revenue for the year ended December 31, 2016,
and our operations have not yet been profitable. No
assurances can be given that we will generate any significant
revenue in the future. As a result, we have a very limited
operating history for you to evaluate in assessing our future
prospects. Our operations have not produced significant
revenue over a period of time, and may not produce significant
revenue in the near term, which may harm our ability to obtain
additional financing and may require us to reduce or discontinue
our operations. You must consider our business and prospects
in light of the risks and difficulties we will encounter as an
early-stage company. We may not be able to successfully
address these risks and difficulties, which could significantly
harm our business, operating results and financial
condition.
The success of our business currently depends on the successful
continuous commercialization of our main products and these
products may not be successfully grown beyond their current
levels.
We
currently have a limited number of products for sale. The success
of our business currently depends on our ability, directly or
through a commercial partner, to successfully market and sell those
limited products outside the U.S. and to expand our retail and
online channels in the U.S.
Although we have commercial products that we can currently market
and sell, we will continue to seek to acquire or license other
products and we may not be successful in doing so.
We
currently have a limited number of products. We may not be
successful in marketing and commercializing these products to the
extent necessary to sustain our operations. In addition, we will
continue to seek to acquire or license non-prescription
pharmaceutical and consumer health products. The successful
consummation of these types of acquisitions and licensing
arrangements is subject to the negotiation of complex agreements
and contractual relationships and we may be unable to negotiate
such agreements or relationships on a timely basis, if at all, or
on terms acceptable to us.
If we fail to successfully
introduce new products, we may lose market
position.
New
products, product improvements, line extensions and new packaging
will be an important factor in our sales growth. If we fail to
identify emerging consumer trends, to maintain and improve the
competitiveness of our existing products or to successfully
introduce new products on a timely basis, we may lose market
position. Continued product development and marketing efforts have
all the risks inherent in the development of new products and line
extensions, including development delays, the failure of new
products and line extensions to achieve anticipated levels of
market acceptance and the cost of failed product
introductions.
Our sales and marketing function is currently very limited and we
currently rely on third parties to help us promote our products to
physicians in the U.S. and rely on our partners outside the U.S. We
will need to maintain the commercial partners we currently have and
attract others or be in a position to afford qualified or
experienced marketing and sales personnel for our
products.
We have
had only approximately $731,000 in net revenue of our products in
2015, and approximately $4.8 million during the year ended December
31, 2016. We will need to continue to develop strategies, partners
and distribution channels to promote and sell our
products.
We have no commercial manufacturing capacity and rely on
third-party contract manufacturers to produce commercial quantities
of our products.
We do
not have the facilities, equipment or personnel to manufacture
commercial quantities of our products and therefore must rely on
qualified third-party contract manufactures with appropriate
facilities and equipment to contract manufacture commercial
quantities of products. These third-party contract manufacturers
are also subject to current good manufacturing practice, or cGMP
regulations, which impose extensive procedural and documentation
requirements. Any performance failure on the part of our contract
manufacturers could delay commercialization of any approved
products, depriving us of potential product revenue.
Failure
by our contract manufacturers to achieve and maintain high
manufacturing standards could result in patient injury or death,
product recalls or withdrawals, delays or failures in testing or
delivery, cost overruns or other problems that could materially
adversely affect our business. Contract manufacturers may encounter
difficulties involving production yields, quality control and
quality assurance. These manufacturers are subject to ongoing
periodic unannounced inspection by the FDA and corresponding state
and foreign agencies to ensure strict compliance with cGMP and
other applicable government regulations; however, beyond
contractual remedies that may be available to us, we do not have
control over third-party manufacturers’ compliance with these
regulations and standards.
If for
some reason our contract manufacturers cannot perform as agreed, we
may be required to replace them. Although we believe there are a
number of potential replacements, we may incur added costs and
delays in identifying and qualifying any such
replacements.
The
inability of a manufacturer to ship orders of our products in a
timely manner or to meet quality standards could cause us to miss
the delivery date requirements of our customers for those items,
which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could
have a material adverse effect as our revenue would decrease and we
would incur net losses as a result of sales of the product, if any
sales could be made.
We are
also dependent on certain third parties for the supply of the raw
materials necessary to develop and manufacture our products,
including the active and inactive pharmaceutical ingredients used
in our products. We are required to identify the supplier of all
the raw materials for our products in any drug applications that we
file with the FDA and all FDA-approved products that we acquire
from others. If raw materials for a particular product become
unavailable from an approved supplier specified in a drug
application, we would be required to qualify a substitute supplier
with the FDA, which would likely delay or interrupt manufacturing
of the affected product. To the extent practicable, we attempt to
identify more than one supplier in each drug application. However,
some raw materials are available only from a single source and, in
some of our drug applications, only one supplier of raw materials
has been identified, even in instances where multiple sources
exist.
In
addition, we obtain some of our raw materials and products from
foreign suppliers. Arrangements with international raw material
suppliers are subject to, among other things, FDA regulation;
various import duties, foreign currency risk and other government
clearances. Acts of governments outside the U.S. may affect the
price or availability of raw materials needed for the development
or manufacture of our products. In addition, any changes in patent
laws in jurisdictions outside the U.S. may make it increasingly
difficult to obtain raw materials for research and development
prior to the expiration of the applicable U.S. or foreign
patents.
Our U.S. business could be adversely affected by changes in the
U.S. presidential administration.
A new
U.S. presidential administration came to power in January 2017 and
President Trump has publicly stated that he will take certain
efforts to impose importation tariffs from certain countries such
as China and Mexico which could affect the cost of certain of our
product components. In addition, the Trump Administration has and
will appoint and employ many new secretaries, directors and the
like into positions of authority in the U.S. Federal government
dealing with the pharmaceutical and healthcare industries that may
potentially have a negative impact on the prices and the regulatory
pathways for certain pharmaceuticals, nutritional supplements and
health care products such as those developed, marketed and sold by
the Company. Such changes in the regulatory pathways could
adversely affect and or delay the ability of the Company to market
and sell its products in the U.S.
The business that we conduct outside the United States may be
adversely affected by international risk and
uncertainties.
Although our
operations are based in the United States, we conduct business
outside the United States and expect to continue to do so in the
future. In addition, we plan to seek approvals to sell our products
in foreign countries. Any business that we conduct outside the
United States will be subject to additional risks that may
materially adversely affect our ability to conduct business in
international markets, including:
●
potentially
reduced protection for intellectual property rights;
●
unexpected changes
in tariffs, trade barriers and regulatory
requirements;
●
economic weakness,
including inflation or political instability in particular foreign
economies and markets;
●
workforce
uncertainty in countries where labor unrest is more common than in
the United States;
●
production
shortages resulting from any events affecting a product candidate
and/or finished drug product supply or manufacturing capabilities
abroad;
●
business
interruptions resulting from geo-political actions, including war
and terrorism or natural disasters, including earthquakes,
hurricanes, typhoons, floods and fires; and
●
failure to comply
with Office of Foreign Asset Control rules and regulations and the
Foreign Corrupt Practices Act, or FCPA.
These
factors or any combination of these factors may adversely affect
our revenue or our overall financial
performance.
Acquisitions involve risks that could result in a reduction of our
operating results, cash flows and liquidity.
We have
made and in the future may continue to make strategic acquisitions
including licenses of third party products. However, we may not be
able to identify suitable acquisition and licensing opportunities.
We may pay for acquisitions and licenses with our common stock or
with convertible securities, which may dilute your investment in
our common stock, or we may decide to pursue acquisitions and
licenses that investors may not agree with. In connection with one
of our latest acquisitions, we have also agreed to substantial
earn-out arrangements. To the extent we defer the payment of the
purchase price for any acquisition or license through a cash
earn-out arrangement, it will reduce our cash flows in subsequent
periods. In addition, acquisitions or licenses may expose us to
operational challenges and risks, including:
●
the
ability to profitably manage acquired businesses or successfully
integrate the acquired business’ operations and financial
reporting and accounting control systems into our
business;
●
increased
indebtedness and contingent purchase price obligations associated
with an acquisition;
●
the
ability to fund cash flow shortages that may occur if anticipated
revenue is not realized or is delayed, whether by general economic
or market conditions or unforeseen internal
difficulties;
●
the
availability of funding sufficient to meet increased capital
needs;
●
diversion of
management’s attention; and
●
the
ability to retain or hire qualified personnel required for expanded
operations.
Completing
acquisitions may require significant management time and financial
resources. In addition, acquired companies may have
liabilities that we failed, or were unable, to discover in the
course of performing due diligence investigations. We cannot assure
you that the indemnification granted to us by sellers of acquired
companies will be sufficient in amount, scope or duration to fully
offset the possible liabilities associated with businesses or
properties we assume upon consummation of an acquisition. We may
learn additional information about our acquired businesses that
materially adversely affect us, such as unknown or contingent
liabilities and liabilities related to compliance with applicable
laws. Any such liabilities, individually or in the aggregate, could
have a material adverse effect on our business.
Failure
to successfully manage the operational challenges and risks
associated with, or resulting from, acquisitions could adversely
affect our results of operations, cash flows and liquidity.
Borrowings or issuances of convertible securities associated with
these acquisitions may also result in higher levels of
indebtedness, which could impact our ability to service our debt
within the scheduled repayment terms.
We will need to expand our operations and increase the size of the
Company, and we may experience difficulties in managing
growth.
As we
increase the number of products we own or have the right to sell,
we will need to increase our sales, marketing, product development
and scientific and administrative headcount to manage these
programs. In addition, to meet our obligations as a public company,
we will need to increase our general and administrative
capabilities. Our management, personnel and systems currently in
place may not be adequate to support this future growth. Our need
to effectively manage our operations, growth and various projects
requires that we:
●
successfully
attract and recruit new employees with the expertise and experience
we will require;
●
successfully grow
our marketing, distribution and sales infrastructure;
and
●
continue to
improve our operational, manufacturing, financial and management
controls, reporting systems and procedures.
If we
are unable to successfully manage this growth and increased
complexity of operations, our business may be adversely
affected.
If we fail to attract and keep senior management and key scientific
personnel, we may be unable to successfully operate our
business.
Our
success depends to a significant extent upon the continued services
of Dr. Bassam Damaj, our President and Chief Executive Officer. Dr.
Damaj has overseen our current business strategy since inception
and provides leadership for our growth and operations strategy as
well as being our sole employee with any significant scientific or
pharmaceutical experience. Loss of the services of Dr. Damaj would
have a material adverse effect on our growth, revenue and
prospective business. The loss of any of our key personnel, or the
inability to attract and retain qualified personnel, may
significantly delay or prevent the achievement of our research,
development or business objectives and could materially adversely
affect our business, financial condition and results of
operations.
Any
employment agreement we enter into will not ensure the retention of
the employee who is a party to the agreement. In addition, we have
only limited ability to prevent former employees from competing
with us. Furthermore, our future success will also depend in part
on the continued service of our key scientific and management
personnel and our ability to identify, hire and retain additional
personnel. We experience intense competition for qualified
personnel and may be unable to attract and retain the personnel
necessary for the development of our business. Moreover,
competition for personnel with the scientific and technical skills
that we seek is extremely high and is likely to remain high.
Because of this competition, our compensation costs may increase
significantly. We presently have no scientific
employees.
We may not be able to continue to pay consultants, vendors and
independent contractors through the issuance of equity instruments
in order to conserve cash.
We have
paid numerous consultants and vendor fees through the issuance of
equity instruments in order to conserve our cash, however there can
be no assurance that we, our vendors, consultants or independent
contractors, current or future, will continue to agree to this
arrangement. As a result, we may be asked to spent more cash for
the same services, or we may not be able to retain the same
consultants, vendors, etc.
We face significant competition and have limited resources compared
to our competitors.
We are
engaged in a highly competitive industry. We can expect competition
from numerous companies, including large international enterprises
and others entering the market for products similar to ours. Most
of these companies have greater research and development,
manufacturing, patent, legal, marketing, financial, technological,
personnel and managerial resources. Acquisitions of competing
companies by large pharmaceutical or healthcare companies could
further enhance such competitors’ financial, marketing and
other resources. Competitors may complete clinical trials, obtain
regulatory approvals and commence commercial sales of their
products before we could enjoy a significant competitive advantage.
Products developed by our competitors may be more effective than
our product candidates.
Competition and technological change may make our product
candidates and technologies less attractive or
obsolete.
We
compete with established pharmaceutical and biotechnology companies
that are pursuing other products for the same markets we are
pursuing and that have greater financial and other resources. Other
companies may succeed in developing or acquiring products earlier
than us, developing products that are more effective than our
products or achieve greater market acceptance. As these
companies develop their products, they may develop competitive
positions that may prevent, make futile, or limit our product
commercialization efforts, which would result in a decrease in the
revenue we would be able to derive from the sale of any
products.
Risks Relating to Intellectual Property
If we fail to protect our intellectual property rights, our ability
to pursue the development of our technologies and products would be
negatively affected.
Our
success will depend in part on our ability to obtain patents and
maintain adequate protection of our technologies and products. If
we do not adequately protect our intellectual property, competitors
may be able to use our technologies to produce and market products
in direct competition with us and erode our competitive advantage.
Some foreign countries lack rules and methods for defending
intellectual property rights and do not protect proprietary rights
to the same extent as the United States. Many companies have had
difficulty protecting their proprietary rights in these foreign
countries. We may not be able to prevent misappropriation of our
proprietary rights.
We have
received, and are currently seeking, patent protection for numerous
compounds and methods of use. However, the patent process is
subject to numerous risks and uncertainties, and there can be no
assurance that we will be successful in protecting our products by
obtaining and defending patents. These risks and uncertainties
include the following: patents that may be issued or licensed may
be challenged, invalidated or circumvented, or otherwise may not
provide any competitive advantage; our competitors, many of which
have substantially greater resources than us and many of which have
made significant investments in competing technologies, may seek,
or may already have obtained, patents that will limit, interfere
with or eliminate our ability to make, use and sell our potential
products either in the United States or in international markets
and countries other than the United States may have less
restrictive patent laws than those upheld by United States courts,
allowing foreign competitors the ability to exploit these laws to
create, develop and market competing products.
Moreover, any
patents issued to us may not provide us with meaningful protection
or others may challenge, circumvent or narrow our patents. Third
parties may also independently develop products similar to our
products, duplicate our unpatented products or design around any
patents on products we develop. Additionally, extensive time is
required for development, testing and regulatory review of a
potential product. While extensions of patent term due to
regulatory delays may be available, it is possible that, before any
of our products candidates can be commercialized, any related
patent, even with an extension, may expire or remain in force for
only a short period following commercialization, thereby reducing
any advantages of the patent.
In
addition, the United States Patent and Trademark Office (the
"PTO") and patent offices
in other jurisdictions have often required that patent applications
concerning pharmaceutical and/or biotechnology-related inventions
be limited or narrowed substantially to cover only the specific
innovations exemplified in the patent application, thereby limiting
the scope of protection against competitive challenges. Thus, even
if we or our licensors are able to obtain patents, the patents may
be substantially narrower than anticipated.
Our
success depends on our patents, patent applications that may be
licensed exclusively to us and other patents to which we may obtain
assignment or licenses. We may not be aware, however, of all
patents, published applications or published literature that may
affect our business either by blocking our ability to commercialize
our products, by preventing the patentability of our products to us
or our licensors or by covering the same or similar technologies
that may invalidate our patents, limit the scope of our future
patent claims or adversely affect our ability to market our
products.
In
addition to patents, we rely on a combination of trade secrets,
confidentiality, nondisclosure and other contractual provisions and
security measures to protect our confidential and proprietary
information. These measures may not adequately protect our trade
secrets or other proprietary information. If they do not adequately
protect our rights, third parties could use our technology and we
could lose any competitive advantage we may have. In addition,
others may independently develop similar proprietary information or
techniques or otherwise gain access to our trade secrets, which
could impair any competitive advantage we may have.
Patent
protection and other intellectual property protection are crucial
to the success of our business and prospects, and there is a
substantial risk that such protections will prove
inadequate.
We may be involved in lawsuits to protect or enforce our patents,
which could be expensive and time consuming.
The
pharmaceutical industry has been characterized by extensive
litigation regarding patents and other intellectual property
rights, and companies have employed intellectual property
litigation to gain a competitive advantage. We may become subject
to infringement claims or litigation arising out of patents and
pending applications of our competitors or additional interference
proceedings declared by the PTO to determine the priority of
inventions. The defense and prosecution of intellectual property
suits, PTO proceedings and related legal and administrative
proceedings are costly and time-consuming to pursue and their
outcome is uncertain. Litigation may be necessary to enforce our
issued patents, to protect our trade secrets and know-how, or to
determine the enforceability, scope and validity of the proprietary
rights of others. An adverse determination in litigation or
interference proceedings to which we may become a party could
subject us to significant liabilities, require us to obtain
licenses from third parties or restrict or prevent us from selling
our products in certain markets. Although patent and intellectual
property disputes might be settled through licensing or similar
arrangements, the costs associated with such arrangements may be
substantial and could include our paying large fixed payments and
ongoing royalties. Furthermore, the necessary licenses may not be
available on satisfactory terms or at all.
Competitors may
infringe our patents and we may file infringement claims to counter
infringement or unauthorized use. This can be expensive,
particularly for a company of our size, and time-consuming. In
addition, in an infringement proceeding, a court may decide that a
patent of ours is not valid or is unenforceable, or may refuse to
stop the other party from using the technology at issue on the
grounds that our patents do not cover its technology. An adverse
determination of any litigation or defense proceedings could put
one or more of our patents at risk of being invalidated or
interpreted narrowly.
Also, a
third party may assert that our patents are invalid and/or
unenforceable. There are no unresolved communications, allegations,
complaints or threats of litigation related to the possibility that
our patents are invalid or unenforceable. Any litigation or claims
against us, whether merited or not, may result in substantial
costs, place a significant strain on our financial resources,
divert the attention of management and harm our reputation. An
adverse decision in litigation could result in inadequate
protection for our product candidates and/or reduce the value of
any license agreements we have with third parties.
Interference
proceedings brought before the PTO may be necessary to determine
priority of invention with respect to our patents or patent
applications. During an interference proceeding, it may be
determined that we do not have priority of invention for one or
more aspects in our patents or patent applications and could result
in the invalidation in part or whole of a patent or could put a
patent application at risk of not issuing. Even if successful, an
interference proceeding may result in substantial costs and
distraction to our management.
Furthermore,
because of the substantial amount of discovery required in
connection with intellectual property litigation or interference
proceedings, there is a risk that some of our confidential
information could be compromised by disclosure. In addition, there
could be public announcements of the results of hearings, motions
or other interim proceedings or developments. If investors perceive
these results to be negative, the price of our common stock could
be adversely affected.
If we infringe the rights of third parties we could be prevented
from selling products, forced to pay damages and defend against
litigation.
If our
products, methods, processes and other technologies infringe the
proprietary rights of other parties, we could incur substantial
costs and we may have to: obtain licenses, which may not be
available on commercially reasonable terms, if at all; abandon an
infringing product candidate; redesign our products or processes to
avoid infringement; stop using the subject matter claimed in the
patents held by others; pay damages; and/or defend litigation or
administrative proceedings which may be costly whether we win or
lose, and which could result in a substantial diversion of our
financial and management resources.
We may be subject to potential product liability and other claims,
creating risks and expense.
We are
also exposed to potential product liability risks inherent in the
development, testing, manufacturing, marketing and sale of human
therapeutic products. Product liability insurance for the
pharmaceutical industry is extremely expensive, difficult to obtain
and may not be available on acceptable terms, if at all. We have no
guarantee that the coverage limits of such insurance policies will
be adequate. A successful claim against us, which is in excess of
our insurance coverage, could have a material adverse effect upon
us and on our financial condition.
Changes in trends in the pharmaceutical and biotechnology
industries, including difficult market conditions, could adversely
affect our operating results.
The
biotechnology, pharmaceutical and medical device industries
generally, and drug discovery and development companies more
specifically, are subject to increasingly rapid technological
changes. Our competitors and others might develop technologies or
products that are more effective or commercially attractive than
our current or future technologies or products or that render our
technologies or products less competitive or obsolete. If
competitors introduce superior technologies or products and we
cannot make enhancements to our technologies or products to remain
competitive, our competitive position and, in turn, our business,
revenue and financial condition, would be materially and adversely
affected.
We may encounter new FDA rules, regulations and laws that could
impede our ability to sell our OTC products.
The FDA
regulates most of our OTC or non-prescription drugs using its OTC
Monograph, which when final, is published in the Code of Federal
Regulations at 21 CFR Parts 330-358. Such of our products that meet
each of these conditions established in the OTC Monograph
regulations, as well as all other regulations, may be marketed
without prior approval by the FDA. If the FDA changes its OTC
Monograph regulatory process, it may subject the Company to
additional FDA rules, regulations and laws that may be more time
consuming and costly to us and could negatively affect our
business.
We may never receive ANDA approval for our product
Fluticare™, which we are
relying upon to generate a significant amount of future
revenue.
Because
of the unpredictability of the FDA review process for generic
drugs, the ANDA filed for our product Fluticare™ may never be
approved by the FDA for a variety of reasons. If such
ANDA is not approved, we will not be able to realize revenue from
the sale of this drug and our revenue will not grow as quickly as
we anticipate.
If the Fluticare™
ANDA is
approved, we have no assurances as to the additional costs
associated with launching our new product, and may need to raise
additional capital in the future to fund such
efforts.
Since
approval is dependent upon a complex FDA review and regulatory
process, should we receive approval for our product Fluticare™, it is unclear the extent of the
additional work and costs associated with launching the new
product. There can be no assurances to the time frame in which we
could get approval, and so no assurances as to the timing and
extent of the possible additional expenses. As a result, additional
funding may be required to cover such expenses.
Risks Related to Ownership of our Common Stock
Sales of additional shares of our common stock could cause the
price of our common stock to decline.
As of
March 15, 2017, we had 124,810,756 shares of common stock
outstanding. A substantial number of those shares are restricted
securities and such shares may be sold under Rule 144 of the
Securities Act of 1933, as amended ("Securities Act"), subject to any
applicable holding period. As such, sales of substantial
amounts of our common stock in the public or private markets, or
the availability of such shares for sale by us, including the
issuance of common stock upon conversion and/or exercise of
outstanding convertible securities, warrants and options, could
adversely affect the price of our common stock. We may sell shares
or securities convertible into shares of common stock, which could
adversely affect the market price of shares of our common
stock. In addition, the sale of a substantial number of
shares of our common stock, or anticipation of such sales, could
make it more difficult for us to obtain future financing. To the
extent the trading price of our common stock at the time of
exercise of any of our outstanding options or warrants exceeds
their exercise price, such exercise will have a dilutive effect on
our stockholders.
The
sale of certain shares held by the selling stockholder may have an
adverse effect on the price of our stock, and such effect could be
material.
This
registration statement contains two forms of prospectus. One form
of prospectus, which we refer to as the primary public offering
prospectus, is to be used in connection with a public offering of
25,666,669 shares of our common stock, Series A Warrants and Series
B Warrants (and the shares of common stock issuable upon exercise
of the Warrants). The other form of prospectus, which we refer to
as the resale prospectus, is to be used in connection with the
potential resale by a selling stockholder of an aggregate of
25,617,592 shares of our common stock upon the effectiveness of the
registration statement of which such prospectus forms a part. In
the event of a sale of the shares of common stock offered by the
selling stockholder, the price of our stock could decline, and such
decline could be material.
If we
default on our Convertible Notes, or if such Convertible Notes are
voluntarily converted, it could result in a significant dilution of
stockholders’ position.
As of March 15, 2017, we have issued and
outstanding convertible promissory notes in the aggregate principal
and interest amount of approximately $1.3 million (the
“Convertible
Notes”). Upon the
occurrence of an Event of Default, as such term is defined in the
Convertible Notes, a “Default Amount” equal to the sum
of (i) the outstanding principal amount, together with accrued
interest due thereon through the date of payment, and (ii) an
additional amount equal to the outstanding principal amount is
payable, either in cash or shares of common stock. Assuming the
Convertible Notes are in default on their maturity date, we may be
required to issue up to 8,738,654 shares of our common stock to the
holders of the Convertible Notes.
The holders of our Convertible Notes
also have the right to convert such Convertible Notes into common
stock at $0.25 per share. In the event the holders of such
Convertible Notes elect to convert their Convertible Notes into
common stock, an additional 5.1 million shares of our common stock
will be issued, resulting in substantial dilution to existing
stockholders. In the event such holders elect to sell their common
stock issued upon conversion of such Convertible Notes, the price
of our common stock may be negatively and materially
impacted.
The market price for our common stock may be volatile and your
investment in our common stock could decline in value.
The
stock market in general has experienced extreme price and volume
fluctuations. The market prices of the securities of biotechnology
and specialty pharmaceutical companies, particularly companies like
ours with limited product revenue, have been highly volatile and
may continue to be highly volatile in the future. This volatility
has often been unrelated to the operating performance of particular
companies. The following factors, in addition to other risk factors
described in this section, may have a significant impact on the
market price of our common stock:
●
announcements of
technological innovations or new products by us or our
competitors;
●
announcement of
FDA approval or disapproval of our product candidates or other
product-related actions;
●
developments
involving our discovery efforts and clinical trials;
●
developments or
disputes concerning patents or proprietary rights, including
announcements of infringement, interference or other litigation
against us or our potential licensees;
●
developments
involving our efforts to commercialize our products, including
developments impacting the timing of
commercialization;
●
announcements
concerning our competitors or the biotechnology, pharmaceutical or
drug delivery industry in general;
●
public concerns as
to the safety or efficacy of our products or our competitors’
products;
●
changes in
government regulation of the pharmaceutical or medical
industry;
●
actual or
anticipated fluctuations in our operating results;
●
changes in
financial estimates or recommendations by securities
analysts;
●
developments
involving corporate collaborators, if any;
●
changes in
accounting principles; and
●
the loss of any of
our key management personnel.
In the
past, securities class action litigation has often been brought
against companies that experience volatility in the market price of
their securities. Whether meritorious or not, litigation brought
against us could result in substantial costs and a diversion of
management’s attention and resources, which could adversely
affect our business, operating results and financial
condition.
We do not anticipate paying dividends on our common stock and,
accordingly, shareholders must rely on stock appreciation for any
return on their investment.
We have
never declared or paid cash dividends on our common stock and do
not expect to do so in the foreseeable future. The declaration of
dividends is subject to the discretion of our board of directors
and will depend on various factors, including our operating
results, financial condition, future prospects and any other
factors deemed relevant by our board of directors. You should not
rely on an investment in our Company if you require dividend income
from your investment in our Company. The success of your investment
will likely depend entirely upon any future appreciation of the
market price of our common stock, which is uncertain and
unpredictable. There is no guarantee that our common stock will
appreciate in value.
Nevada law and provisions in our charter documents may delay or
prevent a potential takeover bid that would be beneficial to common
stockholders.
Our
articles of incorporation and our bylaws contain provisions that
may enable our board of directors to discourage, delay or prevent a
change in our ownership or in our management. In addition, these
provisions could limit the price that investors would be willing to
pay in the future for shares of our common stock. These provisions
include the following:
●
our board of
directors may increase the size of the board of directors up to
nine directors and fill vacancies on the board of directors;
and
●
our board of
directors is expressly authorized to make, alter or repeal our
bylaws.
In
addition, Chapter 78 of the Nevada Revised Statutes also contains
provisions that may enable our board of directors to discourage,
delay or prevent a change in our ownership or in our management.
The combinations with interested stockholders provisions of the
Nevada Revised Statutes, subject to certain exceptions, restrict
the ability of our Company to engage in any combination with an
interested stockholder for three years after the date a stockholder
becomes an interested stockholder, unless, prior to the stockholder
becoming an interested stockholder, our board of directors gave
approval for the combination or the acquisition of shares which
caused the stockholder to become an interested stockholder. If the
combination or acquisition was not so approved prior to the
stockholder becoming an interested stockholder, the interested
stockholder may effect a combination after the three-year period
only if either the stockholder receives approval from a majority of
the outstanding voting shares, excluding shares beneficially owned
by the interested stockholder or its affiliates or associates, or
the consideration to be paid by the interested stockholder exceeds
certain thresholds set forth in the statute. For purposes of the
foregoing provisions, "interested stockholder" means either a
person, other than our Company or our subsidiaries, who directly or
indirectly beneficially owns 10% or more of the voting power of our
outstanding voting shares, or one of our affiliates or associates
which at any time within three years immediately before the date in
question directly or indirectly beneficially owned 10% or more of
the voting power of our outstanding shares.
In
addition, the acquisition of controlling interest provisions of the
Nevada Revised Statutes provide that a stockholder acquiring a
controlling interest in our Company, and those acting in
association with that stockholder, obtain no voting rights in the
control shares unless voting rights are conferred by stockholders
holding a majority of our voting power (exclusive of the control
shares). For purposes of these provisions, "controlling interest"
means the ownership of outstanding voting shares enabling the
acquiring person to exercise (either directly or indirectly or in
association with others) one-fifth or more but less than one-third,
one-third or more but less than a majority, or a majority or more
of the voting power in the election of our directors, and "control
shares" means those shares the stockholder acquired on the date it
obtained a controlling interest or in the 90-day period preceding
that date.
Accordingly, the
provisions could require multiple votes with respect to voting
rights in share acquisitions effected in separate stages, and the
effect of these provisions may be to discourage, delay or prevent a
change in control of our Company.
The rights of the holders of common stock may be impaired by the
potential issuance of preferred stock.
Our
articles of incorporation give our board of directors the right to
create new series of preferred stock. As a result, the board of
directors may, without stockholder approval, issue preferred stock
with voting, dividend, conversion, liquidation or other rights,
which could adversely affect the voting power and equity interest
of the holders of common stock. Preferred stock, which could be
issued with the right to more than one vote per share, could be
utilized as a method of discouraging, delaying or preventing a
change of control. The possible impact on takeover attempts could
adversely affect the price of our common stock. Although we have no
present intention to issue any shares of preferred stock or to
create a series of preferred stock, we may issue such shares in the
future.
Our common stock is subject to the "penny stock" rules of the
Securities and Exchange Commission and the trading market in our
securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our
stock.
The
Securities and Exchange Commission (the “SEC”) has adopted Rule 15g-9
which establishes the definition of a "penny stock," for the
purposes relevant to us, as any equity security that has a market
price of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules
require:
●
that a broker or
dealer approve a person's account for transactions in penny stocks;
and
●
the broker or
dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In
order to approve a person's account for transactions in penny
stocks, the broker or dealer must:
●
obtain financial
information and investment experience objectives of the person;
and
●
make a reasonable
determination that the transactions in penny stocks are suitable
for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form:
●
sets forth
the basis on which the broker or dealer made the suitability
determination; and
●
that the
broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Generally, brokers
may be less willing to execute transactions in securities subject
to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the
market value of our stock.
Disclosure also has
to be made about the risks of investing in penny stocks in both
public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered
representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in
penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny
stocks.
FINRA sales
practice requirements may also limit a shareholder’s ability
to buy and sell our stock.
In addition to the
“penny stock” rules described above, the Financial
Industry Regulatory Authority (“FINRA”) has adopted rules that
require that in recommending an investment to a customer, a
broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending
speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain
information about the customer’s financial status, tax
status, investment objectives and other information. Under
interpretations of these rules, FINRA believes that there is a high
probability that speculative low priced securities will not be
suitable for at least some customers. The FINRA requirements make
it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy
and sell our stock and have an adverse effect on the market for our
shares.
Risks
Related to this Offering
Purchasers in this offering will experience
immediate and substantial dilution in the book value of their
investment.
If we successfully sell all
securities registered by this offering and investors exercise all
Warrants included in this offering, new investors will own
approximately 38.2% of our outstanding common stock. In
addition, we have issued options, warrants or other derivative
securities to acquire common stock at prices below the public
offering price. To the extent outstanding options, warrants or
other derivative securities are ultimately exercised or converted,
or if we issue restricted stock to our employees under our equity
incentive plans, there will be further dilution to investors who
purchase shares in this offering. In addition, if we issue
additional equity securities or derivative securities, investors
purchasing shares in this offering will experience additional
dilution. For a further description of the dilution that you will
experience immediately after this offering, see “Dilution.”
We may allocate the net proceeds from this offering in ways that
differ from our estimates based on our current plans and
assumptions discussed in the section titled "Use of Proceeds" and
with which you may not agree.
The allocation of net proceeds of the offering set
forth in the “Use of
Proceeds” section of this
prospectus represents our estimates based upon our current plans
and assumptions regarding industry and general economic conditions,
our future revenue and expenditures. The amounts and timing of our
actual expenditures will depend on numerous factors, including
market conditions, cash generated by our operations, business
developments and related rate of growth. We may find it necessary
or advisable to use portions of the proceeds from this offering for
other purposes. Circumstances that may give rise to a change in the
use of proceeds and the alternate purposes for which the proceeds
may be used are discussed in the section in this prospectus
entitled “Use of
Proceeds”. You may not
have an opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use our
proceeds. As a result, you and other stockholders may not agree
with our decisions. See “Use of
Proceeds” for additional
information.
The Warrants are speculative in nature.
The
Warrants offered by us in this offering do not confer any rights of
ownership of shares of common stock on its holders, such as voting
rights or the right to receive dividends, but only represent the
right to acquire shares of common stock at a fixed price for a
limited period of time. Specifically, commencing on the date of
issuance, holders of the Warrants may exercise their right to
acquire the shares of common stock and pay an exercise price of
$0.15 per share, with respect to the Series A Warrants and an
exercise price of $0.15 per share with respect to the Series B
Warrants subject to adjustment upon certain events, prior to five
years from the date of issuance for the Series A Warrants and one
year from the date of issuance for the Series B Warrants, after
which date any unexercised Warrants will expire and have no further
value.
There is no established public trading market for the Warrants
offered in this offering and we do not intend to apply to list the
Warrants on a securities exchange or automated quotation
system.
There
is no established public trading market for the Warrants offered in
this offering. We do not intend to apply to list the Warrants on a
securities exchange or automated quotation system. Without an
active trading market, the liquidity of Warrants will be
limited.
SPECIAL NOTE REGARDING
FORWARD-LOOKING INFORMATION
This prospectus includes forward-looking statements. All
statements, other than statements of historical fact, contained in
this prospectus, including statements regarding our future
operating results, financial position and cash flows, our business
strategy and plans and our objectives for future operations, are
forward-looking statements. In some cases, you can identify
forward-looking statements by terms such as “believe,”
“may,” “will,” “estimate,”
“continue,” “anticipate,”
“plan,” “target,” “project,”
“contemplate,” “predict,”
“potential,” “would,” “could,”
“should,” “intend” and “expect”
or the negative of these terms or other similar
expressions.
We have based these forward-looking statements
largely on our current expectations and projections about future
events and financial trends that we believe may affect our
financial condition, operating results, business strategy,
short-term and long-term business operations and objectives. These
forward-looking statements speak only as of the date of this
prospectus and are subject to a number of risks, uncertainties and
assumptions, including those described under sections in this
prospectus entitled “Risk
Factors” and
“Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and elsewhere
in this prospectus. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors and uncertainties
may emerge from time to time. It is not possible for our management
to predict all risk factors and uncertainties, nor can we assess
the impact of all factors on our business or the extent to which
any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements we may make. In light of these risks, uncertainties and
assumptions, the future events and trends discussed in this
prospectus may not occur and actual results could differ materially
and adversely from those anticipated or implied in the
forward-looking statements.
You
should not rely upon forward-looking statements as predictions of
future events. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot
guarantee that the future results, levels of activity, performance
and events and circumstances reflected in the forward-looking
statements will be achieved or occur. Moreover, neither we nor any
other person assume responsibility for the accuracy and
completeness of the forward-looking statements. Except as required
by applicable law, we undertake no obligation to update publicly or
revise any forward-looking statements for any reason after the date
of this prospectus to conform these statements to actual results or
to changes in our expectations, whether as a result of any new
information, future events, changed circumstances or
otherwise.
This
prospectus contains estimates and statistical data that we obtained
from industry publications and reports. These publications
generally indicate that they have obtained their information from
sources believed to be reliable, but do not guarantee the accuracy
and completeness of their information, and you are cautioned not to
give undue weight to such estimates. Although we believe the
publications are reliable, we have not independently verified their
data. In addition, projections, assumptions and estimates of our
future performance and the future performance of the markets in
which we operate are necessarily subject to a high degree of
uncertainty and risk.
USE OF
PROCEEDS
We
estimate that the net proceeds to us from the sale of the
securities that we are offering will be approximately $3.3 million,
based upon the public offering price of $0.15 per share and
associated Warrants, after deducting placement agent fees and
estimated offering expenses payable by us and excluding any
proceeds from the potential exercise of Warrants offered hereby, if
any.
The principal purposes of this offering are to raise additional
capital, and increase our public float. We currently intend to use
the net proceeds we receive from this offering for the commercial
launch of FlutiCare™, which we expect will be approved by the
FDA in 2017 allowing us to launch FlutiCare™ in the second
half of 2017, working capital and general corporate purposes,
including sales and marketing activities, product development and
capital expenditures. We may also use a portion of the net proceeds
for the acquisition of, or investment in, technologies, solutions
or businesses. However, we have no present binding commitments or
agreements to enter into any acquisitions or investments. As of
March 15, 2017, we had convertible notes with principal and
interest balances totaling approximately $1.3 million. As a result
of this offering, the holders of such notes (i) may elect to
convert all principal and accrued interest into shares of common
stock at a conversion price equal to $0.135, which represents a 10%
discount to the public offering price of the shares of common stock
in this offering; or (ii) shall receive a prepayment of 110% of
outstanding principal and 110% of all accrued unpaid interest
directly from the proceeds of this offering. As a result, in the
event all holders of such notes do not elect to exercise their
conversion option, we will be required to prepayment such notes and
approximately $1.4 million of the proceeds will be used to pay such
notes, resulting in net proceeds to us of approximately $1.9
million. In addition, we have approximately $1.0 million in other
outstanding note payables that, under their terms, require us to
make monthly payments or payments, in full, upon their maturity in
October and November 2017. We may be required to use a portion of
the net proceeds to pay off such debt. Pending these uses, we
intend to invest the net proceeds from this offering in short-term,
investment-grade interest-bearing securities such as money market
accounts, certificates of deposit, commercial paper and guaranteed
obligations of the U.S. government.
The
amounts and timing of our actual expenditure, including expenditure
related to sales and marketing and product development will depend
on numerous factors, including the status of our product
development efforts, our sales and marketing activities, the amount
of cash generated or used by our operations, competitive pressures
and other factors described under “Risk Factors” in
this prospectus. We therefore cannot estimate the amount of net
proceeds to be used for the purposes described above. As a result,
we may find it necessary or advisable to use the net proceeds for
other purposes. Our management will have broad discretion in the
application of the net proceeds, and investors will be relying on
our judgment regarding the application of the net proceeds from
this offering.
PRICE RANGE FOR OUR COMMON
EQUITY AND RELATED STOCKHOLDERS MATTERS
Our
common stock is quoted on the OTCQB Marketplace under the symbol
“INNV.” The approximate last closing bid price of our
common stock was $0.18 on March 15, 2017.
The
high and low bid prices of our common stock for the periods
indicated are set forth below. These prices do not
reflect retail mark-up, markdown or commissions. Such OTCQB
quotations reflect inter-dealer prices, without markup, markdown or
commissions and, particularly because our common stock is traded
infrequently, may not necessarily represent actual transactions or
a liquid trading market.
|
|
High
|
Low
|
|
Year
Ending December 31, 2017
|
|
|
|
First quarter
ending March 31, 2017 (through March 15, 2017)
|
$0.39
|
$0.18
|
|
|
|
|
|
Year
Ended December 31, 2016
|
|
|
|
First quarter ended
March 31, 2016
|
$0.10
|
$0.03
|
|
Second quarter
ended June 30, 2016
|
$0.37
|
$0.05
|
|
Third quarter ended
September 30, 2016
|
$0.66
|
$0.21
|
|
Fourth quarter
ended December 31, 2016
|
$0.33
|
$0.16
|
|
|
|
|
|
Year
Ended December 31, 2015
|
|
|
|
First quarter ended
March 31, 2015
|
$0.28
|
$0.13
|
|
Second quarter
ended June 30, 2015
|
$0.19
|
$0.11
|
|
Third quarter ended
September 30, 2015
|
$0.16
|
$0.05
|
|
Fourth quarter
ended December 31, 2015
|
$0.12
|
$0.05
|
Holders
As of March 15,
2017, we had 124,810,756 shares of common stock, $0.001 par value,
issued and outstanding held by approximately 544 shareholders of
record. Our transfer agent is Interwest Transfer Co.,
Inc., 1981 Murray Holladay Road, Suite 100 Salt Lake City, Utah
84117.
DIVIDENDS
The
payment of dividends is subject to the discretion of our board of
directors and will depend, among other things, upon our earnings,
our capital requirements, our financial condition and other
relevant factors. We have not paid or declared any dividends upon
our common stock since our inception and, by reason of our present
financial status and our contemplated financial requirements do not
anticipate paying any dividends upon our common stock in the
foreseeable future.
We have
never declared or paid any cash dividends. We currently do not
intend to pay cash dividends in the foreseeable future on the
shares of common stock. We intend to reinvest any earnings in the
development and expansion of our business. Any cash dividends in
the future to common stockholders will be payable when, as and if
declared by our board of directors, based upon the
Board’s assessment
of:
●
our
financial condition;
●
earnings;
●
need for
funds;
●
capital requirements;
●
prior claims
of preferred stock to the
extent issued and outstanding; and
●
including any applicable
laws.
Therefore, there
can be no assurance that any dividends on the common stock will
ever be paid.
CAPITALIZATION
The following table sets forth our capitalization as of December
31, 2016 that is derived from our audited consolidated financial
information included elsewhere in this prospectus:
●
on an actual
basis; and
●
on a pro forma basis,
giving effect to the sale and issuance by us of 25,666,669 shares
of common stock and Warrants to purchase up to 51,333,338 shares of
common stock in this offering, at an offering price of $0.15 per
share and related warrants, and after deducting placement
agent’s fees and estimated offering expenses payable by
us.
|
|
|
|
December 31, 2016
|
|
|
|
Actual
|
As
Adjusted
|
|
|
|
(unaudited)
|
|
|
|
|
|
Cash
|
$829,933
|
$4,137,508
|
|
Debt:
|
|
|
|
Notes payable and
non-convertible debenture, net of discount of $216,871
|
$681,127
|
$681,127
|
|
Convertible
debentures, net of discount of $845,730
|
714,192
|
714,192
|
|
Total
debt
|
1,395,319
|
1,395,319
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
Common stock,
$0.001 par value; 292,500,000 shares authorized; 121,694,293 shares
issued and outstanding, actual; 147,360,962 shares issued and
outstanding as adjusted
|
121,694
|
147,361
|
|
Additional paid-in
capital
|
30,108,028
|
33,389,936
|
|
Accumulated
deficit
|
(29,135,749)
|
(29,135,749)
|
|
Total
stockholders’ equity
|
1,093,973
|
4,401,548
|
|
Total
capitalization
|
$2,489,292
|
$5,796,867
|
Common
stock outstanding in the table above excludes the following shares
as of December 31, 2016:
●
237,500 shares of
common stock issuable upon the exercise of stock options
outstanding as of December 31, 2016, at a weighted average exercise
price of $0.22 per share;
●
15,983,814
unallocated shares of common stock reserved for future issuance
under our stock-based compensation plans, consisting of no shares
of common stock reserved for future issuance under our 2013 Equity
Incentive Plan ("2013 Plan
"), 146,314 shares of common stock reserved for future issuance
under our 2014 Equity Incentive Plan ("2014 Plan"), and 15,837,500 shares of
common stock reserved for future issuance under our 2016 Equity
Incentive Plan ("2016
Plan") (together, the “Incentive Plans ”), and such
additional shares that become available under our Incentive Plans
pursuant to provisions thereof that automatically increase the
share reserves under the Incentive Plans each year;
●
12,874,848 shares
of common stock reserved for issuance of outstanding restricted
stock units;
●
6,414,132 shares
of common stock issuable upon conversion of the 2016 convertible
notes payable as of December 31, 2016;
●
5,967,054 shares
of common stock issuable upon the exercise of warrants outstanding
as of December 31, 2016, at a weighted average exercise price of
$0.34 per share; and
●
52,616,671 shares of common stock
issuable upon exercise of Warrants to be issued in connection with
this offering, including warrants to be issued to the placement
agent.
Although the foregoing
includes common stock issuable upon conversion of outstanding 2016
Notes, as a result of the offering, the holders of such notes (i)
may elect to convert all principal and accrued interest into shares
of common stock at a 10% discount to the price per share of common
stock in the offering; or (ii) shall receive a prepayment of 110%
of outstanding principal and 110% of all accrued unpaid interest
directly from the proceeds of this offering. As a result, in the
event all holders of 2016 Notes elect to convert into common stock,
an additional 4,329,540 shares of common stock will be issued and
outstanding.
DILUTION
If
you invest in our common stock in this offering, your ownership
interest will immediately be diluted to the extent of the
difference between the amount per share paid by purchasers of
shares of our common stock in this offering and the as adjusted net
tangible book deficit per share of our common stock immediately
after this offering.
As
of December 31, 2016, our historical net tangible book deficit was
approximately $(4.8) million, or ($0.04) per share of our common
stock. Net tangible book deficit per share represents the amount of
our total tangible assets less our total liabilities, divided by
the number of shares of our common stock outstanding as of December
31, 2016.
After
giving further effect to our sale of 25,666,669 shares of our
common stock in this offering at a public offering price of $0.15
per share and related Warrants, and after deducting placement
agent’s fees and estimated offering expenses payable by us,
our as adjusted net tangible book deficit as of December 31, 2016
would have been approximately $(1.5) million, or approximately
($0.01) per share of our common stock. This represents an immediate
increase in as adjusted net tangible book value of $0.03 per share
to existing stockholders and an immediate dilution of $0.16 per
share to new investors purchasing shares of our common stock in
this offering. The following table illustrates this
dilution:
|
Public offering
price per share and related Warrants
|
|
$0.15
|
|
|
|
|
|
Net tangible book
deficit per share as of December 31, 2016
|
$(0.04)
|
|
|
|
|
|
|
Increase per share
attributable to new investors in this offering
|
0.03
|
|
|
|
|
|
|
As adjusted net
tangible book deficit per share after this offering
|
|
(0.01)
|
|
|
|
|
|
Dilution per share
to new investors in this offering
|
|
$0.16
|
The
foregoing table and discussion is based on 121,694,293 shares of
our common stock outstanding as of December 31, 2016 and excludes
the following, in each case as of such date:
●
237,500 shares of
common stock issuable upon the exercise of stock options
outstanding as of December 31, 2016, at a weighted average exercise
price of $0.22 per share;
●
15,983,814
unallocated shares of common stock reserved for future issuance
under our stock-based compensation plans, consisting of no shares
of common stock reserved for future issuance under our 2013 Equity
Incentive Plan ("2013 Plan
"), 146,314 shares of common stock reserved for future issuance
under our 2014 Equity Incentive Plan ("2014 Plan"), and 15,837,500 shares of
common stock reserved for future issuance under our 2016 Equity
Incentive Plan ("2016
Plan") (together, the “Incentive Plans ”), and such
additional shares that become available under our Incentive Plans
pursuant to provisions thereof that automatically increase the
share reserves under the Incentive Plans each year;
●
12,874,848 shares
of common stock reserved for issuance of outstanding restricted
stock units;
●
6,414,132 shares
of common stock issuable upon conversion of the 2016 convertible
notes payable as of December 31, 2016;
●
5,967,054 shares
of common stock issuable upon the exercise of warrants outstanding
as of December 31, 2016, at a weighted average exercise price of
$0.34 per share; and
●
52,616,671
shares of common stock issuable upon
exercise of Warrants to be issued in connection with this offering,
including warrants to be issued to the placement
agent.
Although the
foregoing includes common stock issuable upon conversion of
outstanding 2016 Notes, as a result of the offering, the holders of
such notes (i) may elect to convert all principal and accrued
interest into shares of common stock at a 10% discount to the price
per share of common stock in the offering; or (ii) shall receive a
prepayment of 110% of outstanding principal and 110% of all accrued
unpaid interest directly from the proceeds of this offering. As a
result, in the event all holders of 2016 Notes elect to convert
into common stock, an additional 4,329,540 shares of common stock
will be issued and outstanding.
To
the extent that any of the outstanding options or warrants to
purchase shares of our common stock are exercised, new investors
may experience further dilution. In addition, we may issue
additional shares of common stock, other equity securities or
convertible debt securities in the future, which may cause further
dilution to new investors in this offering.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Historical results and trends should not be taken as indicative of
future operations. Management's statements contained in this report
that are not historical facts are forward-looking statements.
Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project,"
"prospects," or similar expressions. The Company's ability to
predict results or the actual effect of future plans or strategies
is inherently uncertain. Factors which could have a material
adverse effect on the operations and future prospects of the
Company on a consolidated basis include, but are not limited to:
changes in economic conditions, legislative/regulatory changes,
availability of capital, interest rates, competition and generally
accepted accounting principles. These risks and uncertainties
should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such
statements.
Overview
We are an emerging over-the-counter
("OTC") consumer goods and specialty pharmaceutical
company engaged in the commercialization, licensing and
development of safe and effective non-prescription medicine and
consumer care products to improve men’s and women’s
health and vitality and respiratory diseases. We deliver
innovative and uniquely presented and packaged health solutions
through our (a) OTC medicines and consumer and health products,
which we market directly, (b) commercial partners to primary care
physicians, urologists, gynecologists and therapists, and (c)
directly to consumers through our on-line channels, retailers and
wholesalers. We are dedicated to being
a leader in developing and marketing new OTC and branded
Abbreviated New Drug Application (“ANDA”) products. We are actively pursuing
opportunities where existing prescription drugs have recently, or
are expected to, change from prescription (or Rx) to OTC. These
“Rx-to-OTC switches” require Food and Drug
Administration (“FDA”) approval through a process initiated by
the New Drug Application (“NDA”) holder.
Our
business model leverages our ability to (a) develop and build our
current pipeline of products and (b) to also acquire outright or
in-license commercial products that are supported by scientific
and/or clinical evidence, place them through our existing supply
chain, retail and on-line (including Amazon®-based
business platform) channels to tap new markets and drive demand for
such products and to establish physician relationships. We
currently have 17 products marketed in the U.S with six of those
being marketed and sold in multiple countries around the world
through some of our 14 commercial partners. We currently expect to
launch an additional five products in the U.S. in 2017 and we
currently have approvals to launch certain of our already marketed
products in 31 additional countries.
Our Strategy
Our
corporate strategy focuses on two primary objectives:
1.
Developing a
diversified product portfolio of exclusive, unique and patented
non-prescription OTC and branded ANDA drugs and consumer health
products through: (a) the introduction of line extensions and
reformulations of either our or third-party currently marketed
products; and (b) the acquisition of products or obtaining
exclusive licensing rights to market such products;
and
2.
Building an
innovative, U.S. and global sales and marketing model through
direct to consumer approaches such as our proprietary Beyond
Human®
Sales and Marketing platform, the addition of new online platforms
such as Amazon® and commercial partnerships with established
international complimentary partners that: (a) generates revenue,
and (b) requires a lower cost structure compared to traditional
pharmaceutical companies thereby increasing our gross
margins.
Our Products
We
currently generate revenue from 17 products in the U.S. and six in
international countries, as follows:
1.
Vesele® for promoting
sexual and health (U.S. and U.K.);
2.
Zestra® for female
arousal (U.S., U.K., Denmark, Canada, Morocco, the UAE and South
Korea);
3.
Zestra
Glide® (U.S, Canada
and the MENA countries);
4.
EjectDelay® indicated
for the treatment of premature ejaculation (U.S. and
Canada);
5.
Sensum+® to
alleviate reduced penile sensitivity (U.S., U.K. and
Morocco);
6.
Beyond
Human®
Testosterone Booster;
7.
Beyond
Human®
Ketones;
8.
Beyond Human
®
Krill Oil;
9.
Beyond
Human®
Omega 3 Fish Oil;
10.
Beyond
Human®
Vision Formula;
11.
Beyond
Human®
Blood Sugar;
12.
Beyond
Human®
Colon Cleanse;
13.
Beyond
Human®
Green Coffee Extract;
14.
Beyond
Human®
Growth Agent;
15.
RecalMax™
for brain health;
16.
Androferti®
(U.S. and Canada) for the support of overall male reproductive
health and sperm quality; and
17.
UriVarx™ for overactive
bladder and urinary incontinence.
In
addition, we currently expect to launch in the U.S. the following
products in 2017, subject to the applicable regulatory approvals,
if required:
1.
Xyralid™ for the relief of the pain and
symptoms caused by hemorrhoids (first half of 2017);
2.
AllerVarx™ for allergic
rhinitis symptoms (first half of 2017);
3.
AndroVit™ for prostate and sexual health
(second half of 2017);
4.
Urocis™ XR for urinary tract infections in
women (second half of 2017); and
5.
FlutiCare™ for allergic
rhinitis subject to FDA ANDA approval (second half of
2017).
Sales and Marketing Strategy U.S. and Internationally
Our sales and marketing strategy is based on (a)
the use of direct to consumer advertisements in print and online
media through our proprietary Beyond Human®
sales and marketing infrastructure
acquired in March 2016, (b) working with direct commercial channel
partners in the U.S. and also directly marketing the products
ourselves to physicians, urologists, gynecologists and therapists
and to other healthcare providers, and (c) working with exclusive
commercial partners outside of the U.S. that would be responsible
for sales and marketing in those territories. We have now fully
integrated most of our existing line of products such as
Vesele®,
Sensum+®,
UriVarx™,
Zestra®,
and RecalMax™
into the Beyond Human®
sales and marketing platform. We plan
to integrate Xyralid™, AllerVarx™,
AndroVit™, Urocis™ XR; and FlutiCare™,
subject to regulatory approvals, upon their commercial launches in
2017. We also market and distribute our products in the U.S.
through retailers, wholesalers and other online channels. Our
strategy outside the U.S. is to partner with companies who can
effectively market and sell our products in their countries through
their direct marketing and sales teams. The strategy of using our
partners to commercialize our products is designed to limit our
expenses and fix our cost structure, enabling us to increase our
reach while minimizing our incremental
spending.
Our
current OTC monograph, Rx-to-OTC ANDA switch drugs and consumer
care products marketing strategy is to focus on four main U.S.
markets which we believe each to be in excess of $1.0 billion: (1)
Sexual health (female and male sexual dysfunction and health); (2)
Urology (bladder and prostate health); (3) Respiratory disease; and
(4) Brain health. We will focus our current efforts on these four
markets and will seek to develop, acquire or license products that
we can sell through our sales channels in these
fields.
Results of Operations for the Year Ended December 31, 2016 Compared
with the Year Ended December 31, 2015
|
|
Year
Ended December
31, 2016
|
Year
Ended December
31, 2015
|
$
Change
|
%
Change
|
|
NET
REVENUE:
|
|
|
|
|
|
Product
sales, net
|
$ 4,817,603
|
$ 730,717
|
$ 4,086,886
|
559.3%
|
|
License
revenue
|
1,000
|
5,000
|
(4,000)
|
(80.0)%
|
|
Net revenue
|
4,818,603
|
735,717
|
4,082,886
|
555.0%
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
Cost
of product sales
|
1,083,094
|
340,713
|
742,381
|
217.9%
|
|
Research
and development
|
77,804
|
-
|
77,804
|
100.0%
|
|
Sales
and marketing
|
3,621,045
|
82,079
|
3,538,966
|
4,311.7%
|
|
General
and administrative
|
5,870,572
|
3,828,113
|
2,042,459
|
53.4%
|
|
Impairment
of goodwill
|
-
|
759,428
|
(759,428)
|
(100.0)%
|
|
Total operating expense
|
10,652,515
|
5,010,333
|
5,642,182
|
112.6%
|
|
LOSS
FROM OPERATIONS
|
(5,833,912)
|
(4,274,616)
|
(1,559,296)
|
36.5%
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
Interest
expense
|
(6,661,694)
|
(1,153,376)
|
(5,508,318)
|
477.6%
|
|
Loss
on extinguishment of debt
|
-
|
(32,500)
|
32,500
|
(100.0)%
|
|
Other
income (expense), net
|
1,649
|
(8,495)
|
10,144
|
(119.4)%
|
|
Change
in fair value of contingent consideration
|
(1,269,857)
|
115,822
|
(1,385,679)
|
(1,196.4)%
|
|
Change
in fair value of derivative liabilities
|
65,060
|
393,509
|
(328,449)
|
(83.5)%
|
|
LOSS
BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES
|
(13,698,754)
|
(4,959,656)
|
(8,739,098)
|
176.2%
|
|
Provision
for (benefit from) income taxes
|
2,400
|
(757,028)
|
759,428
|
(100.3)%
|
|
NET
LOSS
|
$ (13,701,154)
|
$ (4,202,628)
|
$ (9,498,526)
|
226.0%
|
Net Revenue
We
recognized net revenue of
approximately $4.8 million for the year ended December 31, 2016
compared to $0.7 million for the year ended December 31,
2015. The increase in revenue in 2016 was primarily the result
of the product sales generated through the sales and marketing
platform acquired in the Beyond Human® asset acquisition. The
increase was also due to an increase in sales of Vesele® and
Sensum+® which generated net revenue of approximately $2.2 million and
$0.4 million during the year ended December 31, 2016, respectively,
compared to approximately $7,000 and less than $1,000 during the
year ended December 31, 2015, respectively. We generated additional
net revenue of approximately
$0.8 million and $0.2 million when selling Vesele® and
Sensum+® with other Beyond Human® products during the
year ended December 31, 2016, respectively. The increase in net
revenue from the sale of
products through the Beyond Human® sales and marketing
platform was offset by decreases in our other existing product
sales channels to major retailers and wholesalers as we
concentrated our sales efforts and resources on integrating our
existing products into the Beyond Human® sales and marketing
platform. The decreases in existing product sales channels resulted
in net revenue from the
Zestra® products decreasing approximately $0.3 million during
the year ended December 31, 2016 when compared to the same period
in 2015. We signed an exclusive license and distribution agreement
in November 2016 which is expected to lead to an increase in
product sales of Zestra® and Zestra Glide® through that
sales channel in 2017.
-29-
Cost of Product Sales
We
recognized cost of product sales of approximately $1.1 million for
the year ended December 31, 2016 compared to $0.3 million for the
year ended December 31, 2015. The cost of product sales includes
the cost of inventory, shipping and royalties. The increase in cost
of product sales is a result of higher shipping costs due to an
increase in the number of units shipped. The increase in
the gross margin to 78% in 2016 compared to 54% in 2015 is due to
the higher margins earned on the increased volume of our product
sales through the Beyond Human® sales and marketing platform.
The increased margin in 2016 is also due to fewer sales when
compared to 2015 through our retail and wholesale sales channels,
which have lower margins.
Research and Development
We
recognized research and development expense of approximately
$78,000 for the year ended December 31, 2016 compared to no expense
for the year ended December 31, 2015. The research and development
expense includes salary and the related health benefits for an
employee, the fair value of the shares of common stock issued to
CRI totaling $23,000 for the settlement of certain clinical and
regulatory milestone payments due under the in-license agreement
for Sensum+®, as well as, clinical costs incurred related to
post marketing studies for Vesele® and Beyond Human®
Testosterone Booster.
Sales and Marketing
We recognized sales and marketing expense of
approximately $3.6 million for the year ended December 31, 2016
compared to $82,000 for the year ended December 31,
2015. Sales and marketing
expense of $3.6 million during the year ended December 31, 2016
consists primarily of print advertisements and sales and marketing
support. The increase in sales and marketing expense during the
year ended December 31, 2016 when compared to the same period in
2015 is due to the costs of integration of our existing products
into the Beyond Human® sales and marketing platform and the
increase in the number of print and online media advertisements of
our existing products through the Beyond Human® platform. The
increase is also attributable to increased costs in sales and
marketing support services due to the higher volume of sales orders
received as a result of the Beyond Human® asset acquisition
and the integration of more products into this
platform.
General and Administrative
We
recognized general and administrative expense of approximately $5.9
million for the year ended December 31, 2016 compared to $3.8
million for the year ended December 31, 2015. General and
administrative expense consists primarily of investor relation
expense, legal, accounting, public reporting costs and other
infrastructure expense related to the launch of our products.
Additionally, our general and administrative expense includes
professional fees, insurance premiums and general corporate
expense. The increase is primarily due to the increase in non-cash
stock-based compensation to consultants for services rendered, an
increase in merchant processing fees due to increased credit card
sales volume, an increase in the amortization of intangible assets
as a result of the acquisitions in 2016 and 2015 and increased
payroll and related costs due to the increase in headcount when
compared to 2015.
Other Income and Expense
We
recognized interest expense of approximately $6.7 million for the
year ended December 31, 2016 compared to $1.2 million for the year
ended December 31, 2015. Interest expense primarily includes
interest related to our debt, amortization of debt discounts and
the fair value of the embedded conversion feature derivative
liability in excess of the proceeds allocated to the debt (see
Notes 5, 6 and 9 to the accompanying consolidated financial
statements included elsewhere in this Annual Report). Due to the
shares, warrants and cash discounts provided to our lenders, the
effective interest rate is significantly higher than the coupon
rate. The increase in interest expense reflects the larger
amount of debt discount amortization of approximately $2.7 million
when compared to 2015 due to the convertible debt and note payable
financings completed in 2016 and 2015 and the increase in the fair
value in excess of the allocated proceeds of the embedded
conversion feature in the convertible debt financings in June and
July of 2016 of approximately $2.7 million.
-30-
We
recognized a loss from the change in fair value of contingent
consideration of approximately $1.3 million for the year ended
December 31, 2016 compared to a gain from the change in fair value
of consideration of $0.1 million for the year ended December 31,
2015. Change in fair value of contingent consideration consists
primarily of the increase in the fair value of the contingent ANDA
shares of common stock issuable to Novalere Holdings, LLC in
connection with our acquisition in 2015 totaling approximately $1.4
million and the increase in the royalty contingent consideration to
Semprae of approximately $103,000 (see Note 3 to the accompanying
consolidated financial statements included elsewhere in this Annual
Report). Such amount was offset with the gain on contingent
consideration of $180,000 as a result of the settlement agreement
entered into with the sellers of the Beyond Human® assets in
September 2016 (see Note 3 to the accompanying consolidated
financial statements included elsewhere in this Annual
Report).
We
recognized a gain from the change in fair value of derivative
liabilities of approximately $65,000 for the year ended December
31, 2016 compared a gain from the change in fair value of
derivative liabilities of $0.4 million for the year ended December
31, 2015. Change in fair value of derivative liabilities primarily
includes the change in the fair value of the warrants and embedded
conversion features classified as derivative liabilities. The
decrease in the gain on change in fair value of derivative
liabilities during the year ended December 31, 2016 is due to the
increase in our stock price during that period when compared to
2015.
Income Taxes
We
recognized a provision for income taxes of $2,400 for the year
ended December 31, 2016 compared to a benefit from income taxes of
approximately $0.8 million for the year ended December 31,
2015. The benefit from income taxes during the year
ended December 31, 2015 is due to the release of a portion of the
deferred tax valuation allowance as a result of the Novalere
acquisition.
Net Loss
Net
loss for the year ended December 31, 2016 was approximately $(13.7
million), or $(0.15) basic and diluted net loss per share, compared
to a net loss for the same period in 2015 of $(4.2 million), or
$(0.08) basic and diluted net loss per share.
Liquidity and Capital Resources
Historically, we
have funded losses from operations through the sale of equity and
issuance of debt instruments. Combined with revenue, these funds have provided us with
the resources to operate our business, to sell and support our
products, attract and retain key personnel, and add new products to
our portfolio. To date, we have experienced net losses each year
since our inception. As of December 31, 2016, we had an accumulated
deficit of $29.1 million and a working capital deficit of $1.7
million.
As of
February 28, 2017, we had approximately $0.7 million in cash and
$150,000 of cash collections held by our third-party merchant
service provider, which is expected to be remitted to us by April
2017. Although no assurances can be given, we currently plan to
raise additional capital through the sale of equity or debt
securities. We expect, however, that our existing capital
resources, revenue from sales
of our products and upcoming new product launches and sales
milestone payments from the commercial partners signed for our
products, and equity instruments available to pay certain vendors
and consultants, will be sufficient to allow us to continue our
operations, commence the product development process and launch
selected products through at least the next 12 months. In
addition, our Chief Executive Officer, who is also a significant
shareholder, has deferred the payment of his salary earned thru
June 30, 2016 for at least the next 12 months.
-31-
Our
principal debt instruments include the following:
February 2016 Note Payable
On
February 24, 2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered
into an agreement in which SBI loaned us gross proceeds of $550,000
pursuant to a purchase agreement, 20% secured promissory note and
security agreement (“February 2016 Note Payable”), all
dated February 19, 2016 (collectively, the “Finance Agreements”), to purchase
substantially all of the assets of Beyond
Human®. Of the $550,000 gross proceeds, $300,000
was paid into an escrow account held by a third-party bank and was
released to Beyond Human® upon closing of the transaction,
$242,500 was provided directly to us for use in building the Beyond
Human® business and $7,500 was provided for attorneys’
fees.
Pursuant to the
Finance Agreements, the principal amount of the February 2016 Note
Payable is $550,000 and the interest rate thereon is 20% per
annum. We began to pay principal and interest on the
February 2016 Note Payable on a monthly basis beginning on March
19, 2016 for a period of 24 months and the monthly mandatory
principal and interest payment amount thereunder is $28,209. The
monthly amount shall be paid by us through a deposit account
control agreement with a third-party bank in which SBI shall be
permitted to take the monthly mandatory payment amount from all
revenue received by us from the
Beyond Human® assets in the transaction. The
maturity date for the February 2016 Note Payable is February 19,
2018. The February 2016 Note Payable is secured by SBI through a
first priority secured interest in all of the Beyond Human®
assets acquired by us in the transaction including all revenue
received by us from these assets.
Convertible Debentures - 2016 Financing
In the
second and third quarter of 2016, we entered into Securities
Purchase Agreements with eight accredited investors (the
“Investors”),
pursuant to which we received aggregate gross proceeds of
$3,000,000 (net of OID). We sold nine convertible promissory notes
totaling $3,303,889 (each a “2016 Note” and collectively the
“2016 Notes”)
(the 2016 Notes were sold at a 10% OID and we received an aggregate
total of $2,657,500 in funds thereunder after debt issuance costs
of $342,500). The 2016 Notes and accrued interest are convertible
into shares of our common stock at a conversion price of $0.25 per
share, with certain adjustment provisions noted below. The maturity
date of the 2016 Notes issued on June 30, 2016 and July 15, 2016 is
July 30, 2017 and the maturity date of the 2016 Notes issued on
July 25, 2016 is August 25, 2017. The 2016 Notes bear interest on
the unpaid principal amount at the rate of 5% per annum from the
date of issuance until the same becomes due and payable, whether at
maturity or upon acceleration or by prepayment or
otherwise.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default as defined in
such 2016 Notes, a Default Amount is equal to the sum of (i) the
principal amount, together with accrued interest due thereon
through the date of payment payable at the holder’s option in
cash or common stock and (ii) an additional amount equal to the
principal amount payable at our option in cash or common stock. For
purposes of payments in common stock, the following conversion
formula shall apply: the conversion price shall be the lower of:
(i) the fixed conversion price ($0.25) or (ii) 75% multiplied by
the volume weighted average price of our common stock during the
ten consecutive trading days immediately prior to the later of the
Event of Default or the end of the applicable cure period. For
purposes of the Investors request of repayment in cash but we are
unable to do so, the following conversion formula shall apply: the
conversion price shall be the lower of: (i) the fixed conversion
price ($0.25) or (ii) 60% multiplied by the lowest daily volume
weighted average price of our common stock during the ten
consecutive trading days immediately prior to the conversion.
Certain other conversion rates apply in the event of our sale or
merger, default and other defined events.
We may
prepay the 2016 Notes at any time on the terms set forth in the
2016 Notes at the rate of 110% of the then outstanding balance of
the 2016 Notes. Under the terms of the 2016 Notes, we shall not
effect certain corporate and business actions during the term of
the 2016 Notes, although some may be done with proper notice.
Pursuant to the Securities Purchase Agreements, with certain
exceptions, the Investors have a right of participation during the
term of the 2016 Notes; additionally, we granted the 2016 Note
holders registration rights for the shares of common stock
underlying the 2016 Notes up to $1,000,000 pursuant to Registration
Rights Agreements.
-32-
December 2016 and January 2017 Notes Payable
On
December 5, 2016 and January 19, 2017, we entered into a securities
purchase agreement with three unrelated third-party investors in
which the investors loaned us gross proceeds of $650,000 pursuant
to 5% promissory notes. The
notes have an OID of $65,000 and requires payment of $715,000 in
principal upon maturity. The notes bear interest at the rate
of 5% per annum and the principal amount and interest are payable
at maturity on October 4, 2017 and November 18, 2017. In connection
with the notes, we issued the investors restricted shares of common
stock totaling 1,441,111. The fair value of the
restricted shares of common stock issued was based on the market
price of our common stock on the date of issuance of the
notes.
Net Cash Flows
|
|
For the Year Ended December 31, 2016
|
For the Year Ended December 31, 2015
|
|
|
|
|
|
Net
cash used in operating activities
|
$ (1,784,258)
|
$ (1,031,727)
|
|
Net
cash used in investing activities
|
(172,103)
|
(12,816)
|
|
Net
cash provided by financing activities
|
2,730,393
|
1,092,965
|
|
Net
change in cash
|
774,032
|
48,422
|
|
Cash
at beginning of the year
|
55,901
|
7,479
|
|
Cash
at the end of the year
|
$ 829,933
|
$ 55,901
|
Operating Activities
For the
year ended December 31, 2016, cash used in operating activities was
approximately $1.8 million, consisting primarily of the net loss
for the period of approximately $13.7 million, which was primarily
offset by non-cash common stock, restricted stock units and stock
options issued for services and compensation of approximately $2.7
million, amortization of debt discount of $3.6 million, fair value
of the embedded conversion feature in excess of allocated proceeds
of $2.8 million, change in fair value of contingent consideration
of $1.4 million and amortization of intangible assets of $0.6
million. The non-cash expense was offset with the non-cash gain on
contingent consideration of $0.2 million and change in fair value
of derivative liabilities of $65,000. Additionally, working capital
changes consisted of cash increases of approximately $1.0 million
related to a decrease in accounts receivable from cash collections
from customers of approximately $48,000, $0.9 million related to an
increase in accrued compensation, and $0.7 million related to an
increase in accounts payable and accrued expense, partially offset
by a cash decrease related to the increase in prepaid expense and
other current assets of $0.3 million and inventories of $0.3
million. The increase in net cash used in operating activities from
2015 was mainly due to expanding our operations, including hiring
additional personnel, commercialization and marketing activities
related to our existing products and those acquired in 2016, as
well as, purchasing more finished goods inventory to fulfill the
forecasted increase in revenue in 2017.
Investing Activities
For the
year ended December 31, 2016, cash used in investing activities was
approximately $0.2 million which consisted of the contingent
consideration payment of approximately $0.2 million made to the
seller of the Beyond Human® assets, as well as, a contingent
royalty payment to Semprae for Zestra® product sales in 2015.
Cash used in investing activities in 2015 was primarily related to
the purchase of property and equipment.
-33-
Financing Activities
For the
year ended December 31, 2016, cash provided by financing activities
was approximately $2.7 million, consisting primarily of the net
proceeds from notes payable and convertible debentures of
approximately $3.6 million and proceeds from warrant exercises of
$0.3 million, offset by the repayment of short-term loans payable
of $0.3 million, notes payable of $0.4 million and the related
party line of credit convertible debenture of $0.4 million.
Cash provided by financing activities in 2015 was primarily related
to net proceeds from notes payable and convertible debentures of
approximately $1.5 million and proceeds from short-term loans
payable of $0.3 million, offset by the repayment of notes payable
of $0.4 million and related party non-convertible debentures of
$0.1 million.
Sources of Capital
Our operations have been financed primarily
through the sale of equity and issuance of debt instruments
and revenue generated from the launch
of our products and commercial partnerships signed for the sale and
distribution of our products domestic and internationally. These
funds have provided us with the resources to operate our business,
sell and support our products, attract and retain key personnel and
add new products to our portfolio. We have experienced net losses
and negative cash flows from operations each year since our
inception. As of December 31, 2016, we had an
accumulated deficit of approximately $29.1 million and a working
capital deficit of $1.7 million.
We have raised funds through the issuance of debt
and the sale of common stock. We have also issued equity
instruments in certain circumstances to pay for services from
vendors and consultants. For the year ended December 31, 2016, we
raised approximately $3.6 million in funds, which included net
proceeds of $2.7 million from the issuance of convertible
debentures (with warrants and common stock) and $0.9 million from
the issuance of notes payable. The funds raised through the
issuance of the convertible debentures were used to pay off other
debt instruments and accounts payable, to increase inventory and
for the expanded operations in 2016. In the event we do not pay the
convertible debentures upon their maturity, or after the remedy
period, the note holder has the right to convert the principal
amount and accrued interest into shares of common stock at the
lower of $0.25 per share or 60% multiplied by the lowest
daily volume weighted average price of our shares of common
stock. The outstanding convertible
debentures principal and interest balance at December 31, 2016 was
approximately $1.6 million.
Our
actual needs will depend on numerous factors, including timing of
introducing our products to the marketplace, our ability to attract
additional Ex-U.S. distributors for our products and our ability to
in-license in non-partnered territories and/or develop new product
candidates. In addition, we continue to seek new licensing
agreements from third-party vendors to commercialize our products
in territories outside the U.S., which could result in upfront,
milestone, royalty and/or other payments.
We may seek to raise additional capital, debt or
equity from outside sources to pay 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. Wemay
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 neverbeen
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.
-34-
Critical Accounting Policies
See 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.
Director Independence
We are
not a listed issuer and, therefore, for purposes of determining
whether our directors are independent, we are to use a definition
of independence of a national securities exchange or of an
inter-dealer quotation system which has requirements that a
majority of the board of directors be independent, and state which
definition is used. Whatever such definition we choose, we must use
the same definition with respect to all directors. Our board of
directors has determined that three of our current directors, Dr.
Henry Esber, Ms. Vivian Liu, and Dr. Ziad Mirza, are independent as
defined by the NASDAQ Marketplace Rules.
We are
not required to have any independent members of the board of
directors.
Limited Public Market for Common Stock
There
is presently a limited public market for our common
stock. We are listed on the OTCQB marketplace under the
symbol “INNV.” The approximate last closing price of
our common stock was $0.18 on March 15, 2017.
BUSINESS
Overview
We are an emerging over-the-counter
(“OTC”) consumer goods and specialty
pharmaceutical company engaged in the commercialization,
licensing and development of safe and effective non-prescription
medicine and consumer care products to improve men’s and
women’s health and vitality and respiratory
diseases. We deliver innovative and uniquely presented
and packaged health solutions through our (a) OTC medicines and
consumer and health products, which we market directly, (b)
commercial partners to primary care physicians,
urologists, gynecologists and therapists, and (c) directly to
consumers through our on-line channels, retailers and wholesalers.
We are dedicated to being a leader in
developing and marketing new OTC and branded Abbreviated New Drug
Application (“ANDA”) products. We are actively pursuing
opportunities where existing prescription drugs have recently, or
are expected to, change from prescription (or Rx) to OTC. These
“Rx-to-OTC switches” require Food and Drug
Administration (“FDA”) approval through a process initiated by
the New Drug Application (“NDA”) holder.
Our
business model leverages our ability to (a) develop and build our
current pipeline of products, and (b) to also acquire outright or
in-license commercial products that are supported by scientific
and/or clinical evidence, place them through our existing supply
chain, retail and on-line (including Amazon®-based
business platform) channels to tap new markets and drive demand for
such products and to establish physician relationships. We
currently have 17 products marketed in the United States with six
of those being marketed and sold in multiple countries around the
world through some of our 14 commercial partners. We currently
expect to launch an additional five products in the U.S. in 2017
and we currently have approvals to launch certain of our already
marketed products in 31 additional countries.
Corporate Structure
We incorporated in
the State of Nevada. In December 2011, we merged with FasTrack
Pharmaceuticals, Inc. and changed our name to “Innovus
Pharmaceuticals,
Inc.”
In
December 2013, we acquired Semprae, which had two commercial
products in the U.S. and one in Canada. As a result, Semprae became
our wholly-owned subsidiary.
In
February 2015, we entered into a merger agreement, whereby we
acquired Novalere and its worldwide rights to the
Fluticare™ brand
(Fluticasone propionate nasal spray). We expect that the ANDA
filed in November 2014 with the FDA may be approved in 2017,
which will allow us to market and sell Fluticare™ over the
counter in the U.S in the second half of 2017.
Our Strategy
Our
corporate strategy focuses on two primary objectives:
1
Developing a
diversified product portfolio of exclusive, unique and patented
non-prescription OTC and branded ANDA drugs and consumer health
products through: (a) the introduction of line extensions and
reformulations of either our or third-party currently marketed
products; and (b) the acquisition of products or obtaining
exclusive licensing rights to market such products;
and
2.
Building an
innovative, U.S. and global sales and marketing model through
direct to consumer approaches such as our proprietary Beyond
Human® Sales
and Marketing platform, the addition of new online platforms such
as Amazon® and commercial partnerships with established
international complimentary partners that: (a) generates revenue,
and (b) requires a lower cost structure compared to traditional
pharmaceutical companies thereby increasing our gross
margins.
We
believe that our proven ability to market, license, acquire and
develop brand name non-prescription pharmaceutical and consumer
health products uniquely positions us to commercialize our products
and grow in this market in a differentiated way. The following are
additional details about our strategy:
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●
|
Focusing on acquisition and licensing of commercial,
non-prescription pharmaceutical and consumer health products that
are well aligned with current therapeutic areas of male and female
sexual health, pain, vitality and respiratory diseases. In
general, we seek non-prescription pharmaceutical (OTC monograph, Rx
to OTC ANDA switched drugs) and consumer health products that are
already marketed with scientific and/or clinical data and evidence
that are aligned with our therapeutic areas, which we then can grow
through promotion to physicians and expanding sales through our
existing retail and online channels and commercial partners on a
worldwide basis. We have done this through our acquisitions and
licensing of (1) Sensum+® from Centric
Research Institute or CRI, (2) Zestra® and Zestra
Glide® from Semprae, (3) Vesele® from
Trōphikōs, LLC, (4) U.S. and Canada rights to
Androferti® from
Laboratorios Q Pharma (Spain), (5) FlutiCare™ from Novalere,
and (6) UriVarx™ from Seipel
Group;
|
|
●
|
Increasing the number of U.S. non-exclusive distribution channel
partners for direct and online sales and also open more channels
directly to physicians, urologists, gynecologists and
therapists. One of our goals is to increase the number of
U.S. distribution channel partners that sell our products. To do
this, we have devised a three-pronged approach. First, we are
seeking to expand the number of OTC direct selling partners, such
as the larger in-store distributors for selected products,
and to
expand sales to the more regional, statewide and local
distributors, such as regional pharmacy chains, large grocery
stores and supplement and health stores for selected products.
Second, we are working to expand our online presence through
relationships with well-known online sellers and the acquisition of
additional platforms such as established Amazon stores® . Third,
we are seeking to expand sales of our OTC products directly through
sampling programs and detailing to physicians, urologists,
gynecologists, therapists and to other healthcare providers who
generally are used to recommending to their patients products that
are supported by strong scientific and/or
clinical data and evidence;
|
|
●
|
Seeking commercial partnerships outside the U.S. and developing
consistent international commercial and distribution
systems. We seek to develop a strong network of
international distribution partners outside of the U.S. To do so,
we are relying in part on past relationships that Dr. Bassam Damaj,
our President and Chief Executive Officer, has had with certain
commercial partners globally. In addition, we believe we
have the ability to develop new relationships with commercial
distributors who can demonstrate they have leading positions in
their regions and can provide us with effective marketing and sales
efforts and teams to detail our products to physicians and
therapists. Our commercial partners outside the U.S. are
responsible for storing, distributing and promoting our products to
physicians, urologists, gynecologists, therapists and to other
healthcare providers. We have already entered into 14 commercial
partnerships covering our products in 65 countries outside the
U.S.;
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|
●
|
Developing a proprietary patent portfolio to protect the
therapeutic products and categories we desire to
enter. We have
filed and are working to secure patent claims in the U.S. and
abroad covering product inventions and innovations that we believe
are valuable. These patents, if issued and ultimately found to be
valid, may enable us to create a barrier to entry for competitors
on a worldwide basis; and
|
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●
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Achieving cost economies of scale from lower cost manufacturing,
integrated distribution channels and multiple product
discounts. We believe that we can achieve higher gross
margins per product by shifting manufacturing to lower cost
manufacturers. We also feel that we can acquire other OTC and
consumer healthcare products and reintroduce them into our networks
and sales and marketing platforms utilizing our integrated
distribution and direct to consumer channels, thus receiving
multiple product economies of scale from our distribution
partners.
|
Our Products
Marketed Products
We
currently market 17 products in the United States and six in
multiple countries around the world through our commercial
partners:
1.
Vesele® for promoting
sexual and health (U.S. and U.K.);
2.
Zestra® for female
arousal (U.S., U.K., Denmark, Canada, Morocco, the UAE and South
Korea);
3.
Zestra
Glide® (U.S, Canada
and the MENA countries);
4.
EjectDelay®
indicated for the treatment of premature ejaculation (U.S. and
Canada);
5.
Sensum+® to alleviate
reduced penile sensitivity (U.S., U.K. and Morocco);
6.
Beyond
Human®
Testosterone Booster;
7.
Beyond
Human®
Ketones;
8.
Beyond
Human® Krill
Oil;
9.
Beyond
Human® Omega 3
Fish Oil;
10.
Beyond
Human® Vision
Formula;
11.
Beyond
Human® Blood
Sugar;
12.
Beyond
Human® Colon
Cleanse;
13.
Beyond
Human® Green
Coffee Extract;
14.
Beyond
Human® Growth
Agent;
15.
RecalMax™
for brain health;
16.
Androferti®
(U.S. and Canada) supports overall male reproductive health and
sperm quality; and
17.
UriVarx™ for overactive
bladder and urinary incontinence.
Below
is a more detailed description of each of our main products that we
currently market and sell:
Vesele®
Vesele® is a
proprietary oral supplement of Arginine with high absorption backed
with clinical use data in men and women for sexual dysfunction.
Vesele® contains a
patented formulation of L-Arginine and L-Citrulline in combination
with the natural absorption enhancer Bioperine®. The beneficial
effects of Vesele® on sexual and
cognitive functions were confirmed in a four month US clinical
survey study involving 152 patients (69 men and 83 women). Results
from the clinical survey have indicated (1) improvement of erectile
hardness and maintenance in men and increased sexual intercourse
frequency with their partners, and (2) lubrication in women, when
taken separately by each.
Sensum+®
Sensum+® is a
non-medicated cream which moisturizes the head and shaft of the
penis for enhanced feelings of sensation and greater sexual
satisfaction. It is a patent-pending blend of essential oils and
ingredients generally recognized as safe that recently commenced
marketing in the U.S. We acquired the global ex-U.S. distribution
rights to Sensum+® from CRI. The
safety and efficacy of Sensum+® was evaluated
in two post-marketing survey studies in circumcised and
non-circumcised men. A total of 382 men used Sensum+® twice daily for
14 consecutive days followed by once daily for eight weeks and as
needed thereafter. Study participants reported a ~50% increase in
penile sensitivity with the use of Sensum+®.
Beyond Human® Testosterone Booster (BHT)
BHT is
a proprietary oral supplement containing clinically tested
ingredients to increase libido, vitality and sexual health
endpoints in combination with the natural absorption enhancer
Bioperine®.
Zestra®
Zestra® is our
proprietary blend of essential oils proven in two peer-reviewed and
published U.S. placebo controlled clinical trials in 276 women to
increase desire, arousal and satisfaction. Zestra® is
commercialized in the U.S. and Canada through major retailers, drug
wholesalers such as McKesson and Cardinal Health and
online.
Female Sexual
Arousal Disorder, or FSAD, is a disorder part of the Female Sexual
Dysfunction, or FSD, and is characterized by the persistent or
recurrent inability to attain sexual arousal or to maintain arousal
until completion of sexual activity. 43% of women age 18-59
experience some sort of sexual difficulties with one approved
prescription product. (Laumann, E.O.
et al. Sexual Dysfunction in the United States: Prevalence and
Predictors. JAMA, Feb. 10, 1999. vol. 281, No. 6.537-542).
The arousal liquid market in the
U.S. is estimated to be around $500.0 million.
RecalMax™
RecalMax™
is a proprietary, novel oral dietary supplement to maximize nitric
oxide’s beneficial effects on brain health.
RecalMax™ contains a
patented formulation of low dose L-Arginine and L-Citrulline, in
combination with the natural absorption enhancer
Bioperine®. The beneficial
effects of RecalMax™ on cognitive
functions were confirmed in a four month U.S. clinical survey study
involving 152 patients (69 men and 83 women). Results from the
clinical survey have indicated improvement in multiple brain
functions including word recall and focus.
UriVarx™
UriVarx™
is proprietary supplement clinically
proven and to reduce urinary urgency, accidents and both day and
night frequency in Overactive Bladder (“OAB”) and Urinary Incontinence
(“UI”) patients. UriVarx™ was
tested in OAB and UI patients in a 152 double blind placebo patient
study over a period of eight weeks yielding up to 60% in reduction
of urinary urgency and nocturnia.
EjectDelay®
EjectDelay®
is our proprietary, clinical proven OTC monograph compliant 7.5%
benzocaine gel for premature ejaculation. Benzocaine
acts to inhibit the voltage-dependent sodium channels on the nerve
membrane, stopping the propagation of the action potential and
resulting in temporary numbing of the application
site. EjectDelay® is applied to
the head of the penis ten minutes before
intercourse. Premature Ejaculation, or PE, is the
absence of voluntary control over ejaculation resulting in
ejaculation either preceding vaginal entry or occurring immediately
upon vaginal entry and is defined as an ejaculation latency time of
less than one minute. It is estimated that over 30% of males suffer
from PE with a market size of $1.0 billion with a 10.3% annual
growth rate. Topical anesthetics make up 14% of the total PE
market (The Journal of Sexual Medicine in 2007
Sex Med 2007).
Zestra
Glide®
Zestra
Glide® is a clinically
tested water-based longer lasting lubricant. We acquired Zestra
Glide® in our acquisition of Semprae in December 2013. In a 57
patient safety clinical study, Zestra Glide® proved to be
safe and caused no irritation or skin side effects during the six
week trial. To our knowledge, Zestra Glide® is the only
water-based lubricant clinically tested for safety and has a
viscosity of over 16000cps on the market. Increased viscosity
usually translates into longer effects. The lubricant market is
estimated to be around $200.0 million in the U.S. (Symphony IRI
Group Study, 2012).
Androferti®
Androferti®
is a patented natural supplement that supports overall male
reproductive health and sperm quality. Androferti®, has been shown
in over five published clinical trials to statistically increase
seminal quality (concentration, motility, morphology and vitality)
and enhances spermatozoa quality (decreases of vacuoles in the
sperm nucleus), decreases DNA fragmentation, decreases the dynamics
of sperm DNA fragmentation and improvement on the inventory of
mobile sperms.
Pipeline Products
Fluticare™ (Fluticasone propionate nasal spray)
We
expect that the ANDA filed in November 2014 with the FDA to be
approved in 2017, which will allow us to market and sell
Fluticare™ over the counter in the second half of
2017. FlutiCare™ is a nasal spray in the form of
fluticasone propionate that has been the most prescribed nasal
spray to patients in the U.S. for more than five consecutive years.
The nasal steroid market is over $1.0 billion annually in the U.S.
(Reed, Lee and McCrory, “The Economic Burden of Allergic
Rhinitis, Pharmacoecomics 2004, 22 (6) 345-361).
Xyralid™
Xyralid™ is a
lidocaine based cream for the relief of pain and symptoms caused by
hemorrhoids. We expect to launch Xyralid™ in the first half
of 2017 under our Beyond Human® sales and marketing
platform.
AllerVarx™
AllerVarx™
is a patented formulation produced in bilayer tablets with a
technology that allows a controlled release of the ingredients. The
fast-release layer allows the rapid antihistaminic activity of
perilla. The sustained-release layer enhances quercetin and vitamin
D3 bioavailability, thanks to its lipidic matrix, and exerts
antiallergic activity spread over time. AllerVarx™ was studied in
a clinical trial assessing the reduction of both nasal and ocular
symptoms in allergic patients, and daily consumption of
anti-allergic drugs, over a period of 30 days.
AllerVarx™
showed a reduction of approximately 70% in total symptom scores and
a reduction of approximately 73% in the use of anti-allergic drugs.
There were no side effects noted during the administration of
AllerVarx™ and all the
patients enrolled finished the study with good compliance.
We
expect to launch this product in the first half of
2017.
Urocis™ XR
Urocis™
XR, a proprietary 24 hour extended
release of vaccinium marcocarpon for urinary tract infections in
women shown to provide 24-hour coverage in the body to increase
compliance of the use of the product to get full benefit. According
to Business Insights in their "The Antibacterials Market Outlook to
2016" report, urinary tract infections are very common, with an
estimated incidence of 9.6%, or 7.0 million people in the U.S.
Urinary tract infections typically affect post-pubescent females
and the elderly. We expect to launch this product in the second
half of 2017.
AndroVit™
AndroVit™
is a proprietary supplement to support
overall prostate and male sexual health currently marketed in
Europe. AndroVit™ was
specifically formulated with ingredients known to support the
normal prostate health and vitality and male sexual health.
We expect to launch this product in the second
half of 2017.
Sales and Marketing Strategy U.S. and Internationally
Our sales and marketing strategy is based on (a)
the use of direct to consumer advertisements in print and online
media through our proprietary Beyond Human®
sales and marketing platform acquired
in March 2016, (b) working with direct commercial channel partners
in the U.S. and also directly marketing the products ourselves to
physicians, urologists, gynecologists and therapists and to other
healthcare providers, and (c) working with exclusive commercial
partners outside of the U.S. that would be responsible for sales
and marketing in those territories. We have now fully integrated
most of our existing line of products such as
Vesele®,
Sensum+®,
UriVarx™,
Zestra®,
and RecalMax™
into the Beyond Human®
sales and marketing platform. We plan
to integrate Xyralid™, AllerVarx™,
AndroVit™, Urocis™ XR; and FlutiCare™,
subject to regulatory approvals, upon their 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, Rx-to-OTC ANDA switch drugs and consumer care products
marketing strategy is to focus on four main U.S. markets which we
all believe to be each in excess of $1.0 billion: (1) Sexual health
(female and male sexual dysfunction and health); (2) Urology
(bladder and prostate health); (3) Respiratory disease; and (4)
Brain health. We will focus our current efforts on these four
markets and will seek to develop, acquire or license products that
we can sell through our sales channels in these
fields.
Manufacturers and Single Source Suppliers
We use
third-party manufacturers for the production of our products for
development and commercial purposes. We believe there is currently
excess capacity for manufacturing in the marketplace and
opportunities to lower manufacturing cost through outsourcing to
regions and countries that can do it on a more cost-effective
basis. Some of our products are currently available only from sole
or limited suppliers. We currently have multiple contract
manufacturers for our multiple products and we issue purchase
orders to these suppliers each time we require replenishment of our
product inventory. All of our current manufacturers are based in
the U.S. except for two based in Italy and we are looking to
establish contract manufacturing for certain of our products in
Europe and the Middle Eastern and Northern Africa region to reduce
the cost and risk of supply chain to our current and potential
commercial partners in their territories.
Government Regulation
Our
products are normally subject to regulatory approval or must comply
with various U.S. and international regulatory requirements. Unlike
pharmaceutical companies who primarily sell prescription products,
we currently sell drug or health products into the OTC market.
While prescription products normally must progress from
pre-clinical to clinical to FDA approval and then can be marketed
and sold, our products are normally subject to conformity to FDA
monograph requirements and similar requirements in other countries,
which requires a shorter time frame for us to satisfy regulatory
requirements and permits us to begin
commercialization.
Below
is a brief description of the FDA regulatory process for the
Company’s products in the U.S.
US Food and Drug Administration
The FDA
and other federal, state, local and foreign regulatory agencies
impose substantial requirements upon the clinical development,
approval, labeling, manufacture, marketing and distribution of drug
products. These agencies regulate, among other things, research and
development activities and the testing, approval, manufacture,
quality control, safety, effectiveness, labeling, storage, record
keeping, advertising and promotion of our product candidates. The
regulatory approval process is generally lengthy and expensive,
with no guarantee of a positive result. Moreover, failure to comply
with applicable FDA or other requirements may result in civil or
criminal penalties, recall or seizure of products, injunctive
relief including partial or total suspension of production, or
withdrawal of a product from the market.
The FDA
regulates, among other things, the research, manufacture, promotion
and distribution of drugs in the U.S. under the Federal Food, Drug
and Cosmetic Act, or the ("FFDCA"), and other statutes and
implementing regulations. The process required by the FDA before
prescription drug product candidates may be marketed in the United
States generally involves the following:
●
completion of
extensive nonclinical laboratory tests, animal studies and
formulation studies, all performed in accordance with the
FDA’s Good Laboratory Practice regulations;
●
submission to the
FDA of an investigational new drug application, or IND, which must
become effective before human clinical trials may
begin;
●
for
some products, performance of adequate and well-controlled human
clinical trials in accordance with the FDA’s regulations,
including Good Clinical Practices, to establish the safety and
efficacy of the product candidate for each proposed
indication;
●
submission to the
FDA of a new drug application, or NDA;
●
submission to the
FDA of an abbreviated new drug application, or ANDA;
●
satisfactory
completion of an FDA preapproval inspection of the manufacturing
facilities at which the product is produced to assess compliance
with current Good Manufacturing Practice, or cGMP, regulations;
and
●
FDA
review and approval of the NDA prior to any commercial marketing,
sale or shipment of the drug.
The
testing and approval process requires substantial time, effort and
financial resources, and we cannot be certain that any approvals
for our product candidates will be granted on a timely basis, if at
all.
Nonclinical tests
include laboratory evaluations of product chemistry, formulation
and stability, as well as studies to evaluate toxicity in animals
and other animal studies. The results of nonclinical tests,
together with manufacturing information and analytical data, are
submitted as part of an IND to the FDA. Some nonclinical testing
may continue even after an IND is submitted. The IND also includes
one or more protocols for the initial clinical trial or trials and
an investigator’s brochure. An IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA, within
the 30-day time period, raises concerns or questions relating to
the proposed clinical trials as outlined in the IND and places the
clinical trial on a clinical hold. In such cases, the IND sponsor
and the FDA must resolve any outstanding concerns or questions
before any clinical trials can begin. Clinical trial holds also may
be imposed at any time before or during studies due to safety
concerns or non-compliance with regulatory requirements. An
independent institutional review board, or IRB, at each of the
clinical centers proposing to conduct the clinical trial must
review and approve the plan for any clinical trial before it
commences. An IRB considers, among other things, whether the risks
to individuals participating in the trials are minimized and are
reasonable in relation to anticipated benefits. The IRB also
approves the consent form signed by the trial participants and must
monitor the study until completed.
Abbreviated New Drug Application
An ANDA
contains data which when submitted to FDA's Center for Drug
Evaluation and Research, Office of Generic Drugs, provides for the
review and ultimate approval of a generic drug product. Once
approved, an applicant may manufacture and market the generic drug
product to provide a safe, effective, low cost alternative to the
public than a bioequivalent prescription product.
A
generic drug product is one that is comparable to an innovator drug
product in dosage form, strength, route of administration, quality,
performance characteristics and intended use. Generic drug
applications are termed "abbreviated" because they are generally
not required to include preclinical (animal) and clinical (human)
data to establish safety and effectiveness. Instead, generic
applicants must scientifically demonstrate that their product is
bioequivalent (i.e., performs in the same manner as the innovator
drug). One way scientists demonstrate bioequivalence is to
measure the time it takes the generic drug to reach the bloodstream
in 24 to 36 healthy, volunteers. This gives them the rate of
absorption, or bioavailability, of the generic drug, which they can
then compare to that of the innovator drug. The generic
version must deliver the same amount of active ingredients into a
patient's bloodstream in the same amount of time as the innovator
drug.
Using
bioequivalence as the basis for approving generic copies of drug
products was established by the Drug Price Competition and Patent
Term Restoration Act of 1984, also known as the Waxman-Hatch Act.
This Act expedites the availability of less costly generic drugs by
permitting FDA to approve applications to market generic versions
of brand-name drugs without conducting costly and duplicative
clinical trials. At the same time, the Act granted companies
the ability to apply for up to five additional years of patent
protection for the innovator drugs developed to make up for time
lost while their products were going through the FDA's approval
process. Brand-name drugs are subject to the same bioequivalence
tests as generics upon reformulation.
BioEquivalency Studies
Studies
to measure bioavailability and/or establish bioequivalence of a
product are important elements in support of investigational new
drug applications, or INDs, new drug applications, or NDAs, ANDAs
and their supplements. As part of INDs and NDAs for orally
administered drug products, bioavailability studies focus on
determining the process by which a drug is released from the oral
dosage form and moves to the site of action. Bioavailability data
provide an estimate of the fraction of the drug absorbed, as well
as its subsequent distribution and elimination. Bioavailability can
be generally documented by a systemic exposure profile obtained by
measuring drug and/or metabolite concentration in the systemic
circulation over time. The systemic exposure profile determined
during clinical trials in the IND period can serve as a benchmark
for subsequent bioequivalence studies. Studies to establish
bioequivalence between two products are important for certain
changes before approval for a pioneer product in NDA and ANDA
submissions and in the presence of certain post-approval changes in
NDAs and ANDAs. In bioequivalence studies, an applicant compares
the systemic exposure profile of a test drug product to that of a
reference drug product. For two orally or intra-nasally
administered drug products to be bioequivalent, the active drug
ingredient or active moiety in the test product must exhibit the
same rate.
OTC Monograph Process
The FDA
regulates certain non-prescription drugs using an OTC Monograph
which, when final, is published in the Code of Federal Regulations
at 21 C.F.R. Parts 330-358. Such products that meet each of the
conditions established in the OTC Monograph regulations, as well as
all other applicable regulations, may be marketed without prior
approval by the FDA.
The
general conditions set forth for OTC Monograph products include,
among other things:
●
the
product is manufactured at FDA registered establishments and in
accordance with cGMPs;
●
the
product label meets applicable format and content requirements
including permissible “Indications” and all required
dosing instructions and limitations, warnings, precautions and
contraindications that have been established in an applicable OTC
Monograph;
●
the
product contains only permissible active ingredients in permissible
strengths and dosage forms;
●
the
product contains only suitable inactive ingredients which are safe
in the amounts administered and do not interfere with the
effectiveness of the preparation; and
●
the
product container and container components meet FDA’s
requirements.
The
advertising for OTC drug products is regulated by the Federal Trade
Commission, or FTC, which generally requires that advertising
claims be truthful, not misleading, and substantiated by adequate
and reliable scientific evidence. False, misleading or
unsubstantiated OTC drug advertising may be subject to FTC
enforcement action and may also be challenged in court by
competitors or others under the federal Lanham Act or similar state
laws. Penalties for false or misleading advertising may include
monetary fines or judgments as well as injunctions against further
dissemination of such advertising claims.
A
product marketed pursuant to an OTC Monograph must be listed with
the FDA’s Drug Regulation and Listing System and have a
National Drug Code listing which is required for all marketed drug
products. After marketing, the FDA may test the product or
otherwise investigate the manufacturing and development of the
product to ensure compliance with the OTC Monograph. Should the FDA
determine that a product is not marketed in compliance with the OTC
Monograph or is advertised outside of its regulations, the FDA may
require corrective action up to and including market withdrawal and
recall.
Other Regulatory Requirements
Maintaining
substantial compliance with appropriate federal, state, local and
international statutes and regulations requires the expenditure of
substantial time and financial resources. Drug manufacturers are
required to register their establishments with the FDA and certain
state agencies and, after approval, the FDA and these state
agencies conduct periodic unannounced inspections to ensure
continued compliance with ongoing regulatory requirements,
including cGMPs. In addition, after approval, some types of changes
to the approved product, such as adding new indications,
manufacturing changes and additional labeling claims, are subject
to further FDA review and approval. The FDA may require
post-approval testing and surveillance programs to monitor safety
and the effectiveness of approved products that have been
commercialized. Any drug products manufactured or distributed by us
pursuant to FDA approvals are subject to continuing regulation by
the FDA, including:
●
meeting
record-keeping requirements;
●
reporting of
adverse experiences with the drug;
●
providing
the FDA with updated safety and efficacy information;
●
reporting
on advertisements and promotional labeling;
●
drug sampling and
distribution requirements; and
●
complying
with electronic record and signature requirements.
In
addition, the FDA strictly regulates labeling, advertising,
promotion and other types of information on products that are
placed on the market. There are numerous regulations and policies
that govern various means for disseminating information to
health-care professionals as well as consumers, including to
industry sponsored scientific and educational activities,
information provided to the media and information provided over the
Internet. Drugs may be promoted only for the approved indications
and in accordance with the provisions of the approved
label.
The FDA
has very broad enforcement authority and the failure to comply with
applicable regulatory requirements can result in administrative or
judicial sanctions being imposed on us or on the manufacturers and
distributors of our approved products, including warning letters,
refusals of government contracts, clinical holds, civil penalties,
injunctions, restitution and disgorgement of profit, recall or
seizure of products, total or partial suspension of production or
distribution, withdrawal of approvals, refusal to approve pending
applications and criminal prosecution resulting in fines and
incarceration. The FDA and other agencies actively enforce the laws
and regulations prohibiting the promotion of off-label uses, and a
company that is found to have improperly promoted off-label or
unapproved uses may be subject to significant liability. In
addition, even after regulatory approval is obtained, later
discovery of previously unknown problems with a product may result
in restrictions on the product or even complete withdrawal of the
product from the market.
Competition
The OTC
pharmaceutical market is highly competitive with many established
manufacturers, suppliers and distributors that are actively engaged
in all phases of the business. We believe that competition in the
sale of our products will be based primarily on efficacy,
regulatory compliance, brand awareness, availability, product
safety and price. Our brand name OTC pharmaceutical products may be
subject to competition from alternate therapies during the period
of patent protection and thereafter from generic or other
competitive products. All of our existing products and products we
have agreements to acquire compete with generic and other
competitive products in the marketplace.
Competing in the
branded product business requires us to identify and quickly bring
to market new products embodying technological innovations.
Successful marketing of branded products depends primarily on the
ability to communicate the efficacy, safety and value to healthcare
professionals in private practice, group practices and managed care
organizations. We anticipate that our branded product offerings
will support our existing lines of therapeutic focus. Based upon
business conditions and other factors, we regularly reexamine our
business strategies and may from time to time reallocate our
resources from one therapeutic area to another, withdraw from a
therapeutic area or add an additional therapeutic area in order to
maximize our overall growth opportunities.
Some of
our existing products and products we have agreements to acquire
compete with one or more products marketed by very large
pharmaceutical companies that have much greater financial resources
for marketing, selling and developing their products. These
competitors, as well as others, have been in business for a longer
period of time, have a greater number of products on the market and
have greater financial and other resources than we do. If we
directly compete with them for the same markets and/or products,
their financial and market strength could prevent us from capturing
a meaningful share of those markets.
We also
compete with other OTC pharmaceutical companies for product line
acquisitions as well as for new products and acquisitions of other
companies.
Research and Development
We have used
outside contract research organizations to carry out our research
and development activities. During the years ended
December 31, 2015 and 2016, we incurred research and development
costs totaling $0, and $77,804, respectively. This increase was a
result of the cost of salary and the related health benefits for an
employee, conclusion of testing, non-human primate safety studies,
clinical studies for our products Zestra®, Zestra Glide®,
EjectDelay® and Sensum+®, as well as the fair value of
the shares of common stock issued to CRI totaling $23,000 for the
settlement of certain clinical and regulatory milestone payments
due under the in-license agreement for
Sensum+®.
Employees
We
currently have five full-time employees, including Dr. Bassam
Damaj, who serves as our President and Chief Executive
Officer. We also rely on a number of consultants. Our
employees are not represented by a labor union or by a collective
bargaining agreement. Subject to the availability of financing, we
intend to expand our staff to implement our growth
strategy.
Intellectual Property Protection
Our
ability to protect our intellectual property, including our
technology, will be an important factor in the success and
continued growth of our business. We protect our intellectual
property through trade secrets law, patents, copyrights, trademarks
and contracts. Some of our technology relies upon third-party
licensed intellectual property.
We
currently hold four patents in the United States and six patents
registered outside the United States. We currently have no patent
applications pending in the U.S. and 11 patent applications pending
in countries other than the United States. We also have exclusive
U.S. rights to multiple patents in the U.S. and Europe licensed
under the product license agreements we have with NTC Pharma and Q
Pharma.
We own
nine trademark registrations and have four trademark applications
pending in the United States. We also own 19 trademarks registered
outside of the United States, with no applications currently
pending.
We have
established business procedures designed to maintain the
confidentiality of our proprietary information, including the use
of confidentiality agreements and assignment-of-inventions
agreements with employees, independent contractors, consultants and
companies with which we conduct business.
Description of Property
We
maintain our principal office at 9171 Towne Centre Drive, Suite
440, San Diego, California 92122. Our telephone number at that
office is (858) 964-5123. Our lease agreement was entered into on
January 15, 2014 and was extended on November 2, 2015 to expire on
January 31, 2019. Our current monthly rental rate under the
agreement is $7,682.
We
believe that our existing facilities are suitable and adequate to
meet our current business requirements, but we will require a
larger, more permanent space as we add personnel consistent with
our business plan. We anticipate we will be able to acquire
additional facilities as needed on terms consistent with our
current lease. We maintain a website at www.innovuspharma.com and the
information contained on that website is not deemed to be a part of
this prospectus.
Legal Proceedings
In the
normal course of business, we may be a party to legal
proceedings. We are not currently a party to any material
legal proceedings.
MANAGEMENT
Executive Officers and Directors
|
Name
|
|
Age
|
|
Title
|
|
Bassam
Damaj, Ph.D.
|
|
48
|
|
President,
Chief Executive Officer, Chief Accounting Officer
|
|
Robert
E. Hoffman
|
|
51
|
|
Executive
Vice President and Chief Financial Officer
|
|
Randy
Berholtz, MBA, JD
|
|
55
|
|
Executive
Vice President, Corporate Development and General
Counsel
|
|
Henry
Esber, Ph.D.
|
|
78
|
|
Chairman
of the Board of Directors
|
|
Vivian
Liu
|
|
55
|
|
Director
|
|
Ziad
Mirza, MBA, M.D.
|
|
55
|
|
Director
|
Directors are
elected annually and hold office until the next annual meeting of
the stockholders of the Company and until their successors are
elected. Officers are elected annually and serve at the discretion
of the board of directors.
Bassam Damaj, Ph.D. has served on our board of directors and as our
President and Chief Executive Officer, since January, 2013 and as
our Chief Accounting Officer from July 2015 until September 6,
2016. Before joining Innovus, Dr. Damaj served as President and
Chief Executive Officer of Apricus Biosciences, Inc. (Nasdaq:
APRI), a drug discovery and development company
(“Apricus Bio”), from December 2009 until November 2012.
Before joining Apricus Bio, Dr. Damaj was a co-founder of
Bio-Quant, Inc., a pre-clinical contract services company
(“Bio-Quant”) and served as the Chief Executive Officer
and Chief Scientific Officer and as a member of Bio-Quant’s
board of directors from its inception in June 2000 until its
acquisition by Apricus Bio in June 2011. In addition, Dr. Damaj was
the founder, Chairman, President and Chief Executive Officer of
R&D Healthcare, a wholesale drug distribution company, and the
co-founder of Celltek Biotechnologies, a drug discovery and
services company. He also served as a member of the board of
directors of CreAgri, Inc., a drug discovery company, and was a
member of the Scientific Advisory Board of MicroIslet, Inc., a drug
discovery company. Since July, 2016 Dr. Damaj has been a member of
the board of directors of Hispanica International Delights of
America, Inc. (OTCQB:HISP), an ethnic food company. He is the
author of the Immunological Reagents and Solutions reference book,
the inventor of many patents and the author of numerous peer
reviewed scientific publications. Dr. Damaj won a U.S.
Congressional award for the Anthrax Multiplex Diagnostic Test in
2003. Dr. Damaj holds a Ph.D. degree in Immunology/Microbiology
from Laval University and completed a postdoctoral fellowship in
molecular oncology at McGill University.
Dr.
Damaj’s significant experience with our business and his
significant executive leadership experience, including his
experience leading several pharmaceutical companies, were
instrumental in his selection as a member of the board of
directors.
Robert E. Hoffman was appointed as Executive Vice President and
Chief Financial Officer on August 29, 2016 and began his service on
September 6, 2016. Mr. Hoffman was most recently Chief Financial
Officer of AnaptysBio, Inc., a clinical stage biopharmaceutical
company. He was part of the founding management team of Arena
Pharmaceuticals, Inc., (Nasdaq:ARNA), a biopharmaceutical company,
in 1997, serving as Senior Vice President, Finance and Chief
Financial Officer until 2015. Mr. Hoffman is a member of the board
of directors of CombiMatrix Corporation, (Nasdaq:CBMX), a molecular
diagnostics company, Kura Oncology, Inc., a (Nasdaq:KURA), a
biotechnology company, and MabVax Therapeutics Holdings, Inc.,
(Nasdaq:MBVX), a biopharmaceutical company. He also was a member of
the Financial Accounting Standards Board’s Small Business
Advisory Committee and is a member of the steering committee of the
Association of Bioscience Financial Officers. Mr. Hoffman received
his B.B.A. from St. Bonaventure University, and is licensed as a
C.P.A. (inactive) in the State of California.
Randy Berholtz, MBA, JD has served as
our Executive Vice President, Corporate Development and General
Counsel of the Company since January 9, 2017. He also became the
Secretary of the Company at that time. Mr. Berholtz had previously
been a part-time consultant for the Company from July 2013 to
mid-May 2016. Mr. Berholtz was recently the founding partner of the
Sorrento Valley Law Group, a healthcare and life sciences law firm.
Previously, from 2011 to 2013, he was the Executive Vice President,
General Counsel and Secretary of Apricus Biosciences, Inc., a
biotechnology company; from 2004 to 2010, he was the Vice
President, General Counsel and Secretary of the ACON Group of
private U.S. and Chinese life science companies; from 2003 to 2004,
he was the Chief Operating Officer and General Counsel to Inglewood
Ventures, a life sciences venture capital firm; and from 2000 to
2003, he held multiple titles and rose to become the Acting General
Counsel and Secretary of Nanogen, Inc., a genomics tools company.
From 1992 to 2000, Mr. Berholtz was in private practice with law
firms in New York and San Diego, and from 1990 to 1991, he was a
law clerk to Judge Jerry E. Smith on the U.S. Court of Appeals for
the Fifth Circuit. Mr. Berholtz is a member of the board of
directors of Hispanica International Delights of America, Inc., an
ethnic food company and Larada Health, Inc., a private company in
the medical supply business, and is a Senior Advisor to Mesa Verde
Ventures, a life sciences venture capital firm. Mr. Berholtz
received his B.A. from Cornell University, his M.Litt. from Oxford
University where he was a Rhodes Scholar, his J.D. from Yale
University and his M.B.A. from the University of San
Diego.
Henry Esber, Ph.D. has served as a member of our board of directors
since January 2011 and has served as Chairman of the Board since
January 2013. In 2000, Dr. Esber co-founded Bio-Quant, and from
2000 to 2010, he served as its Senior Vice President and Chief
Business Development Officer. Dr. Esber has more than 30 years of
experience in the pharmaceutical service industry. Dr. Esber served
on the board of directors of Apricus Bio from December 2009 to
January 2013 and currently serves on the board of directors of
several private pharmaceutical companies. Dr. Esber
holds a Ph.D. in Immunology/Microbiology from the West Virginia
University School of Medicine, as well as an M.S. in Public Health
and Medical Parasitology from University of North Carolina Chapel
Hill. His PreMed B.S is from Norfolk College of William and Mary,
now Old Dominion University.
Dr.
Esber’s significant scientific background and experience was
instrumental in his selection as a member of the board of
directors.
Vivian Liu has served as a member of our board of directors
since December 2011 and served as our President, Chief Executive
Officer and Chief Financial Officer from December 2011 to January
22, 2013. Prior to that, she served as the President and Chief
Executive Officer of FasTrack Pharma, (“FasTrack
Pharma”), a
pharmaceutical company, from January 2011 to December 2011. Ms. Liu
is currently the Chief Operating Officer of Cesca Therapeutics,
Inc. (“Cesca”). She has been a member of the Board of
Directors of Cesca since November 2016. From February 2013 to March
2017, Ms. Liu served as Managing Director of OxOnc Services
Company, an oncology development company. In 1995, Ms. Liu
co-founded NexMed, Inc. a Delaware corporation
(“NextMed”), which in 2010 was renamed to Apricus
BioSciences, Inc. Ms. Liu was NexMed’s President and Chief
Executive Officer from 2007 to 2009. Prior to her appointment as
President, Ms. Liu served in several executive capacities,
including Executive Vice President, Chief Operating Officer, Chief
Financial Officer and Vice President of Corporate Affairs. She was
appointed as a director of NexMed in 2007 and served as Chairman of
its board of directors from 2009 to 2010. Ms. Liu has an M.P.A.
from the University of Southern California and has a B.A. from the
University of California,
Berkeley.
Ms.
Liu’s significant executive leadership experience, including
her experience leading several pharmaceutical companies, as well as
her membership on public company boards was instrumental in her
selection as a member of the board of directors.
Ziad Mirza, MBA, M.D. has served as a member of our board of directors
since December 2011 and served as Chairman of our board of
directors from December 2011 to January 2013. He also served as
FasTrack Pharma’s Acting Chief Executive Officer from March
2010 to December 2010. Since February, 2016, Dr. Mirza has been the
Chief Medical Officer of HyperHeal Hyperbarics, Inc., an outpatient
hyperbaric oxygen therapy company. He is the President and
co-founder of Baltimore Medical and Surgical Associates. He is a
Certified Medical Director of long term care through the American
Medical Directors Association. He is also a Certified Physician
Executive from the American College of Physician Executives. He
consults for pharmaceutical companies on clinical trial design. He
has an M.D. from the American University of Beirut and completed
his residency at Good Samaritan Hospital in Baltimore, Maryland. He
received an M.B.A. from the University of
Massachusetts.
Dr.
Mirza’s significant medical and scientific background was
instrumental in his selection as a member of the board of
directors.
Family Relationships
Dr. Mirza and
Dr. Damaj are cousins. Otherwise, there are no family
relationships among any of the members of our board of directors or
our executive officers.
Involvement in Certain Legal Proceedings
Our
directors and executive officers have not been involved in any of
the following events during the past ten years:
1.
any
bankruptcy petition filed by or against such person or any business
of which such person was a general partner or executive officer
either at the time of the bankruptcy or within two years prior to
that time;
2.
any
conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
3.
being
subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him from or
otherwise limiting his involvement in any type of business,
securities or banking activities or to be associated with any
person practicing in banking or securities activities;
4.
being
found by a court of competent jurisdiction in a civil action, the
SEC or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment
has not been reversed, suspended, or vacated;
5.
being
subject of, or a party to, any federal or state judicial or
administrative order, judgment decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation of
any federal or state securities or commodities law or regulation,
any law or regulation respecting financial institutions or
insurance companies, or any law or regulation prohibiting mail or
wire fraud or fraud in connection with any business entity;
or
6.
being
subject of or party to any sanction or order, not subsequently
reversed, suspended, or vacated, of any self-regulatory
organization, any registered entity or any equivalent exchange,
association, entity or organization that has disciplinary authority
over its members or persons associated with a member.
Director Independence
We have determined that all of our directors,
other than Dr. Bassam Damaj, are “independent” as
defined by applicable rules and regulations. Accordingly, a
majority of the members of our board of directors are
“independent.”
Board of Directors’ Meetings
During
the fiscal year ended December 31, 2016, our board of directors
held four meetings and approved certain actions by unanimous
written consent. We expect our directors to attend all board and
committee meetings and to spend the time needed and meet as
frequently as necessary to properly discharge their
responsibilities. Due to the limited size of our board of
directors, we currently do not use board committees. As a result,
the board as a whole carries out the functions of audit, nominating
and compensation committees.
Director Nominations
Generally,
nominees for director are identified and suggested by the members
of the Board using various methods. The Board has not retained any
executive search firms or other third parties to identify or
evaluate director candidates in the past and does not intend to in
the near future. In selecting a nominee for director, the Board
considers the following criteria:
1.
whether
the nominee has the personal attributes for successful service on
the Board, such as demonstrated character and integrity; experience
at a strategy/policy setting level; managerial experience dealing
with complex problems; an ability to work effectively with others;
and sufficient time to devote to the affairs of the
Company;
2.
whether
the nominee has been the chief executive officer or senior
executive of a public company or a leader of a similar
organization, including industry groups, universities or
governmental organizations;
3.
whether
the nominee, by virtue of particular experience, technical
expertise or specialized skills or contacts relevant to the
Company’s current or future business, will add specific value
as a Board member; and
4.
whether
there are any other factors related to the ability and willingness
of a new nominee to serve, or an existing Board member to continue
his/her service.
The
Board has not established any specific minimum qualifications that
a candidate for director must meet in order to be recommended for
Board membership. Rather the Board will evaluate the mix of skills
and experience that the candidate offers, consider how a given
candidate meets the Board’s current expectations with respect
to each such criterion and make a determination regarding whether a
candidate should be recommended to the stockholders for election as
a director.
During
2016, the Company received no recommendation for directors from its
stockholders.
Board of Directors’ Leadership Structure and Role in Risk
Oversight
Dr.
Esber serves as the Chairman of the board of directors of the
Company. Dr. Damaj serves as the President of the Company. The
Board believes this leadership structure provides the most
efficient and effective leadership model for the Company by
enhancing the Chairman and President’s ability to provide
clear insight and direction of business strategies and plans to
both the Board and management by keeping separate the position
of Chairman and President. The Board regularly evaluates its
leadership structure and currently believes the Company can most
effectively execute its business strategies and plans. While the
Board has not made a determination as to director independence and
all our directors, except for Dr. Bassam Damaj, are considered as
independent under Nasdaq definition and requirements, as determined
by outside counsel.
We
take a comprehensive approach to risk management, which is
reflected in the reporting process by which our management provides
timely and comprehensive information to the Board to support the
Board’s role in oversight, approval and decision-making. Our
senior management is responsible for assessing and managing the
Company’s various exposures to risk on a day-to-day basis,
including the creation of appropriate risk management programs and
policies. The Board is responsible for overseeing management in the
execution of its responsibilities and for assessing the
Company’s approach to risk management. The Board exercises
these responsibilities periodically as part of its meetings. In
addition, an overall review of risk is inherent in the
Board’s consideration of the Company’s long-term
strategies and in the transactions and other matters presented to
the Board, including capital expenditures, acquisitions and
divestitures, and financial matters.
Code of Business Conduct and Ethics and Insider Trading
Policy
Our board of directors adopted a Code of Ethical
Conduct and an Insider Trading Policy. These documents are
available for review by contacting the Company’s Corporate
Secretary at Innovus Pharmaceuticals, Inc., 9171 Towne
Centre Drive, Suite 440, San Diego, CA 92122.
EXECUTIVE
COMPENSATION
The
following table sets forth information concerning compensation
earned for services rendered to us during the two years ended
December 31, 2016 and 2015 by (i) all individuals serving as our
principal executive officer or acting in a similar capacity during
the last completed fiscal year (“PEO”), regardless of compensation
level; (ii) our two most highly compensated executive officers
other than the PEO who were serving as executive officers at the
end of each of the last two completed fiscal years and (iii) up to
two additional individuals for whom disclosure would have been
provided pursuant to clause (ii) but for the fact that the
individual was not serving as an executive officer at the end of
each of the last two completed fiscal years.
Summary Compensation Table
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus(1)
|
Stock
Awards
|
Stock
Unit
Awards
|
All
Other
Compen-sation
|
Total
|
|
Bassam Damaj Ph
D.,
|
2016
|
$532,400(2)
|
$-
|
$-
|
$240,000(3)
|
$-
|
$772,400
|
|
President and Chief
Executive Officer, and former Chief Financial Officer
(4)
|
2015
|
$484,000(2)
|
$-
|
$-
|
$630,000(3)
|
$-
|
$1,114,000
|
|
|
|
|
|
|
|
|
|
|
Robert E.
Hoffman,
|
|
|
|
|
|
|
|
|
Executive Vice
President and Chief Financial Officer(5)
|
2016
|
$96,731
|
$-
|
$-
|
$675,000(3)
|
$-
|
$771,731
|
|
(1)
|
Our
board of directors has not yet determined the amounts of bonuses
payable to our named executive officers earned in 2016. We
anticipate that bonuses, if any, for 2016 will be determined by our
board of directors by mid-April 2017.
|
|
(2)
|
Pursuant
to the LOC Convertible Debenture, Dr. Damaj agreed not to draw a
salary pursuant to his employment agreement for so long as payment
of such salary would jeopardize the Company’s ability to
continue as a going concern and not to draw any salary accrued
through December 31, 2015. Salary through June 30, 2016 was accrued
for and remains unpaid as of December 31, 2016. Effective July 1,
2016, Dr. Damaj started receiving his salary in cash.
|
|
(3)
|
Represents
the total grant date fair value, as determined under FASB ASC Topic
718, Stock Compensation, of restricted stock unit awards granted
during the respective fiscal year.
|
|
(4)
|
Dr. Damaj served as Chief Financial Officer from July 2015 until
September 6, 2016 when Mr. Robert E. Hoffman became Executive Vice
President and Chief Financial Officer.
|
|
(5)
|
Represents
Mr. Hoffman’s salary from the commencement of his employment
on September 6, 2016, through December 31, 2016.
|
Outstanding Equity Awards at Fiscal Year-End 2016
The
following table presents, for each of the named executive officers,
information regarding outstanding stock options held as of
December 31, 2016.
|
|
|
Option Awards
|
|||
|
Name
|
Grant Date(1)
|
Number of Securities Underlying Unexercised Options (#)
Exercisable
|
Number of Securities Underlying Unexercised Options (#)
Unexercisable
|
Option Exercise
Price ($)
|
Option Expiration
Date
|
|
Robert E. Hoffman(1)
|
Sep.
30, 2013
|
10,500
|
—
|
$0.90
|
Sep.
29, 2023
|
|
|
Dec. 31, 2013
|
10,500
|
—
|
$0.38
|
Dec.
30, 2023
|
|
|
Mar. 31, 2014
|
10,500
|
—
|
$0.40
|
Mar. 30, 2024
|
|
|
Jun. 30, 2014
|
10,500
|
—
|
$0.25
|
Jun.
29, 2024
|
|
|
Sep. 30, 2014
|
10,500
|
—
|
$0.40
|
Sep. 29, 2024
|
|
|
Dec. 31, 2014
|
10,500
|
—
|
$0.18
|
Dec.
30, 2024
|
|
|
Mar
31, 2015
|
10,500
|
—
|
$0.14
|
Mar.
30, 2025
|
|
|
Jun. 30, 2015
|
10,500
|
—
|
$0.12
|
Jun.
29, 2025
|
|
|
Sep. 30, 2015
|
10,500
|
—
|
$0.07
|
Sep. 29, 2025
|
|
|
Dec. 31, 2015
|
10,500
|
—
|
$0.07
|
Dec. 30, 2025
|
|
|
Mar.
31, 2016
|
10,500
|
—
|
$0.05
|
Mar.
30, 2026
|
(1)
Represents options
fully vested at grant date to Mr. Hoffman while he was a consultant
to the Company, prior to being appointed Executive Vice President
and Chief Financial Officer in September 2016.
The following table
presents, for each of the named executive officers, information
regarding outstanding restricted stock units held as of
December 31, 2016.
|
Name
|
Grant Date(1)
|
Equity incentive
plan awards: Number of unearned shares, units or other rights that
have not vested (#)
|
Equity incentive
plan awards: Market or payout value of unearned shares, units or
other rights
|
|
Bassam
Damaj(1)
|
Mar. 31,
2015
|
375,000
|
$75,000
|
|
Robert E.
Hoffman(2)
|
Sep. 6, 2016
|
2,500,000
|
$500,000
|
(1)
Unvested RSUs vest
125,000 per month through March 2017.
(2)
Unvested RSUs vest 25% on September 6, 2017 with the balance
vesting ratably over eight quarters and fully vested on September
6, 2019.
Employment Agreements
Dr. Bassam Damaj. On January 22, 2013, the Company
entered into an employment agreement (the “Employment Agreement”) with Dr.
Bassam Damaj to serve as its President and Chief Executive Officer,
which was amended on January 21,
2015.
The
Employment Agreement has an initial term of five years, which term
will be extended by an additional year on the fourth and each
subsequent anniversary. Dr. Damaj earned a base salary
of $375,000 for the first year, $440,000 in the second year and
increasing a minimum of 10% per year thereafter. Dr.
Damaj’s salary will be accrued and not paid for so long as
payment of such salary would jeopardize the Company’s ability
to continue as a going concern, in Dr. Damaj’s sole
determination. Dr. Damaj will have annual cash bonus targets equal
to 75% and 30%, respectively, of base salary, based on performance
objectives established by the board of directors, with the board of
directors determining the amount of the annual bonus.
Dr.
Damaj received 6.0 million RSU's of common stock on January 22,
2013, of which 2.0 million shares vested immediately, and the
remaining 4.0 million shares vested in eight equal quarterly
installments beginning on April 1, 2013.
Upon
termination of the Employment Agreement for any reason, Dr. Damaj
will receive (i) a pro-rata bonus during that fiscal year based on
the number of days employed during that fiscal year, and (ii)
Company group medical, dental and vision insurance coverage for Dr.
Damaj and his dependents for 12 months paid by the
Company.
Pursuant to the
Employment Agreement, if Dr. Damaj’s employment is terminated
as a result of death, disability or without Cause (as defined in
the Employment Agreement) or Dr. Damaj resigns for Good Reason (as
defined in the Employment Agreement), Dr. Damaj or his estate, as
applicable, is entitled to the following payments and benefits,
provided that a mutual release of claims is executed: (1) a cash
payment in an amount equal to 1.5 times his then base salary and
annual target bonus amount, or two times his then base salary and
annual target bonus amount if such termination occurs within 24
months of a change of control; (2) Company group medical, dental
and vision insurance coverage for Dr. Damaj and his dependents for
24 months paid by the Company; and (3) the automatic acceleration
of the vesting and exercisability of outstanding unvested stock
awards.
For
purposes of the Employment Agreement, “Cause”
generally means (1) commission of fraud or other unlawful
conduct in the performance of duties for the Company,
(2) conviction of or, entry into a plea of
“guilty” or “no contest” to, a felony under
United States federal or state law, and such felony is either
work-related or materially impairs Dr. Damaj’s ability to
perform services to the Company, and (3) a willful, material
breach of the Employment Agreement that causes material harm to the
Company, provided, however, that the board of directors must
provide 30 days prior written notice of its intention to terminate
for Cause and give Dr. Damaj the opportunity to cure or remedy such
alleged Cause and present Dr. Damaj’s case to the board of
directors and afterwards, at least 75% of the board of directors
(except for Dr. Damaj in the event he the subject of the hearing)
affirmatively determines that termination is for
Cause.
For
purposes of the Employment Agreement, “Good
Reason” generally means that within one year prior to the
date of resigning, (1) a material diminution in Dr.
Damaj’s title, authority, duties or responsibilities (for Dr.
Damaj, this includes remaining a member of the board of directors),
(2) a reduction in Dr. Damaj’s base salary or target
bonus amount, (3) a change in the geographic location greater
than 25 miles from the current office at which Dr. Damaj must
perform his duties, (4) the Company elects not to renew
the Employment Agreement for another term or (5) the
Company materially breaches any provision of the Employment
Agreement, provided, however, that Dr. Damaj must provide 30 days
prior written notice of his intention to resign for Good Reason,
which notice must be given within 90 days of the initial occurrence
of such cause and gives the Company the opportunity to cure or
remedy such alleged Good Reason.
Robert E.
Hoffman. The Company and Mr.
Hoffman entered into an employment agreement, effective, September
6, 2016 wherein Mr. Hoffman will receive an annual base salary of
$300,000 as well as an annual bonus based on personal performance
and as approved by the board of directors. The target bonus amount
is 35% of his annual base salary.
Mr.
Hoffman will also receive an RSU covering 2.5 million shares of the
Company’s common stock; 625,000 of which will vest after one
year of employment. The remaining RSU’s will vest in eight
equal quarterly installments over two years of continued
service.
Upon
termination of the Employment Agreement for any reason, Mr. Hoffman
will receive (i) a pro-rata bonus during that fiscal year based on
the number of days employed during that fiscal year, and (ii)
Company group medical, dental and vision insurance coverage for Mr.
Hoffman and his dependents for six months paid by the
Company.
Pursuant to the
Employment Agreement, if Mr. Hoffman’s employment is
terminated as a result of death, disability or without Cause (as
defined in the Employment Agreement) or Executive resigns for Good
Reason (as defined in the Employment Agreement), Executive or their
estate, as applicable, is entitled to the following payments and
benefits, provided that a mutual release of claims is executed: (1)
a cash payment in an amount equal to six months of his then base
salary and annual target bonus amount, if such termination occurs
within six months of a change of control; (2) Company group
medical, dental and vision insurance coverage for Mr. Hoffman and
his dependents for six months paid by the Company; and (3) the
automatic acceleration of the vesting and exercisability of
outstanding unvested stock awards.
For
purposes of the Employment Agreement, “Cause”
generally means (1) commission of fraud or other unlawful
conduct in the performance of duties for the Company,
(2) conviction of or, entry into a plea of
“guilty” or “no contest” to, a felony under
United States federal or state law, and such felony is either
work-related or materially impairs Mr. Hoffman’s ability to
perform services to the Company, and (3) a willful, material
breach of the Employment Agreement that causes material harm to the
Company, provided, however, that the board of directors must
provide 30 days prior written notice of its intention to terminate
for Cause and give Mr. Hoffman the opportunity to cure or remedy
such alleged Cause and present Executive’s case to the board
of directors and afterwards, at least 75% of the board of directors
(except for Hoffman in the event he the subject of the hearing)
affirmatively determines that termination is for
Cause.
For
purposes of the Employment Agreement, “Good
Reason” generally means that within one year prior to the
date of resigning, (1) a material diminution in Mr.
Hoffman’s title, authority, duties or responsibilities (for
Mr. Hoffman, this includes remaining a member of the board of
directors), (2) a reduction in Mr. Hoffman’s base salary
or target bonus amount, (3) a change in the geographic
location greater than 25 miles from the current office at which Mr.
Hoffman must perform his duties, (4) the Company elects not
to renew the Employment Agreement for another term, or
(5) the Company materially breaches any provision of the Employment
Agreement, provided, however, that Mr. Hoffman must provide 30 days
prior written notice of his intention to resign for Good Reason,
which notice must be given within 90 days of the initial occurrence
of such cause and gives the Company the opportunity to cure or
remedy such alleged Good Reason.
Randy Berholtz. The Company and Mr. Berholtz entered into an
employment agreement, effective, January 9, 2017 wherein Mr.
Berholtz will receive an annual base salary of $280,000 as well as
an annual bonus based on personal performance and as approved by
the board of directors. The target bonus amount is 35% of his
annual base salary.
Mr.
Berholtz will also receive RSU’s covering 2.0 million shares
of the Company’s common stock; 666,666 of which will vest
after one year of employment. The remaining RSU’s will vest
in eight equal quarterly installments over two years of continued
service.
Upon
termination of the Employment Agreement for any reason, Berholtz
will receive (i) a pro-rata bonus during that fiscal year based on
the number of days employed during that fiscal year, and (ii)
Company group medical, dental and vision insurance coverage for
such Executive and their dependents for six months paid by the
Company.
Pursuant to the
Employment Agreement, if Mr. Berholtz’s employment is
terminated as a result of death, disability or without Cause (as
defined in the Employment Agreement) or Berholtz resigns for Good
Reason (as defined in the Employment Agreement), Mr. Berholtz or
his estate, as applicable, is entitled to the following payments
and benefits, provided that a mutual release of claims is executed:
(1) a cash payment in an amount equal to six months of his then
base salary and annual target bonus amount, if such termination
occurs within six months of a change of control; (2) Company group
medical, dental and vision insurance coverage for Executive and his
dependents for six months paid by the Company; and (3) the
automatic acceleration of the vesting and exercisability of
outstanding unvested stock awards.
For
purposes of the Employment Agreement, “Cause”
generally means (1) commission of fraud or other unlawful
conduct in the performance of duties for the Company,
(2) conviction of or, entry into a plea of
“guilty” or “no contest” to, a felony under
United States federal or state law, and such felony is either
work-related or materially impairs Mr. Berholtz’s ability to
perform services to the Company, and (3) a willful, material
breach of the Employment Agreement that causes material harm to the
Company, provided, however, that the board of directors must
provide 30 days prior written notice of its intention to terminate
for Cause and give Mr. Berholtz the opportunity to cure or remedy
such alleged Cause and present Mr. Berholtz’s case to the
board of directors and afterwards, at least 75% of the board of
directors (except for Mr. Berholtzin the event he the subject of
the hearing) affirmatively determines that termination is for
Cause.
For
purposes of the Employment Agreement, “Good
Reason” generally means that within one year prior to the
date of resigning, (1) a material diminution in Mr.
Berholtz’s title, authority, duties or responsibilities (for
Mr. Berholtz, this includes remaining a member of the board of
directors), (2) a reduction in Mr. Berholtz’s base
salary or target bonus amount, (3) a change in the geographic
location greater than 25 miles from the current office at which
Berholtz must perform his duties, (4) the Company elects not
to renew the Employment Agreement for another term, or
(5) the Company materially breaches any provision of the Employment
Agreement, provided, however, that Mr. Berholtz must provide 30
days prior written notice of his intention to resign for Good
Reason, which notice must be given within 90 days of the initial
occurrence of such cause and gives the Company the opportunity to
cure or remedy such alleged Good Reason.
Director Compensation
Each
non-employee director of the Company is to receive quarterly
compensation of $3,000, which is paid in RSUs. In addition, the
Chairman of the board of directors is entitled to receive an
additional $3,000 in quarterly compensation paid in
RSUs.
The
following table sets forth summary information concerning the total
compensation paid to our non-employee directors in 2016 for
services to our Company.
|
Name
|
Fees Earned
or Paid in
Cash
|
Stock
Awards
|
Stock Unit
Awards (1)
(2)
|
Total
|
|
Henry Esber,
Ph.D.
|
$-
|
$-
|
$57,333
|
$57,333
|
|
Vivian
Liu
|
-
|
-
|
45,333
|
45,333
|
|
Ziad Mirza, MBA,
M.D.
|
-
|
-
|
45,333
|
45,333
|
|
Total:
|
$-
|
$-
|
$147,999
|
$147,999
|
|
(1)
|
Represents
the total grant date fair value, as determined under FASB ASC Topic
718, Stock Compensation, of RSU awards granted during the
respective fiscal year.
|
|
(2)
|
Includes
an award of 833,333 RSUs granted to each of the directors on
January 29, 2016 under the 2014 Plan in connection with the
acquisition of Beyond Human® assets.
One-half of the RSUs were vested upon grant and the remaining RSUs
vested upon the closing of the Beyond Human® acquisition on
March 1, 2016.
|
Description of Equity Compensation Plans
2013 Equity Incentive Plan
The Company has issued common stock, restricted
stock units and stock option awards to employees, non-executive
directors and outside consultants under the 2013 Incentive Plan
(“2013 Plan”). The 2013 Plan allows for the
issuance of up to 10.0 million shares of the Company’s 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 the
Company’s 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 Company common
stock, which is eligible for settlement at the earliest of their
termination, a change in control of the Company or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards, and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of December 31, 2016, no shares were available under the 2013
Plan.
2014 Equity Incentive Plan
The Company has issued common stock, restricted
stock units and stock option awards to employees, non-executive
directors and outside consultants under the 2014 Incentive Plan
(“2014 Plan”). The 2014 Plan allows for the
issuance of up to 20.0 million shares of the Company’s 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. Currently, because the
Company’s 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 Company common
stock, which is eligible for settlement at the earliest of their
termination, a change in control of the Company or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of December 31, 2016, 146,314 shares were available under the 2014
Plan.
2016 Equity Incentive Plan
The Company has issued common stock, restricted
stock units and stock option awards to employees, non-executive
directors and outside consultants under the 2016 Equity Incentive
Plan (“2016 Plan”). A maximum of 20.0 million shares of the
Company’s common stock are initially authorized for issuance
and available for future grants under our 2016 Plan (the
“Initial
Reserve”). 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.
As of December 31, 2016, a total of 3.75 million RSUs have been
granted under the 2016 Plan and 412,500 shares have been issued to
consultants under the 2016 Plan. We have not yet granted stock
options and stock appreciation rights under the 2016 Plan. As of
December 31, 2016, 15,837,500 million shares remained issuable
under the 2016 Plan.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table presents information, to the best of our knowledge, about the
beneficial ownership of our common stock on March 15, 2017 by those persons
known to beneficially own more than 5% of our capital stock, by
each of our directors and named executive officers and all of our
directors and current executive officers as a group. The percentage
of beneficial ownership for the following table is based on
124,810,756 shares of common stock outstanding as of March 15,
2017.
Beneficial
ownership is determined in accordance with the rules of the
Securities and Exchange Commission (“SEC”) and does not necessarily
indicate beneficial ownership for any other purpose. Under these
rules, beneficial ownership includes those shares of common stock
over which the stockholder has sole or shared voting or investment
power. It also includes shares of common stock that the stockholder
has a right to acquire within 60 days after March 15, 2017 pursuant to options,
warrants, restricted stock units, conversion privileges or other
rights. The percentage of ownership of the outstanding common
stock, however, is based on the assumption, expressly required by
the rules of the SEC, that only the person or entity whose
ownership is being reported has converted options or warrants into
shares of our common stock.
|
NAME OF OWNER (1)
|
Amount and nature of beneficial ownership of Common Stock
(2)
|
Percentage of outstanding Common
Stock Before the Offering(3)
|
Percentage of outstanding
Common Stock
Following the Offering
(10)
|
|
5%
Stockholders
|
|
|
|
|
Novalere Holdings
LLC
151 Treemont
Street, Penthouse
Boston, MA
02111
|
25,617,592
|
20.53%
|
17.02%
|
|
|
|
|
|
|
Directors
and Named Executive Officers:
|
|
|
|
|
Bassam Damaj, Ph.D.
(4)
|
23,703,347
|
18.42%
|
15.36%
|
|
Robert E. Hoffman
(5)
|
395,603
|
*
|
*
|
|
Randy Berholtz,
MBA/JD (6)
|
175,000
|
*
|
*
|
|
Henry Esber, Ph.D.
(7)
|
1,853,109
|
1.46%
|
1.22%
|
|
Vivian Liu
(8)
|
2,439,780
|
1.93%
|
1.60%
|
|
Ziad Mirza,
MBA/M.D. (9)
|
2,013,044
|
1.59%
|
1.32%
|
|
Officers and
Directors as a Group (6 persons)
|
30,579,883
|
22.82%
|
19.15%
|
* Represents less than 1%
(1)
Unless otherwise
indicated in the footnotes to the following table, each person
named in the table has sole voting and investment power and that
person’s address is c/o Innovus Pharmaceuticals, Inc., 9171
Towne Centre Drive, Suite 440, San Diego, California
92122.
(2)
Beneficial
Ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities. Shares of common stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible
within 60 days of March 15, 2017 are deemed outstanding for
computing the percentage of the owner’s holding such option
or warrant but are not deemed outstanding for computing the
percentage of any other owner.
(3)
Percentage based
upon 124,810,756 shares of common stock issued and outstanding as
of March 15, 2017.
(4)
Includes 3,875,000
shares of common stock issuable upon conversion of vested RSUs
within 60 days after March 15, 2017 and 129,393 shares of
common stock held by Dr. Damaj’s spouse.
(5)
Includes 115,500
shares of common stock issuable upon the exercise of stock options
exercisable within 60 days after March 15, 2017.
(6)
Includes 131,250
shares of common stock issuable upon conversion of vested RSUs
within 60 days after March 15,
2017.
(7)
Includes 1,853,109
shares of common stock issuable upon conversion of vested RSUs
within 60 days after March 15,
2017.
(8)
Includes 1,595,097
shares of common stock issuable upon conversion of vested RSUs
within 60 days after March 15,
2017.
(9)
Includes 1,595,097
shares of common stock issuable upon conversion of vested RSUs
within 60 days after March 15,
2017.
|
(10)
|
Percentage
based upon 150,477,425 shares of common stock issued and
outstanding immediately after the offering.
|
Restricted Stock Grants
During
March 2015, the Company entered into stock unit agreements with its
employees, board of directors and certain key
consultants. Under the terms of the agreements, the Company
issued 10,370,000 RSUs, of which 3,456,667 of the RSUs vested
immediately, while the remaining 6,913,333 vested in equal monthly
installments through March 2017, subject to the continued service
to the Company as of the vesting date. The Company
recognized compensation expense and other expense as appropriate in
the first quarter corresponding to the appropriate service
period.
During
the year ended December 31, 2016, the Company issued 14,636,106
RSUs to employees and board members. In 2016, 886,107 were from the
2013 Plan and vested immediately, 9,999,999 were from the 2014 Plan
and 3,750,000 were from the 2016 Plan. A total of
6,000,001 of 9,999,999 RSUs issued under the 2014 Plan vested
immediately and the remaining 3,999,998 vested upon the closing of
the Beyond Human® asset
acquisition. The RSUs issued under the 2016 Plan vest as to 25% on
the one year anniversary from the date of grant and then in equal
quarterly installments for the next two years.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On
occasion we may engage in certain related party transactions. All
prior related party transactions were approved by a majority of the
disinterested directors. Upon the consummation of offering, our
policy is that all related party transactions will be reviewed and
approved by the independent members of our board of directors prior
to our entering into any related party transactions.
Non-Convertible Note
In January 2013, the Company entered into a line
of credit convertible debenture with Dr. Bassam Damaj, the
Company’s CEO (the “LOC Convertible
Debenture”). Under the
terms of its original issuance: (i) the Company could request to
borrow up to a maximum principal amount of $250,000 from time to
time; (ii) amounts borrowed bore an annual interest rate of 8%;
(iii) the amounts borrowed plus accrued interest were payable in
cash at the earlier of January 14, 2014 or when the Company
completed a Financing, as defined in the LOC Convertible Debenture;
and (iv) the holder had sole discretion to determine whether or not
to make an advance upon the Company’s request. During
2013, the LOC Convertible Debenture was further amended to: (y)
increase the maximum principal amount available for borrowing to
$1.0 million plus any amounts of salary or related payments paid to
Dr. Damaj prior to the termination of the funding commitment; and
(z) change the holder’s funding commitment to automatically
terminate on the earlier of either (a) when the Company completes a
financing with minimum net proceeds of at least $4.0 million, or
(b) July 1, 2016.
On
August 12, 2015, the principal amount that may be borrowed under
the LOC Convertible Debenture was increased to $2.0 million and the
automatic termination date described above was extended to October
1, 2016. The LOC Convertible Debenture was not renewed upon
expiration. The conversion price was $0.16 per share, 80% times the
quoted market price of the Company’s common stock on the date
of the amendment.
During the years ended December 31, 2016 and 2015,
the Company borrowed $0 and $114, respectively, under the LOC Convertible Debenture,
and recognized interest expense on the outstanding debentures to a
related party totaling $16,430 and $33,174 during the years ended
December 31, 2016 and 2015, respectively. The Company repaid
the LOC Convertible Debenture balance and accrued interest in full
during the year ended December 31, 2016.
Accrued Compensation
The
Company has accrued certain wages, vacation pay and target-based
bonuses payable to Dr. Damaj, as follows:
|
|
December
31, 2016
|
December
31,
2015
|
|
Wages
|
$ 1,455,886
|
$ 1,178,909
|
|
Vacation
|
261,325
|
170,371
|
|
Bonus
|
449,038
|
-
|
|
Payroll taxes on
the above
|
133,344
|
93,510
|
|
Total
|
2,299,593
|
1,442,790
|
|
Classified as
long-term
|
(1,531,904)
|
(906,928)
|
|
Accrued
compensation
|
$ 767,689
|
$ 535,862
|
Accrued
wages as of December 31, 2016 and 2015, which totaled $1.4 million
and $1.1 million, respectively, are entirely related to wages owed
to Dr. Damaj. 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 the Company’s ability to
continue as a going concern. Dr. Damaj started to receive payment
of salary in July 2016. Under the third quarter 2015 financing
agreement, salaries prior to January 1, 2015 totaling $906,928
could not be repaid until certain indebtedness was repaid in full
or otherwise extinguished by conversion or other means and,
accordingly, the accrued compensation was shown as a long-term
liability. During the year ended December 31, 2016, the
indebtedness was fully converted into shares of common stock. We do
not expect to pay the wages and related payroll tax amounts within
the next 12 months and thus is classified as a long-term
liability.
All
future transactions between us and our officers, directors or five
percent stockholders, and respective affiliates will be on terms no
less favorable than could be obtained from unaffiliated third
parties and will be approved by a majority of our independent
directors who do not have an interest in the transactions and who
had access, at our expense, to our legal counsel or independent
legal counsel.
To
the best of our knowledge, during the past three fiscal years,
other than as set forth above, there were no material transactions,
or series of similar transactions, or any currently proposed
transactions, or series of similar transactions, to which we were
or are to be a party, in which the amount involved exceeds
$120,000, and in which any director or executive officer, or any
security holder who is known by us to own of record or beneficially
more than 5% of any class of our common stock, or any member of the
immediate family of any of the foregoing persons, has an interest
(other than compensation to our officers and directors in the
ordinary course of business).
DESCRIPTION OF SECURITIES
Common Stock
Our
Amended and Restated Articles of Incorporation authorizes
the issuance of
292,500,000 shares of common stock, $0.001 par value per share and
7,500,000 shares of preferred stock; 124,810,756 shares were
outstanding as March 15, 2017. Upon sale, conversion or exercise of
the 78,283,340 shares offered herein, we may have outstanding, up
to 203,094,096 shares of common stock. Holders of shares
of common stock are entitled to one vote for each share on all
matters to be voted on by the stockholders. Holders of common stock
have no cumulative voting rights, but are entitled to one vote for
each shares of common stock they hold. Holders of shares of common
stock are entitled to share ratably in dividends, if any, as may be
declared, from time to time by the board of directors in its
discretion, from funds legally available to be distributed. In the
event of a liquidation, dissolution or winding up of Innovus, the
holders of shares of common stock are entitled to share pro rata
all assets remaining after payment in full of all liabilities and
the prior payment to the preferred stockholders if any. Holders of
common stock have no preemptive rights to purchase our common
stock. There are no conversion rights or redemption or sinking fund
provisions with respect to the common stock.
Preferred Stock
Our
Articles of Incorporation give our board of directors the right to
create a new series of preferred stock. There are currently no
series of preferred stock authorized and thus no shares of
preferred stock outstanding.
Our
board of directors, subject to the provisions of our Articles of
Incorporation and limitations imposed by law, is authorized
to:
●
adopt
resolutions;
●
to issue the
shares;
●
to fix the number
of shares;
●
to change the
number of shares constituting any series; and
●
to provide for or
change the following:
●
the voting
powers;
●
designations;
●
preferences;
and
●
relative,
participating, optional or other special rights, qualifications,
limitations or restrictions, including the following:
●
dividend rights
(including whether dividends are cumulative);
●
dividend
rates;
●
terms of
redemption (including sinking fund provisions);
●
redemption
prices;
●
conversion rights;
and
●
liquidation
preferences of the shares constituting any class or series
of the preferred stock.
In each
of the listed cases, we will not need any further action or vote by
the stockholders.
One of
the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a tender offer, proxy
contest, merger or otherwise, and thereby to protect the continuity
of our management. The issuance of shares of preferred stock
pursuant to the board of director’s authority described above
may adversely affect the rights of holders of common stock. For
example, preferred stock issued by us may rank prior to the common
stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into
shares of common stock. Accordingly, the issuance of shares of
preferred stock may discourage bids for the common stock at a
premium or may otherwise adversely affect the market price of the
common stock.
Options
As
of March
15, 2017, we had options to purchase 253,500 shares of our
common stock outstanding pursuant to our 2013 Plan, our 2014 Plan,
and our 2016 Plan, with a weighted exercise price of
$0.21 per
share.
Warrants
As
of March
15, 2017, warrants to purchase 5,967,054 shares of our
common stock were outstanding, with a weighted average exercise
price of $0.34 per share.
Warrants Offered Hereby
We
are offering Series A Warrants to purchase up to 25,666,669 shares
of our common stock and Series B Warrants to purchase up to
25,666,669 shares of our common stock to purchasers in this
offering. Each Warrant entitles the holder thereof to
purchase one share of common stock at an exercise price of $0.15
per share (100% of the public offering price of our common stock)
for Series A Warrants and an exercise price of $0.15 per share
(100% of the public offering price of our common stock) for Series
B Warrants.
The
following is a brief summary of certain terms and conditions of the
Warrants to be issued in connection with this offering and are
subject in all respects to the provisions contained in the
Warrants. Please see the section titled “Plan of
Distribution” below for additional information about the
warrants to be issued to the placement agents in connection with
this offering.
Form
The Warrants will be physically delivered to
participants in this offering. You should review a copy of the form of Series A
Warrant and Series B Warrant, which are filed as exhibits to the
registration statement of which this prospectus forms a part, for a
complete description of the terms and conditions applicable to the
Warrants.
Exercisability
The Warrants are exercisable at any time
after their original issuance, and at any time up to the
date that is five-years after the original issuance date with
respect to the Series A Warrants and one-year after the original
issuance date with respect to the Series B Warrants. The
Warrants will be exercisable, at the option of each holder, in
whole or in part by delivering to us a duly executed exercise
notice and, at any time a registration statement registering
the issuance of the shares of common stock underlying the Warrants
under the Securities Act is effective and available for the
issuance of such shares, or an exemption from registration under
the Securities Act is available for the issuance of such shares, by
payment in full in immediately available funds for the number of
shares of common stock purchased upon such exercise. If a
registration statement registering the issuance of the shares of
common stock underlying the Warrants under the Securities Act is
not effective or available and an exemption from registration under
the Securities Act is not available for the issuance of such
shares, the holder may, in its sole discretion, elect to exercise
the Warrants through a cashless exercise, in which case the holder
would receive upon such exercise the net number of shares of common
stock determined according to the formula set forth in the
Warrant.
Exercise Limitation
A
holder will not have the right to exercise any portion of the
Warrants if the holder (together with its affiliates) would
beneficially own in excess of 4.99% of the number of shares of our
common stock outstanding immediately after giving effect to the
exercise, as such percentage ownership is determined in accordance
with the terms of the Warrants. However, any holder may increase or
decrease such percentage to any other percentage not in excess of
9.99% upon at least 61 days’ prior notice from the holder to
us.
Exercise Price
The exercise price per whole share of common stock
purchasable upon exercise of the Warrants is $0.15 per share of
common stock, which represents 100% of the public offering
price of the shares of common stock in this offering for Series A
Warrants and $0.15 per share of common stock, which represents 100%
of the public offering price of the
shares of common stock in this offering for Series B
Warrants. The exercise price is subject to appropriate
adjustment in the event of certain stock dividends and
distributions, stock splits, stock combinations, reclassifications
or similar events affecting our common stock and also upon any
distributions of assets, including cash, stock or other property to
our stockholders.
Transferability
Subject
to applicable laws, the Warrants may be offered for sale, sold,
transferred or assigned without our consent.
Exchange Listing
There
is no established public trading market for the Warrants and we do
not intend to apply to list the Warrants on any securities exchange
or automated quotation system.
Rights as a Stockholder
Except
as otherwise provided in the Warrants or by virtue of such
holder’s ownership of shares of our common stock, the holder
of any Warrant does not have the rights or privileges of a holder
of our common stock, including any voting rights, until the holder
exercises the Warrant.
Nevada Laws
The
Nevada Business Corporation Law contains a provision governing
“Acquisition of Controlling
Interest.” This law provides generally that any person
or entity that acquires 20% or more of the outstanding voting
shares of a publicly-held Nevada corporation in the secondary
public or private market may be denied voting rights with respect
to the acquired shares, unless a majority of the disinterested
stockholders of the corporation elects to restore such voting
rights in whole or in part. The control share acquisition act
provides that a person or entity acquires “control
shares” whenever it acquires shares that, but for the
operation of the control share acquisition act, would bring its
voting power within any of the following three ranges:
●
20% to
33%
●
33% to
50%
●
more
than 50%
A
“control share acquisition” is generally defined as the
direct or indirect acquisition of either ownership or voting power
associated with issued and outstanding control shares. The
stockholders or board of directors of a corporation may elect to
exempt the stock of the corporation from the provisions of the
control share acquisition act through adoption of a provision to
that effect in the articles of incorporation or bylaws of the
corporation. Our articles of incorporation and bylaws do exempt our
common stock from the control share acquisition act.
SHARES ELIGIBLE
FOR FUTURE SALE
Future
sales of substantial amounts of common stock in the public market
could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be
available for sale shortly after this offering because of certain
restrictions on resale, sales of substantial amounts of our common
stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon
completion of this offering, and assuming the exercise or
conversion of all derivative securities, we may have outstanding an
aggregate of up to 229,332,457 shares of common stock issued and
outstanding. Of these shares, at least 163,940,209 will be freely
tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by individuals who
become “affiliates” as that term is defined in Rule 144
under the Securities Act, as the result of the securities they
acquire in this offering which provide them, directly or
indirectly, with control or the capacity to control us. Our
officers and directors will not be purchasing shares in this
offering. The remaining shares of common stock held by our existing
stockholders are “restricted securities” as that term
is defined in Rule 144 under the Securities Act. Restricted shares
may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 and or
Section 4(a)(1). As a result of these provisions of Rule 144,
additional shares will be available for sale in the public market
as follows:
●
no restricted
shares will be eligible for immediate sale on the date of this
prospectus; and
●
the remainder of
the restricted shares will be eligible for sale from time to time
pursuant to available exemptions, subject to restrictions on such
sales by affiliates.
Sales
pursuant to Rule 144 are subject to certain requirements relating
to the availability of current public information about us. A
person (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of the Company at any time during the 90
days immediately preceding the sale and who has beneficially owned
restricted shares for at least six months is entitled to sell such
shares under Rule 144 without regard to the resale
limitations.
The SEC
has adopted rules that regulate broker-dealer practices in
connection with transactions in “penny stocks.” Penny
stocks generally are equity securities with a price of less than
$5.00, other than securities registered on certain national
securities exchanges or quoted on the Nasdaq system, provided that
current price and volume information with respect to transactions
in such securities is provided by the exchange or system. The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver to the
prospective purchaser a standardized risk disclosure document
prepared by the SEC that provides information about penny stocks
and the nature and level of risks in the penny stock market. In
addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from such rules; the
broker-dealer must make a special written determination that the
penny stock is a suitable investment for the prospective purchaser
and receive the purchaser’s written agreement to the
transaction. Furthermore, subsequent to a transaction in a penny
stock, the broker-dealer will be required to deliver monthly or
quarterly statements containing specific information about the
penny stock. It is anticipated that our common stock will be traded
on an OTC market at a price of less than $5.00. In this event,
broker-dealers would be required to comply with the disclosure
requirements mandated by the penny stock rules.
These
disclosure requirements will likely make it more difficult for
investors in this offering to sell their common stock in the
secondary market.
PLAN OF DISTRIBUTION
Pursuant to an
engagement letter, dated as of January 17, 2017, as amended on
March 10, 2017, we have engaged H.C. Wainwright & Co., LLC, or
the placement agent, to act as our exclusive placement agent in
connection with this offering of our securities pursuant to this
prospectus on a reasonable best efforts basis. The terms of this
offering were subject to market conditions and negotiations between
us, the placement agent and prospective investors. The placement
agency agreement does not give rise to any commitment by the
placement agent to purchase any of our securities, and the
placement agent will have no authority to bind us by virtue of the
placement agency agreement. Further, the placement agent does not
guarantee that it will be able to raise new capital in any
prospective offering. The placement agent may engage sub-agents or
selected dealers to assist with the offering.
Only
certain institutional investors purchasing the securities offered
hereby will execute a securities purchase agreement with us,
providing such investors with certain representations, warranties
and covenants from us, which representations, warranties and
covenants will not be available to other investors who will not
execute a securities purchase agreement in connection with the
purchase of the securities offered pursuant to this prospectus.
Therefore, those investors shall rely solely on this prospectus in
connection with the purchase of securities in the
offering.
We will
deliver the securities being issued to the investors upon receipt
of investor funds for the purchase of the securities offered
pursuant to this prospectus. We expect to deliver the securities
being offered pursuant to this prospectus on or about March 21,
2017.
We have
agreed to pay the placement agent a total cash fee equal to 7.0% of
the gross proceeds of this offering. We will also pay the placement
agent a management fee equal to 1.0% of the gross proceeds of this
offering, a non-accountable expense allowance in the amount of
$60,000 and a reimbursement for the placement agent’s legal
fees and expenses in the amount of $75,000. In addition, we have
agreed to issue to the placement agent warrants to purchase up to
5.0% of the aggregate number of shares of common stock sold in this
offering at an exercise price of $0.1875 per share, which
represents 125% of the public offering price of the shares of
common stock. The placement agent warrants will have substantially
the same terms as the warrants being sold to the investors in this
offering. Pursuant to FINRA Rule 5110(g), the placement agent
warrants and any shares issued upon exercise of the placement agent
warrants shall not be sold, transferred, assigned, pledged, or
hypothecated, or be the subject of any hedging, short sale,
derivative, put or call transaction that would result in the
effective economic disposition of the securities by any person for
a period of 180 days immediately following the date of
effectiveness or commencement of sales of this offering, except the
transfer of any security: (i) by operation of law or by reason of
our reorganization; (ii) to any FINRA member firm participating in
the offering and the officers or partners thereof, if all
securities so transferred remain subject to the lock-up restriction
set forth above for the remainder of the time period; (iii) if the
aggregate amount of our securities held by the placement agent or
related persons do not exceed 1% of the securities being offered;
(iv) that is beneficially owned on a pro-rata basis by all equity
owners of an investment fund, provided that no participating member
manages or otherwise directs investments by the fund and the
participating members in the aggregate do not own more than 10% of
the equity in the fund; or (v) the exercise or conversion of any
security, if all securities remain subject to the lock-up
restriction set forth above for the remainder of the time
period.
We have
also agreed to give the placement agent, subject to the completion
of this offering, a twelve-month right of first refusal to act as
our lead underwriter or placement agent for any further capital
raising transactions undertaken by us and, in the event an offering
is not completed during the term of the engagement agreement, a
twelve-month tail fee equal to the cash and warrant compensation in
this offering, if any investor who was contacted or introduced to
us by the placement agent provides us with further capital during
such twelve-month period following the expiration or termination of
our engagement.
We have
agreed to indemnify the placement agent and specified other persons
against some civil liabilities, including liabilities under the
Securities Act and the Exchange Act, and to contribute to payments
that the placement agent may be required to make in respect of such
liabilities.
The
placement agent may be deemed to be an underwriter within the
meaning of Section 2(a)(11) of the Securities Act, and any
commissions received by it and any profit realized on the resale of
the securities sold by it while acting as principal might be deemed
to be underwriting discounts or commissions under the Securities
Act. As an underwriter, the placement agent would be required to
comply with the requirements of the Securities Act and the Exchange
Act, including, without limitation, Rule 415(a)(4) under the
Securities Act and Rule 10b-5 and Regulation M under the Exchange
Act. These rules and regulations may limit the timing of purchases
and sales of shares of common stock and warrants by the placement
agent acting as principal. Under these rules and regulations, the
placement agent:
●
may not engage in
any stabilization activity in connection with our securities;
and
●
may not bid for or
purchase any of our securities or attempt to induce any person to
purchase any of our securities, other than as permitted under the
Exchange Act, until it has completed its participation in the
distribution.
Lock-up Agreements
Our
officers and directors and their respective affiliates have agreed
with the representative to be subject to a lock-up period of 90
days following the date of this prospectus. During the applicable
lock-up period, such persons may not offer for sale, contract to
sell, sell, distribute, grant any option, right or warrant to
purchase, pledge, hypothecate or otherwise dispose of, directly or
indirectly, any shares of our common stock or any securities
convertible into, or exercisable or exchangeable for, shares of our
common stock. Certain limited transfers are permitted during the
lock-up period if the transferee agrees to these lock-up
restrictions. The lock-up period is subject to an additional
extension to accommodate for our reports of financial results or
material news releases. The placement agent may, in its sole
discretion and without notice, waive the terms of any of these
lock-up agreements. In the securities purchase agreement, we have
agreed to a limitation on the issuance and sale of our securities
for 90 days following the closing of this offering, subject to
certain exceptions.
Other Relationships
From
time to time, the placement agent has provided, and may provide in
the future, various advisory, investment banking and other services
to us in the ordinary course of business, for which they have
received and may continue to receive customary fees and
commissions. However, except as disclosed in this prospectus, we
have no present arrangements with the placement agent for any
further services.
The
placement agent in this offering served as our placement agent in
private placements we consummated in June and July 2016 pursuant to
which it received compensation, including warrants to purchase
shares of our common stock.
LEGAL
MATTERS
Disclosure Law
Group, a Professional Corporation, has issued an opinion that the
shares being issued pursuant to this offering, upon issuance, are
duly authorized and validly issued, fully paid and non-assessable.
Sichenzia, Ross,
Ference & Kesner LLP is
representing the placement agent in this
offering.
EXPERTS
The
consolidated balance sheets of the
Company as of December 31, 2016 and 2015, and the related
consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the two-year
period ended December 31, 2016, have been audited by Hall &
Company Certified Public Accountants & Consultants, Inc., an
independent registered public accounting firm, as stated in their
report which is included herein. Such consolidated financial
statements have been so included herein in reliance on the report
of said firm given upon their authority as experts in accounting
and auditing.
No
expert or counsel named in this prospectus as having prepared or
certified any part of this prospectus or having given an opinion
upon the validity of the securities being registered or upon other
legal matters in connection with the registration or offering of
the common stock was employed for such purpose on a contingency
basis, or had, or is to receive, in connection with this offering,
a substantial interest, direct or indirect, in us or any of our
subsidiaries, nor was any such person connected with us as a
promoter, managing or principal underwriter, voting trustee,
director, officer, or employee.
WHERE YOU CAN
FIND MORE INFORMATION
We have filed a registration statement on Form S-1
with the SEC. This prospectus, which forms a part of that
registration statement, does not contain all of the information
included in the registration statement and the exhibits and
schedules thereto as permitted by the rules and regulations of the
SEC. For further information with respect to us and the shares of
our common stock offered hereby, please refer to the registration
statement, including its exhibits and schedules. Statements
contained in this prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete and,
where the contract or other document is an exhibit to the
registration statement, each such statement is qualified in all
respects by the provisions of such exhibit, to which reference is
hereby made. You may review a copy of the registration statement at
the SEC’s public reference room at 100 F Street, N.E.,
Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference rooms.
The registration statement can also be reviewed by accessing the
SEC’s website at http://www.sec.gov.
We are subject to the information and reporting requirements of the
Exchange Act and, in accordance therewith, file periodic reports,
proxy statements or information statements, and other information
with the SEC. These reports can also be reviewed by accessing the
SEC’s website.
You should rely only on the information
provided in this prospectus, any prospectus supplement or as part
of the registration statement filed on Form S-1 of which this
prospective is a part, as such registration statement is amended
and in effect with the Securities and Exchange Commission. We have
not authorized anyone else to provide you with different
information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that
the information in this prospectus, any prospectus supplement or
any document incorporated by reference is accurate as of any date
other than the date of those documents.
INDEX TO FINANCIAL
STATEMENTS
|
Report of
Independent Registered Public Accounting Firm
|
|
F-1 |
|
Consolidated
Balance Sheets - December 31, 2016 and 2015
|
|
F-2
|
|
Consolidated Statements of Operations- Years Ended December 31,
2016 and 2015
|
|
F-3
|
|
Consolidated
Statements of Cash Flows- Years Ended December
31, 2016 and 2015
|
|
F-4
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit) - December
31, 2016 and 2015
|
|
F-6
|
|
Notes
to the Consolidated Financial Statements - December
31, 2016 and 2015
|
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
Innovus
Pharmaceuticals, Inc.
We have audited the
accompanying consolidated balance sheets of Innovus
Pharmaceuticals, Inc. and subsidiaries (the “Company”)
as of December 31, 2016 and 2015, and the related consolidated
statements of operations, stockholders’ equity (deficit), and
cash flows for each of the years in the two-year period ended
December 31, 2016. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of December 31, 2016 and 2015, and the results of its operations
and its cash flows for each of the years in the two-year period
ended December 31, 2016, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Hall & Company Certified Public Accountants &
Consultants, Inc.
Hall
& Company Certified Public Accountants & Consultants,
Inc.
Irvine,
CA
March
9, 2017
INNOVUS PHARMACEUTICALS, INC.
Consolidated
Balance Sheets
|
|
As of December 31,
|
|
|
|
2016
|
2015
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
|
$829,933
|
$55,901
|
|
Accounts
receivable, net
|
33,575
|
83,097
|
|
Prepaid
expense and other current assets
|
863,664
|
53,278
|
|
Inventories
|
599,856
|
254,443
|
|
Total
current assets
|
2,327,028
|
446,719
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
29,569
|
35,101
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
Deposits
|
14,958
|
14,958
|
|
Goodwill
|
952,576
|
549,368
|
|
Intangible
assets, net
|
4,903,247
|
5,300,859
|
|
|
|
|
|
TOTAL
ASSETS
|
$8,227,378
|
$6,347,005
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Accounts
payable and accrued expense
|
$1,210,050
|
$155,503
|
|
Accrued
compensation
|
767,689
|
535,862
|
|
Deferred
revenue and customer deposits
|
11,000
|
24,079
|
|
Accrued
interest payable
|
47,782
|
79,113
|
|
Short-term
loans payable
|
-
|
230,351
|
|
Derivative
liabilities – embedded conversion features
|
319,674
|
301,779
|
|
Derivative
liabilities – warrants
|
164,070
|
432,793
|
|
Contingent
consideration
|
170,015
|
-
|
|
Current
portion of notes payable and non-convertible debenture, net
of debt
discount of $216,403 and $0, respectively
|
626,610
|
73,200
|
|
Line
of credit convertible debenture and non-convertible debenture
– related
parties, net of debt discount of $0 and $17,720,
respectively
|
-
|
391,472
|
|
Convertible
debentures, net of debt discount of $845,730 and $1,050,041,
respectively
|
714,192
|
407,459
|
|
Total
current liabilities
|
4,031,082
|
2,631,611
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
Accrued
compensation – less current portion
|
1,531,904
|
906,928
|
|
Notes
payable and non-convertible debenture, net of current portion
and debt
discount of $468 and $0, respectively
|
54,517
|
-
|
|
Line
of credit convertible debenture and non-convertible debenture
– related
parties, net of current portion
|
-
|
25,000
|
|
Contingent
consideration – less current portion
|
1,515,902
|
3,229,804
|
|
Total
non-current liabilities
|
3,102,323
|
4,161,732
|
|
|
|
|
|
TOTAL
LIABILITIES
|
7,133,405
|
6,793,343
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
Preferred
stock: 7,500,000 shares authorized, at $0.001 par value, no shares
issued and outstanding
at December 31, 2016 and 2015, respectively
|
-
|
-
|
|
Common
stock: 292,500,000 shares authorized, at $0.001 par value,
121,694,293 and 47,141,230 shares issued and outstanding at
December 31, 2016 and 2015, respectively
|
121,694
|
47,141
|
|
Additional
paid-in capital
|
30,108,028
|
14,941,116
|
|
Accumulated
deficit
|
(29,135,749)
|
(15,434,595)
|
|
Total
stockholders' equity (deficit)
|
1,093,973
|
(446,338)
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$8,227,378
|
$6,347,005
|
|
See
accompanying notes to these consolidated financial
statements.
|
INNOVUS PHARMACEUTICALS, INC.
Consolidated
Statements of Operations
|
|
For the Year Ended
December 31,
|
|
|
|
2016
|
2015
|
|
NET
REVENUE:
|
|
|
|
Product
sales, net
|
$4,817,603
|
$730,717
|
|
License
revenue
|
1,000
|
5,000
|
|
Net
revenue
|
4,818,603
|
735,717
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
Cost
of product sales
|
1,083,094
|
340,713
|
|
Research
and development
|
77,804
|
-
|
|
Sales
and marketing
|
3,621,045
|
82,079
|
|
General
and administrative
|
5,870,572
|
3,828,113
|
|
Impairment
of goodwill
|
-
|
759,428
|
|
Total
operating expense
|
10,652,515
|
5,010,333
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
(5,833,912)
|
(4,274,616)
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSE):
|
|
|
|
Interest
expense
|
(6,661,694)
|
(1,153,376)
|
|
Change
in fair value of derivative liabilities
|
65,060
|
393,509
|
|
Other
income (expense), net
|
1,649
|
(8,495)
|
|
Fair
value adjustment for contingent consideration
|
(1,269,857)
|
115,822
|
|
Loss
on extinguishment of debt
|
-
|
(32,500)
|
|
Total
other expense, net
|
(7,864,842)
|
(685,040)
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR (BENEFIT FROM) INCOME
TAXES
|
(13,698,754)
|
(4,959,656)
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
2,400
|
(757,028)
|
|
|
|
|
|
NET
LOSS
|
$(13,701,154)
|
$(4,202,628)
|
|
|
|
|
|
NET
LOSS PER SHARE OF COMMON STOCK – BASIC AND
DILUTED
|
$(0.15)
|
$(0.08)
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
– BASIC AND DILUTED
|
94,106,382
|
52,517,530
|
See
accompanying notes to these consolidated financial
statements.
|
|
INNOVUS PHARMACEUTICALS, INC.
Consolidated
Statements of Cash Flows
|
|
For the Year Ended
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
NET
LOSS
|
$(13,701,154)
|
$(4,202,628)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
|
5,532
|
28,950
|
|
Allowance
for doubtful accounts
|
2,066
|
5,892
|
|
Common
stock, restricted stock units and stock options issued to
employees, board of
directors and consultants for compensation and
services
|
2,684,602
|
1,508,769
|
|
Gain
on purchase price adjustment to goodwill
|
-
|
(759,428)
|
|
Impairment
of goodwill
|
-
|
759,428
|
|
Loss
on extinguishment of debt
|
-
|
32,500
|
|
Change
in fair value of contingent consideration
|
1,449,857
|
(115,822)
|
|
Non-cash
gain on settlement of contingent consideration
|
(180,000)
|
-
|
|
Change
in fair value of derivative liabilities
|
(65,060)
|
(393,509)
|
|
Shares
of common stock issued for debt amendment
|
-
|
15,500
|
|
Fair
value of embedded conversion feature in convertible
debentures in excess of allocated proceeds
|
2,756,899
|
71,224
|
|
Amortization
of debt discount
|
3,646,161
|
960,061
|
|
Amortization
of intangible assets
|
624,404
|
550,789
|
|
Changes
in operating assets and liabilities, net of acquisition
amounts:
|
|
|
|
Accounts
receivable
|
47,456
|
102,612
|
|
Prepaid
expense and other current assets
|
(279,786)
|
27,653
|
|
Deposits
|
-
|
6,961
|
|
Inventories
|
(345,413)
|
11,516
|
|
Accounts
payable and accrued expense
|
694,547
|
(206,657)
|
|
Accrued
compensation
|
856,803
|
535,862
|
|
Accrued
interest payable
|
31,907
|
29,745
|
|
Deferred
revenue and customer deposits
|
(13,079)
|
(1,145)
|
|
Net
cash used in operating activities
|
(1,784,258)
|
(1,031,727)
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Purchase
of property and equipment
|
-
|
(9,540)
|
|
Purchase
of intangible assets
|
-
|
(3,276)
|
|
Payments
on contingent consideration
|
(172,103)
|
-
|
|
Net
cash used in investing activities
|
(172,103)
|
(12,816)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Repayments
of line of credit convertible debenture – related
party
|
(409,192)
|
(14,886)
|
|
Financing
costs in connection with issuance of convertible
debentures
|
(40,000)
|
(82,500)
|
|
Proceeds
from short-term loans payable
|
21,800
|
258,278
|
|
Payments
on short-term loans payable
|
(252,151)
|
(27,927)
|
|
Proceeds
from notes payable and convertible debentures
|
3,574,000
|
1,455,000
|
|
Payments
on notes payable
|
(449,204)
|
(440,000)
|
|
Proceeds
from warrant exercises
|
310,140
|
-
|
|
Proceeds
from non-convertible debentures – related party
|
-
|
50,000
|
|
Payments
on non-convertible debentures – related party
|
(25,000)
|
(105,000)
|
|
Net
cash provided by financing activities
|
2,730,393
|
1,092,965
|
|
|
|
|
|
NET
CHANGE IN CASH
|
774,032
|
48,422
|
|
|
|
|
|
CASH
AT BEGINNING OF YEAR
|
55,901
|
7,479
|
|
|
|
|
|
CASH
AT END OF YEAR
|
$829,933
|
$55,901
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
Cash
paid for income taxes
|
$-
|
$2,400
|
|
Cash
paid for interest
|
$229,046
|
$107,764
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
Common stock issued
for conversion of notes payable, convertible debentures and
accrued interest
|
$3,264,705
|
$167,000
|
|
Reclassification of
the fair value of the embedded conversion features from derivative
liability to additional
paid-in capital upon conversion
|
$3,111,828
|
$-
|
|
Cashless
exercise of warrants
|
$3,385
|
$-
|
|
Reclassification of the fair value of
the warrants from derivative liability to additional paid-in
capital
upon cashless exercise
|
$518,224
|
$-
|
|
Common
stock issued for acquisition
|
$-
|
$2,071,625
|
|
Relative fair value
of common stock issued in connection with notes payable recorded as
debt discount
|
$276,167
|
$-
|
|
Relative fair value
of warrants issued in connection with convertible debentures
recorded as debt discount
|
$445,603
|
$89,551
|
|
Relative fair value
of common stock issued in connection with convertible debentures
recorded as debt
discount
|
$1,127,225
|
$374,474
|
|
Fair value of
embedded conversion feature derivative liabilities recorded as debt
discount
|
$687,385
|
$830,560
|
|
Fair value of
warrants issued to placement agents in connection with convertible
debentures recorded as debt
discount
|
$357,286
|
$68,419
|
|
Fair value of the
contingent consideration for acquisition
|
$330,000
|
$2,905,425
|
|
Fair value of
warrant derivative liabilities recorded as debt
discount
|
$-
|
$226,297
|
|
Proceeds from note
payable paid to seller in connection with acquisition
|
$300,000
|
$-
|
|
Financing costs
paid with proceeds from note payable
|
$7,500
|
$-
|
|
Common
stock issued to Novalere Holdings for payment of the acquisition
contingent consideration
as a result of an amendment and supplement to the registration
rights and stock restriction
agreement
|
$2,971,641
|
$-
|
|
Fair value of
unamortized non-forfeitable common stock issued to consultant
included in prepaid expense and
other current assets
|
$170,600
|
$-
|
|
Fair value of
non-forfeitable common stock to be issued to consultant included in
prepaid expense and other
current assets and accounts payable and accrued
expense
|
$360,000
|
$-
|
|
Issuance of shares
of common stock for vested restricted stock units
|
$19,316
|
$500
|
|
Return of shares of
common stock related to license agreement
|
$-
|
$38,000
|
|
Accrued interest
added to principal in connection with amendment of notes
payable
|
$-
|
$3,200
|
|
Fair value of
beneficial conversion feature on line of credit convertible
debenture – related party
|
$3,444
|
$8,321
|
|
See
accompanying notes to these consolidated financial
statements.
|
INNOVUS PHARMACEUTICALS, INC.
Consolidated
Statements of Stockholders’ Equity (Deficit)
For
the Years Ended December 31, 2016 and 2015
|
|
Common Stock
|
Additional
Paid-in
|
Accumulated
|
Stockholders'
Equity
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2015
|
27,112,263
|
$27,113
|
$10,778,807
|
$(11,231,967)
|
$(426,047)
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
1,780,625
|
1,780
|
208,749
|
-
|
210,529
|
|
Stock
compensation expense
|
-
|
-
|
1,298,240
|
-
|
1,298,240
|
|
Common
stock issued for product acquisition
|
12,947,657
|
12,948
|
2,058,677
|
-
|
2,071,625
|
|
Common
stock issued upon conversion of convertible
debentures, note payable and debentures
– related party
|
699,260
|
699
|
166,301
|
-
|
167,000
|
|
Common
stock issued for vested restricted stock units
|
500,000
|
500
|
(500)
|
-
|
-
|
|
Return
of shares of common stock from CRI license
transaction
|
(200,000)
|
(200)
|
(37,800)
|
-
|
(38,000)
|
|
Return
of shares of common stock from Semprae
merger transaction
|
(386,075)
|
(386)
|
(115,436)
|
-
|
(115,822)
|
|
Fair
value of beneficial conversion feature on line
of
credit convertible debenture – related
party
|
-
|
-
|
8,321
|
-
|
8,321
|
|
Shares
of common stock issued for extension of February
2014 convertible debentures
|
250,000
|
250
|
32,250
|
-
|
32,500
|
|
Shares
of common stock issued for amendment of January
2015 convertible debentures
|
100,000
|
100
|
15,400
|
-
|
15,500
|
|
Relative
fair value of shares of common stock issued
in connection with convertible debentures
|
4,337,500
|
4,337
|
370,137
|
-
|
374,474
|
|
Relative
fair value of warrants issued in connection with convertible
debentures
|
-
|
-
|
89,551
|
-
|
89,551
|
|
Fair value
of warrants issued to placement agents in
connection with convertible debentures
|
-
|
-
|
68,419
|
-
|
68,419
|
|
Net
loss for year ended December 31, 2015
|
-
|
-
|
-
|
(4,202,628)
|
(4,202,268)
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2015
|
47,141,230
|
47,141
|
14,941,116
|
(15,434,595)
|
(446,338)
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
10,732,500
|
10,733
|
1,802,216
|
-
|
1,812,949
|
|
Stock-based
compensation
|
-
|
-
|
954,753
|
-
|
954,753
|
|
Common
stock issued to Novalere Holdings, LLC for
payment of contingent consideration
|
12,808,796
|
12,809
|
2,958,832
|
-
|
2,971,641
|
|
Common
stock issued upon conversion of convertible debentures and
accrued interest
|
17,100,508
|
17,100
|
3,247,605
|
-
|
3,264,705
|
|
Common
stock issued for vested restricted stock units
|
19,315,994
|
19,316
|
(19,316)
|
-
|
-
|
|
Fair
value of beneficial conversion feature on line
of
credit convertible debenture – related party
|
-
|
-
|
3,444
|
-
|
3,444
|
|
Relative
fair value of shares of common stock issued
in connection with notes payable and convertible
debentures
|
9,861,111
|
9,861
|
1,393,531
|
-
|
1,403,392
|
|
Relative
fair value of warrants issued in connection with convertible
debentures
|
-
|
-
|
445,603
|
-
|
445,603
|
|
Fair value
of warrants issued to placement agents in connection
with convertible debentures
|
-
|
-
|
357,286
|
-
|
357,286
|
|
Common
stock issued for legal costs from Semprae merger
transaction
|
215,000
|
215
|
64,285
|
-
|
64,500
|
|
Common
stock issued in connection with license agreement
|
100,000
|
100
|
22,900
|
-
|
23,000
|
|
Common
stock issued upon cashless exercise of warrants
|
3,385,354
|
3,385
|
(3,385)
|
-
|
-
|
|
Common
stock issued upon exercise of warrants
|
1,033,800
|
1,034
|
309,106
|
-
|
310,140
|
|
Reclassification
of embedded conversion feature derivative
liability upon conversion of convertible debentures
|
-
|
-
|
3,111,828
|
-
|
3,111,828
|
|
Reclassification
of warrant derivative liability upon cashless
exercise of warrants
|
-
|
-
|
518,224
|
-
|
518,224
|
|
Net
loss for year ended December 31, 2016
|
-
|
-
|
-
|
(13,701,154)
|
(13,701,154)
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2016
|
121,694,293
|
$121,694
|
$30,108,028
|
$(29,135,749)
|
$1,093,973
|
See
accompanying notes to these consolidated financial
statements.
INNOVUS PHARMACEUTICALS, INC.
Notes
to the Consolidated Financial Statements
December
31, 2016 and 2015
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Innovus Pharmaceuticals, Inc., together with its
subsidiaries (collectively referred to as “Innovus”,
“we”, “our”, “us” or the
“Company”) is a Nevada formed, San Diego,
California-based emerging commercial stage pharmaceutical company
delivering over-the-counter medicines and consumer care products
for men’s and women’s health and respiratory
diseases.
We generate revenue
from 17 commercial products in the United States, including six of
these commercial products in multiple countries around the world
through our commercial partners. Our commercial product portfolio
includes (a) Beyond Human® Testosterone Booster, (b) Beyond
Human® Growth Agent, (c) Zestra® for female arousal, (d)
EjectDelay® for premature ejaculation, (e) Sensum+® for
reduced penile sensitivity, (f) Zestra Glide®, (g)
Vesele® for promoting sexual health, (h) Androferti® to
support overall male reproductive health and sperm quality, (i)
RecalMax™ for cognitive brain health (j) Beyond Human®
Green Coffee Extract (k) Beyond Human® Vision Formula, (l)
Beyond Human® Blood Sugar, (m) Beyond Human® Colon
Cleans, (n) Beyond Human® Ketones, (o) Beyond Human®
Krill Oil (p) Beyond Human® Omega 3 Fish Oil and (q)
Urivarx™ for overactive bladder and urinary incontinence.
While we generate revenue from the sale of our commercial products,
most revenue is currently generated by Vesele®, Zestra®,
Zestra® Glide, RecalMax™, Sensum +®, Urivarx™
and Beyond Human® Testosterone Booster.
Pipeline Products
Fluticare™
(fluticasone propionate nasal spray). Innovus acquired the worldwide
rights to market and sell the Fluticare™ brand
(fluticasone propionate nasal spray) and the related manufacturing
agreement from Novalere FP in February 2015. The Over-the-Counter
(“OTC”) Abbreviated New Drug Application
(“ANDA”) filed at the end of 2014 by the
manufacturer with the U.S. Food and Drug Administration
(“FDA”), subject to FDA approval, may allow us to
market and sell Fluticare™ OTC. An ANDA is an application for
a U.S. generic drug approval for an existing licensed medication or
approved drug.
AllerVarx™.
On December 15, 2016, we entered into an exclusive license and
distribution agreement with NTC S.r.l (Italy) to distribute and
commercialize AllerVarx™ in the U.S. and Canada.
AllerVarx™ is a
proprietary modified release bilayer tablet for the management of
allergic rhinitis. We expect to launch this product in the first
half of 2017.
Xyralid™.
Xyralid™ is an OTC FDA monograph compliant drug containing
the active drug ingredient lidocaine and indicated for the relief
of the pain and symptoms caused by hemorrhoids. We expect to launch
this product in the first half of 2017.
Urocis™ XR.
On October 27, 2015, we entered into an exclusive distribution
agreement with Laboratorios Q Pharma (Spain) to distribute and
commercialize Urocis™ XR in the U.S. and Canada.
Urocis™ XR is a proprietary extended release of Vaccinium
Marcocarpon (cranberry) shown to provide 24-hour coverage in the
body in connection with urinary tract
infections in women. We expect to launch this product in the
second half of 2017.
AndroVit™.
On October 27, 2015, we entered into an exclusive distribution
agreement with Laboratorios Q Pharma (Spain) to distribute and
commercialize AndroVit™ in the U.S. and Canada.
AndroVit™ is a proprietary supplement to support overall
prostate and male sexual health currently marketed in Europe.
AndroVit™ was specifically formulated with ingredients known
to support normal prostate health and vitality and male sexual
health. We expect to launch this product in the second half of
2017.
Change
in Accounting Principle
On January 1, 2016,
we retrospectively adopted Financial Accounting Standards Board
(“FASB”) Accounting Standards Update
(“ASU”) No. 2015-03, Interest - Imputation of Interest (Subtopic
835-30): Simplifying the Presentation of Debt Issuance
Costs. This ASU requires that debt issuance costs be
presented as a direct reduction from the carrying amount of debt.
As a result of the adoption of this ASU, the consolidated balance
sheet at December 31, 2015 was adjusted to reflect the
reclassification of $97,577 from deferred financing costs, net to
convertible debentures, net. The adoption of this ASU
did not have an impact on our consolidated results of
operations.
Basis of Presentation and Principles of Consolidation
These
consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and include
all assets, liabilities, revenue and expense of us and our
wholly-owned subsidiaries: FasTrack Pharmaceuticals, Inc., Semprae
Laboratories, Inc. (“Semprae”) and Novalere, Inc.
(“Novalere”). All material intercompany transactions
and balances have been eliminated. Certain items have been
reclassified to conform to the current year
presentation.
Use of Estimates
The
preparation of these consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements
and the reported amounts of revenue and expense during the
reporting periods. Such management estimates include the allowance
for doubtful accounts, sales returns and chargebacks, realizability
of inventories, valuation of deferred tax assets, goodwill and
intangible assets, valuation of contingent acquisition
consideration, recoverability of long-lived assets and goodwill,
fair value of derivative liabilities and the valuation of
equity-based instruments and beneficial conversion
features. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under
the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
Liquidity
Our
operations have been financed primarily through proceeds from
convertible debentures and notes payable and revenue generated from
our products domestically and internationally by our
partners. These funds have provided us with the resources to
operate our business, sell and support our products, attract and
retain key personnel and add new products to our portfolio. We
have experienced net losses and negative cash flows from operations
each year since our inception. As of December 31, 2016, we
had an accumulated deficit of $29,135,749 and a working capital
deficit of $1,704,054.
We have raised funds through the issuance of debt
and the sale of common stock. We have also issued equity
instruments in certain circumstances to pay for services from
vendors and consultants. In December 2016, we raised $500,000 in
gross proceeds from the issuance of notes payable to three
investors and in June and July 2016, we raised $3,000,000 in
gross proceeds from the issuance of convertible debentures to eight
investors (see Note 5). In the event we do not pay the convertible
debentures upon their maturity, or after the remedy period, the
principal amount and accrued interest on the convertible debentures
is convertible at our option to common stock at the lower of the
fixed conversion price or 60% of the volume weighted average price
(“VWAP”) during the ten consecutive trading day period
preceding the date of conversion. In February 2016, we also raised
$550,000 in funds from a note payable with net proceeds of $242,500
to us, which was used to pay for the asset acquisition of Beyond
Human, LLC (see Note 5), a Texas limited liability company
(“Beyond Human®”) and for working capital
purposes.
As of December 31, 2016, we had $829,933 in cash
and $221,243 of cash collections held by our third-party merchant
service provider, which is included in prepaid expense and other
current assets in the accompanying consolidated balance sheet.
During the year ended December 31, 2016, we had net cash
used in operating activities of $1,784,258 primarily from
purchasing inventory to support our growing revenue and certain
prepayments of annual expenses. We expect that our existing capital
resources, revenue from sales of our products and upcoming sales
milestone payments from the commercial partners signed for our
products, and equity instruments available to pay certain vendors
and consultants, will be sufficient to allow us to continue our
operations, commence the product development process and launch
selected products through at least the next 12 months. In
addition, our CEO, who is also a significant shareholder, has
deferred the payment of his salary earned thru June 30, 2016 for at
least the next 12 months. Our actual needs will depend on numerous
factors, including timing of introducing our products to the
marketplace, our ability to attract additional Ex-U.S. distributors
for our products and our ability to in-license in non-partnered
territories and/or develop new product candidates. Although no
assurances can be given, we currently intend to raise additional
capital through the sale of debt or equity securities to provide
additional working capital, pay for further expansion and
development of our business, and to meet current obligations. Such
capital may not be available to us when we need it or on terms
acceptable to us, if at all.
Fair Value Measurement
Our
financial instruments are cash, accounts receivable, accounts
payable, accrued liabilities, derivative liabilities, contingent
consideration and debt. The recorded values of cash, accounts
receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The
recorded fair value of the convertible debentures, net of debt
discount, is based upon the relative fair value calculation of the
common stock and warrants issued in connection with the convertible
debentures and the fair value of the embedded conversion feature.
The fair values of the warrant derivative liabilities and embedded
conversion feature derivative liabilities are based upon the Black
Scholes Option Pricing Model (“Black-Scholes”) and the
Path-Dependent Monte Carlo simulation model calculations,
respectively, and are a Level 3 measurement (see Note 9). The fair
value of the contingent acquisition consideration is based upon the
discounted future payments due under the terms of the agreements
and is a Level 3 measurement (see Note 3). Based on
borrowing rates currently available to us, the carrying values of
the notes payable and convertible debentures approximate their
respective fair values.
We
follow a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1) and the
lowest priority to measurements involving significant unobservable
inputs (Level 3). The three levels of the fair value hierarchy
are as follows:
●
Level
1 measurements are quoted prices (unadjusted) in active markets for
identical assets or liabilities that we have the ability to access
at the measurement date.
●
Level
2 measurements are inputs other than quoted prices included in
Level 1 that are observable either directly or
indirectly.
●
Level
3 measurements are unobservable inputs.
Cash and Cash Equivalents
Cash
and cash equivalents consist of cash and highly liquid investments
with remaining maturities of three months or less when
purchased.
Concentration of Credit Risk, Major Customers and Segment
Information
Financial instruments that potentially subject us
to significant concentrations of credit risk consist primarily of
cash and accounts receivable. Cash held with financial
institutions may exceed the amount of insurance provided by the
Federal Deposit Insurance Corporation on such
deposits. Accounts receivable consist primarily of
sales of Zestra® to U.S. based retailers and Ex-U.S. partners.
We also require a percentage of
payment in advance for product orders with our larger partners. We
perform ongoing credit evaluations of our customers and generally
do not require collateral.
Revenue consists
primarily of product sales and licensing rights to market and
commercialize our products. We had no customers that
accounted for 10% or greater of our total net revenue during the
year ended December 31, 2016. Three customers accounted for 62% of
total net accounts receivable as of December 31, 2016. We had three
customers that accounted for 43% of our total net revenue during
the year ended December 31, 2015 and two customers accounted for
73% of net accounts receivable as of December 31,
2015.
We categorize
revenue by geographic area based on selling location. All
operations are currently located in the U.S.; therefore,
over 90% of our sales are currently
within the U.S. The balance of the sales are to various other
countries. All long-lived assets at December 31, 2016 and
2015 are located in the U.S.
We operate our
business on the basis of a single reportable segment, which is the
business of delivering over-the-counter medicines and consumer care
products for men’s and women’s health and respiratory
diseases. Our chief operating decision-maker is the Chief Executive
Officer, who evaluates us as a single operating
segment.
Concentration of Suppliers
We have manufacturing relationships with a number
of vendors or manufacturers for our products including:
Sensum+®, EjectDelay®, Vesele®,
RecalMax™,
UriVarx™,
Androferti®, the Zestra® line of products and
Beyond Human® line of
products. Pursuant to these relationships, we purchase
products through purchase orders with our
manufacturers.
Inventories
Inventories are
stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis. We evaluate the carrying value of
inventories on a regular basis, based on the price expected to be
obtained for products in their respective markets compared with
historical cost. Write-downs of inventories are considered to be
permanent reductions in the cost basis of inventories.
We also regularly
evaluate our inventories for excess quantities and obsolescence
(expiration), taking into account such factors as historical and
anticipated future sales or use in production compared to
quantities on hand and the remaining shelf life of products and raw
materials on hand. We establish reserves for excess and obsolete
inventories as required based on our analyses.
Property and Equipment
Property
and equipment, including software, are recorded at historical cost
less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets which range from three to ten years. The initial cost of
property and equipment and software consists of its purchase price
and any directly attributable costs of bringing the asset to its
working condition and location for its intended use.
Business Combinations
We account for business combinations by
recognizing the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair values on
the acquisition date. The final purchase price may be adjusted up
to one year from the date of the acquisition. Identifying the fair
value of the tangible and intangible assets and liabilities
acquired requires the use of estimates by management and
was based upon currently available data. Examples of
critical estimates in valuing certain of the intangible assets we
have acquired or may acquire in the future include but are not
limited to future expected cash flows from product sales, support
agreements, consulting contracts, other customer contracts, and
acquired developed technologies and patents and discount rates
utilized in valuation estimates.
Unanticipated
events and circumstances may occur that may affect the accuracy or
validity of such assumptions, estimates or actual results.
Additionally, any change in the fair value of the
acquisition-related contingent consideration subsequent to the
acquisition date, including changes from events after the
acquisition date, such as changes in our estimate of relevant
revenue or other targets, will be recognized in earnings in the
period of the estimated fair value change. A change in fair value
of the acquisition-related contingent consideration or the
occurrence of events that cause results to differ from our
estimates or assumptions could have a material effect on the
consolidated statements of operations, financial position and cash
flows in the period of the change in the estimate.
Goodwill and Intangible Assets
We test our goodwill for impairment annually, or
whenever events or changes in circumstances indicates an impairment
may have occurred, by comparing our reporting unit's carrying value
to its implied fair value. The goodwill impairment test
consists of a two-step process as follows:
Step 1. We compare
the fair value of each reporting unit to its carrying amount,
including the existing goodwill. The fair value of each reporting
unit is determined using a discounted cash flow valuation analysis.
The carrying amount of each reporting unit is determined by
specifically identifying and allocating the assets and liabilities
to each reporting unit based on headcount, relative revenue or
other methods as deemed appropriate by management. If the carrying
amount of a reporting unit exceeds its fair value, an indication
exists that the reporting unit’s goodwill may be impaired and
we then perform the second step of the impairment test. If the fair
value of a reporting unit exceeds its carrying amount, no further
analysis is required.
Step 2. If further
analysis is required, we compare the implied fair value of the
reporting unit’s goodwill, determined by allocating the
reporting unit’s fair value to all of its assets and its
liabilities in a manner similar to a purchase price allocation, to
its carrying amount. If the carrying amount of the reporting
unit’s goodwill exceeds its fair value, an impairment loss
will be recognized in an amount equal to the excess.
Impairment
may result from, among other things, deterioration in the
performance of the acquired business, adverse market conditions,
adverse changes in applicable laws or regulations and a variety of
other circumstances. If we determine that an impairment has
occurred, it is required to record a write-down of the carrying
value and charge the impairment as an operating expense in the
period the determination is made. In evaluating the recoverability
of the carrying value of goodwill, we must make assumptions
regarding estimated future cash flows and other factors to
determine the fair value of the acquired assets. Changes in
strategy or market conditions could significantly impact those
judgments in the future and require an adjustment to the recorded
balances.
The goodwill was recorded as part of the
acquisition of Semprae that occurred on December 24, 2013, the
acquisition of Novalere that occurred on February 5, 2015 and the
asset acquisition of Beyond Human® that closed on March 1, 2016. During the year
ended December 31, 2015, we recorded $759,428 of goodwill related
to the acquisition of Novalere as an income tax benefit and also
recorded an impairment of $759,428 against this benefit. There was
no impairment of goodwill for the year ended December 31,
2016.
Intangible
assets with finite lives are amortized on a straight-line basis
over their estimated useful lives, which range from one to fifteen
years. The useful life of the intangible asset is evaluated each
reporting period to determine whether events and circumstances
warrant a revision to the remaining useful life.
Long-Lived Assets
We review our long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. We
evaluate assets for potential impairment by comparing estimated
future undiscounted net cash flows to the carrying amount of the
assets. If the carrying amount of the assets exceeds the estimated
future undiscounted cash flows, impairment is measured based on the
difference between the carrying amount of the assets and fair
value. Assets to be disposed of would be separately
presented in the consolidated balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and
are no longer depreciated. The assets and liabilities of a disposal
group classified as held-for-sale would be presented separately in
the appropriate asset and liability sections of the consolidated
balance sheet, if material. During the years ended December 31,
2016 and 2015, we did not recognize any impairment of our
long-lived assets.
Debt Issuance Costs
Debt issuance costs
represent costs incurred in connection with the issuance of the
convertible debentures during the third quarter of 2015 and the
note payable and convertible debentures during the year ended
December 31, 2016. Debt issuance costs related to the issuance of
the convertible debentures and note payable are recorded as a
reduction to the debt balances in the accompanying consolidated
balance sheets. The debt issuance costs are being
amortized to interest expense over the term of the financing
instruments using the effective interest method.
Beneficial Conversion Feature
If
a conversion feature of convertible debt is not accounted for
separately as a derivative instrument and provides for a rate of
conversion that is below market value, this feature is
characterized as a beneficial conversion feature
(“BCF”). A BCF is recorded by us as a debt discount. We
amortize the discount to interest expense over the life of the debt
using the effective interest rate method.
Derivative Liabilities
Certain of our
embedded conversion features on debt and issued and outstanding
common stock purchase warrants, which have exercise price reset
features and other anti-dilution protection clauses, are treated as
derivatives for accounting purposes. The common stock purchase
warrants were not issued with the intent of effectively hedging any
future cash flow, fair value of any asset, liability or any net
investment in a foreign operation. The warrants do not qualify for
hedge accounting, and as such, all future changes in the fair value
of these warrants are recognized currently in earnings until such
time as the warrants are exercised, expire or the related rights
have been waived. These common stock purchase warrants do not trade
in an active securities market, and as such, we estimate the fair
value of these warrants using a Probability Weighted Black-Scholes
Model and the embedded conversion features using a Path-Dependent
Monte Carlo Simulation Model (see Note 9).
Debt Extinguishment
Any
gain or loss associated with debt extinguishment is recorded in the
period in which the debt is considered extinguished. Third party
fees incurred in connection with a debt restructuring accounted for
as an extinguishment are capitalized. Fees paid to third parties
associated with a term debt restructuring accounted for as a
modification are expensed as incurred. Third party and creditor
fees incurred in connection with a modification to a line of credit
or revolving debt arrangements are considered to be associated with
the new arrangement and are capitalized.
Income Taxes
Income
taxes are provided for using the asset and liability method whereby
deferred tax assets and liabilities are recognized using current
tax rates on the difference between the financial statement
carrying amounts and the respective tax basis of the assets and
liabilities. We provide a valuation allowance on deferred tax
assets when it is more likely than not that such assets will not be
realized.
We
recognize the benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting this
standard, the amount recognized in the consolidated financial
statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the
relevant tax authority. There were no uncertain tax positions
at December 31, 2016 and 2015.
Revenue Recognition and Deferred Revenue
We generate revenue
from product sales and the licensing of the rights to market and
commercialize our products.
We recognize
revenue in accordance with FASB Accounting Standards Codification
(“ASC”) 605, Revenue
Recognition. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales: We ship products
directly to consumers pursuant to phone or online orders and to our
wholesale and retail customers pursuant to purchase agreements or
sales orders. Revenue from sales transactions where the buyer
has the right to return the product is recognized at the time of
sale only if (1) the seller’s price to the buyer is
substantially fixed or determinable at the date of sale,
(2) the buyer has paid the seller, or the buyer is obligated
to pay the seller and the obligation is not contingent on resale of
the product, (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction
or damage of the product, (4) the buyer acquiring the product
for resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant obligations
for future performance to directly bring about resale of the
product by the buyer and (6) the amount of future returns can
be reasonably estimated.
License Revenue: The license agreements
we enter into normally generate three separate components of
revenue: 1) an initial payment due on signing or when certain
specific conditions are met; 2) royalties that are earned on an
ongoing basis as sales are made or a pre-agreed transfer price
and 3) sales-based milestone payments that are earned when
cumulative sales reach certain levels. Revenue from the initial
payments or licensing fee is recognized when all required
conditions are met. Royalties are recognized as earned based on the
licensee’s sales. Revenue from the sales-based milestone
payments is recognized when the cumulative revenue levels are
reached. The achievement of the sales-based milestone underlying
the payment to be received predominantly relates to the
licensee’s performance of future commercial activities. FASB
ASC 605-28, Milestone
Method, (“ASC 605-28”) is not used by us as
these milestones do not meet the definition of a milestone under
ASC 605-28 as they are sales-based and similar to a royalty and the
achievement of the sales levels is neither based, in whole or in
part, on our performance, a specific outcome resulting from our
performance, nor is it a research or development
deliverable.
Sales Allowances
We
accrue for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
Our
product returns accrual is primarily based on estimates of future
product returns over the period customers have a right of return,
which is in turn based in part on estimates of the remaining
shelf-life of products when sold to customers. Future product
returns are estimated primarily based on historical sales and
return rates. We estimate our volume rebates and promotional
discounts accrual based on its estimates of the level of inventory
of our products in the distribution channel that remain subject to
these discounts. The estimate of the level of products in the
distribution channel is based primarily on data provided by our
customers.
In
all cases, judgment is required in estimating these reserves.
Actual claims for rebates and returns and promotional discounts
could be materially different from the estimates.
We
provide a customer satisfaction warranty on all of our products to
customers for a specified amount of time after product
delivery. Estimated return costs are based on historical
experience and estimated and recorded when the related sales are
recognized. Any additional costs are recorded when incurred or
when they can reasonably be estimated.
The
estimated reserve for sales returns and allowances, which is
included in accounts payable and accrued expense, was approximately
$61,000 and $5,000 at December 31, 2016 and 2015,
respectively.
Cost of Product Sales
Cost
of product sales includes the cost of inventory, royalties and
inventory reserves. We are required to make royalty payments based
upon the net sales of three of our marketed products, Zestra®,
Sensum+® and Vesele®.
Advertising
Expense
Advertising costs,
which primarily includes print and online media advertisements, are
expensed as incurred and are included in sales and marketing
expense in the accompanying consolidated statements of operations.
Advertising costs were approximately $2.7 million and $3,000 for
the years ended December 31, 2016 and 2015,
respectively.
Research and Development Costs
Research
and development (“R&D”) costs, including research
performed under contract by third parties, are expensed as
incurred. Major components of R&D expense consists of
salaries and benefits, testing, post marketing clinical trials,
material purchases and regulatory affairs.
Stock-Based Compensation
We account for stock-based compensation in
accordance with FASB ASC 718, Stock Based
Compensation. All
stock-based payments to employees and directors, including grants
of stock options, warrants, restricted stock units
(“RSUs”) and restricted stock, are recognized in the
consolidated financial statements based upon their estimated fair
values. We use Black-Scholes to estimate the fair value of
stock-based awards. The estimated fair value is determined at the
date of grant. FASB ASC 718 requires
that stock-based compensation expense be based on awards that are
ultimately expected to vest. Stock-based compensation for the
years ended December 31, 2016 and 2015 have been reduced for
estimated forfeitures. When estimating forfeitures, voluntary
termination behaviors, as well as trends of actual option
forfeitures, are considered. To the extent actual forfeitures
differ from our current estimates, cumulative adjustments to
stock-based compensation expense are recorded.
Except
for transactions with employees and directors that are within the
scope of FASB ASC 718, all transactions in which goods or services
are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Equity Instruments Issued to Non-Employees for
Services
Our accounting
policy for equity instruments issued to consultants and vendors in
exchange for goods and services follows FASB guidance. As such, the
value of the applicable stock-based compensation is periodically
remeasured and income or expense is recognized during the vesting
terms of the equity instruments. The measurement date for the
estimated fair value of the equity instruments issued is the
earlier of (i) the date at which a commitment for performance by
the consultant or vendor is reached or (ii) the date at which the
consultant or vendor’s performance is complete. In the case
of equity instruments issued to consultants, the estimated fair
value of the equity instrument is primarily recognized over the
term of the consulting agreement. According to FASB guidance, an
asset acquired in exchange for the issuance of fully vested,
nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor’s balance
sheet once the equity instrument is granted for accounting
purposes. Accordingly, we record the estimated fair value of
nonforfeitable equity instruments issued for future consulting
services as prepaid expense and other current assets in our
consolidated balance sheets.
Net Loss per Share
Basic net loss per share is computed by dividing
net loss by the weighted average number of common shares
outstanding and vested but deferred RSUs during the period
presented. Diluted net loss per
share is computed using the weighted average number of common
shares outstanding and vested but deferred RSUs during the periods plus the effect of dilutive
securities outstanding during the periods. For the years ended
December 31, 2016 and 2015, basic net loss per share is the same as
diluted net loss per share as a result of our common stock
equivalents being anti-dilutive. See Note 8 for more
details.
Recent Accounting Pronouncements
In January 2017,
the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. The update
simplifies how an entity is required to test goodwill for
impairment by eliminating Step 2 from the goodwill impairment test.
Step 2 measures a goodwill impairment loss by comparing the implied
fair value of a reporting unit’s goodwill with the carrying
amount. This update is effective for annual and interim periods
beginning after December 15, 2019, and interim periods within that
reporting period. While we are still in the process of completing
our analysis on the impact this guidance will have on the
consolidated financial statements and related disclosures, we do
not expect the impact to be material.
In January 2017,
the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying
the Definition of a Business. The update provides that when
substantially all the fair value of the assets acquired is
concentrated in a single identifiable asset or a group of similar
identifiable assets, the set is not a business. This update is
effective for annual and interim periods beginning after December
15, 2017, and interim periods within that reporting period. While
we are still in the process of completing our analysis on the
impact this guidance will have on the consolidated financial
statements and related disclosures, we do not expect the impact to
be material.
In August 2016, the
FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) –
Classification of Certain Cash Receipts and Cash Payments.
This ASU provides clarification regarding how certain cash receipts
and cash payments are presented and classified in the statement of
cash flows. This ASU addresses eight specific cash flow issues with
the objective of reducing the existing diversity in practice. The
issues addressed in this ASU that will affect us is classifying
debt prepayments or debt extinguishment costs and contingent
consideration payments made after a business combination. This
update is effective for annual and interim periods beginning after
December 15, 2017, and interim periods within that reporting
period. Early adoption is permitted. While we are still in the
process of completing our analysis on the impact this guidance will
have on the consolidated financial statements and related
disclosures, we do not expect the impact to be
material.
In March 2016, the FASB
issued ASU No. 2016-09, Improvements
to Employee Share-Based Payment Accounting, which amends ASC
Topic 718, Compensation
- Stock Compensation. The ASU includes
provisions intended to simplify various aspects related to how
share-based payments are accounted for and presented in the
financial statements. ASU 2016-09 is effective for public business
entities for annual reporting periods beginning after December 15,
2016, and interim periods within that reporting period. Early
adoption will be permitted in any interim or annual period, with
any adjustments reflected as of the beginning of the fiscal year of
adoption. While we are still in the process of completing
our analysis on the impact this guidance will have on the
consolidated financial statements and related disclosures, we do
not expect the impact to be material.
In February 2016, the FASB issued its new lease
accounting guidance in Accounting Standards Update
(“ASU”) No. 2016-02, Leases (Topic
842). Under the new guidance,
lessees will be required to recognize the following for all leases
(with the exception of short-term leases) at the commencement date:
A lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to
align, where necessary, lessor accounting with the lessee
accounting model and ASC 606, Revenue from Contracts with
Customers. The new lease
guidance simplified the accounting for sale and leaseback
transactions primarily because lessees must recognize lease assets
and lease liabilities. Lessees will no longer be provided with a
source of off-balance sheet financing. Public business entities
should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted. Lessees (for
capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the
consolidated financial statements. The modified retrospective
approach would not require any transition accounting for leases
that expired before the earliest comparative period presented.
Lessees may not apply a full retrospective transition
approach. While we are currently assessing the
impact ASU 2016-02 will have on the consolidated financial
statements, we expect the primary impact to the consolidated
financial position upon adoption will be the recognition, on a
discounted basis, of the minimum commitments on the consolidated
balance sheet under our sole noncancelable operating lease for our
facility in San Diego resulting in the recording of a right of use
asset and lease obligation. The current minimum commitment under
the noncancelable operating lease is disclosed in Note
11.
In November 2015, the FASB issued Accounting
Standards Update (ASU) No. 2015-17, Balance Sheet Classification
of Deferred Taxes. Current U.S.
GAAP requires an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts in a classified
statement of financial position. To simplify the presentation of
deferred income taxes, the amendments in this update require that
deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. The amendments in
this update apply to all entities that present a classified
statement of financial position. The current requirement that
deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected
by the amendments in this update. The amendments in this update
will align the presentation of deferred income tax assets and
liabilities with International Financial Reporting Standards (IFRS)
and are effective for fiscal years after December 15, 2016,
including interim periods within those annual periods. While
we are still in the process of completing our analysis on the
impact this guidance will have on the consolidated financial
statements and related disclosures, we do not expect the impact to
be material.
In September 2015,
the FASB issued ASU 2015-16, Simplifying the Accounting for
Measurement-Period Adjustments, which eliminates the
requirement to retrospectively adjust the consolidated financial
statements for measurement-period adjustments that occur in periods
after a business combination is consummated. Measurement period
adjustments are calculated as if they were known at the acquisition
date, but are recognized in the reporting period in which they are
determined. Additional disclosures are required about the impact on
current-period income statement line items of adjustments that
would have been recognized in prior periods if prior-period
information had been revised. The guidance is effective for annual
periods beginning after December 15, 2015 and is to be applied
prospectively to adjustments of provisional amounts that occur
after the effective date. Early application is permitted. The
adoption of this ASU during the year ended December 31, 2016 did
not have a material impact on our consolidated financial position
and results of operations.
In July 2015, the FASB issued ASU No.
2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory.
Topic 330. Inventory, currently
requires an entity to measure inventory at the lower of cost or
market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The amendments apply to all other inventory, which includes
inventory that is measured using first-in, first-out (FIFO) or
average cost. An entity should measure in scope inventory at the
lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. The amendments in this Update more closely align
the measurement of inventory in U.S. GAAP with the measurement of
inventory in IFRS. For public business entities, the amendments are
effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The amendments
should be applied prospectively with earlier application permitted
as of the beginning of an interim or annual reporting
period. While we are still in the process of completing our
analysis on the impact this guidance will have on the consolidated
financial statements and related disclosures, we do not expect the
impact to be material.
In August 2014, the FASB issued ASU
2014-15, Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern. This ASU 2014-15
describes how an entity should assess its ability to meet
obligations and sets rules for how this information should be
disclosed in the consolidated financial statements. The standard
provides accounting guidance that will be used along with existing
auditing standards. The ASU 2014-15 is effective for the annual
period ending after December 15, 2016. Early application is
permitted. While we are still in the process of completing
our analysis on the impact this guidance will have on the
consolidated financial statements and related disclosures, we do
not expect the impact to be material.
In May 2014, the FASB issued ASU 2014-09,
Revenue from
Contracts with Customers. This
updated guidance supersedes the current revenue recognition
guidance, including industry-specific guidance. The updated
guidance introduces a five-step model to achieve its core principal
of the entity recognizing revenue to depict the transfer of goods
or services to customers at an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. In August 2015, the FASB
issued ASU 2015-14 which deferred the effective date by one year
for public entities and others. The amendments in this ASU are
effective for interim and annual periods beginning after December
15, 2017 for public business entities, certain not-for-profit
entities, and certain employee benefit plans. Earlier application
is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that
reporting period. In March 2016, the FASB issued ASU 2016-08
which clarifies the implementation guidance on principal versus
agent considerations. In April 2016, the FASB issued ASU 2016-10
which clarifies the principle for determining whether a good or
service is “separately identifiable” and, therefore,
should be accounted for separately. In May 2016 the FASB issued ASU
2016-12 which clarifies the objective of the collectability
criterion. A separate update issued in May 2016 clarifies the
accounting for shipping and handling fees and costs as well as
accounting for consideration given by a vendor to a customer. The
guidance includes indicators to assist an entity in determining
whether it controls a specified good or service before it is
transferred to the customers. We have not yet determined whether we
will adopt the provisions of ASU 2014-09 on a retrospective basis
or through a cumulative adjustment to equity. While we are still in
the process of completing our analysis on the impact this guidance
will have on the consolidated financial statements and related
disclosures, we do not expect the impact to be
material.
NOTE 2 – LICENSE AGREEMENTS
NTC
S.r.l. In-License Agreement
On December 15,
2016, the Company and NTC S.r.l (“NTC”) entered into a
license and distribution agreement (“NTC License
Agreement”) pursuant to which we acquired the rights to use,
market and sell NTC’s proprietary modified release bilayer
tablet formerly known as LERTAL® for the management of
allergic rhinitis in the U.S. and Canada. Such licensed product
will be sold by us under the name AllerVarx™ in the U.S. and Canada. Under
this agreement, we are obligated to pay a non-refundable upfront
license fee of €15,000
($15,806 USD based on December 31, 2016 exchange rate) and cash
payments of up to €120,000
($126,448 USD based on December 31, 2016 exchange rate) upon the
achievement of certain sales milestones. The non-refundable upfront
license is included in sales and marketing expense in the
accompanying consolidated statement of operations for the year
ended December 31, 2016 and accounts payable and accrued expense in
the accompanying consolidated balance sheet at December 31,
2016.
Seipel
Group Pty Ltd. In-License Agreement
On September 29,
2016, the Company and Seipel Group Pty Ltd. (“SG”)
entered into a license and purchase agreement (“SG License
Purchase Agreement”) pursuant to which we acquired the
exclusive rights to use, market and sell SG’s proprietary
dietary supplement formula known as Urox® for bladder support
in the U.S. and worldwide. Under this agreement, we have agreed to
minimum purchase order requirements of 25,000 units per calendar
quarter beginning 12 months after our initial order to retain our
exclusivity (see Note 11) and paid a brokerage fee of $200,000
which is included in sales and marketing expense in the
accompanying consolidated statement of operations for the year
ended December 31, 2016.
CRI In-License Agreement
On April 19, 2013, the Company and Centric
Research Institute (“CRI”) entered into an asset purchase agreement (the
“CRI Asset Purchase Agreement”) pursuant to which we
acquired:
●
All
of CRI’s rights in past, present and future Sensum+®
product formulations and presentations, and
●
An
exclusive, perpetual license to commercialize Sensum+®
products in all territories except for the United
States.
On June 9, 2016,
the Company and CRI amended the CRI Asset Purchase Agreement
(“Amended CRI Asset Purchase Agreement”) to provide us
commercialization rights for Sensum+® in the U.S. through our
Beyond Human® marketing platform through December 31, 2016. On
January 1, 2017, the Company and CRI agreed to extend the term of
the Amended CRI Asset Purchase Agreement to December 31, 2017,
subject to an automatic one-year extension to December 31, 2018
upon certain conditions (see Note 12).
In consideration
for the CRI Asset Purchase Agreement, we issued 631,313 shares of
common stock to CRI in 2013. We recorded an asset totaling
$250,000 related to the CRI Asset Purchase Agreement and are
amortizing this amount over its estimated useful life of 10
years. Under the CRI Asset Purchase Agreement, we were
required to issue to CRI shares of our common stock valued at an
aggregate of $200,000 for milestones relating to additional
clinical data to be received. As a result of the Amended CRI Asset
Purchase Agreement, the Company and CRI agreed to settle the
clinical milestone payments with a payment of 100,000 shares of
restricted common stock. The fair value of the restricted shares of
common stock of $23,000 was based on the market price of our common
stock on the date of issuance and is included in research and
development expense in the accompanying consolidated statement of
operations for the year ended December 31, 2016.
The CRI Asset
Purchase Agreement also requires us to pay to CRI up to $7 million
in cash milestone payments based on first achievement of annual
Ex-U.S. net sales targets plus a royalty based on annual Ex-U.S.
net sales. The obligation for these payments expires on April
19, 2023 or the expiration of the last of CRI’s patent claims
covering the product or its use outside the U.S., whichever is
sooner. No sales milestone obligations have been met and no
royalties are owed to CRI under this agreement during the years
ended December 31, 2016 and 2015.
In consideration
for the Amended CRI Asset Purchase Agreement, we are required to
pay CRI a percentage of the monthly net profit, as defined in the
agreement, from our sales of Sensum+® in the U.S. through our
Beyond Human® marketing platform. During the year ended
December 31, 2016, no amounts have been earned by CRI under the
Amended CRI Asset Purchase Agreement.
J&H Co. LTD Agreement
On November 9, 2016, we entered into an exclusive
ten-year license agreement with J&H Co. LTD, a South Korea
company (“J&H”), under which we granted to J&H
an exclusive license to market and sell our topical treatment for
Female Sexual Interest/Arousal Disorder (“FSI/AD”)
Zestra® and Zestra Glide® in South Korea. Under the
agreement, J&H is obligated to order minimum annual quantities
of Zestra® and Zestra Glide® totaling $2,000,000 at a
pre-negotiated transfer price per unit. The minimum annual order
quantities by J&H are to be made over a 12-month period
beginning upon the completion of the first shipment of product in
2017. During the year ended December 31, 2016, no revenue
was recognized related to this agreement.
Sothema Laboratories Agreement
On September 23,
2014, we entered into an exclusive license agreement with Sothema
Laboratories, SARL, a Moroccan publicly traded company
(“Sothema”), under which we granted to Sothema an
exclusive license to market and sell Zestra® (based on the latest Canadian
approval of the indication) and Zestra Glide® in several
Middle Eastern and African countries (collectively the
“Territory”).
Under the
agreement, we received an upfront payment of $200,000 and are
eligible to receive up to approximately $171 million upon and
subject to the achievement of sales milestones based on cumulative
supplied units of the licensed products in the Territory, plus a
pre-negotiated transfer price per unit. We believe the amount of
the upfront payment received is reasonable compared to the amounts
to be received upon obtainment of future sales-based
milestones.
As the sales-based
milestones do not meet the definition of a milestone under ASC
605-28, we will recognize the revenue from the milestone payments
when the cumulative supplied units’ volume is met. During the
years ended December 31, 2016 and 2015, we recognized $16,056 and
$56,487, respectively, in net revenue for the sales of products
related to this agreement, and no revenue was recognized for the
sales-based milestones of the agreement.
Orimed Pharma Agreement
On September 18,
2014, we entered into a twenty year exclusive license agreement
with Orimed Pharma (“Orimed”), an affiliate of JAMP
Pharma, under which we granted to Orimed an exclusive license to
market and sell in Canada Zestra®, Zestra Glide®, our
topical treatment for premature ejaculation EjectDelay® and
our product Sensum+® to increase penile
sensitivity.
Under the
agreement, we received an upfront payment of $100,000 and are
eligible to receive up to approximately CN $94.5 million ($70.2
million USD based on December 31, 2016 exchange rate) upon and
subject to the achievement of sales milestones based on cumulative
gross sales in Canada by Orimed plus double-digit tiered royalties
based on Orimed’s cumulative net sales in Canada. We believe
the amount of the upfront payment received is reasonable compared
to the amounts to be received upon obtainment of future sales-based
milestones.
As the sales-based
milestones do not meet the definition of a milestone under ASC
605-28, we will recognize the revenue from the milestone payments
when the cumulative gross sales volume is met. We will recognize
the revenue from the royalty payments on a quarterly basis when the
cumulative net sales have been met. During the years
ended December 31, 2016 and 2015, under this agreement we
recognized $42,153 and $108,988, respectively, in net revenue for
the sales of products and no revenue was recognized for the
sales-based milestones. During the years ended December 31, 2016
and 2015, we recognized royalty payments of $1,252 and $0,
respectively.
Elis Pharmaceuticals Agreements
On
July 4, 2015, we announced that we had entered into an exclusive
license and distribution agreement with Elis Pharmaceuticals, an
emirates company (“Elis”), under which we granted to
Elis an exclusive ten-year distribution right to market and sell
Zestra® EjectDelay®, Sensum+® and Zestra Glide®
in Turkey and select African and gulf countries. If Elis exceeds
its minimum yearly orders, the agreement has a ten-year term
extension. Under the agreement, we are eligible to receive up to
$35.5 million in sales milestone payments plus an agreed-upon
transfer price upon sale of products. We had preliminary listed
Syria, Yemen and Somalia as countries in the definition of licensed
territories, but these countries were removed by the
agreement of both parties from the agreement effective the date of
signing of the agreement. As the sales-based milestones
are not considered a milestone under ASC 605-28, we will recognize
the revenue from the milestone payments when the cumulative gross
sales volume is met. We did not recognize any revenue from this
agreement during the years ended December 31, 2016 and
2015.
On October 31, 2016, we entered into another
exclusive license and distribution agreement with Elis under which
we granted to Elis an exclusive ten-year distribution right to
market and sell Zestra® in Lebanon. Under the agreement, we
are eligible to receive up to $2.35 million in sales milestone
payments plus an agreed-upon transfer price upon sale of products.
As the sales-based milestones are not considered a milestone under
ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative gross sales volume is met.
During the year ended December 31, 2016, no revenue was recognized
related to this agreement.
Khandelwal Laboratories Agreement
On
September 9, 2015, we entered into an exclusive license and
distribution agreement with Khandelwal Laboratories, an Indian
company (“KLabs”) under which we have granted to KLabs
an exclusive ten-year distribution right to market and sell in the
Indian Subcontinent, which is defined as India, Nepal, Bhutan,
Bangladesh and Sri Lanka our products including Zestra®,
EjectDelay®, Sensum+® and Zestra
Glide®. If KLabs exceeds its minimum yearly orders,
the agreement has two five-year term extensions. Under the
agreement the minimum orders for the first ten-year term of the
agreement are approximately $2.6 million. We did not
recognize any revenue from this agreement during the years ended
December 31, 2016 and 2015.
NOTE 3 – BUSINESS AND ASSET ACQUISITIONS
Acquisition
of Assets of Beyond Human® in 2016
On February 8,
2016, we entered into an Asset Purchase Agreement
(“APA”), pursuant to which we agreed to purchase
substantially all of the assets of Beyond Human® (the
“Acquisition”) for a total cash payment of up to
$662,500 (the “Purchase Price”). The Purchase Price was
payable in the following manner: (1) $300,000 in cash at
the closing of the Acquisition (the “Initial Payment”),
(2) $100,000 in cash four months from the closing upon the
occurrence of certain milestones as described in the APA, (3)
$100,000 in cash eight months from the closing upon the occurrence
of certain milestones as described in the APA, and (4) $130,000 in
cash in twelve months from the closing upon the occurrence of
certain milestones as described in the APA. An
additional $32,500 in cash is due if certain milestones occur
twelve months from closing. The transaction closed on
March 1, 2016.
The fair value of
the contingent consideration is based on cash flow projections and
other assumptions for the milestone payments and future changes in
the estimate of such contingent consideration will be recognized as
a charge to fair value adjustment for contingent consideration.
The
total purchase price is summarized as follows:
|
Cash
consideration
|
$300,000
|
|
Fair
value of future earn out payments
|
330,000
|
|
Total
|
$630,000
|
We accounted for
such asset acquisition as a business combination under ASC 805,
Business Combinations. We
did not acquire any identifiable tangible assets and did not assume
any liabilities as a result of the asset acquisition. The excess of
the acquisition date fair value of consideration transferred of
$630,000 over the estimated fair value of the intangible assets
acquired was recorded as goodwill. The establishment of the fair
value of the contingent consideration, and the allocation to
identifiable intangible assets requires the extensive use of
accounting estimates and management judgment. The fair values
assigned to the assets acquired are based on estimates and
assumptions from data currently available.
In determining the
fair value of the intangible assets, we considered, among other
factors, the best use of acquired assets such as the Beyond
Human® website, analyses of historical financial performance
of the Beyond Human® products and estimates of future
performance of the Beyond Human® products and website
acquired. The fair values of the identified intangible assets
related to Beyond Human®’s website, trade name,
non-competition covenant and customer list. The fair value of the
website, customer list and the non-competition covenant were
calculated using an income approach. The fair value of the trade
name was calculated using a cost approach. The following table sets
forth the components of identified intangible assets associated
with the Acquisition and their estimated useful lives:
|
|
|
Fair Value
|
|
|
Useful Life
|
|
||
|
Website
|
|
$
|
171,788
|
|
|
|
5
years
|
|
|
Trade
name
|
|
|
50,274
|
|
|
|
10
years
|
|
|
Non-competition
covenant
|
|
|
3,230
|
|
|
|
3
years
|
|
|
Customer
list
|
|
|
1,500
|
|
|
|
1
year
|
|
|
Total
|
|
$
|
226,792
|
|
|
|
|
|
We determined the
useful lives of intangible assets based on the expected future cash
flows and contractual lives associated with the respective asset.
Website represents the fair value of the expected benefit from
revenue to be generated from the Beyond Human® website and
domain name for both Beyond Human® products as well as our
existing products. Trade name represents the fair value of the
brand and name recognition associated with the marketing of Beyond
Human®’s products. Customer list represents the expected
benefit from customer contracts that, at the date of acquisition,
were reasonably anticipated to continue given the history and
operating practices of Beyond Human®. The non-competition
covenant represents the contractual period and expected degree of
adverse economic impact that would exist in its
absence.
Of the total
estimated purchase price, $403,208 was allocated to goodwill and is
attributable to expected synergies the acquired assets will bring
to our existing business, including access for us to market and
sell our existing products through Beyond Human®’s sales
and marketing platform. Goodwill represents the excess of the
purchase price of the acquired business over the estimated fair
value of the underlying intangible assets acquired. Goodwill
resulting from the Acquisition will be tested for impairment at
least annually and more frequently if certain indicators of
impairment are present. In the event we determine that the value of
goodwill has become impaired, we will incur an accounting charge
for the amount of the impairment during the fiscal quarter in which
the determination is made. All of the goodwill is expected to be
deductible for income tax purposes. As a result of completing our
final valuation, the total purchase price increased by $15,521 and
goodwill increased by $403,208 compared to the initial allocation
of the purchase price during the first quarter of
2016.
On September 6,
2016, the Company and the sellers entered into an agreement in
which we agreed to pay the sellers $150,000 to settle the
contingent consideration payments totaling up to $362,500 under the
APA. The settlement agreement was not contemplated at the time of
the acquisition and the fair value of the contingent consideration
on the date of settlement was $330,000. As a result, we recorded a
non-cash gain on contingent consideration of $180,000, which is
included in change in fair value of contingent consideration in the
accompanying consolidated statement of operations for the year
ended December 31, 2016.
Supplemental
Pro Forma Information for Acquisition of Assets of Beyond
Human® (unaudited)
The following
unaudited supplemental pro forma information for the years ended
December 31, 2016 and 2015, assumes the asset acquisition of Beyond
Human® had occurred as of January 1, 2016 and 2015,
giving effect to purchase accounting adjustments such as
amortization of intangible assets. The pro forma data is for
informational purposes only and may not necessarily reflect the
actual results of operations had the assets of Beyond Human®
been operated as part of the Company since January 1, 2016 and
2015.
|
|
Year Ended
December 31, 2016
|
Year Ended
December 31, 2015
|
||
|
|
As Reported
|
Pro Forma (unaudited)
|
As Reported
|
Pro Forma (unaudited)
|
|
Net
revenue
|
$4,818,603
|
$4,868,241
|
$735,717
|
$2,947,694
|
|
Net
loss
|
$(13,701,154)
|
$(13,700,702)
|
$(4,202,628)
|
$(3,901,770)
|
|
Net
loss per share of common stock – basic and
diluted
|
$(0.15)
|
$(0.15)
|
$(0.08)
|
$(0.07)
|
|
Weighted
average number of shares outstanding – basic and
diluted
|
94,106,382
|
94,106,382
|
52,517,530
|
52,517,530
|
We incurred
approximately $70,000 in expense related to the
Acquisition.
Acquisition of Novalere
On
February 5, 2015 (the “Closing Date”), Innovus, Innovus
Pharma Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Innovus (“Merger Subsidiary
I”), Innovus Pharma Acquisition Corporation II, a Delaware
corporation and a wholly-owned subsidiary of Innovus (“Merger
Subsidiary II”), Novalere FP, Inc., a Delaware corporation
(“Novalere FP”) and Novalere Holdings, LLC, a Delaware
limited liability company (“Novalere Holdings”), as
representative of the shareholders of Novalere (the “Novalere
Stockholders”), entered into an Agreement and Plan of Merger
(the “Merger Agreement”), pursuant to which Merger
Subsidiary I merged into Novalere and then Novalere merged with and
into Merger Subsidiary II (the “Merger”), with Merger
Subsidiary II surviving as a wholly-owned subsidiary of Innovus.
Pursuant to the articles of merger effectuating the Merger, Merger
Subsidiary II changed its name to Novalere, Inc.
With
the Merger, we acquired the worldwide rights to market and
sell the Fluticare™ brand (Fluticasone propionate nasal
spray) and the related manufacturing agreement from Novalere FP. We
currently anticipate that the Abbreviated New Drug Application
(“ANDA”) filed in November 2014 by the
manufacturer with the U.S. Food and Drug Administration
(“FDA”) may be approved in 2017, which, when and if
approved, may allow us to market and sell Fluticare™ over the
counter in the second half of 2017. An ANDA is an application for a
U.S. generic drug approval for an existing licensed medication or
approved drug.
Under
the terms of the Merger Agreement, at the Closing Date, the
Novalere Stockholders received 50% of the Consideration Shares (the
“Closing Consideration Shares”) and the remaining 50%
of the Consideration Shares (the “ANDA Consideration
Shares”) were to be delivered only if an ANDA of Fluticasone
Propionate Nasal Spray of Novalere Manufacturing Partners (the
“Target Product”) was approved by the FDA (the
“ANDA Approval”). A portion of the Closing
Consideration Shares and, if ANDA Approval was obtained prior to
the 18 month anniversary of the Closing Date, a
portion of the ANDA Consideration Shares, would have been held
in escrow for a period of 18 months from the Closing Date to be
applied towards any indemnification claims by us pursuant to the
Merger Agreement.
In
addition, the Novalere Stockholders are entitled to receive, if and
when earned, earn-out payments (the “Earn-Out
Payments”). For every $5 million in Net Revenue (as defined
in the Merger Agreement) realized from the sales of
Fluticare™, the Novalere Stockholders will be entitled to
receive, on a pro rata basis, $500,000, subject to cumulative
maximum Earn-Out Payments of $2.5 million.
The
closing price of our common stock on the Closing Date was $0.20 per
share. We issued 12,947,657 Closing Consideration Shares of our
common stock at the Closing Date, the fair market value,
(‘FMV”) of the Closing Consideration Shares was
$2,071,625 as of the Closing Date.
The
fair value of the contingent consideration is based on preliminary
cash flow projections and other assumptions for the ANDA
Consideration shares and the Earn-Out Payments and future changes
in the estimate of such contingent consideration will be recognized
as a charge to other expense.
Issuance
of the 12,947,655 ANDA Consideration Shares was subject to
milestones, achievement of which was uncertain at the time of
acquisition. The FMV of the ANDA Consideration Shares was
established to account for the uncertainty in the future value of
the shares. The value of the shares as derived using the options
pricing model was then weighted based on the probability of
achieving the milestones to determine the FMV of the ANDA
Consideration Shares and estimated potential share prices at such
dates. Due to certain restrictions on the shares of common stock to
be issued, we applied a 20% discount for lack of marketability to
the FMV of the ANDA Consideration Shares. Based on the
aforementioned calculation the fair market value of the ANDA
Consideration shares was determined to be $1,657,300.
The
total fair market value of the considerations issued and to be
issued for the transaction are as follows:
|
|
Shares
|
FMV
|
|
Closing
Consideration Shares
|
12,947,657
|
$2,071,625
|
|
ANDA
Consideration Shares
|
12,947,655
|
1,657,300
|
|
Total
|
25,895,312
|
$3,728,925
|
Based
on the assumptions, the fair market value of the Earn-Out Payments
was determined to be $1,205,000. The preliminary fair values of
the future earn out payments was determined by applying
the income approach, using several significant unobservable inputs
for projected cash flows and a discount rate. These inputs are
considered Level 3 inputs under the fair value measurements and
disclosure guidance.
The
total purchase price is summarized as follows:
|
Cash
consideration
|
$43,124
|
|
Fair
value of common stock issued at closing
|
2,071,625
|
|
Fair
value of ANDA consideration shares
|
1,657,300
|
|
Fair
value of future earn out payments
|
1,205,000
|
|
Total
|
$4,977,049
|
The
fair values of acquired assets and liabilities are based on cash
flow projections and other assumptions. The fair values of acquired
intangible assets were determined using several significant
unobservable inputs for projected cash flows and a discount rate.
These inputs are considered Level 3 inputs under the fair value
measurements and disclosure guidance. The transaction has been
accounted for as a business combination under the acquisition
method of accounting. Accordingly, the tangible assets and
identifiable intangible assets acquired and liabilities assumed
have been recorded at fair value, with the remaining purchase price
recorded as goodwill.
The
fair values of assets acquired and liabilities assumed at the
transaction date are summarized below:
|
Cash
|
$43,124
|
|
Prepaid
expense
|
25,907
|
|
Total
tangible assets
|
69,031
|
|
|
|
|
Product
rights and related manufacturing agreement
|
4,681,000
|
|
Trademarks
|
150,000
|
|
Total
identifiable intangible assets
|
4,831,000
|
|
Goodwill
|
120,143
|
|
Total
acquired assets
|
5,020,174
|
|
|
|
|
Other
current liabilities
|
(43,125)
|
|
Total
assumed liabilities
|
(43,125)
|
|
|
|
|
Acquired
assets net of assumed liabilities
|
$4,977,049
|
We
recorded $759,428 of goodwill related to the acquisition of
Novalere as an income tax benefit and also recorded an impairment
of $759,428 against this benefit during the year ended December 31,
2015.
The
carrying value of current assets and liabilities in
Novalere’s financial statements are considered to be a proxy
for the fair value of those assets and liabilities. Novalere is a
pre-commercial organization specializing in selling and marketing
nasal steroid products; most of the value in Novalere is applicable
to the product rights and related manufacturing agreement.
Novalere holds a non-exclusive, worldwide, royalty-free license to
market, promote, sell, offer for sale, import and distribute the
product. This business relationship is contractual in nature and
meets the separability criterion and as a result is considered an
identifiable intangible asset recognized separately from goodwill.
The value of the business relationship is included in goodwill
under U.S. GAAP. Goodwill is calculated as the difference between
the fair value of the consideration transferred and the values
assigned to the identifiable tangible assets acquired and
liabilities assumed. The acquired goodwill presented in the above
table reflects the estimated goodwill from the preliminary purchase
price allocation. The cash acquired was used to pay amounts due to
shareholders and thus was received by us.
The
establishment of the fair value of the consideration for a Merger,
and the allocation to identifiable tangible and intangible assets
and liabilities, requires the extensive use of accounting estimates
and management judgment. The fair values assigned to the assets
acquired and liabilities assumed were based on estimates and
assumptions. During the year ended December 31, 2016, there was an
increase in the estimated fair value of the ANDA consideration
shares of $1,346,556 due to the amended agreement entered into with
Novalere Holdings (see below) which is included in change in fair
value of contingent consideration in the accompanying consolidated
statement of operations. There was no change to the estimated fair
value of the future earn-out payments of $1,248,125 during the year
ended December 31, 2016 and there was no change to the estimate
fair value of the contingent consideration during the year ended
December 31, 2015.
On November 12,
2016, we entered into an Amendment and Supplement to a Registration
Rights and Stock Restriction Agreement (the "Agreement") with
Novalere Holdings pursuant to which we agreed to issue 12,808,796
shares of our common stock (the “Novalere Shares”) that
were issuable pursuant to agreement upon the approval of
Fluticare™ by the FDA. Management agreed to issue the
Novalere Shares due to its confidence that FlutiCare™ would
be approved by the FDA in the near future and the obligation of us
to issue and register for resale the Novalere Shares and all other
shares of our common stock held by Novalere Holdings. In
connection with the issuance of the Novalere Shares, Novalere
Holdings also agreed to certain restrictions, and to an extension
in the date to register the Novalere Shares and all other shares of
our common stock held by Novalere Holdings until the second quarter
of 2017. In the event a registration statement to register the
Novalere Shares is not filed by February 1, 2017, and does not
become effective by May 15, 2017, the Company will be required to
issue additional shares of common stock as a penalty to Novalere
Holdings equal to 10% of the total shares to be registered of
25,617,592. We filed a Registration
Statement on Form S-1 on February 1, 2017 to register the
25,617,592 shares of common stock issued to Novalere
Holdings. Management believed that the issuance of the
Novalere Shares at that time was in our and our stockholders best
interest as it results in a restriction on the resale of all shares
of our common stock held by Novalere Holdings, including the
Novalere Shares, until after we have achieved certain milestones.
As a result of the issuance of the Novalere Shares, the fair value
of Novalere Shares on the date of issuance of $2,971,641 was
reclassified from liabilities to equity. The remaining 138,859 ANDA
consideration shares not issuable yet will be issued upon FDA
approval of Fluticare™ and the estimated fair value of such
remaining shares of $32,215 is included in contingent consideration
in the accompanying consolidated balance sheet at December 31,
2016.
Supplemental Pro Forma Information for Acquisition of Novalere
(unaudited)
The
following unaudited supplemental pro forma information for the year
ended December 31, 2015, assumes the acquisition of Novalere had
occurred as of January 1, 2015, giving effect to purchase
accounting adjustments such as amortization of intangible assets.
The pro forma data is for informational purposes only and may not
necessarily reflect the actual results of operations had Novalere
been operated as part of the Company since January 1,
2015.
|
|
Year Ended
December 31, 2015
|
|
|
|
As Reported
|
Pro Forma (unaudited)
|
|
Net
revenue
|
$735,717
|
$735,717
|
|
Net
loss
|
$(4,202,628)
|
$(4,578,521)
|
|
Net
loss per share of common stock – basic and
diluted
|
$(0.08)
|
$(0.09)
|
|
Weighted
average number of shares outstanding – basic and
diluted
|
52,517,530
|
53,794,559
|
Purchase of Semprae Laboratories, Inc. in 2013
On
December 24, 2013 (the “Semprae Closing Date”), we,
through Merger Sub, obtained 100% of the outstanding shares of
Semprae in exchange for the issuance of 3,201,776 shares of our
common stock, which shares represented fifteen percent (15%) of our
total issued and outstanding shares as of the close of business on
the Closing Date, whereupon Merger Sub was renamed Semprae
Laboratories, Inc. Also, we agreed to pay $343,500 to the New
Jersey Economic Development Authority (“NJEDA”) as
settlement-in full for an outstanding loan of approximately
$640,000 owed by the former stockholder’s of Semprae, in full
satisfaction of the obligation to the NJEDA. In addition, we agreed
to pay the former shareholders an annual royalty
(“Royalty”) equal to 5% of the net sales from
Zestra® and Zestra Glide® and any second generation
products derived primarily therefrom (“Target
Products”) up until the time that a generic version of such
Target Product is introduced worldwide by a third
party.
The
fair market value of our common stock issued on the Closing Date
was $0.30 per share, which resulted in a fair market value of
$960,530 for the common stock issued to the shareholders of
Semprae. The fair value of the shares of common stock issued were
determined by quoted market prices that are considered to be Level
1 inputs under the fair value measurements and disclosure guidance.
A portion of the shares issued were held in escrow pending
reconciliation of assets received and liabilities assumed at the
acquisition date and were released on September 10,
2015. 386,075 shares of common stock were canceled based
on the terms of the agreement, reducing the total number of shares
issued to 2,815,701. We recorded income on the
cancellation of shares of $115,822, which is included in the change
in fair value of contingent consideration in the accompanying
consolidated statement of operations for the year ended December
31, 2015.
The
agreement to pay the annual Royalty resulted in the recognition of
a contingent consideration, which is recognized at the inception of
the transaction, and subsequent changes to estimate of the amounts
of contingent consideration to be paid will be recognized as
charges or credits in the consolidated statement of operations. The
fair value of the contingent consideration is based on preliminary
cash flow projections, growth in expected product sales and other
assumptions. Based on the assumptions, the fair value of the
Royalty was determined to be $308,273 at the date of acquisition.
The fair value of the Royalty was determined by applying the income
approach, using several significant unobservable inputs for
projected cash flows and a discount rate of approximately 22%
commensurate with our cost of capital and expectation of the
revenue growth for products at their life cycle stage. These inputs
are considered Level 3 inputs under the fair value measurements and
disclosure guidance. During 2016 and 2015, $22,103 and $0,
respectively, was paid under this arrangement. The fair
value of the expected royalties to be paid was increased by
$103,301 and $0 during the years ended December 31, 2016 and 2015,
respectively, which is included in the change in fair value of
contingent consideration in the accompanying consolidated
statements of operations. The fair value of the contingent
consideration was $405,577 and $324,379 at December 31, 2016 and
2015, based on the new estimated fair value of the consideration,
net of the amounts to be returned to us as discussed
above.
NOTE 4 – ASSETS AND LIABILITIES
Inventories
Inventories
consist of the following:
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Raw
materials and supplies
|
$85,816
|
$77,649
|
|
Work
in process
|
48,530
|
90,540
|
|
Finished
goods
|
465,510
|
86,254
|
|
Total
|
$599,856
|
$254,443
|
Property and Equipment
Property
and equipment consists of the following:
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Computer
equipment
|
$5,254
|
$5,254
|
|
Office
furniture and fixtures
|
33,376
|
33,376
|
|
Production
equipment
|
276,479
|
276,479
|
|
Software
|
338,976
|
338,976
|
|
Total
cost
|
654,085
|
654,085
|
|
Less
accumulated depreciation
|
(624,516)
|
(618,984)
|
|
Property
and equipment, net
|
$29,569
|
$35,101
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $5,532
and $28,950, respectively.
Intangible Assets
Amortizable
intangible assets consist of the following:
At December 31, 2016
|
|
Amount
|
Accumulated
Amortization
|
Net
Amount
|
Useful Lives
(years)
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(91,201)
|
$326,396
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(188,428)
|
422,691
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(84,009)
|
150,536
|
10
|
|
Vesele®
Trademark
|
25,287
|
(7,047)
|
18,240
|
8
|
|
Beyond Human® Website and Trade Name
|
222,062
|
(32,821)
|
189,241
|
5 – 10
|
|
Novalere
Mfg. Contract
|
4,681,000
|
(887,440)
|
3,793,560
|
10
|
|
Other Beyond Human® Intangible Assets
|
4,730
|
(2,147)
|
2,583
|
1 – 3
|
|
Total
|
$6,196,340
|
$(1,293,093)
|
$4,903,247
|
|
At December 31, 2015
|
|
Amount
|
Accumulated
Amortization
|
Net
Amount
|
Useful
Lives
(years)
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(57,593)
|
$360,004
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(127,316)
|
483,803
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(60,554)
|
173,991
|
10
|
|
Vesele®
Trademark
|
25,287
|
(3,886)
|
21,401
|
8
|
|
Novalere
Mfg. Contract
|
4,681,000
|
(419,340)
|
4,261,660
|
10
|
|
Total
|
$5,969,548
|
$(668,689)
|
$5,300,859
|
|
Amortization expense for the years ended December
31, 2016 and 2015 was $624,404 and $550,789, respectively.
The following table summarizes the approximate expected future
amortization expense as of December 31, 2016 for intangible
assets:
|
2017
|
$630,000
|
|
2018
|
630,000
|
|
2019
|
629,000
|
|
2020
|
629,000
|
|
2021
|
600,000
|
|
Thereafter
|
1,785,000
|
|
Total
|
$4,903,000
|
Prepaid
Expense and Other Current Assets
Prepaid expense and
other current assets consist of the following:
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Prepaid
insurance
|
$69,976
|
$27,816
|
|
Prepaid
inventory
|
20,750
|
-
|
|
Merchant
net settlement reserve receivable (see Note 1)
|
221,243
|
-
|
|
Prepaid
consulting and other expense
|
21,094
|
25,462
|
|
Prepaid
consulting and other service stock-based compensation expense (see
Note 8)
|
530,601
|
-
|
|
Total
|
$863,664
|
$53,278
|
Accounts
Payable and Accrued Expense
Accounts payable
and accrued expense consists of the following:
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
Accounts
payable
|
$647,083
|
$63,826
|
|
Accrued
credit card balances
|
31,654
|
91,037
|
|
Accrued
royalties
|
73,675
|
-
|
|
Sales
returns and allowances
|
60,853
|
-
|
|
Accrual
for stock to be issued to consultants (see Note 8)
|
360,000
|
-
|
|
Accrued
other
|
36,785
|
640
|
|
Total
|
$1,210,050
|
$155,503
|
Goodwill
The
changes in the carrying value of our goodwill for the years ended
December 31, 2016 and 2015 is as follows:
|
Beginning
balance December 31, 2014
|
$429,225
|
|
Acquisition
of Novalere (see Note 3)
|
120,143
|
|
Release
of valuation allowance in connection with acquisition of Novalere
(see Note 10)
|
759,428
|
|
Impairment
of valuation allowance in connection with acquisition of Novalere
(see Note 10)
|
(759,428)
|
|
Ending
balance December 31, 2015
|
549,368
|
|
Asset acquisition of Beyond Human®
(see Note 3)
|
403,208
|
|
Ending
balance December 31, 2016
|
$952,576
|
NOTE 5 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Short-Term Loans Payable
The short-term
non-convertible financings were from three funding sources and all
balances were guaranteed by our CEO. We repaid these
amounts in full in July 2016.
Notes Payable and Non-Convertible Debenture
The
following table summarizes the outstanding notes payable and
non-convertible debenture at December 31, 2016 and
2015:
|
|
2016
|
2015
|
|
Notes
payable and non-convertible debenture:
|
|
|
|
February
2016 Note Payable
|
$347,998
|
$-
|
|
December
2016 Notes Payable
|
550,000
|
-
|
|
July
2015 Debenture (Amended August 2014 Debenture)
|
-
|
73,200
|
|
Total
notes payable and non-convertible debenture
|
897,998
|
73,200
|
|
Less:
Debt discount
|
(216,871)
|
-
|
|
Carrying
value
|
681,127
|
73,200
|
|
Less:
Current portion
|
(626,610)
|
(73,200)
|
|
Notes
payable and non-convertible debenture, net of current
portion
|
$54,517
|
$-
|
The following table summarizes the future
minimum payments as of December 31, 2016 for the notes payable and
non-convertible debenture:
|
2017
|
$843,013
|
|
2018
|
54,985
|
|
Total
|
$897,998
|
July 2015 Debenture (Amended August 2014 Debenture)
On August 30, 2014,
we issued an 8% debenture to an unrelated third party investor in
the principal amount of $40,000 (the “August 2014
Debenture”). The August 2014 Debenture bore interest at the
rate of 8% per annum. The principal amount and interest were
payable on August 29, 2015. On July 21, 2015, we received an
additional $30,000 from the investor and amended and restated this
agreement to a new principal balance of $73,200 (including accrued
interest of $3,200 added to principal) and a new maturity date of
July 21, 2016. The note was repaid in full in July
2016.
February 2016 Note Payable
On February 24,
2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered into an agreement in which SBI loaned
us gross proceeds of $550,000 pursuant to a purchase agreement, 20%
secured promissory note and security agreement (“February
2016 Note Payable”), all dated February 19, 2016
(collectively, the “Finance Agreements”), to purchase
substantially all of the assets of Beyond Human® (see Note
3). Of the $550,000 gross proceeds, $300,000 was paid
into an escrow account held by a third party bank and was released
to Beyond Human® upon closing of the transaction, $242,500 was
provided directly to us for use in building the Beyond Human®
business and $7,500 was provided for attorneys’
fees. The attorneys’ fees were recorded as a
discount to the carrying value of the February 2016 Note Payable in
accordance with ASU 2015-03.
Pursuant to the
Finance Agreements, the principal amount of the February 2016 Note
Payable is $550,000 and the interest rate thereon is 20% per
annum. We began to pay principal and interest on the
February 2016 Note Payable on a monthly basis beginning on March
19, 2016 for a period of 24 months and the monthly mandatory
principal and interest payment amount thereunder is $28,209. The
monthly amount shall be paid by us through a deposit account
control agreement with a third-party bank in which SBI shall be
permitted to take the monthly mandatory payment amount from all
revenue received by us from the Beyond Human® assets in the
transaction. The maturity date for the February 2016
Note Payable is February 19, 2018.
The February 2016
Note Payable is secured by SBI through a first priority secured
interest in all of the Beyond Human® assets acquired by us in
the transaction including all revenue received by us from these
assets.
May 2016 Debenture
On May 4, 2016, we
issued a 10% non-convertible debenture to an unrelated third party
investor in the principal amount of $24,000 (the “May 2016
Debenture”). The May 2016 Debenture bore interest at the rate
of 10% per annum. The principal amount and interest were payable on
May 4, 2017. The note was repaid in full in July 2016.
May 2016 Notes Payable
On May 6, 2016, we
entered into a securities purchase agreement with an unrelated
third party investor in which the investor loaned us gross proceeds
of $50,000 pursuant to a 3% promissory note (“May 6, 2016
Note Payable”). The May 6, 2016 Note Payable bore
interest at the rate of 3% per annum. The principal amount and
interest were payable on November 6, 2016. The note was repaid in
full in June 2016.
In connection with
the May 6, 2016 Note Payable, we issued the investor restricted
shares of common stock totaling 500,000. The fair value
of the restricted shares of common stock issued was based on the
market price of our common stock on the date of issuance of the May
6, 2016 Note Payable. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value resulted in us recording a debt discount of
$23,684. The discount was amortized in full to interest expense
during the year ended December 31, 2016.
On May 20, 2016, we
entered into a securities purchase agreement with an unrelated
third party investor in which the investor loaned us gross proceeds
of $100,000 pursuant to a 3% promissory note (“May 20, 2016
Note Payable”). The May 20, 2016 Note Payable bore
interest at the rate of 3% per annum. The principal amount and
interest were payable on February 21, 2017. The note was repaid in
full in June 2016.
In connection with
the May 20, 2016 Note Payable, we issued the investor restricted
shares of common stock totaling 750,000. The fair value
of the restricted shares of common stock issued was based on the
market price of our common stock on the date of issuance of the May
20, 2016 Note Payable. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value resulted in us recording a debt discount of
$70,280. The discount was amortized in full to interest expense
during the year ended December 31, 2016.
December 2016 Notes Payable
On December 5,
2016, we entered into a securities purchase agreement with three
unrelated third party investors in which the investors loaned us
gross proceeds of $500,000 pursuant to a 5% promissory note
(“December 5, 2016 Notes
Payable”). The notes
have an Original Issue Discount (“OID”) of $50,000 and
requires payment of $550,000 in principal upon maturity. The
December 5, 2016 Notes Payable bear interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on October 4, 2017.
In connection with
the December 5, 2016 Notes Payable, we issued the investors
restricted shares of common stock totaling
1,111,111. The fair value of the restricted shares of
common stock issued was based on the market price of our common
stock on the date of issuance of the December 5, 2016 Notes
Payable. The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value resulted in us recording a debt discount of $182,203. The
discount is being amortized to interest expense using the effective
interest method over the term of the December 5, 2016 Notes
Payable.
September 2014 Convertible Debenture
On
September 29, 2014, we issued a convertible promissory note (the
“Note”) to an unrelated third party accredited investor
for $50,000. The Note had a principal face amount of $92,000, did
not accrue interest and was due on March 28, 2016 (the
“Maturity Date”). The Note was converted into 230,000
shares common stock according to the terms of the note, by the
investor on March 30, 2015. As such, we recorded the conversion of
the note and the remaining debt discount was charged to interest
expense during the year ended December 31, 2015.
January 2015 Non-Convertible Debenture
On
January 21, 2015, we entered into securities purchase agreements
with Vista Capital Investments, LLC (“Vista”) whereby
we issued and sold to the Vista promissory notes (“January
2015 Non-Convertible Debenture”) and warrants (the
“Vista Warrants”) to purchase up to 500,000 shares of
the our common stock for gross proceeds of $100,000. The note has
an OID of $10,000 and requires payment of $110,000 in principal
upon maturity. On July 30, 2015, the Company and Vista entered into
an amendment to the $110,000 Promissory Note dated January 21, 2015
(“Vista Note Amendment”). In consideration for the
Vista Note Amendment, we issued 100,000 restricted shares of common
stock to Vista. The fair value of such shares totaling $15,500 was
recognized as interest expense during the year ended December 31,
2015. The principal note balance totaling $110,000 was paid off on
November 2, 2015.
The
Vista Warrants were exercisable for five years from the closing
date at an exercise price of $0.30 (see Note 8) per share of
common stock. The warrants contained anti-dilution protection,
including protection upon dilutive issuances.
The
Vista Warrants were measured at fair value and classified as a
liability because these warrants contained anti-dilution protection
and therefore could not be considered indexed to the our own stock
which was a requirement for the scope exception as outlined under
FASB ASC 815. The estimated fair value of the Vista Warrants was
determined using the Probability Weighted Black-Scholes Model,
resulting in a fair value of $99,999 on the date they were issued.
The allocation of the proceeds of the debt was initially recorded
using the residual method, at $1, net of a debt discount of
$109,999 for the fair value of the Vista Warrants and the OID. The
discount was being accreted as non-cash interest expense over the
expected term of the January 2015 Non-Convertible Debenture using
the effective interest method. During the year ended December 31,
2015, the full amount of debt discount has been accreted to
interest expense. The fair value of the Vista Warrants was affected
by changes in inputs to that model including our stock price,
expected stock price volatility, the contractual term and the
risk-free interest rate. We continued to classify the fair value of
the Vista Warrants as a liability until the warrants were exercised
in full during the year ended December 31, 2016 (see Notes 8 and
9).
February 2014 Convertible Debenture
On
February 13, 2014, we entered into a securities purchase agreement
with an unrelated third party accredited investor pursuant to which
we issued a convertible debenture in the aggregate principal amount
of $330,000 (issued at an OID of 10%) (“February 2014
Convertible Debenture”) and a warrant to purchase 250,000
shares of our common stock (“Warrant
Agreement”).
The
February 2014 Convertible Debenture bore interest at the rate of
10% per annum and the principal amount and interest were payable on
March 13, 2015. The Warrant Agreement provided the holder with the
right to acquire up to 250,000 shares of common stock at an
exercise price of $0.50 per share, subject to standard certain
adjustments as described in the Warrant Agreement, at any time
through the fifth anniversary of its issuance date.
On
March 12, 2015, we issued 250,000 shares of our common stock and
250,000 warrants to the holder of the February 2014
Convertible Debenture to extend the maturity date to September 13,
2015 which resulted in a debt extinguishment. The fair value of the
250,000 shares of common stock issued totaled $32,500 computed
based on the stock price on the date of issuance. The
terms of the warrants issued to the holder were amended to reduce
the exercise price of the total warrants outstanding to $0.30 per
share (see Note 8) and included certain anti-dilution protection,
including protection upon dilutive issuances. The warrants were
measured at fair value and classified as a liability because these
warrants contained anti-dilution protection and therefore could not
be considered indexed to our own stock which was a requirement for
the scope exception as outlined under FASB ASC 815. The
estimated fair value of the warrants was determined using the
Probability Weighted Black-Scholes Model, resulting in a fair value
of $76,299 on the date they were issued. The allocation of the
proceeds of the debt after modification which resulted in a debt
extinguishment was initially recorded using the residual method, at
$253,701, net of a debt discount of $76,299 for the fair value of
the warrants. The discount was being accreted as non-cash interest
expense over the expected term of the February 2014 Convertible
Debenture using the effective interest method. During the year
ended December 31, 2015, the full amount of debt discount has been
accreted to interest expense. The fair value of the
common stock issued of $32,500 was recorded as a loss on debt
extinguishment, based on the estimated fair value of the stock on
date of issuance, in the accompanying consolidated statement of
operations during the year ended December 31, 2015. This
convertible debenture was repaid in September 2015 and we continued
to classify the fair value of the warrants as a liability until the
warrants were exercised in full during the year ended December 31,
2016 (see Notes 8 and 9).
Interest Expense
We recognized
interest expense on the short-term loans payable and non-related
party notes payable and non-convertible debentures of $151,924 and
$102,105 for the years ended December 31, 2016 and 2015,
respectively. Amortization of the debt discount to
interest expense during the years ended December 31, 2016 and 2015
totaled $116,798 and $310,006, respectively.
Convertible Debentures
Third Quarter 2015 Financing
The
following table summarizes the outstanding Third Quarter 2015
Convertible Debentures at December 31, 2016 and
2015:
|
|
2016
|
2015
|
|
|
|
|
|
Convertible
debentures
|
$-
|
$1,457,500
|
|
Less:
Debt discount
|
-
|
(1,050,041)
|
|
Carrying
value
|
-
|
407,459
|
|
Less:
Current portion
|
-
|
(407,459)
|
|
Convertible
debentures – long-term
|
$-
|
$-
|
In
the third quarter of 2015, we entered into Securities Purchase
Agreements with three accredited investors (the
“Buyers”), pursuant to which we received aggregate
gross proceeds of $1,325,000 (net of OID) pursuant to which we
sold:
Six convertible
promissory notes of the Company totaling $1,457,500 (each a
“Q3 2015 Note” and collectively the “Q3 2015
Notes”) (the Q3 2015 Notes were sold at a 10% OID and we
received an aggregate total of $1,242,500 in funds thereunder after
debt issuance costs of $82,500). The principal amount due under the
Q3 2015 Notes was $1,457,500. The Q3
2015 Notes and accrued interest were convertible into shares of our
common stock (the “Common Stock”) beginning six months
from the date of execution, at a conversion price of $0.15 per
share, with certain adjustment provisions noted below. The maturity
date of the first and second Q3 2015 Note was August 26, 2016. The
third Q3 2015 Note had a maturity date of September 24, 2016, the
fourth had a maturity date of September 26, 2016, the fifth was
October 20, 2016 and the sixth was October 29, 2016. The Q3 2015
Notes bore interest on the unpaid principal amount at the rate of
5% per annum from the date of issuance until the same became due
and payable, whether at maturity or upon acceleration or by
prepayment or otherwise.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default, as defined
in such Q3 2015 Note, a Default Amount was equal to the sum of (i)
the principal amount, together with accrued interest due thereon
through the date of payment payable at the holder’s option in
cash or common stock and (ii) an additional amount equal to the
principal amount payable at our option in cash or common stock. For
purposes of payments in common stock, the following conversion
formula applied: the conversion price shall be the lower of: (i)
the fixed conversion price ($0.15) or (ii) 60% multiplied by the
volume weighted average price of our common stock during the ten
consecutive trading days immediately prior to the later of the
Event of Default or the end of the applicable cure period. Certain
other conversion rates applied in the event of the sale or merger
of us, default and other defined events. The embedded
conversion feature of these notes contained anti-dilution
protection, therefore, were treated as derivative instruments (see
Note 9).
We could have
prepaid the Q3 2015 Notes at any time on the terms set forth in the
Q3 2015 Notes at the rate of 115% of the then outstanding balance
of the Q3 2015 Notes. Under the terms of the Q3 2015 Notes, we
could not effect certain corporate and business actions during the
term of the Q3 2015 Notes, although some could have been done with
proper notice. Pursuant to the Purchase Agreement, with certain
exceptions, the Q3 2015 Note holder had a right of participation
during the term of the Q3 2015 Notes; additionally, we granted the
Q3 2015 Note holder registration rights for the shares of common
stock underlying the Q3 2015 Notes pursuant to Registration Rights
Agreements.
In
addition, bundled with the convertible debt, we
sold:
1.
A common stock purchase warrant to each Buyer,
which allows the Buyers to purchase an aggregate of 1,325,000
shares of common stock and the placement agent to purchase 483,333
shares of common stock (aggregating 1,808,333 shares of our common
stock) at an exercise price of $0.30 per share (see Note 8);
and
2.
4,337,500 restricted shares of common stock to the
Buyers.
A Registration Rights Agreement was signed and, as
a result, we filed a Registration Statement on September 11, 2015
and filed an Amended Form S–1 on October 26, 2015,
November 12, 2015 and December 10, 2015 and the Amended Form S-1
became effective December 18, 2015.
We
allocated the proceeds from the Q3 2015 Notes to the convertible
debt, warrants and restricted shares of common stock issued based
on their relative fair values. We determined the fair
value of the warrants using Black-Scholes with the following range
of assumptions:
|
|
|
December 31,
2015
|
|
|
Expected
terms (in years)
|
|
5.00
|
|
|
Expected
volatility
|
|
101%
– 119%
|
|
|
Risk-free
interest rate
|
|
1.37%
– 1.58%
|
|
|
Dividend
yield
|
|
-
|
|
The
fair value of the restricted shares of common stock issued was
based on the market price of our common stock on the date of
issuance of the Q3 2015 Notes. The allocation of the
proceeds to the warrants and restricted shares of common stock
based on their relative fair values resulted in us recording a debt
discount of $89,551 and $374,474, respectively. The
remaining proceeds of $860,975 were initially allocated to the
debt. We determined that the embedded conversion
features in the Q3 2015 Notes were a derivative instrument which
was required to be bifurcated from the debt host contracts and
recorded at fair value as a derivative liability. The
fair value of the embedded conversion features at issuance was
determined using a Path-Dependent Monte Carlo Simulation (see Note
9 for assumptions used to calculate fair value). The
initial fair value of the embedded conversion features were
$901,784, of which, $830,560 is recorded as a debt
discount. The initial fair value of the embedded
conversion feature derivative liabilities in excess of the proceeds
allocated to the debt was $71,224, and was immediately
expensed and recorded as interest expense during the year ended
December 31, 2015 in the accompanying consolidated statement of
operations. The Q3 2015 Notes were also issued at an OID
of 10% and the OID of $132,500 was recorded as an addition to the
principal amount of the Q3 2015 Notes and a debt discount in the
accompanying consolidated balance sheet.
Total debt issuance
costs incurred in connection with the Q3 2015 Notes was $150,919,
of which, $68,419 is the fair value of the warrants to purchase
483,333 shares of common stock issued to the placement
agents. The debt issuance costs were recorded as a debt
discount and were being amortized to interest expense using the
effective interest method over the term of the Q3 2015
Notes.
During the year
ended December 31, 2016, the Q3 2015 Notes holders elected to
convert all principal and interest outstanding of $1,515,635 into
10,104,228 shares of common stock at a conversion price of $0.15
per share (see Note 8). As a result of the conversion of
the outstanding principal and interest balance into shares of
common stock, the fair value of the embedded conversion feature
derivative liabilities of $2,018,565 on the date of conversion was
reclassified to additional paid-in capital (see Note 9) and the
remaining unamortized debt discount was amortized to interest
expense during the year ended December 31, 2016.
2016 Financing
The following table
summarizes the outstanding 2016 Convertible Debentures at December
31, 2016:
|
|
2016
|
|
|
|
|
Convertible
debentures
|
$1,559,922
|
|
Less:
Debt discount
|
(845,730)
|
|
Carrying
value
|
714,192
|
|
Less:
Current portion
|
(714,192)
|
|
Convertible
debentures – long-term
|
$-
|
In the second and
third quarter of 2016, we entered into Securities Purchase
Agreements with eight accredited investors (the
“Investors”), pursuant to which we received aggregate
gross proceeds of $3,000,000 (net of OID) pursuant to which we
sold:
Nine convertible
promissory notes of the Company totaling $3,303,889 (each a
“2016 Note” and collectively the “2016
Notes”) (the 2016 Notes were sold at a 10% OID and we
received an aggregate total of $2,657,500 in funds thereunder after
debt issuance costs of $342,500). The 2016 Notes and accrued
interest are convertible into shares of our common stock at a
conversion price of $0.25 per share, with certain adjustment
provisions noted below. The maturity date of the 2016 Notes issued
on June 30, 2016 and July 15, 2016 is July 30, 2017 and the
maturity date of the 2016 Notes issued on July 25, 2016 is August
25, 2017. The 2016 Notes bear interest on the unpaid principal
amount at the rate of 5% per annum from the date of issuance until
the same becomes due and payable, whether at maturity or upon
acceleration or by prepayment or otherwise.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default, as defined
in such 2016 Notes, a Default Amount is equal to the sum of (i) the
principal amount, together with accrued interest due thereon
through the date of payment payable at the holder’s option in
cash or common stock and (ii) an additional amount equal to the
principal amount payable at our option in cash or common stock. For
purposes of payments in common stock, the following conversion
formula shall apply: the conversion price shall be the lower of:
(i) the fixed conversion price ($0.25) or (ii) 75% multiplied by
the volume weighted average price of our common stock during the
ten consecutive trading days immediately prior to the later of the
Event of Default or the end of the applicable cure period. For
purposes of the Investors request of repayment in cash but we are
unable to do so, the following conversion formula shall apply: the
conversion price shall be the lower of: (i) the fixed conversion
price ($0.25) or (ii) 60% multiplied by the lowest daily volume
weighted average price of our common stock during the ten
consecutive trading days immediately prior to the conversion.
Certain other conversion rates apply in the event of the sale or
merger of us, default and other defined events.
We may prepay the
2016 Notes at any time on the terms set forth in the 2016 Notes at
the rate of 110% of the then outstanding balance of the 2016 Notes.
Pursuant to the Securities Purchase Agreements, with certain
exceptions, the Investors have a right of participation during the
term of the 2016 Notes; additionally, we granted the 2016 Note
holders registration rights for the shares of common stock
underlying the 2016 Notes up to $1,000,000 pursuant to Registration
Rights Agreements. We filed a Form S-1 Registration Statement on
August 9, 2016, filed an Amended Form S–1 on August 23, 2016
and August 24, 2016 and the Amended Form S-1 became effective
August 25, 2016.
In
addition, bundled with the convertible debt, we
sold:
1.
A
common stock purchase warrant to each Investor, which allows the
Investors to purchase an aggregate of 3,000,000 shares of common
stock and the placement agent to purchase 1,220,000 shares of
common stock (aggregating 4,220,000 shares of our common stock) at
an exercise price of $0.40 per share (see Note 8); and
2.
7,500,000 restricted shares of
common stock to the Investors.
We allocated the
proceeds from the 2016 Notes to the convertible debenture, warrants
and restricted shares of common stock issued based on their
relative fair values. We determined the fair value of
the warrants using Black-Scholes with the following range of
assumptions:
|
|
December 31,
2016
|
|
Expected
terms (in years)
|
5.00
|
|
Expected
volatility
|
229%
|
|
Risk-free
interest rate
|
1.01-1.15% 1.15%
|
|
Dividend
yield
|
-
|
The fair value of
the restricted shares of common stock issued to Investors was based
on the market price of our common stock on the date of issuance of
the 2016 Notes. The allocation of the proceeds to the
warrants and restricted shares of common stock based on their
relative fair values resulted in us recording a debt discount of
$445,603 and $1,127,225, respectively. The remaining
proceeds of $1,427,172 were initially allocated to the debt. We
determined that the embedded conversion features in the 2016 Notes
were a derivative instrument which was required to be bifurcated
from the debt host contract and recorded at fair value as a
derivative liability. The fair value of the embedded
conversion features at issuance was determined using a
Path-Dependent Monte Carlo Simulation Model (see Note 9 for
assumptions used to calculate fair value). The initial
fair value of the embedded conversion features were $3,444,284, of
which, $687,385 is recorded as a debt discount. The
initial fair value of the embedded conversion feature derivative
liabilities in excess of the proceeds allocated to the debt, after
the allocation of debt proceeds to the debt issuance costs, was
$2,756,899, and was immediately expensed and recorded as
interest expense during the year ended December 31, 2016 in the
accompanying condensed consolidated statement of
operations. The 2016 Notes were also issued at an OID of
10% and the OID of $303,889 was recorded as an addition to the
principal amount of the 2016 Notes and a debt discount in the
accompanying consolidated balance sheet.
Total debt issuance
costs incurred in connection with the 2016 Notes was $739,787, of
which, $357,286 is the fair value of the warrants to purchase
1,220,000 shares of common stock issued to the placement
agents. The debt issuance costs have been recorded as a
debt discount and are being amortized to interest expense using the
effective interest method over the term of the 2016
Notes.
During the year
ended December 31, 2016, certain of the 2016 Notes holders elected
to convert principal and interest outstanding of $1,749,070 into
6,996,280 shares of common stock at a conversion price of $0.25 per
share (see Note 8). As a result of the conversion of the
principal and interest balance into shares of common stock, the
fair value of the embedded conversion feature derivative
liabilities of $1,093,263 on the date of conversion was
reclassified to additional paid-in capital (see Note 9) and the
amortization of the debt discount was accelerated for the amount
converted and recorded to interest expense during the year ended
December 31, 2016.
Interest Expense
We recognized
interest expense on the Q3 2015 Notes and 2016 Notes for the year
ended December 31, 2016 and 2015 of $80,095 and $26,754,
respectively. The debt discount recorded for the 2016 Notes are
being amortized as interest expense over the term of the 2016 Notes
using the effective interest method. Total amortization
of the debt discount on the Q3 2015 Notes and 2016 Notes to
interest expense for the years ended December 31, 2016 and 2015 was
$3,508,199 and $527,964, respectively.
NOTE 6 – DEBENTURES – RELATED PARTIES
The following table
summarizes the outstanding debentures to a related party at
December 31, 2016 and 2015:
|
|
2016
|
2015
|
|
Line
of credit convertible debenture – related party
|
$-
|
$409,192
|
|
2014
non-convertible debenture – related party
|
-
|
25,000
|
|
Total
|
-
|
434,192
|
|
Less
: Debt discount
|
-
|
(17,720)
|
|
Carrying
value
|
-
|
416,472
|
|
Less:
Current portion
|
-
|
(391,472)
|
|
Total
long-term debentures – related party
|
$-
|
$25,000
|
Line of Credit Convertible Debenture
In
January 2013, we entered into a line of credit convertible
debenture with our President and Chief Executive Officer (the
“LOC Convertible Debenture”). Under the terms of its
original issuance: (1) we could request to borrow up to a maximum
principal amount of $250,000 from time to time; (2) amounts
borrowed bore an annual interest rate of 8%; (3) the amounts
borrowed plus accrued interest were payable in cash at the earlier
of January 14, 2014 or when we complete a Financing, as defined,
and (4) the holder had sole discretion to determine whether or not
to make an advance upon our request.
During
2013, the LOC Convertible Debenture was further amended to: (1)
increase the maximum principal amount available for borrowing to $1
million plus any amounts of salary or related payments paid to Dr.
Damaj prior to the termination of the funding commitment; and (2)
change the holder’s funding commitment to automatically
terminate on the earlier of either (a) when we complete a financing
with minimum net proceeds of at least $4 million, or (b) July 1,
2016. The securities to be issued upon automatic conversion would
have been either our securities that were issued to the investors
in a Qualified Financing or, if the financing did not occur by July
1, 2016, shares of the our common stock based on a conversion price
of $0.312 per share, 80% times the quoted market price of our
common stock on the date of the amendment. The LOC Convertible
Debenture bore interest at a rate of 8% per annum. The other
material terms of the LOC Convertible Debenture were not changed.
We recorded a debt discount for the intrinsic value of the BCF with
an offsetting increase to additional paid-in-capital. The BCF was
being accreted as non-cash interest expense over the expected term
of the LOC debenture to its stated maturity date using the
effective interest rate method.
On
July 22, 2014, we agreed with our CEO to increase the principal
amount that may be borrowed from $1,000,000 to
$1,500,000. All other terms of the LOC Convertible
Debenture remained the same.
On August 12, 2015,
the principal amount that may be borrowed was increased to
$2,000,000 and the automatic termination date described above was
extended to October 1, 2016. The LOC Convertible Debenture was not
renewed upon expiration. The conversion price was $0.16 per share,
80% times the quoted market price of our common stock on the date
of the amendment.
During the years
ended December 31, 2016 and 2015, we borrowed $0 and $114,
respectively, under the LOC Convertible Debenture and recorded a
beneficial conversion feature of $3,444 and $8,321, respectively,
for the amounts borrowed and accrued interest. We repaid the LOC
Convertible Debenture balance and accrued interest in full during
the year ended December 31, 2016.
January 2015 Non-Convertible Debenture - Former CFO
On
January 21, 2015, we entered into a securities purchase agreement
with our former Chief Financial Officer whereby we issued and sold
a promissory note in the principal face amount of $55,000 and
warrants to purchase up to 250,000 shares of our common stock for
gross proceeds of $50,000. We recorded an OID of $5,000
upon issuance.
The
note was due on July 31, 2015 and accrued a one-time interest
charge of 8% on the closing date. The warrants are exercisable for
five years from the closing date at an exercise price of $0.30 per
share of common stock. The warrants contain anti-dilution
protection, including protection upon dilutive issuances. The
principal and interest balance of $59,400 was repaid on July 31,
2015.
The
warrants issued in connection with the note, are measured at fair
value and classified as a liability because these warrants contain
anti-dilution protection and therefore, cannot be considered
indexed to our own stock which is a requirement for the scope
exception as outlined under FASB ASC 815. The estimated fair value
of the warrants was determined using the Probability Weighted
Black-Scholes Model, resulting in a fair value of $49,999 on the
date they were issued.
The
allocation of the proceeds of the debt was initially recorded using
the residual method, at $1, net of a debt discount of $54,999 for
the fair value of the warrants and the OID. The discount was
accreted as non-cash interest expense over the expected term of the
note using the effective interest method and the unamortized
balance was expensed upon repayment. The fair value of the warrants
will be affected by changes in inputs to that model including our
stock price, expected stock price volatility, the contractual term
and the risk-free interest rate. We will continue to classify the
fair value of the warrants as a liability until the warrants are
exercised, expire or are amended in a way that would no longer
require these warrants to be classified as a liability, whichever
comes first. The anti-dilution protection for the warrants survives
for the life of the warrants which ends in January 2020 (see Note
9).
2014 Non-Convertible Notes – Related Parties
On January 29,
2014, we issued an 8% note, in the amount of $25,000, to our
President and Chief Executive Officer. The principal amount and
interest were payable on January 22, 2015. This note was amended to
extend the maturity date until January 22, 2017. We repaid the
principal note balance and accrued interest in full in August
2016.
On
May 30, 2014, we issued an 8% debenture, in the amount of $50,000,
to a member of our Board of Directors. The principal amount
and interest were payable on May 30, 2015 and the repayment date
had been extended to May 30, 2016. On August 5, 2015 the debenture
was converted into 313,177 shares of common stock.
On
June 17, 2014, we issued an 8% debenture, in the amount of $50,000,
to our former Chief Financial Officer. The principal and
interest were payable on June 16, 2015 and were repaid in July
2015.
On
August 25, 2014, we issued an 8% debenture, in the amount of
$25,000, to a member of our Board of Directors. The principal
amount and interest were payable on August 25, 2015. In July 2015,
the repayment date was extended to May 30, 2016. On August 5, 2015
the debenture was converted into 156,083 shares of common
stock.
Interest Expense
We recognized
interest expense on the outstanding debentures to related parties
totaling $17,430 and $69,634 during the years ended December 31,
2016 and 2015, respectively. Amortization of the debt discount to
interest expense during the years ended December 31, 2016 and 2015
totaled $21,164 and $122,092, respectively.
NOTE 7 – RELATED PARTY TRANSACTIONS
Related Party Borrowings
There were certain
related party borrowings that were repaid in full or converted into
shares of common stock during the years ended December 31, 2016 and
2015 which are described in more detail in Note 6.
Accrued Compensation – Related Party
Accrued
compensation includes accruals for employee wages, vacation pay and
target-based bonuses. The components of accrued compensation
as of December 31, 2016 and 2015 are as follows:
|
|
2016
|
2015
|
|
Wages
|
$1,455,886
|
$1,178,909
|
|
Vacation
|
261,325
|
170,371
|
|
Bonuses
|
449,038
|
-
|
|
Payroll
taxes on the above
|
133,344
|
93,510
|
|
Total
|
2,299,593
|
1,442,790
|
|
Classified
as long-term
|
(1,531,904)
|
(906,928)
|
|
Accrued
compensation
|
$767,689
|
$535,862
|
Accrued employee wages at December 31 2016 and
2015 are entirely related to wages owed to our President and Chief
Executive Officer. Under the terms of his employment
agreement, wages are to be accrued but no payment made for so long
as payment of such salary would jeopardize our ability to continue
as a going concern. The CEO started to receive payment of salary in
July 2016. Under the third quarter 2015 financing agreement,
salaries prior to January 1, 2015 totaling $906,928 could
not be repaid until the debentures were repaid in full or otherwise
extinguished by conversion or other means and, accordingly, the
accrued compensation was shown as a long-term
liability. During
the year ended December 31, 2016, the Q3 2015 Notes were fully
converted into shares of common stock. We do not expect to pay the
accrued wages and related payroll tax amounts within the next 12
months and thus is classified as a long-term
liability.
NOTE 8 – STOCKHOLDERS’ EQUITY (DEFICIT)
Capital Stock
We
have 292,500,000 authorized shares of common stock with a par value
of $0.001 per share which were increased in November 2016 upon
approval from our stockholders from 150,000,000 authorized shares.
In November 2016, our stockholders approved the Amended and
Restated Articles of Incorporation to authorize a class of
undesignated or "blank check" preferred stock, consisting of
7,500,000 shares at $0.001 par value per share. Shares of preferred
stock may be issued in one or more series, with such rights,
preferences, privileges and restrictions to be fixed by the Board
of Directors.
Issuances of Common Stock
2016 Issuances
On January 6, 2016
and April 5, 2016, we entered into a consulting agreement with a
third party pursuant to which we agreed to issue, over the term of
the agreements, an aggregate of 1,560,000 shares of common stock in
exchange for services to be rendered. During the year ended
December 31, 2016, we issued 1,560,000 shares under the agreement
related to services provided and recognized the fair value of the
shares issued of $184,958 in general and administrative expense in
the accompanying consolidated statement of
operations. The 1,560,000 shares of common stock vested
on the date of issuance and the fair value of the shares of common
stock was based on the market price of our common stock on the date
of vesting.
In January 2016, we
issued 300,000 shares of common stock for services and recorded an
expense of $17,000, which is included in general and administrative
expense in the accompanying consolidated statement of operations.
The 300,000 shares of common stock vested on the date of issuance
and the fair value of the shares of common stock was based on the
market price of our common stock on the date of
vesting.
On February 10,
2016, we entered into a service agreement with a third party
pursuant to which we agreed to issue, over the term of the
agreement, 3,000,000 shares of common stock in exchange for
services to be rendered. During the year ended December 31,
2016, we issued 3,000,000 shares under the agreement related to
services provided and recognized the fair value of the shares
issued of $352,500 in general and administrative expense in the
accompanying consolidated statement of operations. The 3,000,000
shares of common stock vested on the date of issuance and the fair
value of the shares of common stock was based on the market price
of our common stock on the date of vesting.
On
February 19, 2016, we entered into a consulting agreement with a
third party, pursuant to which we agreed to issue, over the term of
the agreement, 1,750,000 shares of common stock in exchange for
services to be rendered. During the year ended December 31,
2016, we issued 1,750,000 shares under the agreement related to
services provided in connection with the acquisition of Beyond
Human® (see Note 3) and recognized the fair value of the
shares issued of $181,013 in general and administrative expense in
the accompanying consolidated statement of operations. The
1,750,000 shares of common stock vested on the date of issuance and
the fair value of the shares of common stock was based on the
market price of our common stock on the date of
vesting.
In April and August
2016, we issued an aggregate of 3,385,354 shares of common stock
upon the cashless exercise of warrants to purchase 5,042,881 shares
of common stock. Upon exercise of certain warrants in
April 2016, the fair value of the warrant derivative liability on
the date of exercise was reclassified to additional paid-in capital
(see Note 9).
In April, May,
August and October 2016, we issued an aggregate of 1,012,500 shares
of common stock for services and recorded an expense of $192,043,
which is included in general and administrative expense in the
accompanying consolidated statement of operations. The 1,012,500
shares of common stock vested on the date of issuance and the fair
value of the shares of common stock was based on the market price
of our common stock on the date of vesting.
On April 27, 2016,
we entered into a service agreement with a third party pursuant to
which we agreed to issue 300,000 shares of common stock in exchange
for services to be rendered over the 3 month term of the
agreement. The shares of common stock issued were
non-forfeitable and the fair value of $28,500 was based on the
market price of our common stock on the date of vesting. During the
year ended December 31, 2016, we recognized $28,500 in general and
administrative expense in the accompanying consolidated statement
of operations.
In May and December
2016, we issued an aggregate of 2,361,111 shares of restricted
common stock to certain note holders in connection with their notes
payable. The relative fair value of the shares of
restricted common stock issued was determined to be $276,167 and
was recorded as a debt discount (see Note 5).
In May and June
2016, the Buyers of the Q3 2015 Notes elected to convert $1,515,635
in principal and interest into 10,104,228 shares of common stock
(see Note 5). Upon conversion, the fair value of the embedded
conversion feature derivative liability on the date of conversion
was reclassified to additional paid-in capital (see Note
9).
On June 16, 2016,
we entered into a consulting agreement with a third party pursuant
to which we agreed to issue 250,000 restricted shares of common
stock in exchange for services to be rendered. In July 2016,
we issued 250,000 fully-vested shares under the agreement related
to services to be provided over the term of the agreement which
ended on December 16, 2016. The fair value of the shares issued of
$47,500 was based on the market price of our common stock on the
date of vesting. On December 16, 2016, we amended the consulting
agreement to extend the term to June 16, 2017 and in connection
with the amendment issued 80,000 fully-vested shares for services
to be provided over the remaining term of the amended agreement.
The fair value of the shares issued of $14,640 was based on the
market price of our common stock on the date of vesting. During the
year ended December 31, 2016, we recognized $48,720 in general and
administrative expense in the accompanying consolidated statement
of operations and the remaining unamortized expense of $13,420 is
included in prepaid expense and other current assets in the
accompanying consolidated balance sheet at December 31,
2016.
In July 2016, we
issued 100,000 shares of common stock to CRI pursuant to the
Amended CRI Asset Purchase Agreement (see Note 2). The
fair value of the restricted shares of common stock of $23,000 was
based on the market price of our common stock on the date of
issuance and is included in research and development expense in the
accompanying consolidated statement of operations.
On August 3, 2016,
we entered into a service agreement with a third party pursuant to
which we issued 75,000 fully-vested restricted shares of common
stock in exchange for services to be rendered over the term of the
agreement which ended on November 10, 2016. The fair value of the
shares issued of $32,250 was based on the market price of our
common stock on the date of vesting. On November 17, 2016, we
entered into a new service agreement with the same third party and
in connection with the new agreement issued 275,000 fully-vested
shares for services to be provided over the term of the new service
agreement through May 17, 2017. The fair value of the shares issued
of $69,575 was based on the market price of our common stock on the
date of vesting. During the year ended December 31, 2016, we
recognized $49,644 in general and administrative expense in the
accompanying consolidated statement of operations and the remaining
unamortized expense of $52,181 is included in prepaid expense and
other current assets in the accompanying consolidated balance sheet
at December 31, 2016.
On August 23, 2016,
we entered into a consulting agreement with a third party pursuant
to which we agreed to issue 1,600,000 restricted shares of common
stock, payable in four equal installments, in exchange for services
to be rendered over the agreement which ends on August 23,
2017. The shares were considered fully-vested and
non-refundable at the execution of the agreement. In September and
December 2016, we issued a total of 800,000 shares of common stock
under the agreement. The fair value of the shares issued of
$360,000 was based on the market price of our common stock on the
date of agreement. As a result of the shares being fully-vested at
the execution of the agreement but payable in equal installments,
we recorded a liability for the fair value of the remaining 800,000
shares of common stock to be issued of $360,000 which is included
in accounts payable and accrued expense in the accompanying
consolidated balance sheet at December 31, 2016. Upon issuance of
the remaining shares, we will reclassify the liability to common
stock and additional paid-in-capital. During the year ended
December 31, 2016, we recognized $255,000 in general and
administrative expense in the accompanying consolidated statement
of operations and the remaining unamortized expense of $465,000 is
included in prepaid expense and other current assets in the
accompanying consolidated balance sheet at December 31,
2016.
On September 1,
2016, we entered into a service agreement with a third party
pursuant to which we agreed to issue, over the term of the
agreement, 2,000,000 shares of common stock in exchange for
services to be rendered. During the year ended December 31,
2016, we issued 1,330,000 shares under the agreement related to
services provided and recognized the fair value of the shares
issued of $332,970 in general and administrative expense in the
accompanying consolidated statement of operations. The 1,330,000
shares of common stock vested on the date of issuance and the fair
value of the shares of common stock was based on the market price
of our common stock on the date of vesting.
In November 2016,
we issued 12,808,796 shares of common stock to Novalere Holdings in
connection with the Amendment and Supplement to a Registration
Rights and Stock Restriction Agreement and $2,971,641 of the
acquisition contingent consideration was reclassified from
liabilities to equity (see Note 3).
During the year
ended December 31, 2016, we issued 215,000 shares of common stock
for legal fees in connection with the Semprae merger transaction
and recognized the fair value of the shares issued of $64,500 in
general and administrative expense in the accompanying consolidated
statement of operations.
During the year
ended December 31, 2016, we issued 19,315,994 shares of common
stock in exchange for vested restricted stock units.
In connection with
the issuance of the 2016 Notes, we issued restricted shares of
common stock totaling 7,500,000 to the Investors. The relative fair
value of the restricted shares of common stock totaling $1,127,225
was recorded as a debt discount (see Note
5).
In the third and
fourth quarter of 2016, certain 2016 Notes holders elected to
convert $1,749,070 in principal and interest into 6,996,280 shares
of common stock (see Note 5). Upon conversion, the fair value of
the embedded conversion feature derivative liability on the date of
conversion was reclassified to additional paid-in capital (see Note
9).
During the year
ended December 31, 2016, five of our warrant holders exercised
their warrants to purchase shares of common stock totaling
1,033,800 at an exercise price of $0.30 per share. We
received gross cash proceeds of $310,140.
2015 Issuances
On
January 17, 2013, we entered into a service agreement with a third
party pursuant to which we agreed to issue over the term of the
agreement 250,000 shares of our common stock in exchange for
services to be rendered. On September 18, 2013, we extended
the term of the agreement and agreed to issue an additional
aggregate of 300,000 shares of common stock in exchange for
services to be rendered. The term was further extended in April
2014 and we agreed to issue an additional 300,000 shares of common
stock in exchange for services to be rendered over the term of the
agreement. During the year ended December 31, 2015, we issued
140,000 and recognized $20,650 of services expense under this
agreement. This agreement was terminated in June 2015.
On
March 17, 2015, we entered into a consulting agreement for
services. In consideration of such services, we issued 28,125
shares of our common stock to the consultant on said date and
valued them at $3,938 based on the closing price of the stock on
the date of issuance. The fair value of such shares was
recognized in general and administrative expense in the
accompanying consolidated statement of operations.
On
August 27, 2014, we agreed to issue 200,000 shares of our common
stock pursuant to a consulting contract with a third party for
services. We extended the consulting contract in January 2015 and
agreed to issue an additional 200,000 shares. The issued shares
have been valued at the closing price of our common stock on the
date of issuance and are expensed over the period that the services
are rendered. We recognized expense of $38,000 during the year
ended December 31, 2015 related to services provided in general and
administrative expense in the accompanying consolidated statement
of operations.
On
January 23, 2015, we entered into a settlement agreement with CRI
whereby CRI returned 200,000 shares of common stock initially
issued for a product license acquired. The share return was in
consideration for us completing certain product development and
regulatory efforts relating to the sale of the product in foreign
territories and reduced the intangible asset value by the fair
value of such shares totaling $38,000.
On September 17,
2015, we issued 500,000 shares of common stock in exchange for
vested restricted stock units.
On
September 29, 2015 we issued 375,000 shares of common stock for
services and recorded an expense of $23,250, which is included in
general and administrative expense in the accompanying consolidated
statement of operations.
We
issued an additional 1,037,500 shares of common stock and expensed
$124,691 during the year ended December 31, 2015 to other
consultants for various services, which is included in general and
administrative expense in the accompanying consolidated statement
of operations. All issued shares have been valued at the closing
price of our common stock on the date of
issuance.
See
Note 5 for more details on the shares of common stock issued in
connection with the Q3 2015 Notes, shares of common stock issued
upon conversion of convertible debentures and note payable and
shares of common stock issued in connection with the extension and
amendment of certain convertible debentures during
2015. See Note 3 for more details on the shares of
common stock issued in connection with the Novalere acquisition
during 2015 and the return of shares of common stock during 2015 in
connection with the Semprae merger transaction.
2013 Equity Incentive Plan
We have issued
common stock, restricted stock units and stock option awards to
employees, non-executive directors and outside consultants under
the 2013 Equity Incentive Plan (“2013 Plan”), which was
approved by our Board of Directors in February of 2013. The
2013 Plan allows for the issuance of up to 10,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. The exercise price for
all equity awards issued under the 2013 Plan is based on the fair
market value of the common stock. Currently, because our
common stock is quoted on the OTCQB, the fair market value of the
common stock is equal to the last-sale price reported by the OTCQB
as of the date of determination, or if there were no sales on such
date, on the last date preceding such date on which a sale was
reported. Generally, each vested stock unit entitles the
recipient to receive one share of our common stock which is
eligible for settlement at the earliest of their termination, a
change in control of us or a specified date. Restricted stock
units can vest according to a schedule or immediately upon
award. Stock options generally vest over a three-year period,
first year cliff vesting with quarterly vesting thereafter on the
three-year awards, and have a ten-year life. Stock options
outstanding are subject to time-based vesting as described above
and thus are not performance-based. As of December 31, 2016, no
shares were available under the 2013 Plan.
2014 Equity Incentive Plan
We have issued
common stock, restricted stock units and stock options to
employees, non-executive directors and outside consultants under
the 2014 Equity Incentive Plan (“2014 Plan”), which was
approved by our Board of Directors in November 2014. The 2014
Plan allows for the issuance of up to 20,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. The exercise price for
all equity awards issued under the 2014 Plan is based on the fair
market value of the common stock. Generally, each vested stock
unit entitles the recipient to receive one share of our common
stock which is eligible for settlement at the earliest of their
termination, a change in control of us or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of December 31, 2016, 146,314 shares were available under the 2014
Plan.
2016
Equity Incentive Plan
On March 21, 2016,
our Board of Directors approved the adoption of the 2016 Equity
Incentive Plan and on October 20, 2016 adopted the Amended and
Restated 2016 Equity Incentive Plan (“2016
Plan”). The 2016 Plan was then approved by our
stockholders in November 2016. The 2016 Plan allows for the
issuance of up to 20,000,000 shares of our common stock to be
issued in the form of stock options, stock awards, stock unit
awards, stock appreciation rights, performance shares and other
share-based awards. The 2016 Plan includes an evergreen
provision in which the number of
shares of common stock authorized for issuance and available for
future grants under the 2016 Plan will be increased each January 1
after the effective date of the 2016 Plan by a number of shares of
common stock equal to the lesser of: (a) 4% of the number of shares
of common stock issued and outstanding on a fully-diluted basis as
of the close of business on the immediately preceding December 31,
or (b) a number of shares of common stock set by our Board of
Directors. The exercise price for all equity awards issued
under the 2016 Plan is based on the fair market value of the common
stock. Generally, each vested stock unit entitles the
recipient to receive one share of our common stock which is
eligible for settlement at the earliest of their termination, a
change in control of the us or a specified date. Restricted
stock units can vest according to a schedule or immediately upon
award. Stock options generally vest over a three-year period,
first year cliff vesting with quarterly vesting thereafter on the
three-year awards and have a ten-year life. Stock options
outstanding are subject to time-based vesting as described above
and thus are not performance-based. As of December 31, 2016,
15,837,500 shares were available under the 2016 Plan.
Stock-Based Compensation
The stock-based compensation expense for the years
ended December 31, 2016 and 2015 was $954,753 and $1,298,240,
respectively, for the issuance of restricted stock units and stock
options to management, directors and consultants. We
calculate the fair value of the restricted stock units based upon
the quoted market value of the common stock at the date of grant.
We calculate the fair value of each stock option award on the date
of grant using Black-Scholes. As of December 31, 2016, the
remaining unamortized stock-based compensation expense to be
recognized in the consolidated statement of operations was
approximately $1.0 million and will be recognized over a remaining
weighted-average term of 2.5 years.
Stock Options
For
the years ended December 31, 2016 and 2015, the following weighted
average assumptions were utilized for the stock options granted
during the period:
|
|
2016
|
2015
|
|
Expected
life (in years)
|
10.0
|
6.0
|
|
Expected
volatility
|
227.2%
|
228.8%
|
|
Average
risk-free interest rate
|
1.76%
|
2.16%
|
|
Dividend
yield
|
-
|
-
|
|
Grant
date fair value
|
$0.18
|
$0.10
|
The
dividend yield of zero is based on the fact that we have never paid
cash dividends and has no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of our common stock over the period commensurate with
the expected life of the stock options. Expected life in years
is based on the “simplified” method as permitted by ASC
Topic 718. We believe that all stock options issued under its
stock option plans meet the criteria of “plain vanilla”
stock options. We use a term equal to the term of the stock
options for all non-employee stock options. The risk-free
interest rate is based on average rates for treasury notes as
published by the Federal Reserve in which the term of the rates
correspond to the expected term of the stock options.
The
following table summarizes the number of stock options outstanding
and the weighted average exercise price:
|
|
Options
|
Weighted average
exercise price
|
Weighted remaining
contractual life (years)
|
Aggregate
intrinsic value
|
|
Outstanding
at December 31, 2014
|
113,000
|
$0.37
|
9.5
|
-
|
|
Granted
|
83,000
|
$0.10
|
10.0
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Cancelled
|
-
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at December 31, 2015
|
196,000
|
$0.31
|
9.0
|
-
|
|
Granted
|
91,500
|
$0.17
|
10.0
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Cancelled
|
(50,000)
|
$0.31
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at December 31, 2016
|
237,500
|
$0.22
|
8.6
|
$14,293
|
|
|
|
|
|
|
|
Vested
at December 31, 2015
|
196,000
|
$0.31
|
9.0
|
$-
|
|
Vested
at December 31, 2016
|
237,500
|
$0.22
|
8.6
|
$14,293
|
The
aggregate intrinsic value is calculated as the difference between
the exercise price of all outstanding stock options and the quoted
price of our common stock at December 31, 2016. During the
years ended December 31, 2016 and 2015, we recognized stock-based
compensation from stock options of $20,390 and $8,564,
respectively.
Restricted Stock Units
The
following table summarizes the restricted stock unit activity
for the years ended December 31, 2016 and 2015:
|
|
Restricted
Stock Units
|
|
Outstanding
at December 31, 2014
|
8,270,239
|
|
Granted
|
10,354,497
|
|
Exchanged
|
(500,000)
|
|
Cancelled
|
(570,000)
|
|
Outstanding
at December 31, 2015
|
17,554,736
|
|
Granted
|
14,636,106
|
|
Exchanged
|
(19,315,994)
|
|
Cancelled
|
-
|
|
Outstanding
at December 31, 2016
|
12,874,848
|
|
|
|
|
Vested
at December 31, 2015
|
14,398,487
|
|
Vested
at December 31, 2016
|
8,493,600
|
The vested
restricted stock units at December 31, 2016 and 2015 have not
settled and are not showing as issued and outstanding shares of
ours but are considered outstanding for earnings per share
calculations. Settlement of these vested restricted stock
units will occur on the earliest of (i) the date of termination of
service of the employee or consultant, (ii) change of control of
us, or (iii) 10 years from date of issuance. Settlement of
vested restricted stock units may be made in the form of (i) cash,
(ii) shares, or (iii) any combination of both, as determined by the
board of directors and is subject to certain criteria having been
fulfilled by the recipient.
During the years
ended December 31, 2016 and 2015, we issued 14,636,106 and
10,354,497 restricted stock units to employees, board members and
consultants. In 2016, 886,107 were from the 2013 Plan and vested
immediately, 9,999,999 were from the 2014 Plan and 3,750,000 were
from the 2016 Plan. A total of 6,000,001 of 9,999,999
restricted stock units issued under the 2014 Plan vested
immediately and the remaining 3,999,998 vested upon the closing of
the Beyond Human® asset acquisition. The restricted stock
units issued under the 2016 Plan vest as to 25% on the one year
anniversary from the date of grant and then in equal quarterly
installments for the next two years. In 2015, 9,370,000 were from the 2014 Plan and
vest one-third on the issuance date and then monthly for the next
two years. The remaining restricted stock units in 2015 were from
the 2014 Plan and vested immediately. The grant date
fair value of restricted stock units issued during the years ended
December 31, 2016 and 2015 was $1,499,268 and $1,363,413,
respectively. For the years ended December 31, 2016 and 2015, we
recognized $934,363 and $1,289,676, respectively, of stock-based
compensation expense for the vested units. As of December 31, 2016,
compensation expense related to unvested shares not yet recognized
in the consolidated statement of operations was approximately $1.0
million and will be recognized over a remaining weighted-average
term of 2.5 years.
Warrants
During the year ended December 31, 2014, we issued
380,973 warrants in connection with notes payable (which were
repaid in 2013). The warrants have an exercise price of $0.10 and
expire December 6, 2018. Warrants to purchase 245,157 shares
of common stock were exercised under the cashless exercise
provisions of the warrant agreement in July 2016, which resulted in
the issuance of 191,908 shares of common stock. The intrinsic value
of the warrants on the date of exercise was $86,359.
In February, 2014, we issued 250,000 warrants in
connection with the February 2014 Convertible Debentures. The
warrants had an exercise price of $0.50 per share and expire
February 13, 2019. On March 6, 2015 we entered into an
agreement with the note holder to extend the February 2014
Convertible Debentures for six months. As consideration for
the extension, we issued the note holder an additional 250,000
warrants, reduced the exercise price of the warrants from $0.50 to
$0.30 per share and extended the expiration date to March 12, 2020.
The warrants were also amended to include certain anti-dilution
protection, including protection upon dilutive issuances. In
connection with the Q3 2015 Notes, the exercise price of these
warrants was reduced to $0.0896 per share and an additional
1,173,410 warrants were issued per the anti-dilution protection
afforded in the warrant agreement during the year ended December
31, 2015. These warrants were exercised under the cashless exercise
provisions of the warrant agreement in April 2016. In
connection with the exercise of the warrants, we agreed to reduce
the exercise price of these warrants to $0.07 per share which
resulted in an additional 469,447 warrants being issued in April
2016 prior to exercise. The warrants exercised were
classified as derivative liabilities and, upon exercise, the fair
value of the warrant derivative liability was reclassified to
additional paid-in capital (see Note 9). The intrinsic value of the
warrants on the date of exercise was $53,629.
In January, 2015, we issued 500,000 warrants in
connection with the January 2015 Non-Convertible Debentures. The
warrants were exercisable for five years from the closing date at
an exercise price of $0.30 per share of common stock or January 21,
2020. The warrants contained anti-dilution protection, including
protection upon dilutive issuances. In connection with the
Q3 2015 Notes, the exercise price of these warrants was reduced to
$0.0896 per share and an additional 1,173,410 warrants were issued
per the anti-dilution protection afforded in the warrant agreement
during the year ended December 31, 2015. These warrants were
exercised under the cashless exercise provisions of the warrant
agreement in April 2016. In connection with the exercise
of the warrants, we agreed to reduce the exercise price of these
warrants to $0.0565 per share which resulted in an additional
981,457 warrants being issued in April 2016 prior to
exercise. The warrants exercised were classified as
derivative liabilities and, upon exercise, the fair value of the
warrant derivative liability was reclassified to additional paid-in
capital (see Note 9). The intrinsic value of the warrants on the
date of exercise was $99,121.
In
January 2015, we issued 250,000 warrants with an exercise price of
$0.30 per share to our former Chief Financial Officer in connection
with the January 2015 debenture. The warrants expire on January 21,
2020. The warrants contain anti-dilution protection, including
protection upon dilutive issuances. In connection with the Q3 2015
Notes, the exercise price of these warrants was reduced to $0.0896
per share and an additional 586,705 warrants were issued per the
anti-dilution protection afforded in the warrant agreement during
the year ended December 31, 2015. The increase in the fair value of
the warrants from the additional warrants issued is included in the
change in fair value of derivative liabilities in the consolidated
statement of operations during the year ended December 31, 2015
(see Note 9).
In connection with
the Q3 2015 Notes, we issued 1,808,333 warrants with an exercise
price of $0.30 per share and expire in 2020 (see Note 5). Warrants
to purchase 1,033,800 shares of common stock were exercised during
the year ended December 31, 2016. The intrinsic value of the
warrants on the dates of exercise was $150,200.
In connection with
the 2016 Notes, we issued 4,220,000 warrants to the Investors and
placement agents with an exercise price of $0.40 per share and
expire in 2021 (see Note 5).
At December 31,
2016 and 2015, there are 5,967,054 and 6,372,831 fully vested
warrants outstanding, respectively. The weighted average exercise
price of outstanding warrants at December 31, 2016 is $0.34 per
share, the weighted average remaining contractual term is 4.2 years
and the aggregate intrinsic value of the outstanding warrants is
$104,160.
Net Loss per Share
Restricted
stock units that are vested but the issuance and delivery of the
shares are deferred until the employee or director resigns are
included in the basic and diluted net loss per share
calculations.
The
weighted average shares of common stock outstanding used in the
basic and diluted net loss per share calculation for the years
ended December 31, 2016 and 2015 was 85,436,145 and 41,359,779,
respectively.
The weighted
average restricted stock units vested but issuance of the common
stock is deferred until there is a change in control, a specified
date in the agreement or the employee or director resigns used in
the basic and diluted net loss per share calculation for
the years ended December 31, 2016 and
2015 was 8,670,237 and 11,157,751,
respectively.
The
total weighted average shares outstanding used in the basic and
diluted net loss per share calculation for the years ended December
31, 2016 and 2015 was 94,106,382 and 52,517,530,
respectively.
The
following table shows the anti-dilutive shares excluded from the
calculation of basic and diluted net loss per common share as of
December 31, 2016 and 2015:
|
|
As of December 31,
|
|
|
|
2016
|
2015
|
|
Gross number of shares excluded:
|
|
|
|
Restricted
stock units - unvested
|
4,381,248
|
3,156,249
|
|
Stock
options
|
237,500
|
196,000
|
|
Convertible
debentures and accrued interest
|
6,414,132
|
12,751,512
|
|
Warrants
|
5,967,054
|
6,372,831
|
|
Total
|
16,999,934
|
22,476,592
|
The
above table does not include the ANDA Consideration Shares related
to the Novalere acquisition totaling 138,859 and 12,947,655 at
December 31, 2016 and 2015, respectively, as they are considered
contingently issuable (see Note 3).
NOTE 9 – DERIVATIVE LIABILITIES
The warrants issued in connection with the January
2015 Non-Convertible Debenture, January 2015 Non-Convertible
Debenture to the former Chief Financial Officer and the February
2014 Convertible Debenture are measured at fair value and
classified as a liability because these warrants contain
anti-dilution protection and therefore, cannot be considered
indexed to our own stock which is a requirement for the scope
exception as outlined under FASB ASC 815. The estimated fair value
of the warrants was determined using the Probability Weighted
Black-Scholes Model, resulting in a value of $226,297 at the date
of issuance. The fair value will be affected by changes in inputs
to that model including our stock price, expected stock price
volatility, the contractual term and the risk-free interest rate.
We will continue to classify the fair value of the warrants as a
liability until the warrants are exercised, expire or are amended
in a way that would no longer require these warrants to be
classified as a liability, whichever comes first. The anti-dilution
protection for the warrants survives for the life of the warrants
which ends in January 2020. Certain of these warrants were
exercised under the cashless exercise provisions of the warrant
agreement in April 2016 and, as a result, the fair value of the
warrant derivative liability on the date of exercise totaling
$518,224 was reclassified to additional paid-in capital (see Note
8).
The derivative liabilities are a Level 3 fair
value measure in the fair value hierarchy and the
assumptions for the Probability Weighted Black-Scholes
Option-Pricing Model for the years ended December 31, 2016 and 2015
are represented in the table below:
|
|
2016
|
|
2015
|
|
|
Expected
life (in years)
|
3.1
– 4.0
|
|
4.1
– 5.0
|
|
|
Expected
volatility
|
188%
– 230%
|
|
226%
|
|
|
Average
risk-free interest rate
|
0.86%
– 1.47%
|
|
1.15%
– 1.54%
|
|
|
Dividend
yield
|
-
|
|
-
|
|
We have determined
the embedded conversion features of the Q3 2015 Notes and 2016
Notes (see Note 5) to be derivative liabilities because the terms
of the embedded conversion features contain anti-dilution
protection and therefore, cannot be considered indexed to our own
stock which is a requirement for the scope exception as outlined
under FASB ASC 815. The embedded conversion features are
to be measured at fair value and classified as a liability with
subsequent changes in fair value recorded in earnings at the end of
each reporting period. We have determined the fair value
of the derivative liabilities using a Path-Dependent Monte Carlo
Simulation Model. The fair value of the derivative
liabilities using such model will be affected by changes in inputs
to that model and is based on the individual characteristics of the
embedded conversion features on the valuation date as well as
assumptions for volatility, remaining expected life, risk-free
interest rate, credit spread, probability of default by us and
acquisition of us. We will continue to classify the fair
value of the embedded conversion features as a liability until the
conversion features are exercised, expire or are amended in a way
that would no longer require these embedded conversion features to
be classified as a liability, whichever comes
first. During the year ended December 31, 2016, the Q3
2015 Notes were fully converted and certain 2016 Notes were
converted into shares of common stock which resulted in the fair
value of the embedded conversion feature derivative liability on
the dates of conversion of $3,111,828 to be reclassified to
additional paid-in capital (see Note 8). The
anti-dilution protection for the embedded conversion features
survive the life of the 2016 Notes which mature at July 30, 2017
and August 25, 2017.
The
derivative liabilities are a Level 3 fair value measure in the fair
value hierarchy and a summary of quantitative information with
respect to valuation methodology and significant unobservable
inputs used for our embedded conversion feature derivative
liabilities that are categorized within Level 3 of the fair value
hierarchy during the years ended December 31, 2016 and 2015 are as
follows:
|
|
|
2016
|
|
|
2015
|
|
|
Stock
price
|
$
|
0.05
– 0.50
|
|
$
|
0.07
– 0.16
|
|
|
Strike
price
|
$
|
0.15
– 0.25
|
|
$
|
0.15
|
|
|
Expected
life (in years)
|
|
0.3
– 1.1
|
|
|
0.7
– 1.1
|
|
|
Expected
volatility
|
|
121%
– 274%
|
|
|
101%
– 119%
|
|
|
Average
risk-free interest rate
|
|
0.28%
– 0.69%
|
|
|
0.28%
– 0.60%
|
|
At
December 31, 2016 and 2015, the estimated Level 3 fair values of
the embedded conversion feature and warrant derivative liabilities
measured on a recurring basis are as follows:
At December 31, 2016
|
|
Fair value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Embedded
conversion feature derivative liabilities
|
$319,674
|
$-
|
$-
|
$319,674
|
$319,674
|
|
Warrant
derivative liabilities
|
164,070
|
-
|
-
|
164,070
|
164,070
|
|
Total
|
$483,744
|
$-
|
$-
|
$483,744
|
$483,744
|
At
December 31, 2015
|
|
Fair value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Embedded
conversion feature derivative liabilities
|
$301,779
|
$-
|
$-
|
$301,779
|
$301,779
|
|
Warrant
derivative liabilities
|
432,793
|
-
|
-
|
432,793
|
432,793
|
|
Total
|
$734,572
|
$-
|
$-
|
$734,572
|
$734,572
|
The
following table presents the activity for the Level 3 embedded
conversion feature and warrant derivative liabilities measured at
fair value on a recurring basis for the years ended December 31,
2016 and 2015:
|
Warrant derivative liabilities:
|
|
|
Beginning
balance December 31, 2014
|
$-
|
|
Initial
fair value of warrant derivative liability with January 2015
Non-Convertible Debenture
|
99,999
|
|
Initial
fair value of warrant derivative liability with January 2015
Non-Convertible Debenture
to Former Chief Financial Officer
|
49,999
|
|
Initial
fair value of warrant derivative liability with the February 2014
Convertible Debentures
|
76,299
|
|
Change
in fair value
|
206,496
|
|
Ending
balance December 31, 2015
|
432,793
|
|
Reclassification of
fair value of warrant derivative liability to additional paid-in
capital upon cashless exercise of
warrants
|
(518,224)
|
|
Change
in fair value
|
249,501
|
|
Ending
balance December 31, 2016
|
$164,070
|
|
|
|
|
Embedded conversion feature derivative liabilities:
|
|
|
Beginning
balance December 31, 2014
|
$-
|
|
Initial
fair value of embedded conversion feature derivative liabilities
with the Q3 2015 Notes
|
901,784
|
|
Change
in fair Value
|
(600,005)
|
|
Ending
balance December 31, 2015
|
301,779
|
|
Initial fair value
of embedded conversion feature
derivative liabilities with the 2016 Notes
|
3,444,284
|
|
Reclassification of
fair value of embedded conversion feature derivative liability to
additional paid-in capital upon
conversions of Q3 2015 Notes
|
(2,018,565)
|
|
Reclassification of
fair value of embedded conversion feature derivative liability to
additional paid-in capital upon
conversions of 2016 Notes
|
(1,093,263)
|
|
Change
in fair value
|
(314,561)
|
|
Ending
balance December 31, 2016
|
$319,674
|
NOTE 10 – INCOME TAXES
We
are subject to taxation in the United States and
California. The provision for (benefit
from) income taxes for the years ended December 31, 2016 and
2015 are summarized below:
|
|
2016
|
2015
|
|
Current:
|
|
|
|
Federal
|
$(800)
|
$(759,428)
|
|
State
|
3,200
|
2,400
|
|
Total
current
|
2,400
|
(757,028)
|
|
|
|
|
|
Deferred:
|
|
|
|
Federal
|
2,552,758
|
(525,815)
|
|
State
|
650,597
|
(96,157)
|
|
Change
in valuation allowance
|
(3,203,355)
|
621,972
|
|
Total
deferred
|
-
|
-
|
|
Income
tax provision (benefit)
|
$2,400
|
$(757,028)
|
As
a result of the Novalere acquisition and the intangible assets
acquired (see Note 3), we released $759,428 of its deferred tax
valuation allowance during the year ended December 31, 2015 which
is recorded as an increase in goodwill (see Note 4) and benefit
from income taxes in the accompanying consolidated statement of
operations. We also recorded an impairment against this goodwill of
$759,428. At December 31, 2016, we had federal net operating loss
carry forwards of approximately $20,890,000 which may be offset
against future taxable income through 2036, and a California net
operating loss carryforward of approximately
$19,736,000. No net deferred tax assets are recorded at
December 31, 2016 and 2015, as all deferred tax assets and
liabilities have been fully offset by a valuation allowance due to
the uncertainty of future utilization.
At
December 31, 2016 and 2015, the approximate deferred tax assets
(liabilities) consist of the following:
|
|
2016
|
2015
|
|
|
|
|
|
Net
operating loss carry-forwards
|
$8,108,000
|
$3,792,000
|
|
State
taxes
|
1,000
|
1,000
|
|
Equity
based instruments
|
374,000
|
1,585,000
|
|
Deferred
compensation
|
916,000
|
575,000
|
|
Intangibles
|
-
|
158,000
|
|
Derivative
liabilities
|
127,000
|
120,000
|
|
Other
|
125,000
|
106,000
|
|
Total
deferred tax assets
|
9,651,000
|
6,337,000
|
|
|
|
|
|
Intangibles
|
(1,572,000)
|
(1,687,000)
|
|
Warrants
|
(170,000)
|
(23,000)
|
|
Debt
discount
|
(252,000)
|
(172,000)
|
|
Other
|
(4,000)
|
(5,000)
|
|
Total
deferred tax liabilities
|
(1,998,000)
|
(1,887,000)
|
|
|
|
|
|
Less:
valuation allowance
|
(7,653,000)
|
(4,450,000)
|
|
|
|
|
|
Net
deferred tax assets
|
$-
|
$-
|
At
December 31, 2016 and 2015, we have recorded a full valuation
allowance against its net deferred tax assets of approximately
$7,653,000 and $4,450,000 respectively. The change in
the valuation allowance during the years ended December 31, 2016
and 2015 was an increase of approximately $3,203,000 and a decrease
of approximately $622,000, respectively, and a full valuation
allowance has been recorded since, in the judgement of management,
these net deferred tax assets are not more likely than not to be
realized. The ultimate realization of deferred tax
assets and liabilities is dependent upon the generation of future
taxable income during periods in which those temporary differences
and carryforwards become deductible or are utilized.
Pursuant
to Section 382 of the Internal Revenue Code of 1986, the annual
utilization of a company's net operating loss carryforwards could
be limited if we experience a change in ownership of more than 50
percentage points within a three-year period. An ownership change
occurs with respect to a corporation if it is a loss corporation on
a testing date and, immediately after the close of the testing
date, the percentage of stock of the corporation owned by one or
more five-percent shareholders has increased by more than 50
percentage points over the lowest percentage of stock of such
corporation owned by such shareholders at any time during the
testing period. We do not believe such an ownership change occurred
subsequent to the reverse merger transaction.
We
have experienced an ownership change with regard to Semprae
operating losses. Out of approximately $19,482,000 of Federal and
California NOLs as of December 24, 2013, only approximately $44,000
per year can be used going forward for a total of approximately
$844,000 each.
We
have experienced an ownership change with regard to Novalere
operating losses. A study has not been completed to
evaluate the impact on the utilization of those
losses.
A
reconciliation of the statutory federal income tax rate for the
years ended December 31, 2016 and 2015 to the effective tax rate is
as follows:
|
|
2016
|
2015
|
|
Expected
federal tax
|
34.00%
|
34.00%
|
|
State
tax (net of federal benefit)
|
(0.02)%
|
(0.04)%
|
|
Contingent
consideration
|
(3.15)%
|
0.94%
|
|
Fair
value of embedded conversion feature in excess of allocated debt
proceeds
|
(5.01)%
|
-%
|
|
Restricted
stock
|
(7.34)%
|
-%
|
|
Release
of valuation allowance
|
-%
|
18.10%
|
|
Other
|
0.86%
|
0.57%
|
|
Valuation
allowance
|
(19.36)%
|
(35.49)%
|
|
|
|
|
|
Total
|
(0.02)%
|
18.08%
|
We follow FASB ASC 740-10, Uncertainty in Income
Taxes. We recognize interest
and penalties associated with uncertain tax positions as a
component of income tax expense. We do not have any unrecognized
tax benefits or a liability for uncertain tax positions at December
31, 2016 and 2015. We do not expect to have any unrecognized tax
benefits within the next twelve months. We recognize accrued
interest and penalties associated with uncertain tax positions, if
any, as part of income tax expense. There were no tax related
interest and penalties recorded for 2016 and 2015. Since we
incurred net operating losses in every tax year since inception,
all of its income tax returns are subject to examination and
adjustments by the IRS for at least three years following the year
in which the tax attributes are utilized.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Royalties and Other Obligations
As
described more fully in Note 2, we have several licensing
agreements which could result in substantial payments for royalties
and upon the obtainment of contractual milestones, as well as,
certain minimum purchase order requirements.
As
described more fully in Note 3, the Novalere Stockholders are
entitled to receive earn-out payments.
We
have annual royalty payments in connection with the Semprae
acquisition discussed in Note 3.
Operating Lease
In December 2013,
we entered into a lease agreement for 2,578 square feet of office
space that commenced on December 10, 2013 and continues until
January 31, 2019. Monthly rent at December 31, 2016 is in the
amount of $7,347, with an approximate 4% increase in the base rent
amount on an annual basis.
Rent expense for
the years ended December 31, 2016 and 2015 was $88,513 and $86,931,
respectively. The following represents future annual minimum lease
payments as of December 31, 2016:
|
2017
|
$91,849
|
|
2018
|
95,880
|
|
2019
|
8,018
|
|
Total
|
$195,747
|
Employment Agreements
We
have entered into employment agreements with certain of our
officers and employees which payment and benefits would become
payable in the event of termination by us for any reason other than
cause, or upon change in control of our Company, or by the employee
for good reason.
Litigation
In the ordinary
course of business, we may face various claims brought by third
parties and we may, from time to time, make claims or take legal
actions to assert our rights, including intellectual property
disputes, contractual disputes and other commercial disputes. Any
of these claims could subject us to litigation. Management believes
the outcomes of currently pending claims are not likely to have a
material effect on our consolidated financial position and results
of operations.
Indemnities
In addition to the
indemnification provisions contained in our directors and officers.
These agreements require us, among other things, to indemnify the
director or officer against specified expenses and liabilities,
such as attorneys’ fees, judgments, fines and settlements,
paid by the individual in connection with any action, suit or
proceeding arising out of the individual’s status or service
as our director or officer, other than liabilities arising from
willful misconduct or conduct that is knowingly fraudulent or
deliberately dishonest, and to advance expenses incurred by the
individual in connection with any proceeding against the individual
with respect to which the individual may be entitled to
indemnification by us. We also indemnify our lessor in connection
with our facility lease for certain claims arising from the use of
the facilities. These indemnities do not provide for any limitation
of the maximum potential future payments we could be obligated to
make. Historically, we have not incurred any payments for these
obligations and, therefore, no liabilities have been recorded for
these indemnities in the accompanying consolidated balance
sheets.
NOTE 12 – SUBSEQUENT EVENTS
We have evaluated
subsequent events through the filing date of this Form 10-K and
determined that no subsequent events have occurred that would
require recognition in the consolidated financial statements or
disclosures in the notes thereto other than as disclosed
below.
In January and
February 2017, we issued 1,159,023 shares of common stock to
various consultants for services rendered. The fair value of the
common stock issued was approximately $321,000.
In March 2017,
certain 2016 Notes holders elected to convert principal and
interest of $350,610 into 1,402,440 shares of common
stock.
On January 1, 2017,
the Company and CRI agreed to extend the term of the Amended CRI
Asset Purchase Agreement to December 31, 2017 (see Note 2). In
connection with the extension, we issued restricted shares of
common stock totaling 225,000 to CRI as a prepayment of royalties
due on net profit of Sensum+® in the U.S. in 2017. The royalty
prepayment amount is $45,000 as the number of shares of common
stock issued was based on the closing price of our common stock on
December 30, 2016. If CRI does not earn royalties larger than the
prepaid amount of $45,000 in 2017, the term of the Amended CRI
Asset Purchase Agreement is automatically extended one additional
year to December 31, 2018.
On
January 4, 2017, we signed an employment agreement with Randy
Berholtz, MBA, JD to become the Executive Vice President, Corporate
Development and General Counsel of the Company. He will also become
the Secretary of the Company. Mr. Berholtz began his position on
January 9, 2017. Mr. Berholtz had previously been a part-time
consultant for us from July 2013 to mid-May 2016. The Company and
Mr. Berholtz entered into an employment agreement, effective,
January 9, 2017 wherein Mr. Berholtz received RSUs covering
2,000,000 shares of our common stock; 666,666 of which will vest
after one year of employment. The remaining RSU’s will vest
in eight equal quarterly installments over two years of continued
service.
On January 19,
2017, we entered into a securities purchase agreement with an
unrelated third party investor in which the investor loaned us
gross proceeds of $150,000 pursuant to a 5% promissory note
(“Q1 2017 Note Payable”). The note has an OID of $15,000 and requires
payment of $165,000 in principal upon maturity. The Q1 2017
Note Payable bears interest at the rate of 5% per annum and the
principal amount and interest are payable at maturity on November
18, 2017. In connection with the Q1 2017 Note Payable, we issued
the investor 330,000 restricted shares of common
stock.
25,666,669
Shares of Common
Stock
and
Warrants to Purchase up to 52,616,671 Shares of Common
Stock
Prospectus
March 15,
2017