10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period ended March 31, 2018
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Exchange Act.
For the transition period from ___ to ____.
Commission File Number: 000-52991
INNOVUS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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90-0814124
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(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer
Identification No.)
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8845 Rehco Road
San Diego, CA
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92121
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(Address of Principal Executive Offices)
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(Zip Code)
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858-964-5123
(Registrant’s telephone number, including area
code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a nonaccelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act (Check one):
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company ☒
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Emerging growth company ☐
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ☒
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate
the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of May 10, 2018, the registrant had 194,046,100 shares of
common stock outstanding.
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35
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INNOVUS PHARMACEUTICALS,
INC.
Condensed Consolidated Balance Sheets
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ASSETS
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Assets:
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Cash
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$4,923,796
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$1,564,859
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Accounts receivable, net
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195,242
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68,259
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Prepaid expense and other current assets
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333,136
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363,080
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Inventories
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1,648,730
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1,725,698
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Total
current assets
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7,100,904
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3,721,896
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Property
and equipment, net
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203,385
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62,454
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Deposits
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20,881
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20,881
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Goodwill
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952,576
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952,576
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Intangible
assets, net
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4,115,624
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4,273,099
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Total
assets
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$12,393,370
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$9,030,906
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Liabilities:
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Accounts payable and accrued expense
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$2,910,282
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$2,607,121
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Accrued compensation
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1,288,209
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1,118,293
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Deferred revenue and customer deposits
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142,769
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24,690
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Accrued interest payable
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11,671
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3,648
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Derivative liabilities – warrants
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-
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58,609
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Contingent consideration
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32,883
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28,573
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Short-term loan payable
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32,775
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65,399
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Notes payable, net of debt discount of $929,353 and $437,355,
respectively
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2,288,876
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1,239,296
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Total
current liabilities
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6,707,465
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5,145,629
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Accrued compensation – less current portion
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1,531,904
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1,531,904
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Contingent consideration – less current portion
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1,448,965
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1,450,430
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Total
non-current liabilities
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2,980,869
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2,982,334
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Total
liabilities
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9,688,334
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8,127,963
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Commitments
and contingencies
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Stockholders’
equity:
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Preferred stock: 7,500,000 shares authorized, at $0.001 par value,
no shares issued and outstanding at March 31, 2018 and December 31,
2017, respectively
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-
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-
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Common stock: 292,500,000 shares authorized, at $0.001 par value,
192,555,147 and 167,420,605 shares issued and outstanding at March
31, 2018 and December 31, 2017, respectively
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192,555
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167,421
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Additional paid-in capital
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39,922,601
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36,375,359
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Accumulated deficit
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(37,410,120)
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(35,639,837)
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Total
stockholders' equity
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2,705,036
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902,943
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Total
liabilities and stockholders’ equity
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$12,393,370
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$9,030,906
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See accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS,
INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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For the
Three Months Ended
March 31,
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Net
revenue:
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Product sales, net
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$4,542,026
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$2,177,290
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License revenue
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2,578
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-
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Net
revenue
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4,544,604
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2,177,290
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Operating
expense:
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Cost of product sales
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864,095
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440,476
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Research and development
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11,287
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3,183
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Sales and marketing
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3,301,784
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1,687,351
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General and administrative
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1,696,021
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1,704,663
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Total
operating expense
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5,873,187
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3,835,673
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Loss
from operations
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(1,328,583)
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(1,658,383)
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Other
income (expense):
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Interest expense
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(241,888)
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(557,479)
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Loss on extinguishment of debt
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(255,685)
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(304,828)
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Other income (expense), net
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109
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(616)
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Fair value adjustment for contingent consideration
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(2,845)
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27,175
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Change in fair value of derivative liabilities
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-
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(51,656)
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Total
other expense, net
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(500,309)
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(887,404)
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Net
loss
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$(1,828,892)
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$(2,545,787)
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Net
loss per share of common stock – basic and
diluted
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$(0.01)
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$(0.02)
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Weighted
average number of shares of common stock outstanding – basic
and diluted
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186,933,622
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135,099,173
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See accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS,
INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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For the
Three Months Ended
March 31,
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Cash
flows from operating activities:
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Net loss
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$(1,828,892)
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$(2,545,787)
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Adjustments to reconcile net loss to net cash used in operating
activities:
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Depreciation
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6,991
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2,822
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(Recovery
of) Allowance for doubtful accounts
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(179)
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2,578
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Common
stock, restricted stock units and stock options issued to
employees, board of directors
and consultants for compensation and services
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115,459
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580,394
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Loss
on extinguishment of debt
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255,685
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304,828
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Change
in fair value of contingent consideration
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2,845
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(27,175)
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Change
in fair value of derivative liabilities
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-
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51,656
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Amortization
of debt discount
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229,404
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512,874
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Amortization
of intangible assets
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157,475
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157,725
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Changes
in operating assets and liabilities, net of acquisition
amounts
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Accounts receivable
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(126,804)
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15,922
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Prepaid expense and other current assets
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29,944
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101,075
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Inventories
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76,968
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63,216
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Accounts payable and accrued expense
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121,948
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119,702
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Accrued compensation
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169,916
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186,918
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Accrued interest payable
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8,023
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(22,383)
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Deferred revenue and customer deposits
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118,079
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-
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Net
cash used in operating activities
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(663,138)
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(495,635)
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Cash
flows used in investing activities:
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Purchase of property and equipment
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(147,922)
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(2,256)
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Cash
flows from financing activities:
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Payments
on short-term loans payable
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(32,624)
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-
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Proceeds
from notes payable
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1,872,500
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150,000
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Payments
on notes payable
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(508,630)
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(67,688)
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Proceeds
from stock option and warrant exercises
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2,838,751
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2,894
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Proceeds
from sale of common stock and warrants, net of offering
costs
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-
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3,307,773
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Payments
on convertible debentures
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-
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(1,222,422)
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Prepayment
penalty on extinguishment of convertible debentures
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-
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(127,247)
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Net
cash provided by financing activities
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4,169,997
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2,043,310
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Net
change in cash
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3,358,937
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1,545,419
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Cash
at beginning of period
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1,564,859
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829,933
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Cash
at end of period
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$4,923,796
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$2,375,352
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Supplemental
disclosures of cash flow information:
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Cash paid for income taxes
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$-
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$2,400
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Cash paid for interest
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$2,157
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$66,719
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Supplemental
disclosures of non-cash investing and financing
activities:
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Common stock issued for conversion of convertible debentures, notes
payable and accrued
interest
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$166,667
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$350,610
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Reclassification of the fair value of the embedded conversion
features from derivative liability
to additional paid-in capital upon conversion
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$-
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$203,630
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Relative fair value of common stock issued in connection with notes
payable recorded
as debt discount
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$292,129
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$44,217
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Fair value of non-forfeitable common stock issued to consultant
included in accounts payable
and accrued expense
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$-
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$180,000
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Offering costs in connection with warrant exercises included in
accounts payable and accrued
expense
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$181,213
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$-
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Cumulative adjustment to accumulated deficit for the fair value of
the warrant derivative liability
upon adoption of ASU 2017-11 on January 1, 2018
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$58,609
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$-
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Fair value of common stock issued as financing fees in connection
with notes payable recorded
as debt discount
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$122,500
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$-
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Fair value of common stock issued for prepayment of future
royalties due under the CRI License
Agreement included in prepaid expense and other current
assets
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$-
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$44,662
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Fair value of non-forfeitable common stock issued to consultant
recorded as prepaid expense
and other current assets
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$-
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$15,000
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See accompanying notes to these condensed consolidated financial
statements.
INNOVUS PHARMACEUTICALS,
INC.
Notes to Condensed Consolidated Financial Statements
March 31, 2018
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Innovus Pharmaceuticals, Inc., together with its subsidiaries
(collectively referred to as “Innovus”,
“we”, “our”, “us” or the
“Company”) is a Nevada formed, San Diego,
California-based emerging commercial stage pharmaceutical company
delivering over-the-counter medicines and consumer care products
for men’s and women’s health and respiratory
diseases.
We generate revenue from 29 commercial products in the United
States, including 12 of these commercial products in multiple
countries around the world through our 18 international commercial
partners. Our commercial product portfolio includes (1) Beyond
Human® Testosterone Booster, (2) Beyond Human® Growth
Agent, (3) Zestra® to increase female arousal and desire, (4)
EjectDelay® for premature ejaculation, (5) Sensum+® for
reduced penile sensitivity, (6) Zestra Glide®, (7)
Vesele® for promoting sexual health, (8) Androferti® to
support overall male reproductive health and sperm quality, (9)
RecalMax™ for cognitive brain health, (10) Beyond Human®
Green Coffee Extract, (11) Beyond Human® Eagle Vision Formula,
(12) Beyond Human® Blood Sugar, (13) Beyond Human® Colon
Cleanse, (14) Beyond Human® Ketones, (15) Beyond Human®
Krill Oil, (16) Beyond Human® Omega 3 Fish Oil, (17)
RecalMax™
for brain health, (18) UriVarx®
for bladder health, (19) ProstaGorx® for prostate health, (20)
AllerVarx® for management of allergy symptoms, (21)
Apeaz® indicated for arthritis pain relief, (22)
ArthriVarx® for joint health, (23) PEVarx® for extension
of sexual intercourse time, (24) FlutiCare® for allergy
symptom relief, (25) Xyralid® for relief of pain and symptoms
caused by hemorrhoids, (26) Can-C® eye drops and supplement
for lubricating the eye and to enhance free radical
protection and reduce the oxidative environment inside the
eye, (27) MZS™ melatonin
as a sleeping aid, (28) DiabaSens™ a cream designed to
increase blood flow in the diabetic foot, and (29) UriVarx™
UTI Urine Strips. While we generate revenue from the sale of our
commercial products, most revenue is currently generated by
UriVarx®, Apeaz®, Vesele®,
Diabasens™,
Sensum+®, ProstaGorx®, Zestra®, Zestra® Glide,
RecalMax™, FlutiCare®, AllerVarx®, ArthriVarx®, Xyralid®, PEVarx®,
and Beyond Human® Testosterone Booster and related
products.
Pipeline Products
Xyralid® Suppositories. Xyralid® Suppositories are OTC FDA
monograph suppositories indicated for the relief of both internal
& external hemorrhoidal symptoms. The drug works by
constricting or shrinking swollen hemorrhoidal tissues and gives
prompt soothing relief from painful burning, itching and
discomfort. We currently expect to launch this product in the
second quarter of 2018.
Vesele™ Nitric Oxide Strips. We have developed the
Vesele™ Nitric Oxide Strips to be used with our
supplement product Vesele® to monitor the levels of nitric
oxide in saliva and help consumers monitor the effect of
Vesele® real time on their blood flow
increase. We currently expect to launch this product in the
second quarter of 2018.
RecalMax™ Nitric Oxide Strips. We have developed the RecalMax™ Nitric
Oxide Strips to be used with our product RecalMax™ to monitor
the levels of nitric oxide in saliva and help consumers monitor the
effect of RecalMax™ real time on their blood flow
increase. We currently expect to launch this product in the
second quarter of 2018.
GlucoGorx™ Supplement, Glucometer, Lancing Device ad
GlucoGorx™ Strips. GlucoGorx™ is a supplement made of
a combination of herbs
and nutrients designed to balance and maintain healthy
blood sugar levels. The
Glucometer, Lancing Device and GlucoGorx™ Strips are part of
a recently FDA cleared kit that is co-marketed with
GlucoGorx™ to provide customers with the ability to utilize
the supplement’s benefits and to test their blood sugar
levels in their own homes in a quick and efficient manner. We
currently expect to launch this product and the kit in the second
half of 2018.
Musclin™. Musclin™ is a proprietary supplement made of two
FDA Generally Recognized As
Safe (GRAS) approved
ingredients designed to increase muscle mass, endurance and
activity. The main ingredient in Musclin™ is a patent-pending natural activator of
the transient receptor
potential cation channel, subfamily V, member 3
(TRPV3) channels on muscle
fibers responsible to increase width of myotubules in fibers width
resulting in larger muscles and higher endurance. We currently
expect to launch this product in the second half of
2018.
Regenerum™. Regenerum™ is a proprietary product containing two
natural molecules, one is an activator the TRPV3 channels resulting
in the increase of muscle fiber width and the second targeting a
different unknown receptor to build
the muscle's capacity for energy production and increases
physical endurance, allowing an added benefit to increase muscle
mass and potentially decrease muscle wasting.
Regenerum™ is being developed for
patients suffering from muscle wasting or
cachexia. We currently
expect to launch this product in 2019 pending successful clinical
trials in patients with muscle wasting or
cachexia.
In
addition to the above listed product pipeline, we are continuously
looking to add additional drugs, supplements and medical devices to
our pipeline.
Change in Accounting Principle
On January 1, 2018, we adopted Financial Accounting Standards Board
(“FASB”) Accounting Standards Update
(“ASU”) No. 2017-11, Earnings Per Share (Topic
260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for
Certain Financial Instruments with Down Round
Features. This ASU requires
that when determining whether certain financial instruments should
be classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
As a result, a freestanding equity-linked financial instrument no
longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. For
freestanding equity classified financial instruments, the
amendments require entities that present earnings per share to
recognize the effect of the down round feature when it is
triggered. That effect is treated as a dividend and as a reduction
of income available to common shareholders in basic earnings per
share. The Company elected to use the modified retrospective
transition method, where the cumulative effect of the initial
application is recognized as an adjustment to opening retained
earnings at January 1, 2018. As a result of the adoption of
this ASU, we recorded a cumulative-effect adjustment to the
consolidated statement of financial position as of January 1, 2018
of $58,609 for the warrants previously classified as a derivative
liability due to a down round provision included in the terms of
the warrant agreement. Therefore, the cumulative-effect adjustment
was recorded as a reduction in accumulated deficit and derivative
liabilities in the accompanying condensed consolidated balance
sheet as of January 1, 2018. The adoption of this ASU
did not have an impact on our condensed consolidated results of
operations.
Basis of Presentation and Principles of Consolidation
The condensed consolidated balance sheet as of December 31, 2017,
which has been derived from audited consolidated financial
statements, and these unaudited condensed consolidated financial
statements have been prepared by management in accordance with
accounting principles generally accepted in the United States
(“U.S. GAAP”), and include all assets, liabilities,
revenues and expenses of the Company and its wholly owned
subsidiaries: FasTrack Pharmaceuticals, Inc., Semprae Laboratories,
Inc. (“Semprae”) and Novalere, Inc.
(“Novalere”). All material intercompany transactions
and balances have been eliminated. These interim unaudited
condensed consolidated financial statements and notes thereto
should be read in conjunction with Management’s Discussion
and Analysis of Financial Condition and Results of Operations and
the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended
December 31, 2017. Certain information required by U.S. GAAP has
been condensed or omitted in accordance with the rules and
regulations of the U.S. Securities and Exchange Commission
(“SEC”). The results for the period ended March 31,
2018 are not necessarily indicative of the results to be expected
for the entire fiscal year ending December 31, 2018 or for any
future period.
Use of Estimates
The preparation of these condensed consolidated financial
statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Such management estimates include the
allowance for doubtful accounts, sales returns and chargebacks,
realizability of inventories, valuation of deferred tax assets,
goodwill and intangible assets, valuation of contingent acquisition
consideration, recoverability of long-lived assets and goodwill and
the valuation of equity-based instruments. We base our
estimates on historical experience and various other assumptions
that we believe to be reasonable under the
circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
Liquidity
Our operations have been financed primarily through proceeds from
convertible debentures and notes payable, sales of our common stock
and revenue generated from our products domestically and
internationally by our partners. These funds have provided us
with the resources to operate our business, sell and support our
products, attract and retain key personnel and add new products to
our portfolio. We have experienced net losses and negative
cash flows from operations each year since our inception. As
of March 31, 2018, we had an accumulated deficit of $37,410,120 and
positive working capital of $393,439.
In the first quarter of 2018, we received net cash proceeds of $2.7
million from the exercise of warrants (see Note 8). Additionally,
during the first quarter of 2018 we raised $1,872,500 in gross
proceeds from the issuance of notes payable to six
investors (see Note 6). We have also issued equity
securities in certain circumstances to pay for services from
vendors and consultants.
As of March 31, 2018, we had $4,923,796 in cash. During the three
months ended March 31, 2018, we had net cash used in
operating activities of $663,138. We expect that our existing
capital resources, together with revenue from sales of our products and upcoming
sales milestone payments from the commercial partners signed for
our products will be sufficient to allow us to continue our
operations, commence the product development process and launch
selected products through at least the next 12 months.
In addition, our CEO, who is also a significant shareholder, has
deferred the remaining payment of his salary earned through June
30, 2016 totaling $1,531,904 for at least the next 12 months. Our
actual needs will depend on numerous factors, including timing of
introducing our products to the marketplace, our ability to attract
additional international distributors for our products and our
ability to in-license in non-partnered territories and/or develop
new product candidates. Although no assurances can be given,
we currently intend to raise
additional capital through the sale of debt or equity securities to
provide additional working capital, pay for further expansion and
development of our business, and to meet current obligations. Such
capital may not be available to us when we need it or on terms
acceptable to us, if at all.
Fair Value Measurement
Our financial instruments are cash, accounts receivable, accounts
payable, accrued liabilities, contingent consideration and
debt. The recorded values of cash, accounts receivable,
accounts payable and accrued liabilities approximate their fair
values based on their short-term nature. The fair value of the
contingent acquisition consideration is based upon the present
value of expected future payments under the terms of the agreements
and is a Level 3 measurement (see Note 4). Based on
borrowing rates currently available to us, the carrying values of
the notes payable and short-term loans payable approximate their
respective fair values.
We follow a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1) and
the lowest priority to measurements involving significant
unobservable inputs (Level 3). The three levels of the fair
value hierarchy are as follows:
●
Level 1 measurements are quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access at the measurement date.
●
Level 2 measurements are inputs other than quoted prices included
in Level 1 that are observable either directly or
indirectly.
●
Level 3 measurements are unobservable inputs.
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 to U.S. based retailers and Ex-U.S.
partners. We also require a percentage of payment in advance for
product orders with our larger partners. We perform ongoing credit
evaluations of our customers and generally do not require
collateral.
Revenues consist primarily of product sales and licensing rights to
market and commercialize our products. We have no
customers that accounted for 10% or more of our total net revenue
during the three months ended March 31, 2018 and 2017. As of March
31, 2018 and December 31, 2017, one customer and four customers
accounted for 82% and 72% of total net accounts receivable of
$195,242 and $68,259, respectively.
All operations are currently located in the U.S.;
therefore, over 90% of our sales are currently within the U.S.
The balance of the sales are to various other countries, none of
which is 10% or greater. With the recent launch of our direct
Canadian sales and continuous expansion of our sales into other
countries, we expect the percentage of our Ex-US sales to grow
potentially to over 10%. See Note 2 for more details.
We
operate our business on the basis of a single reportable segment,
which is the business of delivering over-the-counter medicines and
consumer care products for men’s and women’s health and
respiratory diseases. Our chief operating decision-maker is the
Chief Executive Officer, who evaluates us as a single operating
segment.
Revenue Recognition
On January 1, 2018, we adopted FASB Accounting Standards
Codification (“ASC”) Topic
606, Revenue
from Contracts with Customers (“ASC 606”). The new guidance sets forth a new five-step
revenue recognition model which replaces the prior revenue
recognition guidance in its entirety and is intended to eliminate
numerous industry-specific pieces of revenue recognition guidance
that have historically existed in U.S. GAAP. The underlying
principle of the new standard is that a business or other
organization will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
what it expects to receive in exchange for the goods or services.
The standard also requires more detailed disclosures and provides
additional guidance for transactions that were not addressed
completely in the prior accounting guidance.
We reviewed all contracts at the date of initial application and
elected to use the modified retrospective transition method, where
the cumulative effect of the initial application is recognized as
an adjustment to opening retained earnings at January 1, 2018.
Therefore, comparative prior periods have not been adjusted and
continue to be reported under FASB ASC Topic 605,
Revenue
Recognition, (“ASC
605”). The adoption of the new revenue recognition guidance
was immaterial to our condensed consolidated statements of
operations, balance sheet, and cash flows as of and for the three
months ended March 31, 2018. Refer to Note 2 for additional
information regarding our adoption of ASC 606.
Our principal activities from which we generate our revenue are
product sales.
Revenue is measured based on consideration specified in a contract
with a customer. A contract with a customer exists when we enter
into an enforceable contract with a customer. The contract is based
on either the acceptance of standard terms and conditions on the
websites for e-commerce customers and via telephone with our
third-party call center for our print media and direct mail
customers, or the execution of terms and conditions contracts with
retailers and wholesalers. These contracts define each party's
rights, payment terms and other contractual terms and conditions of
the sale. Consideration is typically paid prior to shipment via
credit card or check when our products are sold direct to consumers
or approximately 30 days from the time control is transferred when
sold to wholesalers, distributors and retailers. We apply judgment
in determining the customer’s ability and intention to pay,
which is based on a variety of factors including the
customer’s historical payment experience and, in some
circumstances, published credit and financial information
pertaining to the customer.
A performance obligation is a promise in a contract to transfer a
distinct product to the customer, which for us is transfer of
over-the-counter drug and consumer care products to our customers.
Performance obligations promised in a contract are identified based
on the goods that will be transferred to the customer that are both
capable of being distinct and are distinct in the context of the
contract, whereby the transfer of the goods is separately
identifiable from other promises in the contract. We have concluded
the sale of bottled finished goods and related shipping and
handling are accounted for as the single performance
obligation.
The transaction price of a contract is allocated to each distinct
performance obligation and recognized as revenue when or as the
customer receives the benefit of the performance obligation. The
transaction price is determined based on the consideration to which
we will be entitled to receive in exchange for transferring goods
to the customer. We issue refunds to e-commerce and print media
customers, upon request, within 30 days of delivery. We
estimate the amount of potential refunds at each reporting period
using a portfolio approach of historical data, adjusted for changes
in expected customer experience, including seasonality and changes
in economic factors. For retailers, distributors and wholesalers,
we do not offer a right of return or refund and revenue is
recognized at the time products are shipped to customers. In all
cases, judgment is required in estimating these reserves. Actual
claims for returns could be materially different from the
estimates. The estimated reserve for sales returns and allowances,
which is included in accounts payable and accrued expense, was
approximately $137,000 and $53,000 at March 31, 2018 and December
31, 2017, respectively.
We recognize revenue when we satisfy a performance obligation in a
contract by transferring control over a product to a customer when
product is shipped. Taxes assessed by a governmental authority that
are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by us from a
customer, are excluded from revenue. Shipping and handling costs
associated with outbound freight after control over a product has
transferred to a customer are accounted for as a fulfillment cost
and are included in cost of product sales.
We enter into exclusive distributor and license agreements that are
within the scope of ASC Topic 606. The license agreements we
enter into normally generate three separate components of revenue:
(1) an initial nonrefundable payment due on signing or when certain
specific conditions are met; (2) royalties that are earned on an
ongoing basis as sales are made or a pre-agreed transfer
price; and (3) sales-based milestone payments that are earned when
cumulative sales reach certain levels. Revenue from the initial
nonrefundable payments or licensing fee is recognized when all
required conditions are met. If the consideration for the initial
license fee is for the right to sell the licensed product in the
respective territory with no other required conditions to be met,
such type of nonrefundable license fee arrangement for the right to
sell the licensed product in the territory is recognized ratably
over the term of the license agreement. For arrangements with licenses that include
sales-based royalties, including sales-based milestone payments
based on the level of sales, and the license is deemed to be the
predominant item to which the royalties relate, we recognize
royalty revenue and sales-based milestones at the later of (i) when
the related sales occur, or (ii) when the performance obligation to
which the royalty has been allocated has been satisfied. The
achievement of the sales-based milestone underlying the payment to
be received predominantly relates to the licensee’s
performance of future commercial activities.
Advertising Expense
Advertising costs, which primarily includes print and online media
advertisements, are expensed as incurred and are included in sales
and marketing expense in the accompanying condensed consolidated
statements of operations. Advertising costs were approximately
$2,526,000 and $1,358,000 for the three months ended March 31, 2018
and 2017, respectively.
Net Loss per Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding and
vested but deferred RSUs during the period presented. Diluted
net loss per share is computed using the weighted average number of
common shares outstanding and vested plus deferred
RSUs during the periods plus the effect of dilutive securities
outstanding during the periods. For the three months ended
March 31, 2018 and 2017, basic net loss per share is the same as
diluted net loss per share as a result of our common stock
equivalents being anti-dilutive. See Note 8 for more
details.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU
2017-01, Business Combinations (Topic
805): Clarifying the Definition of a Business. The update provides that when substantially all
the fair value of the assets acquired is concentrated in a single
identifiable asset or a group of similar identifiable assets, the
set is not a business. This update is effective for annual and
interim periods beginning after December 15, 2017, and interim
periods within that reporting period. We adopted this ASU on
January 1, 2018 and the impact on our consolidated financial
statements will depend on the facts and circumstances of any
specific future transactions.
In February 2016, the FASB issued its new lease accounting guidance
in ASU No. 2016-02, Leases (Topic
842). Under the new guidance,
lessees will be required to recognize the following for all leases
(with the exception of short-term leases) at the commencement date.
A lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to
align, where necessary, lessor accounting with the lessee
accounting model and ASC 606, Revenue from Contracts with
Customers. The new lease
guidance simplified the accounting for sale and leaseback
transactions primarily because lessees must recognize lease assets
and lease liabilities. Lessees will no longer be provided with a
source of off-balance sheet financing. Public business entities
should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted. Lessees (for
capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the
consolidated financial statements. The modified retrospective
approach would not require any transition accounting for leases
that expired before the earliest comparative period presented.
Lessees may not apply a full retrospective transition
approach. While we are currently assessing the impact
ASU 2016-02 will have on the consolidated financial statements, we
expect the primary impact to the consolidated financial position
upon adoption will be the recognition, on a discounted basis, of
the minimum commitments on the consolidated balance sheet under our
sole noncancelable operating lease for our facility in San Diego
resulting in the recording of a right of use asset and lease
obligation.
NOTE 2 – REVENUE
Disaggregation of Revenue
Our revenue is primarily from distinct fixed-price product sales in
the over-the-counter drug and consumer care products market, to
similar customers and channels utilizing similar types of contracts
that are short term in nature (less than one year). We do not sell
service agreements or goods over a period of time and do not sell
or utilize customer financing arrangements or time-and-material
contracts.
The following is a table that presents product sales, net by
geographical area:
|
|
For theThree Months Ended
March
31,
|
|
|
|
|
|
United
States
|
$4,184,102
|
$2,107,051
|
|
All
Other
|
357,924
|
70,239
|
|
Product sales,
net
|
$4,542,026
|
$2,177,290
|
All Other consists of Canada, Europe, Australia, Asia, and the
Middle East.
Contract Balances
We do not have any contract assets such as work-in-process but do
have certain contract liabilities such as customer advances for
product sales under its license agreements. As of March 31, 2018,
we had customer advances totaling $42,242 included in deferred
revenue and customer deposits in the accompanying condensed
consolidated balance sheet for advance payments on the future sale
of Zestra® and Zestra Glide® products to Sothema under
their license agreement. See Note 3 for more details on the
remaining amounts in deferred revenue and customer deposits as of
March 31, 2018. All trade receivables on the Company’s
condensed consolidated balance sheet are from contracts with
customers.
Contract Costs
Costs incurred to obtain a contract are capitalized unless short
term in nature. As a practical expedient, costs to obtain a
contract that are short term in nature are expensed as incurred. We
had no contract costs capitalized as of March 31,
2018.
NOTE 3 – LICENSE AGREEMENTS
In-License Agreements
CRI In-License Agreement
On April 19, 2013, the Company and Centric Research
Institute (“CRI”) entered
into an asset purchase agreement (the “CRI Asset Purchase
Agreement”) pursuant to which we
acquired:
●
All of CRI’s rights in past, present and future Sensum+®
product formulations and presentations, and
●
An exclusive, perpetual license to commercialize Sensum+®
products in all territories except for the United
States.
On June 9, 2016, the Company and CRI amended the CRI Asset Purchase
Agreement (“Amended CRI Asset Purchase Agreement”) to
provide us commercialization rights for Sensum+® in the U.S.
through our Beyond Human™ sales and marketing platform through
December 31, 2016. On January 1, 2017, the Company and CRI agreed
to extend the term of the Amended CRI Asset Purchase Agreement to
December 31, 2017. In connection with the extension, we issued
restricted shares of common stock totaling 225,000 to CRI as a
prepayment of royalties due on net profit of Sensum+® in the
U.S. in 2017. The royalty prepayment amount is $44,662 as the
number of shares of common stock issued was based on the closing
price of our common stock on December 30, 2016. Since CRI did not
earn royalties larger than the prepaid amount of $44,662 in 2017,
the term of the Amended CRI Asset Purchase Agreement is
automatically extended one additional year to December 31,
2018.
The CRI Asset Purchase Agreement also requires us to pay to CRI up
to $7.0 million in cash milestone payments based on first
achievement of annual Ex-U.S. net sales targets plus a royalty
based on annual Ex-U.S. net sales. The obligation for these
payments expires on April 19, 2023 or the expiration of the last of
CRI’s patent claims covering the product or its use outside
the U.S., whichever is sooner. No sales milestone obligations
have been met and no royalties are owed to CRI under this agreement
during the three months ended March 31, 2018 and 2017.
In consideration for the Amended CRI Asset Purchase Agreement, we
are required to pay CRI a percentage of the monthly net profit, as
defined in the agreement, from our sales of Sensum+® in the
U.S. through our Beyond Human™ sales and marketing platform. During the
three months ended March 31, 2018 and 2017, no amounts have been
earned by CRI under the Amended CRI Asset Purchase
Agreement.
Out-License Agreements
Acerus Pharmaceuticals Corporation Agreement
On January 5, 2018, we entered into an exclusive ten-year license
agreement with Acerus Pharmaceuticals Corporation, a Canadian
company (“Acerus”), under which we granted to Acerus an
exclusive license to market and sell UriVarx® in Canada. Under
the agreement, we received a non-refundable upfront payment, we
will be eligible to receive up to CAD $1.65 million (USD $1.28
million at March 31, 2018) in milestone payments based on Acerus
achieving certain sales targets and we will sell UriVarx® to
Acerus at an agreed-upon transfer price. Acerus also has minimum
annual purchase requirements for UriVarx® during the term of
the agreement.
During the three months ended March 31, 2018, we received an
upfront payment totaling $78,105 (CAD $100,000) which is being
recognized over the term of the ten-year license agreement. During
the three months ended March 31, 2018, we recognized license
revenue related to this agreement of $1,953. As of March 31, 2018,
$76,152 of the upfront payment is included in deferred revenue and
customer deposits in the accompanying condensed consolidated
balance sheet. We believe the amount of the upfront payment
received is reasonable compared to the amounts to be received upon
obtainment of future minimum order quantities. During the three
months ended March 31, 2018, we recognized revenue for the sale of
products related to this agreement of $310,629.
Lavasta Pharma FZ-LLC Agreement
On January 18, 2018, we entered into an exclusive ten-year license
agreement with Lavasta Pharma FZ-LLC, a Dubai company
(“Lavasta”), under which we granted to Lavasta an
exclusive license to market and sell ProstaGorx® in the
Kingdom of Saudi Arabia, Algeria, Egypt, the United Arab Emirates,
Lebanon, Jordan, Kuwait, Morocco, Tunisia, Bahrain, Oman, Qatar,
and Turkey, among other countries. If any country in the territory
under this agreement is ever listed on the U.S. Department of
Treasury’s restricted OFAC List or other list of countries
that a U.S. OTC pharma company cannot do business with, then such
country shall be removed from the list of countries included in the
territory in this agreement for such applicable restricted
period. Under the agreement, we received a non-refundable
upfront payment and we will sell products to Lavasta at an
agreed-upon transfer price. Lavasta also has minimum annual
purchase requirements for the products during the term of the
agreement.
During the three months ended March 31, 2018, we received an
upfront payment totaling $25,000 which is being recognized over the
term of the ten-year license agreement. During the three months
ended March 31, 2018, we recognized license revenue related to this
agreement of $625. As of March 31, 2018, $24,375 of the upfront
payment is included in deferred revenue and customer deposits in
the accompanying condensed consolidated balance sheet. We believe
the amount of the upfront payment received is reasonable compared
to the amounts to be received upon obtainment of future minimum
order quantities. During the three months ended March 31, 2018, we
did not recognize revenue for the sale of products related to this
agreement.
LI USA Co. Agreement
On November 9, 2016, we entered into an exclusive ten-year license
agreement with J&H Co. LTD, a South Korea company
(“J&H”), under which we granted to J&H an
exclusive license to market and sell our topical treatment for
Female Sexual Interest/Arousal Disorder (“FSI/AD”)
Zestra® and Zestra Glide® in South Korea. Under the
agreement, J&H is obligated to order minimum annual quantities
of Zestra® and Zestra Glide® totaling $2.0 million at a
pre-negotiated transfer price per unit through March 2018. The
minimum annual order quantities by J&H are to be made over a
12-month period following the approval of the product by local
authorities and beginning upon the completion of the first shipment
of product. Our partner recently received the approval to
import the product and placed its first order in March 2017. During
the three months ended March 31, 2018 and 2017, we recognized
$82,300 and $60,000 in revenue for the sale of products related to
this agreement.
On October 26, 2017, the exclusive license and distributor rights
under this agreement were assigned to LI USA Co., a U.S. company
(“LI USA”), from J&H and LI USA is now the
distributor under this agreement. LI USA is controlled by the same
original owners as J&H. All terms and conditions of the
original agreement remain intact.
NOTE 4 – BUSINESS AND ASSET ACQUISITIONS
Acquisition of Novalere in 2015
On February 5, 2015 (the “Closing Date”), we acquired
the worldwide rights to market and sell the FlutiCare®
brand (fluticasone propionate nasal spray) and the related
third-party manufacturing agreement for the manufacturing of
FlutiCare® (“Acquisition Manufacturer”) from
Novalere FP. The OTC Abbreviated New Drug Application
(“ANDA”) for fluticasone propionate nasal spray was
filed at the end of 2014 by our third-party manufacturer and
partner, who is currently selling the prescription version of the
drug, with the FDA and the OTC ANDA is still subject to FDA
approval. An ANDA is an application for a U.S. generic drug
approval for an existing licensed medication or approved drug. A
prescription ANDA (“RX ANDA”) is for a generic version
of a prescription pharmaceutical and an OTC ANDA is for a generic
version of an OTC pharmaceutical.
Due to the delay in approval of the Acquisition
Manufacturer’s OTC ANDA by the FDA, in May 2017, we announced
a commercial relationship with a different third-party manufacturer
(West-Ward Pharmaceuticals International Limited or
“WWPIL”) who has an FDA approved OTC ANDA for
fluticasone propionate nasal spray under which they have agreed to
manufacture our FlutiCare® OTC product for sale in the U.S.
(see Note 10). We currently still anticipate that the OTC ANDA
filed in November 2014 by the Acquisition Manufacturer with
the FDA may be approved in 2018. As we hold the worldwide rights to
market and sell FlutiCare® under the manufacturing
agreement with the Acquisition Manufacturer, we believe the
agreement with the Acquisition Manufacturer will still provide us
with the opportunity to market and sell
FlutiCare® ex-U.S. and, if the OTC ANDA is approved by
the FDA, a second source of supply within the U.S., if ever
needed.
The Novalere Stockholders are entitled to receive, if and when
earned, earn-out payments (the “Earn-Out Payments”).
For every $5.0 million in Net Revenue (as defined in the Merger
Agreement) realized from the sales of FlutiCare® through the
manufacturing agreement with the Acquisition Manufacturer, the
Novalere Stockholders will be entitled to receive, on a pro rata
basis, $500,000, subject to cumulative maximum Earn-Out Payments of
$2.5 million. The Novalere Stockholders are only entitled to the
Earn-Out Payments from the Acquisition Manufacturer’s OTC
ANDA under review by the FDA and have no earn-out rights to the
sales of FlutiCare® supplied by WWPIL under the commercial
agreement entered into in May 2017.
During the three months ended March
31, 2018 and 2017, there was an increase (decrease) in the
estimated fair value of the remaining 138,859 ANDA consideration
shares totaling $4,310 and ($20,107) which is included in fair
value adjustment for contingent consideration in the accompanying
condensed consolidated statements of operations. The
remaining 138,859 ANDA consideration shares not issuable yet will
be issued upon FDA approval of the ANDA filed by the Acquisition
Manufacturer and the estimated fair value of such remaining shares
of $13,586 is included in contingent consideration in the
accompanying condensed consolidated balance sheet at March 31,
2018. The fair value of the expected future earn-out payment was
increased by $4,310 and decreased by $20,107 during the three
months ended March 31, 2018 and 2017, respectively. The fair value
of the contingent consideration was $1,261,711 and $1,257,401 as of
March 31, 2018 and December 31, 2017,
respectively.
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 Laboratories, Inc. We agreed to pay the former shareholders
an annual royalty (“Royalty”) equal to 5% of the net
sales from Zestra® and Zestra Glide® and any second
generation products derived primarily therefrom (“Target
Products”) up until the time that a generic version of such
Target Product is introduced worldwide by a third
party.
The agreement to pay the annual Royalty resulted in the recognition
of a contingent consideration, which is recognized at the inception
of the transaction, and subsequent changes to estimate of the
amounts of contingent consideration to be paid will be recognized
as charges or credits in the consolidated statement of operations.
The fair value of the contingent consideration is based on
preliminary cash flow projections, growth in expected product sales
and other assumptions. During the three months ended March 31, 2018
and 2017, no amounts have been paid under this
arrangement. The fair value of the expected royalties to
be paid was decreased by $1,465 and $7,067 during the three months
ended March 31, 2018 and 2017, respectively, which is included in
the fair value adjustment for contingent consideration in the
accompanying condensed consolidated statements of operations. The
fair value of the contingent consideration was $220,137 and
$221,602 as of March 31, 2018 and December 31, 2017, respectively,
based on the new estimated fair value of the
consideration.
NOTE 5 – ASSETS AND LIABILITIES
Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
Raw
materials and supplies
|
$138,602
|
$164,469
|
|
Work
in process
|
92,833
|
152,935
|
|
Finished
goods
|
1,417,295
|
1,408,294
|
|
Total
|
$1,648,730
|
$1,725,698
|
Intangible Assets
Amortizable intangible assets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(133,212)
|
$284,385
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(264,818)
|
346,301
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(113,328)
|
121,217
|
10
|
|
Vesele®
Trademark
|
25,287
|
(10,998)
|
14,289
|
8
|
|
Beyond
Human® Website and Trade Name
|
222,062
|
(82,052)
|
140,010
|
5 – 10
|
|
Novalere
Manufacturing Contract
|
4,681,000
|
(1,472,565)
|
3,208,435
|
10
|
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(3,743)
|
987
|
1 – 3
|
|
Total
|
$6,196,340
|
$(2,080,716)
|
$4,115,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$417,597
|
$(124,809)
|
$292,788
|
7 – 15
|
|
Customer
Contracts
|
611,119
|
(249,540)
|
361,579
|
10
|
|
Sensum+®
License (from CRI)
|
234,545
|
(107,464)
|
127,081
|
10
|
|
Vesele®
Trademark
|
25,287
|
(10,208)
|
15,079
|
8
|
|
Beyond
Human® Website and Trade Name
|
222,062
|
(72,206)
|
149,856
|
5 – 10
|
|
Novalere
Manufacturing Contract
|
4,681,000
|
(1,355,540)
|
3,325,460
|
10
|
|
Other
Beyond Human® Intangible Assets
|
4,730
|
(3,474)
|
1,256
|
1 – 3
|
|
Total
|
$6,196,340
|
$(1,923,241)
|
$4,273,099
|
|
Amortization expense for the three months ended March 31, 2018 and
2017 was $157,475 and $157,725, respectively. The following table
summarizes the approximate expected future amortization expense as
of March 31, 2018 for intangible assets:
|
Remainder
of 2018
|
$472,000
|
|
2019
|
629,000
|
|
2020
|
629,000
|
|
2021
|
600,000
|
|
2022
|
592,000
|
|
2023
|
558,000
|
|
Thereafter
|
636,000
|
|
|
$4,116,000
|
Prepaid Expense and Other Current Assets
Prepaid expense and other current assets consist of the
following:
|
|
|
|
|
|
|
|
|
Prepaid
insurance
|
$72,584
|
$109,990
|
|
Prepaid
inventory
|
148,679
|
124,871
|
|
Prepaid
consulting and other expense
|
67,211
|
83,557
|
|
Prepaid
CRI royalties (see Note 3)
|
44,662
|
44,662
|
|
Total
|
$333,136
|
$363,080
|
Accounts Payable and Accrued Expense
Accounts payable and accrued expense consist of the
following:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
$2,312,746
|
$2,305,884
|
|
Accrued
credit card balances
|
118,747
|
72,719
|
|
Accrued
royalties
|
132,326
|
132,326
|
|
Sales
returns and allowances
|
136,789
|
52,904
|
|
Deferred
rent
|
110,474
|
-
|
|
Accrued
other
|
99,200
|
43,288
|
|
Total
|
$2,910,282
|
$2,607,121
|
NOTE 6 – NOTES PAYABLE AND SHORT-TERM LOANS
PAYABLE
Notes Payable
The following table summarizes the outstanding notes payable at
March 31, 2018 and December 31, 2017:
|
|
|
|
|
Notes
payable:
|
|
|
|
February
2016 Note Payable
|
$-
|
$54,984
|
|
September
2017 5% Note Payable
|
165,000
|
165,000
|
|
October
and December 2017 Notes Payable
|
583,333
|
1,066,667
|
|
December
2017 5% Note Payable
|
390,000
|
390,000
|
|
January
and March 2018 Notes Payable
|
1,359,896
|
-
|
|
February
and March 2018 5% Notes Payable
|
720,000
|
-
|
|
Total notes payable
|
3,218,229
|
1,676,651
|
|
Less:
Debt discount
|
(929,353)
|
(437,355)
|
|
Carrying value
|
2,288,876
|
1,239,296
|
|
Less:
Current portion
|
(2,288,876)
|
(1,239,296)
|
|
Notes payable, net of current portion
|
$-
|
$-
|
The following table summarizes the future minimum payments as of
March 31, 2018 for the notes payable:
|
Remainder
of 2018
|
$2,730,740
|
|
2019
|
487,489
|
|
|
$3,218,229
|
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®. 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 was to be paid by us
through a deposit account control agreement with a third-party bank
in which SBI was permitted to take the monthly mandatory payment
amount from all revenue received by us from the Beyond Human®
assets in the transaction. The maturity date for the
February 2016 Note Payable was February 19, 2018 and was repaid in
full.
September 2017 5% Note Payable
On
September 20, 2017, we entered into a securities purchase agreement
with an unrelated third-party investor in which the investor loaned
us gross proceeds of $150,000 pursuant to a 5% promissory
note. The note has an
Original Issue Discount (“OID”) of $15,000 and requires
payment of $165,000 in principal upon maturity. The note
bears interest at the rate of 5% per annum and the principal amount
and interest are payable at maturity on May 20, 2018.
In
connection with the note, we issued the investor restricted shares
of common stock totaling 895,000 shares. The fair value
of the restricted shares of common stock issued was based on the
market price of our common stock on the date of issuance of the
note. The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value and the OID resulted in us recording a debt discount of
$70,169. The discount is being amortized to interest expense using
the effective interest method over the term of the
note.
In
April 2018, the Company elected to settle the September 2017 note
payable outstanding principal and interest balance in exchange for
shares of common stock (see Note 11).
October and December 2017 Notes Payable
On October 17, 2017, October 20, 2017 and December 4, 2017, we
entered into a securities purchase agreement with two unrelated
third-party investors in which the investors loaned us gross
proceeds of $500,000 in October 2017 and $500,000 in December 2017
pursuant to a 0% promissory note (“October and December 2017
Notes Payable”). The notes have an OID of $200,000
and require nine payments of $66,667 in principal per month through
July 2018 and twelve payments of $50,000 in principal per month
through December 2018. The October and December 2017 Notes
Payable bear no interest per annum. The effective interest rate is
27% per annum for the notes issued in October and 20% per annum for
the notes issued in December.
In connection with the October and December 2017 Notes Payable, we
issued the investors restricted shares of common stock totaling
600,000 shares in December 2017. The fair value of the
restricted shares of common stock issued was based on the market
price of our common stock on the date of issuance of the October
and December 2017 Notes Payable. The allocation of the
proceeds received to the restricted shares of common stock based on
their relative fair value and the OID resulted in us recording a
debt discount of $100,000 in October 2017 and $149,712 in December
2017. In connection with the financing, we issued 576,373
restricted shares of common stock in October 2017 and 543,478
restricted shares of common stock in December 2017 to a third-party
consultant. The fair value of the restricted shares of common stock
issued of $48,761 in October 2017 and $50,000 in December 2017 were
recorded as a debt discount to the carrying value of the notes
payable. The discount is being amortized to interest expense using
the effective interest method over the term of the October and
December 2017 Notes Payable.
On March 1, 2018, we entered into a securities exchange agreement
with certain of the October and December 2017 Notes Payable
holders. In connection with the securities exchange agreement, we
issued a total of 2,250,000 shares of common stock in exchange for
the settlement of principal due under the October and December 2017
Notes Payable totaling $166,667 (see Note 8). The fair
value of the shares of common stock issued was based on the market
price of our common stock on the date of the securities exchange
agreements was determined to be $384,750. Due to the settlement of
the principal balance of $166,667 into shares of common stock, the
transaction was recorded as a debt extinguishment and the fair
value of the shares of common stock issued in excess of the settled
principal balance totaling $218,083 and the unamortized debt
discount as of the date of settlement of $37,602 were recorded as a
loss on debt extinguishment in the accompanying condensed
consolidated statement of operations.
December 2017 5% Note Payable
On December 13, 2017, we entered into a securities purchase
agreement with an unrelated third-party investor in which the
investor loaned us gross proceeds of $350,000 pursuant to a 5%
promissory note (“December 2017 5% Note
Payable”). The note has an OID of $40,000, bears
interest at 5% per annum and requires principal and interest
payments of $139,750, $133,250 and $131,625 on June 15, 2018,
September 15, 2018 and December 15, 2018,
respectively.
In connection with the December 2017 5% Note Payable, we issued the
investor restricted shares of common stock totaling 1,000,000
shares in December 2017. The fair value of the
restricted shares of common stock issued was based on the market
price of our common stock on the date of issuance of the December
2017 5% Note Payable. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value and the OID resulted in us recording a debt
discount of $107,807 in December 2017. The discount is being
amortized to interest expense using the effective interest method
over the term of the December 2017 5% Note Payable.
January and March 2018 Notes Payable
On January 8, 2018, January 30, 2018, March 1, 2018 and March 2,
2018, we entered into a securities purchase agreement with three
unrelated third-party investors in which the investors loaned us
gross proceeds of $677,500 in January 2018 and $550,000 in December
2017 pursuant to 0% promissory notes (“January and March 2018
Notes Payable”). The notes have an OID of $269,375
and bear interest at the rate of 0% per annum. The principal
amount of $1,496,875 is to be repaid in twelve equal monthly
installments. Monthly installments of $68,490 began in February
2018 and are due through January 2019 and monthly installments of
$56,250 begin in April 2018 and are due through March 2019. The
effective interest rate is 22% per annum for the January and March
2018 Notes Payable.
In connection with the January and March 2018 Notes Payable, we
issued the investors restricted shares of common stock totaling
1,282,000 shares. The fair value of the restricted
shares of common stock issued was based on the market price of our
common stock on the date of issuance of the January and March 2018
Notes Payable. The allocation of the proceeds received
to the restricted shares of common stock based on their relative
fair value and the OID resulted in us recording a debt discount of
$226,669 in January 2018 and $187,574 in March 2018. In connection
with the financing, we issued 621,317 restricted shares of common
stock in January 2018 and 314,737 restricted shares of common stock
in March 2018 to a third-party consultant. The fair value of the
restricted shares of common stock issued of $67,500 in January 2018
and $55,000 in March 2018 was recorded as a debt discount to the
carrying value of the January and March 2018 Notes Payable (see
Note 8). The discount is being amortized to interest expense using
the effective interest method over the term of the January and
March 2018 Notes Payable.
February and March 5% Notes Payable
On February 28, 2018 and March 28, 2018, we entered into a
securities purchase agreement with two unrelated third-party
investors in which the investors loaned us gross proceeds of
$650,000 pursuant to 5% promissory notes (“February and March
2018 5% Notes Payable”). The notes have an OID of
$70,000 and require payments of $720,000 in principal. The
notes bear interest at the rate of 5% per annum and the principal
amount and interest are payable at maturity on October 28, 2018 for
the note issued in February 2018 and in three installments on
October 1, 2018, January 1, 2019 and April 1, 2019 for the note
issued in March 2018.
In connection with the February and March 2018 5% Notes Payable, we
issued the investors restricted shares of common stock totaling
1,485,000 shares (see Note 8). The fair value of the
restricted shares of common stock issued was based on the market
price of our common stock on the date of issuance of the February
and March 2018 5% Notes Payable. The allocation of the
proceeds received to the restricted shares of common stock based on
their relative fair value and the OID resulted in us recording a
debt discount of $93,566 in February 2018 and $128,695 in March
2018. The discount is being amortized to interest expense using the
effective interest method over the term of the February and March
2018 5% Notes Payable.
Interest Expense
We
recognized interest expense on notes payable of $12,484 and $44,605
for the three months ended March 31, 2018 and 2017,
respectively. Amortization of the debt discount to
interest expense during the three months ended March 31, 2018 and
2017 totaled $229,404 and $512,874, respectively.
NOTE 7 – RELATED PARTY TRANSACTIONS
Accrued Compensation – Related Party
Accrued compensation includes accruals for employee wages, vacation
pay and target-based bonuses. The components of accrued
compensation as of March 31, 2018 and December 31, 2017 are as
follows:
|
|
|
|
|
Wages
|
$1,431,686
|
$1,431,686
|
|
Vacation
|
367,855
|
342,284
|
|
Bonus
|
883,813
|
742,481
|
|
Payroll
taxes on the above
|
136,759
|
133,746
|
|
Total
|
2,820,113
|
2,650,197
|
|
Classified
as long-term
|
(1,531,904)
|
(1,531,904)
|
|
Accrued
compensation
|
$1,288,209
|
$1,118,293
|
Accrued employee wages at March 31, 2018 and December 31, 2017 are
entirely related to wages owed to our President and Chief Executive
Officer. Under the terms of his employment agreement, wages
are to be accrued but no payment made for so long as payment of
such salary would jeopardize our ability to continue as a going
concern. The President and Chief Executive Officer started to
receive payment of salary in July 2016. Our President and
Chief Executive Officer has agreed to not receive payment on his
remaining accrued wages and related payroll tax amounts within the
next 12 months and thus the remaining balance is classified as a
long-term liability.
NOTE 8 – STOCKHOLDERS’ EQUITY
Issuances of Common Stock
In the first quarter of 2018, eleven of our warrant holders
exercised their Series B Warrants to purchase shares of common
stock totaling 18,925,002 at an exercise price of $0.15 per share.
We received net cash proceeds of $2,657,538. The remaining Series B
Warrants totaling 6,741,667 expired on March 21, 2018. Per the
terms of the engagement letter with H.C. Wainwright & Co.
(“HCW”) in connection with the public offering in March
2017 and as a result of the Series B Warrant exercises, we paid HCW
$181,213 and issued a warrant to purchase 862,917 shares of common
stock at an exercise price of $0.1875 per share (125% of the price
of the common stock sold in the public offering in March 2017)
which expires on March 21, 2023. The fair value of the warrants
issued to HCW totaled $136,729 and was determined using
Black-Scholes. The fair value of the warrants was recorded as an
offering cost but has no net impact to additional paid-in capital
in stockholders’ equity in the accompanying condensed
consolidated balance sheet.
On October 10, 2017, we entered into a service agreement with a
third party pursuant to which we agreed to issue, over the term of
the agreement, 2,000,000 shares of common stock in exchange for
services to be rendered. We have terminated this agreement
effective January 30, 2018. During the three months ended March 31,
2018, we issued 166,666 shares of restricted common stock under the
agreement related to services provided and recognized the fair
value of the shares issued of $13,917 in general and administrative
expense in the accompanying consolidated statement of operations.
The shares of common stock vested on the date of issuance and the
fair value of the shares of common stock was based on the market
price of our common stock on the date of vesting.
In
January 2018, we issued a total of 89,820 shares of common stock
for services and recorded an expense of $7,500 for the three months
ended March 31, 2018 which is included in general and
administrative expense in the accompanying condensed consolidated
statement of operations. The 89,820 shares of common stock vested
on the date of issuance and the fair value of the shares of common
stock was based on the market price of our common stock on the date
of vesting.
During
the three months ended March 31, 2018, we issued 2,767,000 shares
of restricted common stock to note holders in connection with their
notes payable. The relative fair value of the shares of
restricted common stock issued was determined to be $292,129 and
was recorded as a debt discount (see Note 6).
In connection with the January and March 2018 Notes, we issued
621,317 restricted shares of common stock in January 2018 and
314,737 restricted shares of common stock in March 2018 to a
third-party consultant. The fair value of the restricted shares of
common stock issued of $67,500 in January 2018 and $55,000 in March
2018 was recorded as a debt discount to the carrying value of the
notes payable during the three months ended March 31, 2018 (see
Note 6).
In
March 2018, certain October and December 2017 Notes Payable holders
elected to exchange $166,667 in principal for 2,250,000 shares of
common stock (see Note 6). The fair value of the shares of common
stock of $384,750 was based on the market price of our common stock
on the date of issuance.
2013 Equity Incentive Plan
We have
issued common stock, restricted stock units and stock option awards
to employees, non-executive directors and outside consultants under
the 2013 Equity Incentive Plan (“2013 Plan”), which was
approved by our Board of Directors in February of 2013. The
2013 Plan allows for the issuance of up to 10,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. As of March 31, 2018,
there were no shares available under the 2013 Plan.
2014 Equity Incentive Plan
We have
issued common stock, restricted stock units and stock options to
employees, non-executive directors and outside consultants under
the 2014 Equity Incentive Plan (“2014 Plan”), which was
approved by our Board of Directors in November 2014. The 2014
Plan allows for the issuance of up to 20,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. As of March 31, 2018,
40,063 shares were available under the 2014 Plan.
2016 Equity Incentive Plan
On
March 21, 2016, our Board of Directors approved the adoption of the
2016 Equity Incentive Plan and on October 20, 2016 adopted the
Amended and Restated 2016 Equity Incentive Plan (“2016
Plan”). The 2016 Plan was then approved by our
stockholders in November 2016. The 2016 Plan allows for the
issuance of up to 20,000,000 shares of our common stock to be
issued in the form of stock options, stock awards, stock unit
awards, stock appreciation rights, performance shares and other
share-based awards. The 2016 Plan includes an evergreen
provision in which the number of
shares of common stock authorized for issuance and available for
future grants under the 2016 Plan will be increased each January 1
after the effective date of the 2016 Plan by a number of shares of
common stock equal to the lesser of: (a) 4% of the number of shares
of common stock issued and outstanding on a fully-diluted basis as
of the close of business on the immediately preceding December 31,
or (b) a number of shares of common stock set by our Board of
Directors. In March 2017, our Board of Directors approved an
increase of 5,663,199 shares of common stock to the shares
authorized under the 2016 Plan in accordance with the evergreen
provision in the 2016 Plan. As of March 31, 2018, 18,315,170 shares
were available under the 2016 Plan.
Stock Options
For the three months ended March 31, 2018 and 2017, the following
weighted average assumptions were utilized for the calculation of
the fair value of the stock options granted during the period using
Black-Scholes:
|
|
|
|
|
Expected
life (in years)
|
6.4
|
7.9
|
|
Expected
volatility
|
203.6%
|
217.9%
|
|
Average
risk-free interest rate
|
2.86%
|
2.28%
|
|
Dividend
yield
|
0%
|
0%
|
|
Grant
date fair value
|
$0.17
|
$0.23
|
The dividend yield of zero is based on the fact that we have never
paid cash dividends and have no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of our common stock over the period commensurate with
the expected life of the stock options. Expected life in years
is based on the “simplified” method as permitted by ASC
Topic 718. We believe that all stock options issued under its
stock option plans meet the criteria of “plain vanilla”
stock options. We use a term equal to the term of the stock
options for all non-employee stock options. The risk-free
interest rate is based on average rates for treasury notes as
published by the Federal Reserve in which the term of the rates
correspond to the expected term of the stock options.
The following table summarizes the number of stock options
outstanding and the weighted average exercise price:
|
|
|
Weighted average exercise price
|
Weighted remaining contractual life (years)
|
Aggregate intrinsic value
|
|
Outstanding
at December 31, 2017
|
88,000
|
$0.17
|
9.0
|
$377
|
|
Granted
|
59,000
|
0.17
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Cancelled
|
-
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
Outstanding
at March 31, 2018
|
147,000
|
$0.17
|
9.2
|
$1,694
|
|
|
|
|
|
|
|
Vested
and Expected to Vest at March 31, 2018
|
147,000
|
$0.17
|
9.2
|
$1,694
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of all outstanding stock options and the
quoted price of our common stock at March 31,
2018. During the three months ended March 31, 2018 and
2017, we recognized stock-based compensation from stock options of
$1,487 and $4,378, respectively. As of March 31, 2018, compensation
expense related to unvested options not yet recognized in the
condensed consolidated statement of operations was approximately
$9,000 and will be recognized over a remaining weighted-average
term of 2.9 years.
Restricted Stock Units
The following table summarizes the restricted stock
unit activity for the three months ended March 31,
2018:
|
|
|
|
Outstanding
at December 31, 2017
|
13,191,835
|
|
Granted
|
2,643,712
|
|
Exchanged
|
-
|
|
Cancelled
|
-
|
|
Outstanding
at March 31, 2018
|
15,835,547
|
|
|
|
|
Vested
at March 31, 2018
|
10,799,088
|
The
vested restricted stock units at March 31, 2018 have not settled
and are not showing as issued and outstanding shares of ours but
are considered outstanding for earnings per share
calculations. Settlement of these vested restricted stock
units will occur on the earliest of (i) the date of termination of
service of the employee or consultant, (ii) change of control of
us, or (iii) 10 years from date of issuance. Settlement of
vested restricted stock units may be made in the form of (i) cash,
(ii) shares, or (iii) any combination of both, as determined by the
board of directors and is subject to certain criteria having been
fulfilled by the recipient.
We calculate the fair value of the restricted stock units based
upon the quoted market value of the common stock at the date of
grant. The grant date fair value of restricted stock units issued
during the three months ended March 31, 2018 was $459,500. For the
three months ended March 31, 2018 and 2017, we recognized $92,555
and $220,794, respectively, of stock-based compensation expense for
the vested units. As of March 31, 2018, compensation expense
related to unvested shares not yet recognized in the condensed
consolidated statement of operations was approximately $885,000 and
will be recognized over a remaining weighted-average term of 2.3
years.
Warrants
During the year ended December 31, 2014, we issued warrants in
connection with notes payable (which were repaid in 2013). The
remaining warrants of 135,816 have an exercise price of $0.10 and
expire December 6, 2018.
In January 2015, we issued 250,000 warrants with an exercise price
of $0.30 per share to a former executive in connection with the
January 2015 debenture. The warrants expire on January 21, 2020.
The warrants contain anti-dilution protection, including protection
upon dilutive issuances. In connection with the convertible
debentures issued in 2015, the exercise price of these warrants was
reduced to $0.0896 per share and an additional 586,705 warrants
were issued per the anti-dilution protection afforded in the
warrant agreement during the year ended December 31,
2015.
In connection with the convertible debentures in 2015, we issued
warrants with an exercise price of $0.30 per share and expiration
in 2020 to investors and placement agents. Warrants to purchase
774,533 shares of common stock remain outstanding as of March 31,
2018.
In connection with the convertible debentures in 2016, we issued
warrants to the investors and placement agents with an exercise
price of $0.40 per share and expire in 2021. Warrants to purchase
4,220,000 shares of common stock remain outstanding as of
March 31, 2018.
In connection with the public equity offering in March 2017, we
issued Series A Warrants to purchase 25,666,669 shares of common
stock at $0.15 per share and Series B Warrants to purchase
25,666,669 shares of common stock at $0.15 per share. The Series A
Warrants expire in 2022. In the first quarter of 2018, certain
investors elected to exercise 18,925,002 Series B Warrants and the
remaining Series B Warrants expired in March 2018. We also issued
warrants to purchase 1,283,333 shares of common stock to our
placement agent with an exercise price of $0.1875 per share and
expire in 2022, as well as in March 2018 we issued our placement
agent warrants to purchase 862,917 shares of common stock with an
exercise price of $0.1875 per share and expire in 2023 in
connection with the Series B Warrants exercised.
For the three months ended March 31, 2018, the following weighted
average assumptions were utilized for the calculation of the fair
value of the warrants issued during the period using
Black-Scholes:
|
|
|
|
Expected
life (in years)
|
5.0
|
|
Expected
volatility
|
183.8%
|
|
Average
risk-free interest rate
|
2.69%
|
|
Dividend
yield
|
0%
|
At
March 31, 2018, there are 33,779,973 fully vested warrants
outstanding. The weighted average exercise price of outstanding
warrants at March 31, 2018 is $0.19 per share, the weighted average
remaining contractual term is 3.8 years and the aggregate intrinsic
value of the outstanding warrants is $30,055.
Net Loss per Share
Restricted stock units that are vested but which the issuance and
delivery of the shares are deferred until the employee or director
resigns are included in the basic and diluted net loss per share
calculations.
The weighted average shares of common stock outstanding used in the
basic and diluted net loss per share calculation for the three
months ended March 31, 2018 and 2017 was 176,299,261 and
126,327,687, respectively.
The
weighted average restricted stock units vested but which 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 which were used in the basic and diluted net loss per share
calculation for the three months ended
March 31, 2018 and 2017 was 10,634,361 and 8,771,486,
respectively.
The total weighted average shares outstanding used in the basic and
diluted net loss per share calculation for the three months ended
March 31, 2018 and 2017 was 186,933,622 and 135,099,173,
respectively.
The following table shows the anti-dilutive shares excluded from
the calculation of basic and diluted net loss per common share as
of March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
Gross number of shares excluded:
|
|
|
|
Restricted
stock units – unvested
|
5,036,459
|
5,750,000
|
|
Stock
options
|
147,000
|
216,500
|
|
Warrants
|
33,779,973
|
58,583,725
|
|
Total
|
38,963,432
|
64,550,225
|
The above table does not include the ANDA Consideration Shares
related to the Novalere acquisition totaling 138,859 at March 31,
2018 and 2017 as they are considered contingently issuable (see
Note 4).
NOTE 9 – DERIVATIVE LIABILITIES
Prior to the adoption of ASU 2017-11 (see Note 1), the warrants
issued in connection with the January 2015 non-convertible
debenture to a former executive were measured at fair value and
classified as a liability because these warrants contain
anti-dilution protection and therefore, could not be considered
indexed to our own stock which was a requirement for the scope
exception as outlined previously under FASB ASC 815. The estimated
fair value of the warrants was determined using the Probability
Weighted Black-Scholes Model. The fair value 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. Upon the adoption of ASU 2017-11, we no longer
classify the fair value of these warrants as a
liability.
The derivative liabilities were a Level 3 fair value measure in the
fair value hierarchy. The following table presents the activity for
the Level 3 warrant derivative liabilities measured at fair value
on a recurring basis for the three months ended March 31,
2018:
Fair
Value Measurements Using Level 3 Inputs
|
Warrant derivative liabilities:
|
|
|
Beginning
balance December 31, 2017
|
$58,609
|
|
Cumulative
adjustment from liabilities to accumulated deficit for the fair
value of the warrant derivative
liability upon adoption of ASU 2017-11 on January 1,
2018
|
(58,609)
|
|
Change
in fair value
|
-
|
|
Ending
balance March 31, 2018
|
$-
|
NOTE 10 – COMMITMENTS AND CONTINGENCIES
In May 2017, we entered into a commercial agreement with West-Ward
Pharmaceuticals International Limited (“WWPIL”), a
wholly-owned subsidiary of Hikma Pharmaceuticals PLC
(“Hikma”) (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY).
Pursuant to the commercial agreement, WWPIL provided us with the
rights to launch our branded, fluticasone propionate nasal spray
USP, 50 mcg per spray (FlutiCare®), under WWPIL’s FDA
approved ANDA No. 207957 in the U.S. in mid-November 2017. The
initial term of the commercial agreement is for two years, and upon
expiration of the initial term, the agreement will automatically
renew for subsequent one-year terms unless either party notifies
the other party in writing of its desire not to renew at least 90
days prior to the end of the then current term. The agreement
requires us to meet certain minimum product batch purchase
requirements in order for the agreement to continue to be in
effect. We have met the minimum product batch purchase requirements
through May 2018.
Litigation
James L. Yeager, Ph.D., and Midwest Research Laboratories, LLC v.
Innovus Pharmaceuticals, Inc. On January 18, 2018, Dr. Yeager and Midwest
Research Laboratories (the “Plaintiffs”) filed a
complaint in the Illinois Northern District Court in Chicago,
Illinois, which Plaintiffs amended on February 26, 2018
(“Amended Complaint”). The Amended Complaint
alleges that the Company violated Dr. Yeager’s right of
publicity and made unauthorized use of his name, likeness and
identity in advertising materials for its product Sensum+®.
Plaintiffs seek actual and punitive damages, costs and
attorney’s fees, an injunction and corrective advertising. We
intend to file a response to the Amended Complaint by May 21, 2018.
We believe that the Plaintiffs’ allegations and claims are
wholly without merit, and we intend to defend the case vigorously
and assert counterclaims against the Plaintiffs. More
specifically, we believe that we secured and paid for all of the
rights claimed by Dr. Yeager from his company Centric Research
Institute (“CRI”) pursuant to agreements with CRI (the
“CRI Agreements”) and that CRI has indemnification
obligations under the CRI Agreements for all expenses and losses
associated with the claims made by the
Plaintiffs.
In the ordinary course of business, we may face various claims
brought by third parties and we may, from time to time, make claims
or take legal actions to assert our rights, including intellectual
property disputes, contractual disputes and other commercial
disputes. Any of these claims could subject us to litigation.
Management believes the outcomes of currently pending claims are
not likely to have a material effect on our consolidated financial
position and results of operations.
NOTE 11 – SUBSEQUENT EVENTS
On
April 9, 2018, we entered into a securities exchange agreement with
the September 2017 Note Payable holder. In connection with the
securities exchange agreement, we issued a total of 1,474,287
shares of common stock in exchange for the settlement of principal
and interest due under the September 2017 Note Payable totaling
$169,543. The fair value of the shares of common stock
issued was based on the market price of our common stock on the
date of the securities exchange agreement. Due to the settlement of
the principal and interest balance of $169,543 into shares of
common stock, the transaction was recorded as a debt extinguishment
and the fair value of the shares of common stock issued in excess
of the settled principal and interest balance totaling
approximately $27,000 was recorded as a loss on debt
extinguishment.
We have evaluated subsequent events through the filing date of this
Form 10-Q and determined that no additional subsequent events have
occurred that would require recognition in the condensed
consolidated financial statements or disclosures in the notes
thereto other than as disclosed in the accompanying notes to the
condensed consolidated financial statements.
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Innovus Pharmaceuticals, Inc., together with its subsidiaries, are
collectively referred to as “Innovus”, the
“Company”, “us”, “we”, or
“our”. The following information should be read in
conjunction with the condensed consolidated financial statements
and notes thereto appearing elsewhere in this report. For
additional context with which to understand our financial condition
and results of operations, see the discussion and analysis included
in Part II, Item 7 of our Annual Report on Form 10-K for the year
ended December 31, 2017, filed with the Securities and Exchange
Commission (“SEC”) on April 2, 2018, as well as the
consolidated financial statements and related notes contained
therein.
Forward Looking Statements
Certain statements in this report, including information
incorporated by reference, are “forward-looking
statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, Section 21E of the Securities
Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, as amended. Forward-looking
statements reflect current views about future events and financial
performance based on certain assumptions. They include opinions,
forecasts, intentions, plans, goals, projections, guidance,
expectations, beliefs or other statements that are not statements
of historical fact. Words such as “may,”
“should,” “could,” “would,”
“expects,” “plans,” “believes,”
“anticipates,” “intends,”
“estimates,” “approximates,”
“predicts,” or “projects,” or the negative
or other variation of such words, and similar expressions may
identify a statement as a forward-looking statement. Any statements
that refer to projections of our future financial performance, our
anticipated growth and trends in our business, our goals,
strategies, focus and plans, and other characterizations of future
events or circumstances, including statements expressing general
optimism about future operating results and the development of our
products, are forward-looking statements.
Although forward-looking statements in this Quarterly Report on
Form 10-Q reflect the good faith judgment of our management, such
statements can only be based on facts and factors currently known
by us. Consequently, forward-looking statements are inherently
subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could
cause or contribute to such differences in results and outcomes
include, without limitation, those specifically addressed under the
heading “Risks Factors” below, as well as those
discussed elsewhere in this Quarterly Report on Form 10-Q. Readers
are urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Quarterly
Report on Form 10-Q. We file reports with the SEC. You can read and
copy any materials we file with the SEC at the SEC's Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You can
obtain additional information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (www.sec.gov) that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including
us.
Overview
We are an emerging over-the-counter (“OTC”) consumer
goods and specialty pharmaceutical company engaged in the
commercialization, licensing and development of safe and effective
non-prescription medicine, consumer care products, supplements and
certain related devices to improve men’s and women’s
health and vitality, urology, brain health, pain and respiratory
diseases. We deliver innovative and uniquely presented and
packaged health solutions through our (a) OTC medicines, devices,
consumer and health products, and clinical supplements, which we
market directly, (b) commercial retail and wholesale partners to
primary care physicians, urologists, gynecologists and
therapists, and (c) directly to consumers through our proprietary
Beyond Human™ Sales & Marketing Platform including print
media, on-line channels, websites, retailers and
wholesalers. We are dedicated to being a leader in developing
and marketing new OTC and branded Abbreviated New Drug Application
(“ANDA”) products, supplements and certain related
devices. We are actively pursuing opportunities where existing
prescription drugs have recently, or are expected to, change from
prescription (or Rx) to OTC. These “Rx-to-OTC switches”
require Food and Drug Administration (“FDA”) approval
through a process initiated by the New Drug Application
(“NDA”) holder.
Our business model leverages our ability to (a) develop and build
our current pipeline of proprietary products, and (b) to also
acquire outright or in-license commercial products that are
supported by scientific and/or clinical evidence, place them
through our existing supply chain, retail and on-line
(including our Amazon®, eBay®, Wish.com, Sears.com,
Walmart.com®, and Walgreens.com on-line stores and other
e-commerce business platforms) channels to tap new markets and
drive demand for such products and to establish physician
relationships. We currently have 29 products marketed in the United
States with 12 of those being marketed and sold in multiple
countries around the world through some of our 18 international
commercial partners. We currently expect to launch an additional
seven to ten products in the U.S. in 2018 and we currently have
approvals to launch certain of our already marketed products in at
least six additional countries.
Our Strategy
Our
corporate strategy focuses on two primary objectives:
1.
Developing a diversified product portfolio of exclusive, unique and
patented non-prescription OTC and branded ANDA drugs, devices,
consumer health products, and clinical supplements through: (a) the
introduction of line extensions and reformulations of either our or
third-party currently marketed products; (b) the development of new
proprietary OTC products, supplements and devices; and (c) the
acquisition of products or obtaining exclusive licensing rights to
market such products; and
2.
Building an innovative, U.S. and global sales and marketing model
through direct to consumer approaches such as our proprietary
Beyond Human™ sales and marketing platform, the addition of
new online platforms such as Amazon®, eBay®, Wish.com,
Sears.com, Walmart.com® and Walgreens.com and commercial
partnerships with established international complimentary partners
that: (a) generates revenue, and (b) requires a lower cost
structure compared to traditional pharmaceutical companies, thereby
increasing our gross margins.
Our Products
We currently market and sell 29 products in the U.S. and 12 in
multiple countries around the world through our 18 international
commercial partners:
1.
Vesele® for
promoting sexual health (U.S. and U.K.);
2.
Zestra® for
female arousal (U.S., U.K., Denmark, Belgium, France, Malaysia,
India, Monaco, Canada, Morocco, the UAE, Hong Kong, South Africa
and South Korea);
3.
Zestra
Glide® (U.S, Canada and the MENA countries);
4.
UriVarx®
for overactive bladder and urinary incontinence;
5.
Sensum+® to
alleviate reduced penile sensitivity (U.S., U.K. and
Morocco);
6.
ProstaGorx®
for prostate support;
7.
AllerVarx®
for allergy relief;
8.
Apeaz® for
pain relief;
9.
ArthriVarx®
for joint pain;
10
EjectDelay®
indicated for the treatment of premature ejaculation (U.S. and
Canada);
11.
RecalMax™
for brain health;
12.
Androferti®
(U.S. and Canada) for the support of overall male reproductive
health and sperm quality;
13.
PEVarx®
to support peak sexual
performance and stamina ;
14.
Beyond
Human® Testosterone Booster;
15.
Beyond
Human® Ketones;
16.
Beyond
Human® Krill Oil;
17.
Beyond
Human® Omega 3 Fish Oil;
18.
Beyond
Human® Eagle Vision Formula;
19.
Beyond
Human® Blood Sugar;
20.
Beyond
Human® Colon Cleanse;
21.
Beyond
Human® Green Coffee Extract;
22.
Beyond
Human® Growth Agent;
23.
FlutiCare®
for nasal allergy symptom relief;
24.
Xyralid® a
hemorrhoid cream;
26.
Can-C® Supplement, an eye care anti-oxidant
supplement;
27.
MZS™ Sleep Aid, a sleep aid supplement;
28.
Diabasens™, a cream to increase blood flow in the diabetic
foot; and
29.
UriVarx™ UTI Urine Test Strips.
In addition, we currently expect to launch in the U.S. the
following products in 2018, subject to the applicable regulatory
approvals, if required:
1.
Xyralid® Suppositories are designed to be rectal suppositories
for the relief of hemorrhoids (second quarter of
2018);
2.
Vesele ™
Nitric Oxide Strips for
measurement of nitric oxide levels (second quarter of
2018);
3.
RecalMax™ Nitric Oxide Strips for measurement of nitric oxide
levels (second quarter of 2018);
4.
GlucoGorx™ Supplement, Glucometer, Lancing Device and
GlucoGorx™ Strips. GlucoGorx™ is a supplement designed
to help diabetics and others control their levels of blood sugar.
The Glucometer, Lancing Device and GlucoGorx™ Strips are part
of an FDA approved kit that we will co-market with GlucoGorx™
(second half of 2018);
5.
Musclin™ for muscle growth (second half of 2018);
and
6.
Regenerum™ for muscle wasting or cachexia
(2019).
Sales and Marketing Strategy U.S. and Internationally
Our sales and marketing strategy is based on (a) the use of direct
to consumer advertisements in print and online media through our
proprietary Beyond Human™ sales and marketing platform acquired in
March 2016, which in addition to the print and direct mail includes
extensive on-line media channels through our Amazon®,
eBay®, Wish.com, Sears.com, Walgreens.com and
Walmart.com® sites, over 170 websites and over 2.5 million
subscribers, (b) working with direct retail and wholesale
commercial channel partners in the U.S. and also directly marketing
the products ourselves to physicians, urologists, gynecologists and
therapists and to other healthcare providers, and (c) working with
exclusive commercial partners outside of the U.S. that would be
responsible for sales and marketing in those territories. We have
now fully integrated most of our existing line of products such as
Vesele®, Sensum+®, UriVarx®, Zestra®,
RecalMax™, Xyralid®, FlutiCare®, Apeaz® and
other products into the Beyond Human™ sales and marketing platform. We plan to
integrate other products upon their commercial launches in 2018. We
also market and distribute our products in the U.S. through
retailers, wholesalers and other online channels. Our strategy
outside the U.S. is to partner with companies who can effectively
market and sell our products in their countries through their
direct marketing and sales teams. The strategy of using our
partners to commercialize our products is designed to limit our
expenses and fix our cost structure, enabling us to increase our
reach while minimizing our incremental
spending.
Our current OTC, Rx-to-OTC ANDA switch drugs and consumer care
products marketing strategy is to focus on four main U.S. markets
all of which we believe to be each in excess of $1.0 billion: (1)
sexual health (female and male sexual dysfunction and health); (2)
urology (bladder and prostate health); (3) respiratory disease; (4)
brain health; and (5) pain. We will focus our current efforts on
these four markets and will seek to develop, acquire or license
products that we can sell through our sales channels in these
fields.
Results of Operations for the Three Months Ended March 31, 2018
Compared with the Three Months Ended March 31, 2017
|
|
Three Months Ended
March 31,
2018
|
Three Months Ended
March 31,
2017
|
|
|
|
NET
REVENUE:
|
|
|
|
|
|
Product
sales, net
|
$4,542,026
|
$2,177,290
|
$2,364,736
|
108.6%
|
|
License
revenue
|
2,578
|
-
|
2,578
|
100.0%
|
|
Net revenue
|
4,544,604
|
2,177,290
|
2,367,314
|
108.7%
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
Cost
of product sales
|
864,095
|
440,476
|
423,619
|
96.2%
|
|
Research
and development
|
11,287
|
3,183
|
8,104
|
254.6%
|
|
Sales
and marketing
|
3,301,784
|
1,687,351
|
1,614,433
|
95.7%
|
|
General
and administrative
|
1,696,021
|
1,704,663
|
(8,642)
|
(0.5)%
|
|
Total
operating expense
|
5,873,187
|
3,835,673
|
2,037,514
|
53.1%
|
|
LOSS
FROM OPERATIONS
|
(1,328,583)
|
(1,658,383)
|
(329,800)
|
(19.9)%
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
Interest
expense
|
(241,888)
|
(557,479)
|
(315,591)
|
56.6%
|
|
Loss
on extinguishment of debt
|
(255,685)
|
(304,828)
|
(49,143)
|
16.1%
|
|
Other
income (expense), net
|
109
|
(616)
|
(725)
|
117.7%
|
|
Fair
value adjustment for contingent consideration
|
(2,845)
|
27,175
|
(30,020)
|
(110.5)%
|
|
Change
in fair value of derivative liabilities
|
-
|
(51,656)
|
(51,656)
|
100.0%
|
|
Total
other expense, net
|
(500,309)
|
(887,404)
|
(387,095)
|
43.6%
|
|
NET
LOSS
|
$(1,828,892)
|
$(2,545,787)
|
(716,895)
|
28.2%
|
Net Revenue
We recognized net revenue of approximately $4.5 million and $2.2
million for the three months ended March 31, 2018 and 2017,
respectively. The increase in net revenue in 2018 was
primarily the result of an increase in our
UriVarx® product sales as well as the launch of
Diabasens™ in the first quarter of 2018 and ProstaGorx®
and Apeaz® with ArthriVarx® in mid-2017. During the
three months ended March 31, 2018, net revenue from product sales
of UriVarx® totaled approximately $2.1 million compared to
$527,000 in 2017. Included in the UriVarx® net revenue from
product sales during the three months ended March 31, 2018 was
approximately $311,000 from the sale of products under our license
agreement with Acerus Pharmaceutical Corporation entered into in
January 2018. We launched Diabasens™ in mid-February 2018 and recognized approximately
$445,000 in net revenue during the three months ended March 31,
2018. The remaining new product launches in mid-2017 such as
ProstaGorx® and Apeaz® with ArthriVarx® generated
net revenue of approximately $895,000 during the three months ended
March 31, 2018. In March 2018 and 2017, we shipped orders under our
South Korea license and distribution agreement resulting in net
revenue of $82,300 and $60,000, respectively, during the three
months ended March 31, 2018 and 2017. Due to the recent license and
distribution agreements entered into in 2017 and 2018, we expect
this will lead to an increase in product sales of UriVarx®,
ProstaGorx®, Zestra® and Zestra Glide® through our
Ex-U.S. sales channel in 2018.
Cost of Product Sales
We
recognized cost of product sales of approximately $864,000 and
$440,000 for the three months ended March 31, 2018 and 2017,
respectively. The cost of product sales includes the cost of
inventory, shipping and warehouse costs, royalties and salaries and
benefits for our warehouse employees. 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 81.0% in 2018 compared to 79.8% in 2017 is due
to the higher margins earned on the increased volume of our product
sales through the Beyond Human™ sales and
marketing platform, as well as the efforts in the first quarter of
2018 to bring our fulfillment and shipping process in-house to our
facility in San Diego.
Research and Development
We
recognized research and development expense of approximately
$11,000 and $3,000 for the three months ended March 31, 2018 and
2017, respectively. The research and development expense includes
costs for stability testing and other development related costs for
our products.
Sales and Marketing
We recognized sales and marketing expense of approximately $3.3
million and $1.7 million for the three months ended March 31, 2018
and 2017, respectively. Sales and marketing expense consists
primarily of print advertisements and sales and marketing support.
The increase in sales and marketing expense during the three months
ended March 31, 2018 when compared to the same period in 2017 is
due to the increase in the number of products integrated into the
Beyond Human™ sales and marketing platform, as well as the
costs of our third-party customer service call center due to the
higher volume of sales orders received as a result of the Beyond
Human® asset acquisition. Also, initial product launches
require larger advertising spends in an effort to increase brand
awareness. Total direct advertising costs for the three months
ended March 31, 2018 was $2.5 million compared to $1.4 million in
2017.
General and Administrative
We recognized general and administrative expense of approximately
$1.7 million for each of the three months ended March 31, 2018 and
2017, respectively. General and administrative expense consists
primarily of investor relation expense, legal, accounting, public
reporting costs and other infrastructure expense related to the
launch of our products. Additionally, our general and
administrative expense includes professional fees, insurance
premiums and general corporate expense.
Other Income and Expense
We recognized interest expense of approximately $242,000 and
$557,000 for the three months ended March 31, 2018 and 2017,
respectively. Interest expense primarily includes interest related
to our debt and amortization of debt discounts (see Note 6 to the
accompanying condensed consolidated financial statements). Due to
the shares, warrants and cash discounts provided to our lenders,
the effective interest rate is significantly higher than the coupon
rate. The decrease in interest expense during the three months
ended March 31, 2018 is due to the larger amount of debt discount
amortization in 2017 compared to 2018 as a result of the
convertible debt and note payable financings completed in
2016.
We recognized a loss on extinguishment of debt of approximately
$256,000 and $305,000 during the three months ended March 31, 2018
and 2017, respectively. The loss on debt extinguishment in 2018 was
the result of the securities exchange agreement entered into with a
certain note payable holder in March 2018. In exchange for the
issuance of 2,250,000 shares of common stock with a fair value of
approximately $385,000, we settled the principal balance totaling
$166,667 with the noteholder. The remaining loss on debt
extinguishment was the write off of the remaining unamortized debt
discount as of the date of settlement. The loss on debt
extinguishment in 2017 was due to a settlement of notes payable as
well as the required prepayment of the 2016 convertible notes from
the cash proceeds received through the public equity offering in
March 2017.
We recognized a loss from the fair value adjustment for contingent
consideration of approximately $3,000 for the three months ended
March 31, 2018 compared to a gain of $27,000 for the three months
ended March 31, 2017. Fair value adjustment for contingent
consideration consists primarily of the change in the fair value of
the contingent ANDA shares of common stock issuable to individual
members of Novalere Holdings, LLC in connection with our
acquisition in 2015 and the royalty contingent consideration to
Semprae (see Note 4 to the accompanying consolidated financial
statements).
We recognized a loss from the change in fair value of derivative
liabilities of approximately $52,000 for the three months ended
March 31, 2017. Change in fair value of derivative liabilities
primarily includes the change in the fair value of the warrants and
embedded conversion features classified as derivative liabilities.
The loss on change in fair value of derivative liabilities during
the three months ended March 31, 2017 is primarily due to the
increase in our stock price from December 31, 2016 through the date
of conversion of certain of the convertible debentures in 2017,
which resulted in the fair value of the embedded conversion
features at the conversion date to be higher than the fair value at
December 31, 2016. There was no change in fair value during the
three months ended March 31, 2018 as we adopted Accounting
Standards Update (“ASU”) 207-11 which resulted in our
warrants derivative liability being reclassified to equity as of
the date of adoption on January 1, 2018 (see Note 1 to the
accompanying condensed consolidated financial
statements).
Net Loss
Net loss for the three months ended March 31, 2018 was
approximately $(1.8 million) or $(0.01) basic and diluted net loss
per share compared to a net loss for the same period in 2017 of
$(2.5 million) or $(0.02) basic and diluted net loss per
share.
Liquidity and Capital Resources
Historically, we have funded losses from operations through the
sale of equity and issuance of debt instruments. Combined with
revenue, these funds have provided us with the capital to operate
our business, to sell and support our products, attract and retain
key personnel, and add new products to our portfolio. To date, we
have experienced net losses each year since our inception. As of
March 31, 2018, we had an accumulated deficit of $37.4 million and
working capital of $0.4 million.
As of March 31, 2018, we had approximately $4.9 million in cash.
Although no assurances can be given, we currently plan to raise
additional capital through the sale of equity or debt securities.
We expect, however, that our existing capital resources, revenue
from sales of our products and upcoming new product launches and
sales milestone payments from the commercial partners signed for
our products, and equity instruments available to pay certain
vendors and consultants, will be sufficient to allow us to continue
our operations, commence the product development process and launch
selected products through at least the next 12 months. In
addition, our CEO, who is also a significant shareholder, has
deferred the remaining payment of his salary earned through June
30, 2016 totaling $1.5 million for at least the next 12
months.
Our actual needs will depend on numerous factors, including timing
of introducing our products to the marketplace, our ability to
attract additional Ex-U.S. distributors for our products and our
ability to in-license in non-partnered territories and/or develop
new product candidates. In addition, we continue to seek new
licensing agreements from third-party vendors to commercialize our
products in territories outside the U.S., which could result in
upfront, milestone, royalty and/or other payments.
We currently intend to raise additional capital through the sale of
debt or equity securities to provide additional working capital,
for further expansion and development of our business, and to meet
current obligations, although no assurances can be given. If
we issue equity or convertible debt securities to raise additional
funds, our existing stockholders may experience substantial
dilution, and the newly issued equity or debt securities may have
more favorable terms or rights, preferences and privileges senior
to those of our existing stockholders. If we raise funds by
incurring additional debt, we may be required to pay significant
interest expense and our leverage relative to our earnings or to
our equity capitalization may increase. Obtaining commercial loans,
assuming they would be available, would increase our liabilities
and future cash commitments and may impose restrictions on our
activities, such as financial and operating covenants. Further, we
may incur substantial costs in pursuing future capital and/or
financing transactions, including investment banking fees, legal
fees, accounting fees, printing and distribution expense and other
costs. We may also be required to recognize non-cash expense in
connection with certain securities we may issue, such as
convertible notes and warrants, which would adversely impact our
financial results. We may be unable to obtain financing when
necessary as a result of, among other things, our performance,
general economic conditions, conditions in the pharmaceuticals
industries, or our operating history. In addition, the fact that we
are not and have never been profitable could further impact the
availability or cost to us of future financings. As a result,
sufficient funds may not be available when needed from any source
or, if available, such funds may not be available on terms that are
acceptable to us. If we are unable to raise funds to satisfy our
capital needs when needed, then we may need to forego pursuit of
potentially valuable development or acquisition opportunities, we
may not be able to continue to operate our business pursuant to our
business plan, which would require us to modify our operations to
reduce spending to a sustainable level by, among other things,
delaying, scaling back or eliminating some or all of our ongoing or
planned investments in corporate infrastructure, business
development, sales and marketing and other activities, or we may be
forced to discontinue our operations entirely.
The Company’s principle debt instruments include the
following:
October and December 2017 Notes Payable
On October 17, 2017, October 20, 2017 and December 4, 2017, we
entered into a securities purchase agreement with two unrelated
third-party investors in which the investors loaned us gross
proceeds of $500,000 in October 2017 and $500,000 in December 2017
pursuant to 0% promissory notes. The notes have an OID
of $200,000 and require nine payments of $66,667 in principal per
month through July 2018 and twelve payments of $50,000 in principal
per month through December 2018. The notes bear no interest
per annum. In connection with the notes, we issued the investors
restricted shares of common stock totaling 600,000 in December
2017. In March 2018, we entered into a securities exchange
agreement with one of the note holders. In connection with the
securities exchange agreement, we issued a total of 2,250,000
shares of common stock in exchange for the settlement of principal
due under the note payable totaling $166,667. The remaining
principal balance under these notes as of March 31, 2018 is
$583,333.
On December 13, 2017, we entered into a securities purchase
agreement with an unrelated third-party investor in which the
investor loaned us gross proceeds of $350,000 pursuant to a 5%
promissory note. The note has an OID of $40,000, bears
interest at 5% per annum and requires principal and interest
payments of $139,750, $133,250 and $131,625 on June 15, 2018,
September 15, 2018 and December 15, 2018, respectively. In
connection with the note, we issued the investor restricted shares
of common stock totaling 1,000,000 in December 2017. The remaining
principal balance under this note is $390,000 at March 31,
2018.
2018 Notes Payable
In the first quarter of 2018, we entered into a securities purchase
agreement with three unrelated third-party investors in which the
investors loaned us gross proceeds of $1,227,500. The
promissory notes have an OID of $269,375 and bear interest at
the rate of 0% per annum. The principal amount of $1,496,875 is to
be repaid in twelve equal monthly installments. Monthly
installments of $68,490 began in February 2018 and are due through
January 2019 and monthly installments of $56,250 begin in April
2018 and are due through March 2019. In connection with the
promissory notes, we issued 1,282,000 restricted shares of common
stock to the investors. The remaining principal balance under these
notes is $1,359,896 at March 31, 2018.
In February and March 2018, we entered into securities purchase
agreements with two unrelated third-party investors in which the
investors loaned us gross proceeds of $650,000 pursuant to 5%
promissory notes. The notes have an OID of $70,000 and require
payment of $720,000 in principal. The notes bear interest at
the rate of 5% per annum and the principal amount and interest are
payable at maturity on October 28, 2018 for the note issued in
February 2018 and in three installments on October 1, 2018, January
1, 2019 and April 1, 2019 for the note issued in March 2018. In
connection with the notes, we issued the investors restricted
shares of common stock totaling 1,485,000. The remaining principal
balance under these notes is $720,000 at March 31,
2018.
Net Cash Flows
|
|
Three Months Ended March 31, 2018
|
Three Months Ended March 31, 2017
|
|
Net
cash used in operating activities
|
$(663,138)
|
$(495,635)
|
|
Net
cash used in investing activities
|
(147,922)
|
(2,256)
|
|
Net
cash provided by financing activities
|
4,169,997
|
2,043,310
|
|
Net
change in cash
|
3,358,937
|
1,545,419
|
|
Cash
at beginning of period
|
1,564,859
|
829,933
|
|
Cash
at end of period
|
$4,923,796
|
$2,375,352
|
Operating Activities
For the
three months ended March 31, 2018, cash used in operating
activities was approximately $0.7 million, consisting primarily of
the net loss for the period of approximately $1.8 million, which
was primarily offset by non-cash common stock, restricted stock
units and stock options issued for services and compensation of
approximately $115,000, amortization of debt discount of $229,000,
loss on debt extinguishment of $256,000, and amortization of
intangible assets of $157,000. Additionally, working capital
changes consisted of cash increases of approximately $0.4 million
related to a decrease in prepaid expense and other current assets
of approximately $30,000, a decrease in inventories of $77,000,
$170,000 related to an increase in accrued compensation, an
increase related to deferred revenue and customer deposits of
$118,000 and $122,000 related to an increase in accounts payable
and accrued expense. The increase in net cash used in operating
activities from 2017 was mainly due to expanding our operations,
including hiring additional personnel, commercialization and
marketing activities related to our newly launched products in 2018
and 2017 and payment in the first quarter of 2018 for the purchase
of our initial batch of FlutiCare®.
Investing Activities
For the
three months ended March 31, 2018, cash used in investing
activities was approximately $148,000 which consisted of the
purchase of property and equipment for our new corporate office
location compared to approximately $2,000 for 2017.
Financing Activities
For the
three months ended March 31, 2018, cash provided by financing
activities was approximately $4.2 million, consisting primarily of
the net proceeds from the exercise of Series B Warrants of $2.8
million and notes payable of $1.9 million, offset by the repayment
of notes payable and short-term loans payable of
$541,000. Cash provided by financing activities in 2017 was
primarily related to the net proceeds
from the public equity offering in March 2017 of $3.3 million and
notes payable of $150,000, offset by the repayment of convertible
debentures of approximately $1.2 million, notes payable of $68,000,
and the prepayment penalty on the repayment of the convertible
debentures of $0.1 million.
Critical Accounting Policies and Estimates
On January 1, 2018, we adopted Financial Accounting Standards Board
(“FASB”) ASU No. 2017-11, Earnings Per Share (Topic
260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for
Certain Financial Instruments with Down Round
Features. This ASU requires
that when determining whether certain financial instruments should
be classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
As a result, a freestanding equity-linked financial instrument no
longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. For
freestanding equity classified financial instruments, the
amendments require entities that present earnings per share to
recognize the effect of the down round feature when it is
triggered. That effect is treated as a dividend and as a reduction
of income available to common shareholders in basic earnings per
share. As a result of the adoption of this ASU, we recorded a
cumulative-effect adjustment to the consolidated statement of
financial position as of January 1, 2018 of $58,609 for the
warrants previously classified as a derivative liability due to a
down round provision included in the terms of the warrant
agreement. Therefore, the cumulative-effect adjustment was recorded
as a reduction in accumulated deficit and derivative liabilities in
the accompanying condensed consolidated balance sheet as of January
1, 2018. The adoption of this ASU did not have an impact
on our condensed consolidated results of
operations.
On January 1, 2018, we adopted FASB Accounting Standards
Codification (“ASC”) Topic
606, Revenue
from Contracts with Customers (“ASC 606”). The new guidance sets forth a new five-step
revenue recognition model which replaces the prior revenue
recognition guidance in its entirety and is intended to eliminate
numerous industry-specific pieces of revenue recognition guidance
that have historically existed in U.S. GAAP. The underlying
principle of the new standard is that a business or other
organization will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
what it expects to receive in exchange for the goods or services.
The standard also requires more detailed disclosures and provides
additional guidance for transactions that were not addressed
completely in the prior accounting guidance.
We reviewed all contracts at the date of initial application and
elected to use the modified retrospective transition method, where
the cumulative effect of the initial application is recognized as
an adjustment to opening retained earnings at January 1, 2018.
Therefore, comparative prior periods have not been adjusted and
continue to be reported under FASB ASC Topic 605, Revenue
Recognition, (“ASC 605”). The adoption of the new
revenue recognition guidance was immaterial to our condensed
consolidated statements of operations, balance sheet, and cash
flows as of and for the three months ended March 31,
2018.
Our principal activities from which we generate our revenue are
product sales. We have one reportable segment of
business.
Revenue is measured based on consideration specified in a contract
with a customer. A contract with a customer exists when we enter
into an enforceable contract with a customer. The contract is based
on either the acceptance of standard terms and conditions on the
websites for e-commerce customers and via telephone with our
third-party call center for our print media and direct mail
customers, or the execution of terms and conditions contracts with
retailers and wholesalers. These contracts define each party's
rights, payment terms and other contractual terms and conditions of
the sale. Consideration is typically paid prior to shipment via
credit card when our products are sold direct to consumers or
approximately 30 days from the time control is transferred when
sold to wholesalers, distributors and retailers. We apply judgment
in determining the customer’s ability and intention to pay,
which is based on a variety of factors including the
customer’s historical payment experience and, in some
circumstances, published credit and financial information
pertaining to the customer.
A performance obligation is a promise in a contract to transfer a
distinct product to the customer, which for us is transfer of
over-the-counter drug and consumer care products to our customers.
Performance obligations promised in a contract are identified based
on the goods that will be transferred to the customer that are both
capable of being distinct and are distinct in the context of the
contract, whereby the transfer of the goods is separately
identifiable from other promises in the contract. We have concluded
the sale of bottled finished goods and related shipping and
handling are accounted for as the single performance
obligation.
The transaction price of a contract is allocated to each distinct
performance obligation and recognized as revenue when or as the
customer receives the benefit of the performance obligation. The
transaction price is determined based on the consideration to which
we will be entitled to receive in exchange for transferring goods
to the customer. We issue refunds to e-commerce and print media
customers, upon request, within 30 days of delivery. We
estimate the amount of potential refunds at each reporting period
using a portfolio approach of historical data, adjusted for changes
in expected customer experience, including seasonality and changes
in economic factors. For retailers, distributors and wholesalers,
we do not offer a right of return or refund and revenue is
recognized at the time products are shipped to customers. In all
cases, judgment is required in estimating these reserves. Actual
claims for returns could be materially different from the
estimates.
We recognize revenue when we satisfy a performance obligation in a
contract by transferring control over a product to a customer when
product is shipped. Taxes assessed by a governmental authority that
are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by us from a
customer, are excluded from revenue. Shipping and handling costs
associated with outbound freight after control over a product has
transferred to a customer are accounted for as a fulfillment cost
and are included in cost of product sales.
We enter into exclusive distributor and license agreements that are
within the scope of ASC Topic 606. The license agreements we
enter into normally generate three separate components of revenue:
1) an initial nonrefundable payment due on signing or when certain
specific conditions are met; 2) royalties that are earned on an
ongoing basis as sales are made or a pre-agreed transfer price
and 3) sales-based milestone payments that are earned when
cumulative sales reach certain levels. Revenue from the initial
nonrefundable payments or licensing fee is recognized when all
required conditions are met. If the consideration for the initial
license fee is for the right to sell the licensed product in the
respective territory with no other required conditions to be met,
such type of nonrefundable license fee arrangement for the right to
sell the licensed product in the territory is recognized ratably
over the term of the license agreement. For arrangements with licenses that include
sales-based royalties, including sales-based milestone payments
based on the level of sales, and the license is deemed to be the
predominant item to which the royalties relate, we recognize
royalty revenue and sales-based milestones at the later of (i) when
the related sales occur, or (ii) when the performance obligation to
which the royalty has been allocated has been satisfied. The
achievement of the sales-based milestone underlying the payment to
be received predominantly relates to the licensee’s
performance of future commercial activities.
For the three months ended March 31, 2018, there were no other
material changes to the “Critical Accounting Policies”
discussed in Part II, Item 7 (Management’s Discussion and
Analysis of Financial Condition and Results of Operations) of our
Annual Report on Form 10-K for the year ended December 31
2017.
Off- Balance Sheet Arrangements
None.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements
included in this Quarterly Report.
|
ITEM 3.
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not applicable.
Evaluation of disclosure controls and procedures.
As of March 31, 2018, we evaluated, with the participation of our
principal executive officer and principal financial officer, the
effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")).
Based on that evaluation, our principal executive officer and
principal financial officer concluded that, as of March 31, 2018,
our disclosure controls and procedures are designed at a reasonable
assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms, and that such information is accumulated and
communicated to our management, including chief executive officer
and vice president, finance, as appropriate to allow timely
decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, but not
absolute, assurance that the objectives of the disclosure controls
and procedures are met. The design of any disclosure control and
procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all
potential future conditions.
Changes in internal control over financial reporting.
During the quarter ended March 31, 2018, there were no changes in
our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II—OTHER INFORMATION
|
ITEM 1.
|
LEGAL PROCEEDINGS
|
James L. Yeager, Ph.D., and Midwest Research Laboratories, LLC v.
Innovus Pharmaceuticals, Inc. On January 18, 2018, Dr. Yeager and Midwest
Research Laboratories (the “Plaintiffs”) filed a
complaint in the Illinois Northern District Court in Chicago,
Illinois, which Plaintiffs amended on February 26, 2018
(“Amended Complaint”). The Amended Complaint
alleges that the Company violated Dr. Yeager’s right of
publicity and made unauthorized use of his name, likeness and
identity in advertising materials for its product Sensum+®.
Plaintiffs seek actual and punitive damages, costs and
attorney’s fees, an injunction and corrective advertising. We
intend to file a response to the Amended Complaint by May 21, 2018.
We believe that the Plaintiffs’ allegations and claims are
wholly without merit, and we intend to defend the case vigorously
and assert counterclaims against the Plaintiffs. More
specifically, we believe that we secured and paid for all of the
rights claimed by Dr. Yeager from his company Centric Research
Institute (“CRI”) pursuant to agreements with CRI (the
“CRI Agreements”) and that CRI has indemnification
obligations under the CRI Agreements for all expenses and losses
associated with the claims made by the
Plaintiffs.
From time to time, in addition to the matter identified above, we
may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. Litigation is subject to
inherent uncertainties, and an adverse result in the matter
identified above or other matters may harm our
business.
The risks described in Part I, Item 1A, Risk
Factors, in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2017, could
materially and adversely affect our business, financial condition
and results of operations. These risk factors do not identify all
of the risks that we face. Our business, financial condition and
results of operations could also be affected by factors that are
not presently known to us or that we currently consider to be
immaterial. There have been no material changes to the “Risk
Factors” section included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2017.
|
ITEM 2.
|
UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS
|
Unregistered Sales of Equity Securities
For the three months ended March 31, 2018, we issued 256,486 shares
of our common stock valued at $21,417 in exchange for services
under existing consulting and service agreements with third
parties.
For the three months ended March 31, 2018, a certain note
payable holder elected to exchange $166,667 in principal into
2,250,000 shares of common stock.
In the first quarter of 2018, we entered into a securities purchase
agreement with three unrelated third-party investors in which the
investors loaned us gross proceeds of $1,227,500. In
connection with the promissory notes, we issued 1,282,000
restricted shares of common stock to the investors.
In February and March 2018, we entered into securities purchase
agreements with two unrelated third-party investors in which the
investors loaned us gross proceeds of $650,000 pursuant to 5%
promissory notes. In connection with the notes, we issued the
investors restricted shares of common stock totaling
1,485,000.
In connection with the notes payable, we issued 621,317 restricted
shares of common stock in January 2018 and 314,737 restricted
shares of common stock in March 2018 to a third-party consultant.
The fair value of the restricted shares of common stock issued in
January 2018 was $67,500 and $55,000 in March 2018.
Per the terms of the engagement letter with H.C. Wainwright &
Co. (“HCW”) in connection with the public offering in
March 2017 and as a result of the Series B Warrant exercises in the
first quarter of 2018, we issued a warrant to purchase 862,917
shares of common stock at an exercise price of $0.1875 per share
(125% of the price of the common stock sold in the public offering
in March 2017) which expires on March 21, 2023 to HCW. The fair
value of the warrants issued to HCW totaled $136,729.
Each of the securities were offered and sold in transactions exempt
from registration under the Securities Act, in reliance on Section
4(a)(2) thereof and Rule 506 of Regulation D thereunder and/or
Section 3(a)(9) of the Securities Act. Each of the investors
represented that it was an "accredited investor" as defined in
Regulation D under the Securities Act.
Use of Proceeds from the Sale of Registered Securities
On March 15, 2017, our registration statement on Form S-1 (File
No. 333-215851) was declared effective by the SEC for our
public offering pursuant to which we sold an aggregate of
25,666,669 shares of our common stock at an offering price of $0.15
per share. There has been no material change in our use of
proceeds from our public offering as described in our final
prospectus filed with the SEC on March 17, 2017 pursuant to
Rule 424(b).
|
ITEM 3.
|
DEFAULTS UPON SENIOR
SECURITIES
|
None.
Not applicable.
None.
See the Exhibit Index immediately following the signature page of
this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
|
|
Innovus Pharmaceuticals, Inc.
|
|
|
(Registrant)
|
|
|
|
|
Date:
May 14, 2018
|
/s/ Bassam Damaj
|
|
|
|
Bassam Damaj, Ph.D.
President, Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
/s/
Ryan Selhorn
|
|
|
|
Ryan
Selhorn, CPA
Vice
President, Chief Financial Officer
(Principal
Financial Officer)
|
|
Exhibit No.
|
|
Description
|
|
|
|
Employment Agreement, dated April 27, 2018 by and between Innovus
Pharmaceuticals, Inc. and Ryan Selhorn (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed April 19, 2018)
|
|
|
|
Certification
of Bassam Damaj, Ph.D., principal executive officer, pursuant to
Rule 13-a-14(a) or 15d-14(a) of the Securities and Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
Certification of Ryan Selhorn, CPA, principal financial officer,
pursuant to Rule 13-a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
Certification of Bassam Damaj, Ph.D., principal executive officer,
and Ryan Selhorn, CPA, principal financial officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
101.INS*
|
|
XBRL
Instance Document
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB*
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
**
This
certification is being furnished solely to accompany this report
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and is not being filed for
purposes of Section 18 of the Securities Exchange Act of 1934 and
is not to be incorporated by reference into any filing of the
Registrant, whether made before or after the date hereof,
regardless of any general incorporation by reference language of
such filing.