Notes
to the Consolidated Financial Statements
December
31, 2016 and 2015
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
Innovus Pharmaceuticals, Inc., together with its
subsidiaries (collectively referred to as “Innovus”,
“we”, “our”, “us” or the
“Company”)
is a Nevada formed, San Diego,
California-based emerging commercial stage pharmaceutical company
delivering over-the-counter medicines and consumer care products
for men’s and women’s health and respiratory
diseases.
We generate revenue
from 17 commercial products in the United States, including six of
these commercial products in multiple countries around the world
through our commercial partners. Our commercial product portfolio
includes (a) Beyond Human® Testosterone Booster, (b) Beyond
Human® Growth Agent, (c) Zestra® for female arousal, (d)
EjectDelay® for premature ejaculation, (e) Sensum+® for
reduced penile sensitivity, (f) Zestra Glide®, (g)
Vesele® for promoting sexual health, (h) Androferti® to
support overall male reproductive health and sperm quality, (i)
RecalMax™ for cognitive brain health (j) Beyond Human®
Green Coffee Extract (k) Beyond Human® Vision Formula, (l)
Beyond Human® Blood Sugar, (m) Beyond Human® Colon
Cleans, (n) Beyond Human® Ketones, (o) Beyond Human®
Krill Oil (p) Beyond Human® Omega 3 Fish Oil and (q)
Urivarx™ for overactive bladder and urinary incontinence.
While we generate revenue from the sale of our commercial products,
most revenue is currently generated by Vesele®, Zestra®,
Zestra® Glide, RecalMax™, Sensum +®, Urivarx™
and Beyond Human® Testosterone Booster.
Pipeline Products
Fluticare™
(fluticasone propionate nasal spray).
Innovus acquired the worldwide
rights to market and sell the Fluticare™ brand
(fluticasone propionate nasal spray) and the related manufacturing
agreement from Novalere FP in February 2015. The Over-the-Counter
(“OTC”) Abbreviated New Drug Application
(“ANDA”) filed at the end of 2014 by the
manufacturer with the U.S. Food and Drug Administration
(“FDA”), subject to FDA approval, may allow us to
market and sell Fluticare™ OTC. An ANDA is an application for
a U.S. generic drug approval for an existing licensed medication or
approved drug.
AllerVarx™
.
On December 15, 2016, we entered into an exclusive license and
distribution agreement with NTC S.r.l (Italy) to distribute and
commercialize AllerVarx
™
in the U.S. and Canada.
AllerVarx
™
is a
proprietary modified release bilayer tablet for the management of
allergic rhinitis. We expect to launch this product in the first
half of 2017.
Xyralid
™
.
Xyralid™ is an OTC FDA monograph compliant drug containing
the active drug ingredient lidocaine and indicated for the relief
of the pain and symptoms caused by hemorrhoids. We expect to launch
this product in the first half of 2017.
Urocis™
XR
.
On October 27, 2015, we entered into an exclusive distribution
agreement with Laboratorios Q Pharma (Spain) to distribute and
commercialize Urocis™ XR in the U.S. and Canada.
Urocis™ XR is a proprietary extended release of Vaccinium
Marcocarpon (cranberry) shown to provide 24-hour coverage in the
body in connection with
urinary tract
infections in women
. We expect to launch this product in the
second half of 2017.
AndroVit™
.
On October 27, 2015, we entered into an exclusive distribution
agreement with Laboratorios Q Pharma (Spain) to distribute and
commercialize AndroVit™ in the U.S. and Canada.
AndroVit™ is a proprietary supplement to support overall
prostate and male sexual health currently marketed in Europe.
AndroVit™ was specifically formulated with ingredients known
to support normal prostate health and vitality and male sexual
health. We expect to launch this product in the second half of
2017.
Change
in Accounting Principle
On January 1, 2016,
we retrospectively adopted Financial Accounting Standards Board
(“FASB”) Accounting Standards Update
(“ASU”) No. 2015-03,
Interest - Imputation of Interest (Subtopic
835-30): Simplifying the Presentation of Debt Issuance
Costs
. This ASU requires that debt issuance costs be
presented as a direct reduction from the carrying amount of debt.
As a result of the adoption of this ASU, the consolidated balance
sheet at December 31, 2015 was adjusted to reflect the
reclassification of $97,577 from deferred financing costs, net to
convertible debentures, net. The adoption of this ASU
did not have an impact on our consolidated results of
operations.
Basis of Presentation and Principles of Consolidation
These
consolidated financial statements have been prepared by management
in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and include
all assets, liabilities, revenue and expense of us and our
wholly-owned subsidiaries: FasTrack Pharmaceuticals, Inc., Semprae
Laboratories, Inc. (“Semprae”) and Novalere, Inc.
(“Novalere”). All material intercompany transactions
and balances have been eliminated. Certain items have been
reclassified to conform to the current year
presentation.
Use of Estimates
The
preparation of these consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements
and the reported amounts of revenue and expense during the
reporting periods. Such management estimates include the allowance
for doubtful accounts, sales returns and chargebacks, realizability
of inventories, valuation of deferred tax assets, goodwill and
intangible assets, valuation of contingent acquisition
consideration, recoverability of long-lived assets and goodwill,
fair value of derivative liabilities and the valuation of
equity-based instruments and beneficial conversion
features. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under
the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
Liquidity
Our
operations have been financed primarily through proceeds from
convertible debentures and notes payable and revenue generated from
our products domestically and internationally by our
partners. These funds have provided us with the resources to
operate our business, sell and support our products, attract and
retain key personnel and add new products to our portfolio. We
have experienced net losses and negative cash flows from operations
each year since our inception. As of December 31, 2016, we
had an accumulated deficit of $29,135,749 and a working capital
deficit of $1,704,054.
We have raised funds through the issuance of debt
and the sale of common stock. We have also issued equity
instruments in certain circumstances to pay for services from
vendors and consultants. In December 2016, we raised $500,000 in
gross proceeds from the issuance of notes payable to three
investors and i
n June and July 2016, we raised $3,000,000 in
gross proceeds from the issuance of convertible debentures to eight
investors (see Note 5). In the event we do not pay the convertible
debentures upon their maturity, or after the remedy period, the
principal amount and accrued interest on the convertible debentures
is convertible at our option to common stock at the lower of the
fixed conversion price or 60% of the volume weighted average price
(“VWAP”) during the ten consecutive trading day period
preceding the date of conversion. In February 2016, we also raised
$550,000 in funds from a note payable with net proceeds of $242,500
to us, which was used to pay for the asset acquisition of Beyond
Human, LLC (see Note 5), a Texas limited liability company
(“Beyond Human®”) and for working capital
purposes.
As of December 31, 2016, we had $829,933 in cash
and $221,243 of cash collections held by our third-party merchant
service provider, which is included in prepaid expense and other
current assets in the accompanying consolidated balance sheet.
During the year ended December 31, 2016,
we had net cash
used in operating activities of $1,784,258 primarily from
purchasing inventory to support our growing revenue and certain
prepayments of annual expenses. We expect that our existing capital
resources, revenue from sales of our products and upcoming sales
milestone payments from the commercial partners signed for our
products, and equity instruments available to pay certain vendors
and consultants, will be sufficient to allow us to continue our
operations, commence the product development process and launch
selected products through at least the next 12 months. In
addition, our CEO, who is also a significant shareholder, has
deferred the payment of his salary earned thru June 30, 2016 for at
least the next 12 months. Our actual needs will depend on numerous
factors, including timing of introducing our products to the
marketplace, our ability to attract additional Ex-U.S. distributors
for our products and our ability to in-license in non-partnered
territories and/or develop new product candidates. Although no
assurances can be given, we currently intend to raise additional
capital through the sale of debt or equity securities to provide
additional working capital, pay for further expansion and
development of our business, and to meet current obligations. Such
capital may not be available to us when we need it or on terms
acceptable to us, if at all.
Fair Value Measurement
Our
financial instruments are cash, accounts receivable, accounts
payable, accrued liabilities, derivative liabilities, contingent
consideration and debt. The recorded values of cash, accounts
receivable, accounts payable and accrued liabilities approximate
their fair values based on their short-term nature. The
recorded fair value of the convertible debentures, net of debt
discount, is based upon the relative fair value calculation of the
common stock and warrants issued in connection with the convertible
debentures and the fair value of the embedded conversion feature.
The fair values of the warrant derivative liabilities and embedded
conversion feature derivative liabilities are based upon the Black
Scholes Option Pricing Model (“Black-Scholes”) and the
Path-Dependent Monte Carlo simulation model calculations,
respectively, and are a Level 3 measurement (see Note 9). The fair
value of the contingent acquisition consideration is based upon the
discounted future payments due under the terms of the agreements
and is a Level 3 measurement (see Note 3). Based on
borrowing rates currently available to us, the carrying values of
the notes payable and convertible debentures approximate their
respective fair values.
We
follow a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1) and the
lowest priority to measurements involving significant unobservable
inputs (Level 3). The three levels of the fair value hierarchy
are as follows:
●
Level
1 measurements are quoted prices (unadjusted) in active markets for
identical assets or liabilities that we have the ability to access
at the measurement date.
●
Level
2 measurements are inputs other than quoted prices included in
Level 1 that are observable either directly or
indirectly.
●
Level
3 measurements are unobservable inputs.
Cash and Cash Equivalents
Cash
and cash equivalents consist of cash and highly liquid investments
with remaining maturities of three months or less when
purchased.
Concentration of Credit Risk, Major Customers and Segment
Information
Financial instruments that potentially subject us
to significant concentrations of credit risk consist primarily of
cash and accounts receivable. Cash held with financial
institutions may exceed the amount of insurance provided by the
Federal Deposit Insurance Corporation on such
deposits.
Accounts receivable consist primarily of
sales of Zestra® to U.S. based retailers and Ex-U.S. partners.
We also require a percentage of
payment in advance for product orders with our larger partners. We
perform ongoing credit evaluations of our customers and generally
do not require collateral.
Revenue consists
primarily of product sales and licensing rights to market and
commercialize our products. We had no customers that
accounted for 10% or greater of our total net revenue during the
year ended December 31, 2016. Three customers accounted for 62% of
total net accounts receivable as of December 31, 2016. We had three
customers that accounted for 43% of our total net revenue during
the year ended December 31, 2015 and two customers accounted for
73% of net accounts receivable as of December 31,
2015.
We categorize
revenue by geographic area based on selling location. All
operations are currently located in the U.S.; therefore,
over 90% of our sales are currently
within the U.S. The balance of the sales are to various other
countries.
All long-lived assets at December 31, 2016 and
2015 are located in the U.S.
We operate our
business on the basis of a single reportable segment, which is the
business of delivering over-the-counter medicines and consumer care
products for men’s and women’s health and respiratory
diseases. Our chief operating decision-maker is the Chief Executive
Officer, who evaluates us as a single operating
segment.
Concentration of Suppliers
We have manufacturing relationships with a number
of vendors or manufacturers for our products including:
Sensum+®, EjectDelay®, Vesele®,
RecalMax
™
,
UriVarx
™
,
Androferti®, the Zestra® line of products and
Beyond Human
® line of
products. Pursuant to these relationships, we purchase
products through purchase orders with our
manufacturers.
Inventories
Inventories are
stated at the lower of cost or market. Cost is determined on a
first-in, first-out basis. We evaluate the carrying value of
inventories on a regular basis, based on the price expected to be
obtained for products in their respective markets compared with
historical cost. Write-downs of inventories are considered to be
permanent reductions in the cost basis of inventories.
We also regularly
evaluate our inventories for excess quantities and obsolescence
(expiration), taking into account such factors as historical and
anticipated future sales or use in production compared to
quantities on hand and the remaining shelf life of products and raw
materials on hand. We establish reserves for excess and obsolete
inventories as required based on our analyses.
Property and Equipment
Property
and equipment, including software, are recorded at historical cost
less accumulated depreciation. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets which range from three to ten years. The initial cost of
property and equipment and software consists of its purchase price
and any directly attributable costs of bringing the asset to its
working condition and location for its intended use.
Business Combinations
We account for business combinations by
recognizing the assets acquired, liabilities assumed, contractual
contingencies, and contingent consideration at their fair values on
the acquisition date. The final purchase price may be adjusted up
to one year from the date of the acquisition. Identifying the fair
value of the tangible and intangible assets and liabilities
acquired requires the use of estimates by management and
was based upon currently available data.
Examples of
critical estimates in valuing certain of the intangible assets we
have acquired or may acquire in the future include but are not
limited to future expected cash flows from product sales, support
agreements, consulting contracts, other customer contracts, and
acquired developed technologies and patents and discount rates
utilized in valuation estimates.
Unanticipated
events and circumstances may occur that may affect the accuracy or
validity of such assumptions, estimates or actual results.
Additionally, any change in the fair value of the
acquisition-related contingent consideration subsequent to the
acquisition date, including changes from events after the
acquisition date, such as changes in our estimate of relevant
revenue or other targets, will be recognized in earnings in the
period of the estimated fair value change. A change in fair value
of the acquisition-related contingent consideration or the
occurrence of events that cause results to differ from our
estimates or assumptions could have a material effect on the
consolidated statements of operations, financial position and cash
flows in the period of the change in the estimate.
Goodwill and Intangible Assets
We test our goodwill for impairment annually, or
whenever events or changes in circumstances indicates an impairment
may have occurred, by comparing our reporting unit's carrying value
to its implied fair value.
The goodwill impairment test
consists of a two-step process as follows:
Step 1. We compare
the fair value of each reporting unit to its carrying amount,
including the existing goodwill. The fair value of each reporting
unit is determined using a discounted cash flow valuation analysis.
The carrying amount of each reporting unit is determined by
specifically identifying and allocating the assets and liabilities
to each reporting unit based on headcount, relative revenue or
other methods as deemed appropriate by management. If the carrying
amount of a reporting unit exceeds its fair value, an indication
exists that the reporting unit’s goodwill may be impaired and
we then perform the second step of the impairment test. If the fair
value of a reporting unit exceeds its carrying amount, no further
analysis is required.
Step 2. If further
analysis is required, we compare the implied fair value of the
reporting unit’s goodwill, determined by allocating the
reporting unit’s fair value to all of its assets and its
liabilities in a manner similar to a purchase price allocation, to
its carrying amount. If the carrying amount of the reporting
unit’s goodwill exceeds its fair value, an impairment loss
will be recognized in an amount equal to the excess.
Impairment
may result from, among other things, deterioration in the
performance of the acquired business, adverse market conditions,
adverse changes in applicable laws or regulations and a variety of
other circumstances. If we determine that an impairment has
occurred, it is required to record a write-down of the carrying
value and charge the impairment as an operating expense in the
period the determination is made. In evaluating the recoverability
of the carrying value of goodwill, we must make assumptions
regarding estimated future cash flows and other factors to
determine the fair value of the acquired assets. Changes in
strategy or market conditions could significantly impact those
judgments in the future and require an adjustment to the recorded
balances.
The goodwill was recorded as part of the
acquisition of Semprae that occurred on December 24, 2013, the
acquisition of Novalere that occurred on February 5, 2015 and the
asset acquisition of Beyond Human
®
that closed on March 1, 2016. During the year
ended December 31, 2015, we recorded $759,428 of goodwill related
to the acquisition of Novalere as an income tax benefit and also
recorded an impairment of $759,428 against this benefit. There was
no impairment of goodwill for the year ended December 31,
2016.
Intangible
assets with finite lives are amortized on a straight-line basis
over their estimated useful lives, which range from one to fifteen
years. The useful life of the intangible asset is evaluated each
reporting period to determine whether events and circumstances
warrant a revision to the remaining useful life.
Long-Lived Assets
We review our long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. We
evaluate assets for potential impairment by comparing estimated
future undiscounted net cash flows to the carrying amount of the
assets. If the carrying amount of the assets exceeds the estimated
future undiscounted cash flows, impairment is measured based on the
difference between the carrying amount of the assets and fair
value.
Assets to be disposed of would be separately
presented in the consolidated balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and
are no longer depreciated. The assets and liabilities of a disposal
group classified as held-for-sale would be presented separately in
the appropriate asset and liability sections of the consolidated
balance sheet, if material. During the years ended December 31,
2016 and 2015, we did not recognize any impairment of our
long-lived assets.
Debt Issuance Costs
Debt issuance costs
represent costs incurred in connection with the issuance of the
convertible debentures during the third quarter of 2015 and the
note payable and convertible debentures during the year ended
December 31, 2016. Debt issuance costs related to the issuance of
the convertible debentures and note payable are recorded as a
reduction to the debt balances in the accompanying consolidated
balance sheets. The debt issuance costs are being
amortized to interest expense over the term of the financing
instruments using the effective interest method.
Beneficial Conversion Feature
If
a conversion feature of convertible debt is not accounted for
separately as a derivative instrument and provides for a rate of
conversion that is below market value, this feature is
characterized as a beneficial conversion feature
(“BCF”). A BCF is recorded by us as a debt discount. We
amortize the discount to interest expense over the life of the debt
using the effective interest rate method.
Derivative Liabilities
Certain of our
embedded conversion features on debt and issued and outstanding
common stock purchase warrants, which have exercise price reset
features and other anti-dilution protection clauses, are treated as
derivatives for accounting purposes. The common stock purchase
warrants were not issued with the intent of effectively hedging any
future cash flow, fair value of any asset, liability or any net
investment in a foreign operation. The warrants do not qualify for
hedge accounting, and as such, all future changes in the fair value
of these warrants are recognized currently in earnings until such
time as the warrants are exercised, expire or the related rights
have been waived. These common stock purchase warrants do not trade
in an active securities market, and as such, we estimate the fair
value of these warrants using a Probability Weighted Black-Scholes
Model and the embedded conversion features using a Path-Dependent
Monte Carlo Simulation Model (see Note 9).
Debt Extinguishment
Any
gain or loss associated with debt extinguishment is recorded in the
period in which the debt is considered extinguished. Third party
fees incurred in connection with a debt restructuring accounted for
as an extinguishment are capitalized. Fees paid to third parties
associated with a term debt restructuring accounted for as a
modification are expensed as incurred. Third party and creditor
fees incurred in connection with a modification to a line of credit
or revolving debt arrangements are considered to be associated with
the new arrangement and are capitalized.
Income Taxes
Income
taxes are provided for using the asset and liability method whereby
deferred tax assets and liabilities are recognized using current
tax rates on the difference between the financial statement
carrying amounts and the respective tax basis of the assets and
liabilities. We provide a valuation allowance on deferred tax
assets when it is more likely than not that such assets will not be
realized.
We
recognize the benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain the
position following an audit. For tax positions meeting this
standard, the amount recognized in the consolidated financial
statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the
relevant tax authority. There were no uncertain tax positions
at December 31, 2016 and 2015.
Revenue Recognition and Deferred Revenue
We generate revenue
from product sales and the licensing of the rights to market and
commercialize our products.
We recognize
revenue in accordance with FASB Accounting Standards Codification
(“ASC”) 605,
Revenue
Recognition
. Revenue is recognized when all of the following
criteria are met: (1) persuasive evidence of an arrangement
exists; (2) title to the product has passed or services have
been rendered; (3) price to the buyer is fixed or determinable
and (4) collectability is reasonably assured.
Product Sales
: We ship products
directly to consumers pursuant to phone or online orders and to our
wholesale and retail customers pursuant to purchase agreements or
sales orders. Revenue from sales transactions where the buyer
has the right to return the product is recognized at the time of
sale only if (1) the seller’s price to the buyer is
substantially fixed or determinable at the date of sale,
(2) the buyer has paid the seller, or the buyer is obligated
to pay the seller and the obligation is not contingent on resale of
the product, (3) the buyer’s obligation to the seller
would not be changed in the event of theft or physical destruction
or damage of the product, (4) the buyer acquiring the product
for resale has economic substance apart from that provided by the
seller, (5) the seller does not have significant obligations
for future performance to directly bring about resale of the
product by the buyer and (6) the amount of future returns can
be reasonably estimated.
License Revenue
: The license agreements
we enter into normally generate three separate components of
revenue: 1) an initial payment due on signing or when certain
specific conditions are met; 2) royalties that are earned on an
ongoing basis as sales are made or a pre-agreed transfer price
and 3) sales-based milestone payments that are earned when
cumulative sales reach certain levels. Revenue from the initial
payments or licensing fee is recognized when all required
conditions are met. Royalties are recognized as earned based on the
licensee’s sales. Revenue from the sales-based milestone
payments is recognized when the cumulative revenue levels are
reached. The achievement of the sales-based milestone underlying
the payment to be received predominantly relates to the
licensee’s performance of future commercial activities. FASB
ASC 605-28,
Milestone
Method
, (“ASC 605-28”) is not used by us as
these milestones do not meet the definition of a milestone under
ASC 605-28 as they are sales-based and similar to a royalty and the
achievement of the sales levels is neither based, in whole or in
part, on our performance, a specific outcome resulting from our
performance, nor is it a research or development
deliverable.
Sales Allowances
We
accrue for product returns, volume rebates and promotional
discounts in the same period the related sale is
recognized.
Our
product returns accrual is primarily based on estimates of future
product returns over the period customers have a right of return,
which is in turn based in part on estimates of the remaining
shelf-life of products when sold to customers. Future product
returns are estimated primarily based on historical sales and
return rates. We estimate our volume rebates and promotional
discounts accrual based on its estimates of the level of inventory
of our products in the distribution channel that remain subject to
these discounts. The estimate of the level of products in the
distribution channel is based primarily on data provided by our
customers.
In
all cases, judgment is required in estimating these reserves.
Actual claims for rebates and returns and promotional discounts
could be materially different from the estimates.
We
provide a customer satisfaction warranty on all of our products to
customers for a specified amount of time after product
delivery. Estimated return costs are based on historical
experience and estimated and recorded when the related sales are
recognized. Any additional costs are recorded when incurred or
when they can reasonably be estimated.
The
estimated reserve for sales returns and allowances, which is
included in accounts payable and accrued expense, was approximately
$61,000 and $5,000 at December 31, 2016 and 2015,
respectively.
Cost of Product Sales
Cost
of product sales includes the cost of inventory, royalties and
inventory reserves. We are required to make royalty payments based
upon the net sales of three of our marketed products, Zestra®,
Sensum+® and Vesele®.
Advertising
Expense
Advertising costs,
which primarily includes print and online media advertisements, are
expensed as incurred and are included in sales and marketing
expense in the accompanying consolidated statements of operations.
Advertising costs were approximately $2.7 million and $3,000 for
the years ended December 31, 2016 and 2015,
respectively.
Research and Development Costs
Research
and development (“R&D”) costs, including research
performed under contract by third parties, are expensed as
incurred. Major components of R&D expense consists of
salaries and benefits, testing, post marketing clinical trials,
material purchases and regulatory affairs.
Stock-Based Compensation
We account for stock-based compensation in
accordance with FASB ASC 718,
Stock Based
Compensation
.
All
stock-based payments to employees and directors, including grants
of stock options, warrants, restricted stock units
(“RSUs”) and restricted stock, are recognized in the
consolidated financial statements based upon their estimated fair
values. We use Black-Scholes to estimate the fair value of
stock-based awards. The estimated fair value is determined at the
date of grant.
FASB ASC 718 requires
that stock-based compensation expense be based on awards that are
ultimately expected to vest. Stock-based compensation for the
years ended December 31, 2016 and 2015 have been reduced for
estimated forfeitures. When estimating forfeitures, voluntary
termination behaviors, as well as trends of actual option
forfeitures, are considered. To the extent actual forfeitures
differ from our current estimates, cumulative adjustments to
stock-based compensation expense are recorded.
Except
for transactions with employees and directors that are within the
scope of FASB ASC 718, all transactions in which goods or services
are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
Equity Instruments Issued to Non-Employees for
Services
Our accounting
policy for equity instruments issued to consultants and vendors in
exchange for goods and services follows FASB guidance. As such, the
value of the applicable stock-based compensation is periodically
remeasured and income or expense is recognized during the vesting
terms of the equity instruments. The measurement date for the
estimated fair value of the equity instruments issued is the
earlier of (i) the date at which a commitment for performance by
the consultant or vendor is reached or (ii) the date at which the
consultant or vendor’s performance is complete. In the case
of equity instruments issued to consultants, the estimated fair
value of the equity instrument is primarily recognized over the
term of the consulting agreement. According to FASB guidance, an
asset acquired in exchange for the issuance of fully vested,
nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor’s balance
sheet once the equity instrument is granted for accounting
purposes. Accordingly, we record the estimated fair value of
nonforfeitable equity instruments issued for future consulting
services as prepaid expense and other current assets in our
consolidated balance sheets.
Net Loss per Share
Basic net loss per share is computed by dividing
net loss by the weighted average number of common shares
outstanding
and vested but deferred RSUs during the period
presented
. Diluted net loss per
share is computed using the weighted average number of common
shares outstanding
and vested but deferred RSUs
during the periods plus the effect of dilutive
securities outstanding during the periods. For the years ended
December 31, 2016 and 2015, basic net loss per share is the same as
diluted net loss per share as a result of our common stock
equivalents being anti-dilutive. See Note 8 for more
details.
Recent Accounting Pronouncements
In January 2017,
the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
. The update
simplifies how an entity is required to test goodwill for
impairment by eliminating Step 2 from the goodwill impairment test.
Step 2 measures a goodwill impairment loss by comparing the implied
fair value of a reporting unit’s goodwill with the carrying
amount. This update is effective for annual and interim periods
beginning after December 15, 2019, and interim periods within that
reporting period. While we are still in the process of completing
our analysis on the impact this guidance will have on the
consolidated financial statements and related disclosures, we do
not expect the impact to be material.
In January 2017,
the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying
the Definition of a Business
. The update provides that when
substantially all the fair value of the assets acquired is
concentrated in a single identifiable asset or a group of similar
identifiable assets, the set is not a business. This update is
effective for annual and interim periods beginning after December
15, 2017, and interim periods within that reporting period. While
we are still in the process of completing our analysis on the
impact this guidance will have on the consolidated financial
statements and related disclosures, we do not expect the impact to
be material.
In August 2016, the
FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230) –
Classification of Certain Cash Receipts and Cash Payments
.
This ASU provides clarification regarding how certain cash receipts
and cash payments are presented and classified in the statement of
cash flows. This ASU addresses eight specific cash flow issues with
the objective of reducing the existing diversity in practice. The
issues addressed in this ASU that will affect us is classifying
debt prepayments or debt extinguishment costs and contingent
consideration payments made after a business combination. This
update is effective for annual and interim periods beginning after
December 15, 2017, and interim periods within that reporting
period. Early adoption is permitted. While we are still in the
process of completing our analysis on the impact this guidance will
have on the consolidated financial statements and related
disclosures, we do not expect the impact to be
material.
In March 2016, the FASB
issued ASU No. 2016-09,
Improvements
to Employee Share-Based Payment Accounting
, which amends ASC
Topic 718,
Compensation
- Stock Compensation
. The ASU includes
provisions intended to simplify various aspects related to how
share-based payments are accounted for and presented in the
financial statements. ASU 2016-09 is effective for public business
entities for annual reporting periods beginning after December 15,
2016, and interim periods within that reporting period. Early
adoption will be permitted in any interim or annual period, with
any adjustments reflected as of the beginning of the fiscal year of
adoption.
While we are still in the process of completing
our analysis on the impact this guidance will have on the
consolidated financial statements and related disclosures, we do
not expect the impact to be material.
In February 2016, the FASB issued its new lease
accounting guidance in Accounting Standards Update
(“ASU”) No. 2016-02,
Leases (Topic
842)
. Under the new guidance,
lessees will be required to recognize the following for all leases
(with the exception of short-term leases) at the commencement date:
A lease liability, which is a lessee’s obligation to make
lease payments arising from a lease, measured on a discounted
basis; and a right-of-use asset, which is an asset that represents
the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to
align, where necessary, lessor accounting with the lessee
accounting model and ASC 606,
Revenue from Contracts with
Customers
. The new lease
guidance simplified the accounting for sale and leaseback
transactions primarily because lessees must recognize lease assets
and lease liabilities. Lessees will no longer be provided with a
source of off-balance sheet financing. Public business entities
should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted. Lessees (for
capital and operating leases) must apply a modified retrospective
transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the
consolidated financial statements. The modified retrospective
approach would not require any transition accounting for leases
that expired before the earliest comparative period presented.
Lessees may not apply a full retrospective transition
approach.
While we are currently assessing the
impact ASU 2016-02 will have on the consolidated financial
statements, we expect the primary impact to the consolidated
financial position upon adoption will be the recognition, on a
discounted basis, of the minimum commitments on the consolidated
balance sheet under our sole noncancelable operating lease for our
facility in San Diego resulting in the recording of a right of use
asset and lease obligation. The current minimum commitment under
the noncancelable operating lease is disclosed in Note
11.
In November 2015, the FASB issued Accounting
Standards Update (ASU) No. 2015-17,
Balance Sheet Classification
of Deferred Taxes
. Current U.S.
GAAP requires an entity to separate deferred income tax liabilities
and assets into current and noncurrent amounts in a classified
statement of financial position. To simplify the presentation of
deferred income taxes, the amendments in this update require that
deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. The amendments in
this update apply to all entities that present a classified
statement of financial position. The current requirement that
deferred tax liabilities and assets of a tax-paying component of an
entity be offset and presented as a single amount is not affected
by the amendments in this update. The amendments in this update
will align the presentation of deferred income tax assets and
liabilities with International Financial Reporting Standards (IFRS)
and are effective for fiscal years after December 15, 2016,
including interim periods within those annual periods.
While
we are still in the process of completing our analysis on the
impact this guidance will have on the consolidated financial
statements and related disclosures, we do not expect the impact to
be material.
In September 2015,
the FASB issued ASU 2015-16,
Simplifying the Accounting for
Measurement-Period Adjustments,
which eliminates the
requirement to retrospectively adjust the consolidated financial
statements for measurement-period adjustments that occur in periods
after a business combination is consummated. Measurement period
adjustments are calculated as if they were known at the acquisition
date, but are recognized in the reporting period in which they are
determined. Additional disclosures are required about the impact on
current-period income statement line items of adjustments that
would have been recognized in prior periods if prior-period
information had been revised. The guidance is effective for annual
periods beginning after December 15, 2015 and is to be applied
prospectively to adjustments of provisional amounts that occur
after the effective date. Early application is permitted. The
adoption of this ASU during the year ended December 31, 2016 did
not have a material impact on our consolidated financial position
and results of operations.
In July 2015, the FASB issued ASU No.
2015-11
,
Inventory (Topic 330): Simplifying the Measurement of Inventory.
Topic 330
. Inventory, currently
requires an entity to measure inventory at the lower of cost or
market. Market could be replacement cost, net realizable value, or
net realizable value less an approximately normal profit margin.
The amendments apply to all other inventory, which includes
inventory that is measured using first-in, first-out (FIFO) or
average cost. An entity should measure in scope inventory at the
lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. The amendments in this Update more closely align
the measurement of inventory in U.S. GAAP with the measurement of
inventory in IFRS. For public business entities, the amendments are
effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The amendments
should be applied prospectively with earlier application permitted
as of the beginning of an interim or annual reporting
period.
While we are still in the process of completing our
analysis on the impact this guidance will have on the consolidated
financial statements and related disclosures, we do not expect the
impact to be material.
In August 2014, the FASB issued ASU
2014-15,
Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern.
This ASU 2014-15
describes how an entity should assess its ability to meet
obligations and sets rules for how this information should be
disclosed in the consolidated financial statements. The standard
provides accounting guidance that will be used along with existing
auditing standards. The ASU 2014-15 is effective for the annual
period ending after December 15, 2016. Early application is
permitted.
While we are still in the process of completing
our analysis on the impact this guidance will have on the
consolidated financial statements and related disclosures, we do
not expect the impact to be material.
In May 2014, the FASB issued ASU 2014-09,
Revenue from
Contracts with Customers.
This
updated guidance supersedes the current revenue recognition
guidance, including industry-specific guidance. The updated
guidance introduces a five-step model to achieve its core principal
of the entity recognizing revenue to depict the transfer of goods
or services to customers at an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. In August 2015, the FASB
issued ASU 2015-14 which deferred the effective date by one year
for public entities and others. The amendments in this ASU are
effective for interim and annual periods beginning after December
15, 2017 for public business entities, certain not-for-profit
entities, and certain employee benefit plans. Earlier application
is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim reporting periods within that
reporting period.
In March 2016, the FASB issued ASU 2016-08
which clarifies the implementation guidance on principal versus
agent considerations. In April 2016, the FASB issued ASU 2016-10
which clarifies the principle for determining whether a good or
service is “separately identifiable” and, therefore,
should be accounted for separately. In May 2016 the FASB issued ASU
2016-12 which clarifies the objective of the collectability
criterion. A separate update issued in May 2016 clarifies the
accounting for shipping and handling fees and costs as well as
accounting for consideration given by a vendor to a customer. The
guidance includes indicators to assist an entity in determining
whether it controls a specified good or service before it is
transferred to the customers. We have not yet determined whether we
will adopt the provisions of ASU 2014-09 on a retrospective basis
or through a cumulative adjustment to equity. While we are still in
the process of completing our analysis on the impact this guidance
will have on the consolidated financial statements and related
disclosures, we do not expect the impact to be
material.
NOTE 2 – LICENSE AGREEMENTS
NTC
S.r.l. In-License Agreement
On December 15,
2016, the Company and NTC S.r.l (“NTC”) entered into a
license and distribution agreement (“NTC License
Agreement”) pursuant to which we acquired the rights to use,
market and sell NTC’s proprietary modified release bilayer
tablet formerly known as LERTAL® for the management of
allergic rhinitis in the U.S. and Canada. Such licensed product
will be sold by us under the name AllerVarx
™
in the U.S. and Canada. Under
this agreement, we are obligated to pay a non-refundable upfront
license fee of
€
15,000
($15,806 USD based on December 31, 2016 exchange rate) and cash
payments of up to
€
120,000
($126,448 USD based on December 31, 2016 exchange rate) upon the
achievement of certain sales milestones. The non-refundable upfront
license is included in sales and marketing expense in the
accompanying consolidated statement of operations for the year
ended December 31, 2016 and accounts payable and accrued expense in
the accompanying consolidated balance sheet at December 31,
2016.
Seipel
Group Pty Ltd. In-License Agreement
On September 29,
2016, the Company and Seipel Group Pty Ltd. (“SG”)
entered into a license and purchase agreement (“SG License
Purchase Agreement”) pursuant to which we acquired the
exclusive rights to use, market and sell SG’s proprietary
dietary supplement formula known as Urox® for bladder support
in the U.S. and worldwide. Under this agreement, we have agreed to
minimum purchase order requirements of 25,000 units per calendar
quarter beginning 12 months after our initial order to retain our
exclusivity (see Note 11) and paid a brokerage fee of $200,000
which is included in sales and marketing expense in the
accompanying consolidated statement of operations for the year
ended December 31, 2016.
CRI In-License Agreement
On April 19, 2013, the Company and
Centric
Research Institute (“CRI”)
entered into an asset purchase agreement (the
“CRI Asset Purchase Agreement”) pursuant to which we
acquired:
●
All
of CRI’s rights in past, present and future Sensum+®
product formulations and presentations, and
●
An
exclusive, perpetual license to commercialize Sensum+®
products in all territories except for the United
States.
On June 9, 2016,
the Company and CRI amended the CRI Asset Purchase Agreement
(“Amended CRI Asset Purchase Agreement”) to provide us
commercialization rights for Sensum+® in the U.S. through our
Beyond Human® marketing platform through December 31, 2016. On
January 1, 2017, the Company and CRI agreed to extend the term of
the Amended CRI Asset Purchase Agreement to December 31, 2017,
subject to an automatic one-year extension to December 31, 2018
upon certain conditions (see Note 12).
In consideration
for the CRI Asset Purchase Agreement, we issued 631,313 shares of
common stock to CRI in 2013. We recorded an asset totaling
$250,000 related to the CRI Asset Purchase Agreement and are
amortizing this amount over its estimated useful life of 10
years. Under the CRI Asset Purchase Agreement, we were
required to issue to CRI shares of our common stock valued at an
aggregate of $200,000 for milestones relating to additional
clinical data to be received. As a result of the Amended CRI Asset
Purchase Agreement, the Company and CRI agreed to settle the
clinical milestone payments with a payment of 100,000 shares of
restricted common stock. The fair value of the restricted shares of
common stock of $23,000 was based on the market price of our common
stock on the date of issuance and is included in research and
development expense in the accompanying consolidated statement of
operations for the year ended December 31, 2016.
The CRI Asset
Purchase Agreement also requires us to pay to CRI up to $7 million
in cash milestone payments based on first achievement of annual
Ex-U.S. net sales targets plus a royalty based on annual Ex-U.S.
net sales. The obligation for these payments expires on April
19, 2023 or the expiration of the last of CRI’s patent claims
covering the product or its use outside the U.S., whichever is
sooner. No sales milestone obligations have been met and no
royalties are owed to CRI under this agreement during the years
ended December 31, 2016 and 2015.
In consideration
for the Amended CRI Asset Purchase Agreement, we are required to
pay CRI a percentage of the monthly net profit, as defined in the
agreement, from our sales of Sensum+® in the U.S. through our
Beyond Human® marketing platform. During the year ended
December 31, 2016, no amounts have been earned by CRI under the
Amended CRI Asset Purchase Agreement.
J&H Co. LTD Agreement
On November 9, 2016, we entered into an exclusive
ten-year license agreement with J&H Co. LTD, a South Korea
company (“J&H”), under which we granted to J&H
an exclusive license to market and sell our topical treatment for
Female Sexual Interest/Arousal Disorder (“FSI/AD”)
Zestra® and Zestra Glide® in South Korea. Under the
agreement, J&H is obligated to order minimum annual quantities
of Zestra® and Zestra Glide® totaling $2,000,000 at a
pre-negotiated transfer price per unit. The minimum annual order
quantities by J&H are to be made over a 12-month period
beginning upon the completion of the first shipment of product in
2017.
During the year ended December 31, 2016, no revenue
was recognized related to this agreement.
Sothema Laboratories Agreement
On September 23,
2014, we entered into an exclusive license agreement with Sothema
Laboratories, SARL, a Moroccan publicly traded company
(“Sothema”), under which we granted to Sothema an
exclusive license to market and sell Zestra
®
(based on the latest Canadian
approval of the indication) and Zestra Glide® in several
Middle Eastern and African countries (collectively the
“Territory”).
Under the
agreement, we received an upfront payment of $200,000 and are
eligible to receive up to approximately $171 million upon and
subject to the achievement of sales milestones based on cumulative
supplied units of the licensed products in the Territory, plus a
pre-negotiated transfer price per unit. We believe the amount of
the upfront payment received is reasonable compared to the amounts
to be received upon obtainment of future sales-based
milestones.
As the sales-based
milestones do not meet the definition of a milestone under ASC
605-28, we will recognize the revenue from the milestone payments
when the cumulative supplied units’ volume is met. During the
years ended December 31, 2016 and 2015, we recognized $16,056 and
$56,487, respectively, in net revenue for the sales of products
related to this agreement, and no revenue was recognized for the
sales-based milestones of the agreement.
Orimed Pharma Agreement
On September 18,
2014, we entered into a twenty year exclusive license agreement
with Orimed Pharma (“Orimed”), an affiliate of JAMP
Pharma, under which we granted to Orimed an exclusive license to
market and sell in Canada Zestra®, Zestra Glide®, our
topical treatment for premature ejaculation EjectDelay® and
our product Sensum+® to increase penile
sensitivity.
Under the
agreement, we received an upfront payment of $100,000 and are
eligible to receive up to approximately CN $94.5 million ($70.2
million USD based on December 31, 2016 exchange rate) upon and
subject to the achievement of sales milestones based on cumulative
gross sales in Canada by Orimed plus double-digit tiered royalties
based on Orimed’s cumulative net sales in Canada. We believe
the amount of the upfront payment received is reasonable compared
to the amounts to be received upon obtainment of future sales-based
milestones.
As the sales-based
milestones do not meet the definition of a milestone under ASC
605-28, we will recognize the revenue from the milestone payments
when the cumulative gross sales volume is met. We will recognize
the revenue from the royalty payments on a quarterly basis when the
cumulative net sales have been met. During the years
ended December 31, 2016 and 2015, under this agreement we
recognized $42,153 and $108,988, respectively, in net revenue for
the sales of products and no revenue was recognized for the
sales-based milestones. During the years ended December 31, 2016
and 2015, we recognized royalty payments of $1,252 and $0,
respectively.
Elis Pharmaceuticals Agreements
On
July 4, 2015, we announced that we had entered into an exclusive
license and distribution agreement with Elis Pharmaceuticals, an
emirates company (“Elis”), under which we granted to
Elis an exclusive ten-year distribution right to market and sell
Zestra® EjectDelay®, Sensum+® and Zestra Glide®
in Turkey and select African and gulf countries. If Elis exceeds
its minimum yearly orders, the agreement has a ten-year term
extension. Under the agreement, we are eligible to receive up to
$35.5 million in sales milestone payments plus an agreed-upon
transfer price upon sale of products. We had preliminary listed
Syria, Yemen and Somalia as countries in the definition of licensed
territories, but these countries were removed by the
agreement of both parties from the agreement effective the date of
signing of the agreement. As the sales-based milestones
are not considered a milestone under ASC 605-28, we will recognize
the revenue from the milestone payments when the cumulative gross
sales volume is met. We did not recognize any revenue from this
agreement during the years ended December 31, 2016 and
2015.
On October 31, 2016, we entered into another
exclusive license and distribution agreement with Elis under which
we granted to Elis an exclusive ten-year distribution right to
market and sell Zestra® in Lebanon. Under the agreement, we
are eligible to receive up to $2.35 million in sales milestone
payments plus an agreed-upon transfer price upon sale of products.
As the sales-based milestones are not considered a milestone under
ASC 605-28, we will recognize the revenue from the milestone
payments when the cumulative gross sales volume is met.
During the year ended December 31, 2016, no revenue was recognized
related to this agreement.
Khandelwal Laboratories Agreement
On
September 9, 2015, we entered into an exclusive license and
distribution agreement with Khandelwal Laboratories, an Indian
company (“KLabs”) under which we have granted to KLabs
an exclusive ten-year distribution right to market and sell in the
Indian Subcontinent, which is defined as India, Nepal, Bhutan,
Bangladesh and Sri Lanka our products including Zestra®,
EjectDelay®, Sensum+® and Zestra
Glide®. If KLabs exceeds its minimum yearly orders,
the agreement has two five-year term extensions. Under the
agreement the minimum orders for the first ten-year term of the
agreement are approximately $2.6 million. We did not
recognize any revenue from this agreement during the years ended
December 31, 2016 and 2015.
NOTE 3 – BUSINESS AND ASSET ACQUISITIONS
Acquisition
of Assets of Beyond Human® in 2016
On February 8,
2016, we entered into an Asset Purchase Agreement
(“APA”), pursuant to which we agreed to purchase
substantially all of the assets of Beyond Human® (the
“Acquisition”) for a total cash payment of up to
$662,500 (the “Purchase Price”). The Purchase Price was
payable in the following manner: (1) $300,000 in cash at
the closing of the Acquisition (the “Initial Payment”),
(2) $100,000 in cash four months from the closing upon the
occurrence of certain milestones as described in the APA, (3)
$100,000 in cash eight months from the closing upon the occurrence
of certain milestones as described in the APA, and (4) $130,000 in
cash in twelve months from the closing upon the occurrence of
certain milestones as described in the APA. An
additional $32,500 in cash is due if certain milestones occur
twelve months from closing. The transaction closed on
March 1, 2016.
The fair value of
the contingent consideration is based on cash flow projections and
other assumptions for the milestone payments and future changes in
the estimate of such contingent consideration will be recognized as
a charge to fair value adjustment for contingent consideration.
The
total purchase price is summarized as follows:
Cash
consideration
|
$
300,000
|
Fair
value of future earn out payments
|
330,000
|
Total
|
$
630,000
|
We accounted for
such asset acquisition as a business combination under ASC 805,
Business Combinations
. We
did not acquire any identifiable tangible assets and did not assume
any liabilities as a result of the asset acquisition. The excess of
the acquisition date fair value of consideration transferred of
$630,000 over the estimated fair value of the intangible assets
acquired was recorded as goodwill. The establishment of the fair
value of the contingent consideration, and the allocation to
identifiable intangible assets requires the extensive use of
accounting estimates and management judgment. The fair values
assigned to the assets acquired are based on estimates and
assumptions from data currently available.
In determining the
fair value of the intangible assets, we considered, among other
factors, the best use of acquired assets such as the Beyond
Human® website, analyses of historical financial performance
of the Beyond Human® products and estimates of future
performance of the Beyond Human® products and website
acquired. The fair values of the identified intangible assets
related to Beyond Human®’s website, trade name,
non-competition covenant and customer list. The fair value of the
website, customer list and the non-competition covenant were
calculated using an income approach. The fair value of the trade
name was calculated using a cost approach. The following table sets
forth the components of identified intangible assets associated
with the Acquisition and their estimated useful lives:
|
|
Fair Value
|
|
|
Useful Life
|
|
Website
|
|
$
|
171,788
|
|
|
|
5
years
|
|
Trade
name
|
|
|
50,274
|
|
|
|
10
years
|
|
Non-competition
covenant
|
|
|
3,230
|
|
|
|
3
years
|
|
Customer
list
|
|
|
1,500
|
|
|
|
1
year
|
|
Total
|
|
$
|
226,792
|
|
|
|
|
|
We determined the
useful lives of intangible assets based on the expected future cash
flows and contractual lives associated with the respective asset.
Website represents the fair value of the expected benefit from
revenue to be generated from the Beyond Human® website and
domain name for both Beyond Human® products as well as our
existing products. Trade name represents the fair value of the
brand and name recognition associated with the marketing of Beyond
Human®’s products. Customer list represents the expected
benefit from customer contracts that, at the date of acquisition,
were reasonably anticipated to continue given the history and
operating practices of Beyond Human®. The non-competition
covenant represents the contractual period and expected degree of
adverse economic impact that would exist in its
absence.
Of the total
estimated purchase price, $403,208 was allocated to goodwill and is
attributable to expected synergies the acquired assets will bring
to our existing business, including access for us to market and
sell our existing products through Beyond Human®’s sales
and marketing platform. Goodwill represents the excess of the
purchase price of the acquired business over the estimated fair
value of the underlying intangible assets acquired. Goodwill
resulting from the Acquisition will be tested for impairment at
least annually and more frequently if certain indicators of
impairment are present. In the event we determine that the value of
goodwill has become impaired, we will incur an accounting charge
for the amount of the impairment during the fiscal quarter in which
the determination is made. All of the goodwill is expected to be
deductible for income tax purposes. As a result of completing our
final valuation, the total purchase price increased by $15,521 and
goodwill increased by $403,208 compared to the initial allocation
of the purchase price during the first quarter of
2016.
On September 6,
2016, the Company and the sellers entered into an agreement in
which we agreed to pay the sellers $150,000 to settle the
contingent consideration payments totaling up to $362,500 under the
APA. The settlement agreement was not contemplated at the time of
the acquisition and the fair value of the contingent consideration
on the date of settlement was $330,000. As a result, we recorded a
non-cash gain on contingent consideration of $180,000, which is
included in change in fair value of contingent consideration in the
accompanying consolidated statement of operations for the year
ended December 31, 2016.
Supplemental
Pro Forma Information for Acquisition of Assets of Beyond
Human® (unaudited)
The following
unaudited supplemental pro forma information for the years ended
December 31, 2016 and 2015, assumes the asset acquisition of Beyond
Human® had occurred as of January 1, 2016 and 2015,
giving effect to purchase accounting adjustments such as
amortization of intangible assets. The pro forma data is for
informational purposes only and may not necessarily reflect the
actual results of operations had the assets of Beyond Human®
been operated as part of the Company since January 1, 2016 and
2015.
|
Year Ended
December 31, 2016
|
Year Ended
December 31, 2015
|
|
|
|
|
|
Net
revenue
|
$
4,818,603
|
$
4,868,241
|
$
735,717
|
$
2,947,694
|
Net
loss
|
$
(13,701,154
)
|
$
(13,700,702
)
|
$
(4,202,628
)
|
$
(3,901,770
)
|
Net
loss per share of common stock – basic and
diluted
|
$
(0.15
)
|
$
(0.15
)
|
$
(0.08
)
|
$
(0.07
)
|
Weighted
average number of shares
outstanding – basic and
diluted
|
94,106,382
|
94,106,382
|
52,517,530
|
52,517,530
|
We incurred
approximately $70,000 in expense related to the
Acquisition.
Acquisition of Novalere
On
February 5, 2015 (the “Closing Date”), Innovus, Innovus
Pharma Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Innovus (“Merger Subsidiary
I”), Innovus Pharma Acquisition Corporation II, a Delaware
corporation and a wholly-owned subsidiary of Innovus (“Merger
Subsidiary II”), Novalere FP, Inc., a Delaware corporation
(“Novalere FP”) and Novalere Holdings, LLC, a Delaware
limited liability company (“Novalere Holdings”), as
representative of the shareholders of Novalere (the “Novalere
Stockholders”), entered into an Agreement and Plan of Merger
(the “Merger Agreement”), pursuant to which Merger
Subsidiary I merged into Novalere and then Novalere merged with and
into Merger Subsidiary II (the “Merger”), with Merger
Subsidiary II surviving as a wholly-owned subsidiary of Innovus.
Pursuant to the articles of merger effectuating the Merger, Merger
Subsidiary II changed its name to Novalere, Inc.
With
the Merger, we acquired the worldwide rights to market and
sell the Fluticare™ brand (Fluticasone propionate nasal
spray) and the related manufacturing agreement from Novalere FP. We
currently anticipate that the Abbreviated New Drug Application
(“ANDA”) filed in November 2014 by the
manufacturer with the U.S. Food and Drug Administration
(“FDA”) may be approved in 2017, which, when and if
approved, may allow us to market and sell Fluticare™ over the
counter in the second half of 2017. An ANDA is an application for a
U.S. generic drug approval for an existing licensed medication or
approved drug.
Under
the terms of the Merger Agreement, at the Closing Date, the
Novalere Stockholders received 50% of the Consideration Shares (the
“Closing Consideration Shares”) and the remaining 50%
of the Consideration Shares (the “ANDA Consideration
Shares”) were to be delivered only if an ANDA of Fluticasone
Propionate Nasal Spray of Novalere Manufacturing Partners (the
“Target Product”) was approved by the FDA (the
“ANDA Approval”). A portion of the Closing
Consideration Shares and, if ANDA Approval was obtained prior to
the 18 month anniversary of the Closing Date, a
portion of the ANDA Consideration Shares, would have been held
in escrow for a period of 18 months from the Closing Date to be
applied towards any indemnification claims by us pursuant to the
Merger Agreement.
In
addition, the Novalere Stockholders are entitled to receive, if and
when earned, earn-out payments (the “Earn-Out
Payments”). For every $5 million in Net Revenue (as defined
in the Merger Agreement) realized from the sales of
Fluticare™, the Novalere Stockholders will be entitled to
receive, on a pro rata basis, $500,000, subject to cumulative
maximum Earn-Out Payments of $2.5 million.
The
closing price of our common stock on the Closing Date was $0.20 per
share. We issued 12,947,657 Closing Consideration Shares of our
common stock at the Closing Date, the fair market value,
(‘FMV”) of the Closing Consideration Shares was
$2,071,625 as of the Closing Date.
The
fair value of the contingent consideration is based on preliminary
cash flow projections and other assumptions for the ANDA
Consideration shares and the Earn-Out Payments and future changes
in the estimate of such contingent consideration will be recognized
as a charge to other expense.
Issuance
of the 12,947,655 ANDA Consideration Shares was subject to
milestones, achievement of which was uncertain at the time of
acquisition. The FMV of the ANDA Consideration Shares was
established to account for the uncertainty in the future value of
the shares. The value of the shares as derived using the options
pricing model was then weighted based on the probability of
achieving the milestones to determine the FMV of the ANDA
Consideration Shares and estimated potential share prices at such
dates. Due to certain restrictions on the shares of common stock to
be issued, we applied a 20% discount for lack of marketability to
the FMV of the ANDA Consideration Shares. Based on the
aforementioned calculation the fair market value of the ANDA
Consideration shares was determined to be $1,657,300.
The
total fair market value of the considerations issued and to be
issued for the transaction are as follows:
|
|
|
Closing
Consideration Shares
|
12,947,657
|
$
2,071,625
|
ANDA
Consideration Shares
|
12,947,655
|
1,657,300
|
Total
|
25,895,312
|
$
3,728,925
|
Based
on the assumptions, the fair market value of the Earn-Out Payments
was determined to be $1,205,000. The preliminary fair values of
the future earn out payments was determined by applying
the income approach, using several significant unobservable inputs
for projected cash flows and a discount rate. These inputs are
considered Level 3 inputs under the fair value measurements and
disclosure guidance.
The
total purchase price is summarized as follows:
Cash
consideration
|
$
43,124
|
Fair
value of common stock issued at closing
|
2,071,625
|
Fair
value of ANDA consideration shares
|
1,657,300
|
Fair
value of future earn out payments
|
1,205,000
|
Total
|
$
4,977,049
|
The
fair values of acquired assets and liabilities are based on cash
flow projections and other assumptions. The fair values of acquired
intangible assets were determined using several significant
unobservable inputs for projected cash flows and a discount rate.
These inputs are considered Level 3 inputs under the fair value
measurements and disclosure guidance. The transaction has been
accounted for as a business combination under the acquisition
method of accounting. Accordingly, the tangible assets and
identifiable intangible assets acquired and liabilities assumed
have been recorded at fair value, with the remaining purchase price
recorded as goodwill.
The
fair values of assets acquired and liabilities assumed at the
transaction date are summarized below:
Cash
|
$
43,124
|
Prepaid
expense
|
25,907
|
Total
tangible assets
|
69,031
|
|
|
Product
rights and related manufacturing agreement
|
4,681,000
|
Trademarks
|
150,000
|
Total
identifiable intangible assets
|
4,831,000
|
Goodwill
|
120,143
|
Total
acquired assets
|
5,020,174
|
|
|
Other
current liabilities
|
(43,125
)
|
Total
assumed liabilities
|
(43,125
)
|
|
|
Acquired
assets net of assumed liabilities
|
$
4,977,049
|
We
recorded $759,428 of goodwill related to the acquisition of
Novalere as an income tax benefit and also recorded an impairment
of $759,428 against this benefit during the year ended December 31,
2015.
The
carrying value of current assets and liabilities in
Novalere’s financial statements are considered to be a proxy
for the fair value of those assets and liabilities. Novalere is a
pre-commercial organization specializing in selling and marketing
nasal steroid products; most of the value in Novalere is applicable
to the product rights and related manufacturing agreement.
Novalere holds a non-exclusive, worldwide, royalty-free license to
market, promote, sell, offer for sale, import and distribute the
product. This business relationship is contractual in nature and
meets the separability criterion and as a result is considered an
identifiable intangible asset recognized separately from goodwill.
The value of the business relationship is included in goodwill
under U.S. GAAP. Goodwill is calculated as the difference between
the fair value of the consideration transferred and the values
assigned to the identifiable tangible assets acquired and
liabilities assumed. The acquired goodwill presented in the above
table reflects the estimated goodwill from the preliminary purchase
price allocation. The cash acquired was used to pay amounts due to
shareholders and thus was received by us.
The
establishment of the fair value of the consideration for a Merger,
and the allocation to identifiable tangible and intangible assets
and liabilities, requires the extensive use of accounting estimates
and management judgment. The fair values assigned to the assets
acquired and liabilities assumed were based on estimates and
assumptions. During the year ended December 31, 2016, there was an
increase in the estimated fair value of the ANDA consideration
shares of $1,346,556 due to the amended agreement entered into with
Novalere Holdings (see below) which is included in change in fair
value of contingent consideration in the accompanying consolidated
statement of operations. There was no change to the estimated fair
value of the future earn-out payments of $1,248,125 during the year
ended December 31, 2016 and there was no change to the estimate
fair value of the contingent consideration during the year ended
December 31, 2015.
On November 12,
2016, we entered into an Amendment and Supplement to a Registration
Rights and Stock Restriction Agreement (the "Agreement") with
Novalere Holdings pursuant to which we agreed to issue 12,808,796
shares of our common stock (the “Novalere Shares”) that
were issuable pursuant to agreement upon the approval of
Fluticare™ by the FDA. Management agreed to issue the
Novalere Shares due to its confidence that FlutiCare™ would
be approved by the FDA in the near future and the obligation of us
to issue and register for resale the Novalere Shares and all other
shares of our common stock held by Novalere Holdings. In
connection with the issuance of the Novalere Shares, Novalere
Holdings also agreed to certain restrictions, and to an extension
in the date to register the Novalere Shares and all other shares of
our common stock held by Novalere Holdings until the second quarter
of 2017. In the event a registration statement to register the
Novalere Shares is not filed by February 1, 2017, and does not
become effective by May 15, 2017, the Company will be required to
issue additional shares of common stock as a penalty to Novalere
Holdings equal to 10% of the total shares to be registered of
25,617,592.
We filed a Registration
Statement on Form S-1 on February 1, 2017 to register the
25,617,592 shares of common stock issued to Novalere
Holdings.
Management believed that the issuance of the
Novalere Shares at that time was in our and our stockholders best
interest as it results in a restriction on the resale of all shares
of our common stock held by Novalere Holdings, including the
Novalere Shares, until after we have achieved certain milestones.
As a result of the issuance of the Novalere Shares, the fair value
of Novalere Shares on the date of issuance of $2,971,641 was
reclassified from liabilities to equity. The remaining 138,859 ANDA
consideration shares not issuable yet will be issued upon FDA
approval of Fluticare™ and the estimated fair value of such
remaining shares of $32,215 is included in contingent consideration
in the accompanying consolidated balance sheet at December 31,
2016.
Supplemental Pro Forma Information for Acquisition of Novalere
(unaudited)
The
following unaudited supplemental pro forma information for the year
ended December 31, 2015, assumes the acquisition of Novalere had
occurred as of January 1, 2015, giving effect to purchase
accounting adjustments such as amortization of intangible assets.
The pro forma data is for informational purposes only and may not
necessarily reflect the actual results of operations had Novalere
been operated as part of the Company since January 1,
2015.
|
Year Ended
December 31, 2015
|
|
|
|
Net
revenue
|
$
735,717
|
$
735,717
|
Net
loss
|
$
(4,202,628
)
|
$
(4,578,521
)
|
Net
loss per share of common stock – basic and
diluted
|
$
(0.08
)
|
$
(0.09
)
|
Weighted
average number of shares outstanding – basic and
diluted
|
52,517,530
|
53,794,559
|
Purchase of Semprae Laboratories, Inc. in 2013
On
December 24, 2013 (the “Semprae Closing Date”), we,
through Merger Sub, obtained 100% of the outstanding shares of
Semprae in exchange for the issuance of 3,201,776 shares of our
common stock, which shares represented fifteen percent (15%) of our
total issued and outstanding shares as of the close of business on
the Closing Date, whereupon Merger Sub was renamed Semprae
Laboratories, Inc. Also, we agreed to pay $343,500 to the New
Jersey Economic Development Authority (“NJEDA”) as
settlement-in full for an outstanding loan of approximately
$640,000 owed by the former stockholder’s of Semprae, in full
satisfaction of the obligation to the NJEDA. In addition, we agreed
to pay the former shareholders an annual royalty
(“Royalty”) equal to 5% of the net sales from
Zestra® and Zestra Glide® and any second generation
products derived primarily therefrom (“Target
Products”) up until the time that a generic version of such
Target Product is introduced worldwide by a third
party.
The
fair market value of our common stock issued on the Closing Date
was $0.30 per share, which resulted in a fair market value of
$960,530 for the common stock issued to the shareholders of
Semprae. The fair value of the shares of common stock issued were
determined by quoted market prices that are considered to be Level
1 inputs under the fair value measurements and disclosure guidance.
A portion of the shares issued were held in escrow pending
reconciliation of assets received and liabilities assumed at the
acquisition date and were released on September 10,
2015. 386,075 shares of common stock were canceled based
on the terms of the agreement, reducing the total number of shares
issued to 2,815,701. We recorded income on the
cancellation of shares of $115,822, which is included in the change
in fair value of contingent consideration in the accompanying
consolidated statement of operations for the year ended December
31, 2015.
The
agreement to pay the annual Royalty resulted in the recognition of
a contingent consideration, which is recognized at the inception of
the transaction, and subsequent changes to estimate of the amounts
of contingent consideration to be paid will be recognized as
charges or credits in the consolidated statement of operations. The
fair value of the contingent consideration is based on preliminary
cash flow projections, growth in expected product sales and other
assumptions. Based on the assumptions, the fair value of the
Royalty was determined to be $308,273 at the date of acquisition.
The fair value of the Royalty was determined by applying the income
approach, using several significant unobservable inputs for
projected cash flows and a discount rate of approximately 22%
commensurate with our cost of capital and expectation of the
revenue growth for products at their life cycle stage. These inputs
are considered Level 3 inputs under the fair value measurements and
disclosure guidance. During 2016 and 2015, $22,103 and $0,
respectively, was paid under this arrangement. The fair
value of the expected royalties to be paid was increased by
$103,301 and $0 during the years ended December 31, 2016 and 2015,
respectively, which is included in the change in fair value of
contingent consideration in the accompanying consolidated
statements of operations. The fair value of the contingent
consideration was $405,577 and $324,379 at December 31, 2016 and
2015, based on the new estimated fair value of the consideration,
net of the amounts to be returned to us as discussed
above.
NOTE 4 – ASSETS AND LIABILITIES
Inventories
Inventories
consist of the following:
|
|
|
|
|
Raw
materials and supplies
|
$
85,816
|
$
77,649
|
Work
in process
|
48,530
|
90,540
|
Finished
goods
|
465,510
|
86,254
|
Total
|
$
599,856
|
$
254,443
|
Property and Equipment
Property
and equipment consists of the following:
|
|
|
|
|
Computer
equipment
|
$
5,254
|
$
5,254
|
Office
furniture and fixtures
|
33,376
|
33,376
|
Production
equipment
|
276,479
|
276,479
|
Software
|
338,976
|
338,976
|
Total
cost
|
654,085
|
654,085
|
Less
accumulated depreciation
|
(624,516
)
|
(618,984
)
|
Property
and equipment, net
|
$
29,569
|
$
35,101
|
Depreciation
expense for the years ended December 31, 2016 and 2015 was $5,532
and $28,950, respectively.
Intangible Assets
Amortizable
intangible assets consist of the following:
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
417,597
|
$
(91,201
)
|
$
326,396
|
7 – 15
|
Customer
Contracts
|
611,119
|
(188,428
)
|
422,691
|
10
|
Sensum+®
License (from CRI)
|
234,545
|
(84,009
)
|
150,536
|
10
|
Vesele®
Trademark
|
25,287
|
(7,047
)
|
18,240
|
8
|
Beyond Human
®
Website and Trade Name
|
222,062
|
(32,821
)
|
189,241
|
5 – 10
|
Novalere
Mfg. Contract
|
4,681,000
|
(887,440
)
|
3,793,560
|
10
|
Other Beyond Human
®
Intangible Assets
|
4,730
|
(2,147
)
|
2,583
|
1 – 3
|
Total
|
$
6,196,340
|
$
(1,293,093
)
|
$
4,903,247
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
Patent
& Trademarks
|
$
417,597
|
$
(57,593
)
|
$
360,004
|
7 – 15
|
Customer
Contracts
|
611,119
|
(127,316
)
|
483,803
|
10
|
Sensum+®
License (from CRI)
|
234,545
|
(60,554
)
|
173,991
|
10
|
Vesele®
Trademark
|
25,287
|
(3,886
)
|
21,401
|
8
|
Novalere
Mfg. Contract
|
4,681,000
|
(419,340
)
|
4,261,660
|
10
|
Total
|
$
5,969,548
|
$
(668,689
)
|
$
5,300,859
|
|
Amortization expense for the years ended December
31, 2016 and 2015 was $624,404 and $550,789, respectively.
The following table summarizes the approximate expected future
amortization expense as of December 31, 2016 for intangible
assets:
2017
|
$
630,000
|
2018
|
630,000
|
2019
|
629,000
|
2020
|
629,000
|
2021
|
600,000
|
Thereafter
|
1,785,000
|
Total
|
$
4,903,000
|
Prepaid
Expense and Other Current Assets
Prepaid expense and
other current assets consist of the following:
|
|
|
|
|
Prepaid
insurance
|
$
69,976
|
$
27,816
|
Prepaid
inventory
|
20,750
|
-
|
Merchant
net settlement reserve receivable (see Note 1)
|
221,243
|
-
|
Prepaid
consulting and other expense
|
21,094
|
25,462
|
Prepaid
consulting and other service stock-based compensation expense (see
Note 8)
|
530,601
|
-
|
Total
|
$
863,664
|
$
53,278
|
Accounts
Payable and Accrued Expense
Accounts payable
and accrued expense consists of the following:
|
|
|
|
|
Accounts
payable
|
$
647,083
|
$
63,826
|
Accrued
credit card balances
|
31,654
|
91,037
|
Accrued
royalties
|
73,675
|
-
|
Sales
returns and allowances
|
60,853
|
-
|
Accrual
for stock to be issued to consultants (see Note 8)
|
360,000
|
-
|
Accrued
other
|
36,785
|
640
|
Total
|
$
1,210,050
|
$
155,503
|
Goodwill
The
changes in the carrying value of our goodwill for the years ended
December 31, 2016 and 2015 is as follows:
Beginning
balance December 31, 2014
|
$
429,225
|
Acquisition
of Novalere (see Note 3)
|
120,143
|
Release
of valuation allowance in connection with acquisition of Novalere
(see Note 10)
|
759,428
|
Impairment
of valuation allowance in connection with acquisition of Novalere
(see Note 10)
|
(759,428
)
|
Ending
balance December 31, 2015
|
549,368
|
Asset acquisition of Beyond Human
®
(see Note 3)
|
403,208
|
Ending
balance December 31, 2016
|
$
952,576
|
NOTE 5 – NOTES PAYABLE AND DEBENTURES – NON-RELATED
PARTIES
Short-Term Loans Payable
The short-term
non-convertible financings were from three funding sources and all
balances were guaranteed by our CEO. We repaid these
amounts in full in July 2016.
Notes Payable and Non-Convertible Debenture
The
following table summarizes the outstanding notes payable and
non-convertible debenture at December 31, 2016 and
2015:
|
|
|
Notes
payable and non-convertible debenture:
|
|
|
February
2016 Note Payable
|
$
347,998
|
$
-
|
December
2016 Notes Payable
|
550,000
|
-
|
July
2015 Debenture (Amended August 2014 Debenture)
|
-
|
73,200
|
Total
notes payable and non-convertible debenture
|
897,998
|
73,200
|
Less:
Debt discount
|
(216,871
)
|
-
|
Carrying
value
|
681,127
|
73,200
|
Less:
Current portion
|
(626,610
)
|
(73,200
)
|
Notes
payable and non-convertible debenture, net of current
portion
|
$
54,517
|
$
-
|
The following table
summarizes the future
minimum payments as of December 31, 2016 for the notes payable and
non-convertible debenture:
2017
|
$
843,013
|
2018
|
54,985
|
Total
|
$
897,998
|
July 2015 Debenture (Amended August 2014 Debenture)
On August 30, 2014,
we issued an 8% debenture to an unrelated third party investor in
the principal amount of $40,000 (the “August 2014
Debenture”). The August 2014 Debenture bore interest at the
rate of 8% per annum. The principal amount and interest were
payable on August 29, 2015. On July 21, 2015, we received an
additional $30,000 from the investor and amended and restated this
agreement to a new principal balance of $73,200 (including accrued
interest of $3,200 added to principal) and a new maturity date of
July 21, 2016. The note was repaid in full in July
2016.
February 2016 Note Payable
On February 24,
2016, the Company and SBI Investments, LLC, 2014-1
(“SBI”) entered into an agreement in which SBI loaned
us gross proceeds of $550,000 pursuant to a purchase agreement, 20%
secured promissory note and security agreement (“February
2016 Note Payable”), all dated February 19, 2016
(collectively, the “Finance Agreements”), to purchase
substantially all of the assets of Beyond Human® (see Note
3). Of the $550,000 gross proceeds, $300,000 was paid
into an escrow account held by a third party bank and was released
to Beyond Human® upon closing of the transaction, $242,500 was
provided directly to us for use in building the Beyond Human®
business and $7,500 was provided for attorneys’
fees. The attorneys’ fees were recorded as a
discount to the carrying value of the February 2016 Note Payable in
accordance with ASU 2015-03.
Pursuant to the
Finance Agreements, the principal amount of the February 2016 Note
Payable is $550,000 and the interest rate thereon is 20% per
annum. We began to pay principal and interest on the
February 2016 Note Payable on a monthly basis beginning on March
19, 2016 for a period of 24 months and the monthly mandatory
principal and interest payment amount thereunder is $28,209. The
monthly amount shall be paid by us through a deposit account
control agreement with a third-party bank in which SBI shall be
permitted to take the monthly mandatory payment amount from all
revenue received by us from the Beyond Human® assets in the
transaction. The maturity date for the February 2016
Note Payable is February 19, 2018.
The February 2016
Note Payable is secured by SBI through a first priority secured
interest in all of the Beyond Human® assets acquired by us in
the transaction including all revenue received by us from these
assets.
May 2016 Debenture
On May 4, 2016, we
issued a 10% non-convertible debenture to an unrelated third party
investor in the principal amount of $24,000 (the “May 2016
Debenture”). The May 2016 Debenture bore interest at the rate
of 10% per annum. The principal amount and interest were payable on
May 4, 2017. The note was repaid in full in July 2016.
May 2016 Notes Payable
On May 6, 2016, we
entered into a securities purchase agreement with an unrelated
third party investor in which the investor loaned us gross proceeds
of $50,000 pursuant to a 3% promissory note (“May 6, 2016
Note Payable”). The May 6, 2016 Note Payable bore
interest at the rate of 3% per annum. The principal amount and
interest were payable on November 6, 2016. The note was repaid in
full in June 2016.
In connection with
the May 6, 2016 Note Payable, we issued the investor restricted
shares of common stock totaling 500,000. The fair value
of the restricted shares of common stock issued was based on the
market price of our common stock on the date of issuance of the May
6, 2016 Note Payable. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value resulted in us recording a debt discount of
$23,684. The discount was amortized in full to interest expense
during the year ended December 31, 2016.
On May 20, 2016, we
entered into a securities purchase agreement with an unrelated
third party investor in which the investor loaned us gross proceeds
of $100,000 pursuant to a 3% promissory note (“May 20, 2016
Note Payable”). The May 20, 2016 Note Payable bore
interest at the rate of 3% per annum. The principal amount and
interest were payable on February 21, 2017. The note was repaid in
full in June 2016.
In connection with
the May 20, 2016 Note Payable, we issued the investor restricted
shares of common stock totaling 750,000. The fair value
of the restricted shares of common stock issued was based on the
market price of our common stock on the date of issuance of the May
20, 2016 Note Payable. The allocation of the proceeds
received to the restricted shares of common stock based on their
relative fair value resulted in us recording a debt discount of
$70,280. The discount was amortized in full to interest expense
during the year ended December 31, 2016.
December 2016 Notes Payable
On December 5,
2016, we entered into a securities purchase agreement with three
unrelated third party investors in which the investors loaned us
gross proceeds of $500,000 pursuant to a 5% promissory note
(“December 5, 2016 Notes
Payable”).
The notes
have an Original Issue Discount (“OID”) of $50,000 and
requires payment of $550,000 in principal upon maturity.
The
December 5, 2016 Notes Payable bear interest at the rate of 5% per
annum and the principal amount and interest are payable at maturity
on October 4, 2017.
In connection with
the December 5, 2016 Notes Payable, we issued the investors
restricted shares of common stock totaling
1,111,111. The fair value of the restricted shares of
common stock issued was based on the market price of our common
stock on the date of issuance of the December 5, 2016 Notes
Payable. The allocation of the proceeds received to the
restricted shares of common stock based on their relative fair
value resulted in us recording a debt discount of $182,203. The
discount is being amortized to interest expense using the effective
interest method over the term of the December 5, 2016 Notes
Payable.
September 2014 Convertible Debenture
On
September 29, 2014, we issued a convertible promissory note (the
“Note”) to an unrelated third party accredited investor
for $50,000. The Note had a principal face amount of $92,000, did
not accrue interest and was due on March 28, 2016 (the
“Maturity Date”). The Note was converted into 230,000
shares common stock according to the terms of the note, by the
investor on March 30, 2015. As such, we recorded the conversion of
the note and the remaining debt discount was charged to interest
expense during the year ended December 31, 2015.
January 2015 Non-Convertible Debenture
On
January 21, 2015, we entered into securities purchase agreements
with Vista Capital Investments, LLC (“Vista”) whereby
we issued and sold to the Vista promissory notes (“January
2015 Non-Convertible Debenture”) and warrants (the
“Vista Warrants”) to purchase up to 500,000 shares of
the our common stock for gross proceeds of $100,000. The note has
an OID of $10,000 and requires payment of $110,000 in principal
upon maturity. On July 30, 2015, the Company and Vista entered into
an amendment to the $110,000 Promissory Note dated January 21, 2015
(“Vista Note Amendment”). In consideration for the
Vista Note Amendment, we issued 100,000 restricted shares of common
stock to Vista. The fair value of such shares totaling $15,500 was
recognized as interest expense during the year ended December 31,
2015. The principal note balance totaling $110,000 was paid off on
November 2, 2015.
The
Vista Warrants were exercisable for five years from the closing
date at an exercise price of $0.30 (see Note 8) per share of
common stock. The warrants contained anti-dilution protection,
including protection upon dilutive issuances.
The
Vista Warrants were measured at fair value and classified as a
liability because these warrants contained anti-dilution protection
and therefore could not be considered indexed to the our own stock
which was a requirement for the scope exception as outlined under
FASB ASC 815. The estimated fair value of the Vista Warrants was
determined using the Probability Weighted Black-Scholes Model,
resulting in a fair value of $99,999 on the date they were issued.
The allocation of the proceeds of the debt was initially recorded
using the residual method, at $1, net of a debt discount of
$109,999 for the fair value of the Vista Warrants and the OID. The
discount was being accreted as non-cash interest expense over the
expected term of the January 2015 Non-Convertible Debenture using
the effective interest method. During the year ended December 31,
2015, the full amount of debt discount has been accreted to
interest expense. The fair value of the Vista Warrants was affected
by changes in inputs to that model including our stock price,
expected stock price volatility, the contractual term and the
risk-free interest rate. We continued to classify the fair value of
the Vista Warrants as a liability until the warrants were exercised
in full during the year ended December 31, 2016 (see Notes 8 and
9).
February 2014 Convertible Debenture
On
February 13, 2014, we entered into a securities purchase agreement
with an unrelated third party accredited investor pursuant to which
we issued a convertible debenture in the aggregate principal amount
of $330,000 (issued at an OID of 10%) (“February 2014
Convertible Debenture”) and a warrant to purchase 250,000
shares of our common stock (“Warrant
Agreement”).
The
February 2014 Convertible Debenture bore interest at the rate of
10% per annum and the principal amount and interest were payable on
March 13, 2015. The Warrant Agreement provided the holder with the
right to acquire up to 250,000 shares of common stock at an
exercise price of $0.50 per share, subject to standard certain
adjustments as described in the Warrant Agreement, at any time
through the fifth anniversary of its issuance date.
On
March 12, 2015, we issued 250,000 shares of our common stock and
250,000 warrants to the holder of the February 2014
Convertible Debenture to extend the maturity date to September 13,
2015 which resulted in a debt extinguishment. The fair value of the
250,000 shares of common stock issued totaled $32,500 computed
based on the stock price on the date of issuance. The
terms of the warrants issued to the holder were amended to reduce
the exercise price of the total warrants outstanding to $0.30 per
share (see Note 8) and included certain anti-dilution protection,
including protection upon dilutive issuances. The warrants were
measured at fair value and classified as a liability because these
warrants contained anti-dilution protection and therefore could not
be considered indexed to our own stock which was a requirement for
the scope exception as outlined under FASB ASC 815. The
estimated fair value of the warrants was determined using the
Probability Weighted Black-Scholes Model, resulting in a fair value
of $76,299 on the date they were issued. The allocation of the
proceeds of the debt after modification which resulted in a debt
extinguishment was initially recorded using the residual method, at
$253,701, net of a debt discount of $76,299 for the fair value of
the warrants. The discount was being accreted as non-cash interest
expense over the expected term of the February 2014 Convertible
Debenture using the effective interest method. During the year
ended December 31, 2015, the full amount of debt discount has been
accreted to interest expense. The fair value of the
common stock issued of $32,500 was recorded as a loss on debt
extinguishment, based on the estimated fair value of the stock on
date of issuance, in the accompanying consolidated statement of
operations during the year ended December 31, 2015. This
convertible debenture was repaid in September 2015 and we continued
to classify the fair value of the warrants as a liability until the
warrants were exercised in full during the year ended December 31,
2016 (see Notes 8 and 9).
Interest Expense
We recognized
interest expense on the short-term loans payable and non-related
party notes payable and non-convertible debentures of $151,924 and
$102,105 for the years ended December 31, 2016 and 2015,
respectively. Amortization of the debt discount to
interest expense during the years ended December 31, 2016 and 2015
totaled $116,798 and $310,006, respectively.
Convertible Debentures
Third Quarter 2015 Financing
The
following table summarizes the outstanding Third Quarter 2015
Convertible Debentures at December 31, 2016 and
2015:
|
|
|
|
|
|
Convertible
debentures
|
$
-
|
$
1,457,500
|
Less:
Debt discount
|
-
|
(1,050,041
)
|
Carrying
value
|
-
|
407,459
|
Less:
Current portion
|
-
|
(407,459
)
|
Convertible
debentures – long-term
|
$
-
|
$
-
|
In
the third quarter of 2015, we entered into Securities Purchase
Agreements with three accredited investors (the
“Buyers”), pursuant to which we received aggregate
gross proceeds of $1,325,000 (net of OID) pursuant to which we
sold:
Six convertible
promissory notes of the Company totaling $1,457,500 (each a
“Q3 2015 Note” and collectively the “Q3 2015
Notes”) (the Q3 2015 Notes were sold at a 10% OID and we
received an aggregate total of $1,242,500 in funds thereunder after
debt issuance costs of $82,500). The principal amount due under the
Q3 2015 Notes was $1,457,500.
The Q3
2015 Notes and accrued interest were convertible into shares of our
common stock (the “Common Stock”) beginning six months
from the date of execution, at a conversion price of $0.15 per
share, with certain adjustment provisions noted below. The maturity
date of the first and second Q3 2015 Note was August 26, 2016. The
third Q3 2015 Note had a maturity date of September 24, 2016, the
fourth had a maturity date of September 26, 2016, the fifth was
October 20, 2016 and the sixth was October 29, 2016. The Q3 2015
Notes bore interest on the unpaid principal amount at the rate of
5% per annum from the date of issuance until the same became due
and payable, whether at maturity or upon acceleration or by
prepayment or otherwise.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default, as defined
in such Q3 2015 Note, a Default Amount was equal to the sum of (i)
the principal amount, together with accrued interest due thereon
through the date of payment payable at the holder’s option in
cash or common stock and (ii) an additional amount equal to the
principal amount payable at our option in cash or common stock. For
purposes of payments in common stock, the following conversion
formula applied: the conversion price shall be the lower of: (i)
the fixed conversion price ($0.15) or (ii) 60% multiplied by the
volume weighted average price of our common stock during the ten
consecutive trading days immediately prior to the later of the
Event of Default or the end of the applicable cure period. Certain
other conversion rates applied in the event of the sale or merger
of us, default and other defined events. The embedded
conversion feature of these notes contained anti-dilution
protection, therefore, were treated as derivative instruments (see
Note 9).
We could have
prepaid the Q3 2015 Notes at any time on the terms set forth in the
Q3 2015 Notes at the rate of 115% of the then outstanding balance
of the Q3 2015 Notes. Under the terms of the Q3 2015 Notes, we
could not effect certain corporate and business actions during the
term of the Q3 2015 Notes, although some could have been done with
proper notice. Pursuant to the Purchase Agreement, with certain
exceptions, the Q3 2015 Note holder had a right of participation
during the term of the Q3 2015 Notes; additionally, we granted the
Q3 2015 Note holder registration rights for the shares of common
stock underlying the Q3 2015 Notes pursuant to Registration Rights
Agreements.
In
addition, bundled with the convertible debt, we
sold:
1.
A common stock purchase warrant to each Buyer,
which allows the Buyers to purchase an aggregate of 1,325,000
shares of common stock and the placement agent to purchase 483,333
shares of common stock (aggregating 1,808,333 shares of our common
stock) at an exercise price of $0.30 per share (see Note 8);
and
2.
4,337,500 restricted shares of common stock to the
Buyers.
A Registration Rights Agreement was signed and, as
a result, we filed a Registration Statement on September 11, 2015
and filed an Amended Form S–1 on October 26, 2015,
November 12, 2015 and December 10, 2015 and the Amended Form S-1
became effective December 18, 2015.
We
allocated the proceeds from the Q3 2015 Notes to the convertible
debt, warrants and restricted shares of common stock issued based
on their relative fair values. We determined the fair
value of the warrants using Black-Scholes with the following range
of assumptions:
|
|
December 31,
2015
|
|
Expected
terms (in years)
|
|
5.00
|
|
Expected
volatility
|
|
101%
– 119%
|
|
Risk-free
interest rate
|
|
1.37%
– 1.58%
|
|
Dividend
yield
|
|
-
|
|
The
fair value of the restricted shares of common stock issued was
based on the market price of our common stock on the date of
issuance of the Q3 2015 Notes. The allocation of the
proceeds to the warrants and restricted shares of common stock
based on their relative fair values resulted in us recording a debt
discount of $89,551 and $374,474, respectively. The
remaining proceeds of $860,975 were initially allocated to the
debt. We determined that the embedded conversion
features in the Q3 2015 Notes were a derivative instrument which
was required to be bifurcated from the debt host contracts and
recorded at fair value as a derivative liability. The
fair value of the embedded conversion features at issuance was
determined using a Path-Dependent Monte Carlo Simulation (see Note
9 for assumptions used to calculate fair value). The
initial fair value of the embedded conversion features were
$901,784, of which, $830,560 is recorded as a debt
discount. The initial fair value of the embedded
conversion feature derivative liabilities in excess of the proceeds
allocated to the debt was $71,224, and was immediately
expensed and recorded as interest expense during the year ended
December 31, 2015 in the accompanying consolidated statement of
operations. The Q3 2015 Notes were also issued at an OID
of 10% and the OID of $132,500 was recorded as an addition to the
principal amount of the Q3 2015 Notes and a debt discount in the
accompanying consolidated balance sheet.
Total debt issuance
costs incurred in connection with the Q3 2015 Notes was $150,919,
of which, $68,419 is the fair value of the warrants to purchase
483,333 shares of common stock issued to the placement
agents. The debt issuance costs were recorded as a debt
discount and were being amortized to interest expense using the
effective interest method over the term of the Q3 2015
Notes.
During the year
ended December 31, 2016, the Q3 2015 Notes holders elected to
convert all principal and interest outstanding of $1,515,635 into
10,104,228 shares of common stock at a conversion price of $0.15
per share (see Note 8). As a result of the conversion of
the outstanding principal and interest balance into shares of
common stock, the fair value of the embedded conversion feature
derivative liabilities of $2,018,565 on the date of conversion was
reclassified to additional paid-in capital (see Note 9) and the
remaining unamortized debt discount was amortized to interest
expense during the year ended December 31, 2016.
2016 Financing
The following table
summarizes the outstanding 2016 Convertible Debentures at December
31, 2016:
|
|
|
|
Convertible
debentures
|
$
1,559,922
|
Less:
Debt discount
|
(845,730
)
|
Carrying
value
|
714,192
|
Less:
Current portion
|
(714,192
)
|
Convertible
debentures – long-term
|
$
-
|
In the second and
third quarter of 2016, we entered into Securities Purchase
Agreements with eight accredited investors (the
“Investors”), pursuant to which we received aggregate
gross proceeds of $3,000,000 (net of OID) pursuant to which we
sold:
Nine convertible
promissory notes of the Company totaling $3,303,889 (each a
“2016 Note” and collectively the “2016
Notes”) (the 2016 Notes were sold at a 10% OID and we
received an aggregate total of $2,657,500 in funds thereunder after
debt issuance costs of $342,500). The 2016 Notes and accrued
interest are convertible into shares of our common stock at a
conversion price of $0.25 per share, with certain adjustment
provisions noted below. The maturity date of the 2016 Notes issued
on June 30, 2016 and July 15, 2016 is July 30, 2017 and the
maturity date of the 2016 Notes issued on July 25, 2016 is August
25, 2017. The 2016 Notes bear interest on the unpaid principal
amount at the rate of 5% per annum from the date of issuance until
the same becomes due and payable, whether at maturity or upon
acceleration or by prepayment or otherwise.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default, as defined
in such 2016 Notes, a Default Amount is equal to the sum of (i) the
principal amount, together with accrued interest due thereon
through the date of payment payable at the holder’s option in
cash or common stock and (ii) an additional amount equal to the
principal amount payable at our option in cash or common stock. For
purposes of payments in common stock, the following conversion
formula shall apply: the conversion price shall be the lower of:
(i) the fixed conversion price ($0.25) or (ii) 75% multiplied by
the volume weighted average price of our common stock during the
ten consecutive trading days immediately prior to the later of the
Event of Default or the end of the applicable cure period. For
purposes of the Investors request of repayment in cash but we are
unable to do so, the following conversion formula shall apply: the
conversion price shall be the lower of: (i) the fixed conversion
price ($0.25) or (ii) 60% multiplied by the lowest daily volume
weighted average price of our common stock during the ten
consecutive trading days immediately prior to the conversion.
Certain other conversion rates apply in the event of the sale or
merger of us, default and other defined events.
We may prepay the
2016 Notes at any time on the terms set forth in the 2016 Notes at
the rate of 110% of the then outstanding balance of the 2016 Notes.
Pursuant to the Securities Purchase Agreements, with certain
exceptions, the Investors have a right of participation during the
term of the 2016 Notes; additionally, we granted the 2016 Note
holders registration rights for the shares of common stock
underlying the 2016 Notes up to $1,000,000 pursuant to Registration
Rights Agreements. We filed a Form S-1 Registration Statement on
August 9, 2016, filed an Amended Form S–1 on August 23, 2016
and August 24, 2016 and the Amended Form S-1 became effective
August 25, 2016.
In
addition, bundled with the convertible debt, we
sold:
1.
A
common stock purchase warrant to each Investor, which allows the
Investors to purchase an aggregate of 3,000,000 shares of common
stock and the placement agent to purchase 1,220,000 shares of
common stock (aggregating 4,220,000 shares of our common stock) at
an exercise price of $0.40 per share (see Note 8); and
2.
7,500,000
restricted shares of
common stock to the Investors.
We allocated the
proceeds from the 2016 Notes to the convertible debenture, warrants
and restricted shares of common stock issued based on their
relative fair values. We determined the fair value of
the warrants using
Black-Scholes
with the following range of
assumptions:
|
|
Expected
terms (in years)
|
5.00
|
Expected
volatility
|
229
%
|
Risk-free
interest rate
|
1.01-1.15
% 1.15%
|
Dividend
yield
|
-
|
The fair value of
the restricted shares of common stock issued to Investors was based
on the market price of our common stock on the date of issuance of
the 2016 Notes. The allocation of the proceeds to the
warrants and restricted shares of common stock based on their
relative fair values resulted in us recording a debt discount of
$445,603 and $1,127,225, respectively. The remaining
proceeds of $1,427,172 were initially allocated to the debt. We
determined that the embedded conversion features in the 2016 Notes
were a derivative instrument which was required to be bifurcated
from the debt host contract and recorded at fair value as a
derivative liability. The fair value of the embedded
conversion features at issuance was determined using a
Path-Dependent Monte Carlo Simulation Model (see Note 9 for
assumptions used to calculate fair value). The initial
fair value of the embedded conversion features were $3,444,284, of
which, $687,385 is recorded as a debt discount. The
initial fair value of the embedded conversion feature derivative
liabilities in excess of the proceeds allocated to the debt, after
the allocation of debt proceeds to the debt issuance costs, was
$2,756,899, and was immediately expensed and recorded as
interest expense during the year ended December 31, 2016 in the
accompanying condensed consolidated statement of
operations. The 2016 Notes were also issued at an OID of
10% and the OID of $303,889 was recorded as an addition to the
principal amount of the 2016 Notes and a debt discount in the
accompanying consolidated balance sheet.
Total debt issuance
costs incurred in connection with the 2016 Notes was $739,787, of
which, $357,286 is the fair value of the warrants to purchase
1,220,000 shares of common stock issued to the placement
agents. The debt issuance costs have been recorded as a
debt discount and are being amortized to interest expense using the
effective interest method over the term of the 2016
Notes.
During the year
ended December 31, 2016, certain of the 2016 Notes holders elected
to convert principal and interest outstanding of $1,749,070 into
6,996,280 shares of common stock at a conversion price of $0.25 per
share (see Note 8). As a result of the conversion of the
principal and interest balance into shares of common stock, the
fair value of the embedded conversion feature derivative
liabilities of $1,093,263 on the date of conversion was
reclassified to additional paid-in capital (see Note 9) and the
amortization of the debt discount was accelerated for the amount
converted and recorded to interest expense during the year ended
December 31, 2016.
Interest Expense
We recognized
interest expense on the Q3 2015 Notes and 2016 Notes for the year
ended December 31, 2016 and 2015 of $80,095 and $26,754,
respectively. The debt discount recorded for the 2016 Notes are
being amortized as interest expense over the term of the 2016 Notes
using the effective interest method. Total amortization
of the debt discount on the Q3 2015 Notes and 2016 Notes to
interest expense for the years ended December 31, 2016 and 2015 was
$3,508,199 and $527,964, respectively.
NOTE 6 – DEBENTURES – RELATED PARTIES
The following table
summarizes the outstanding debentures to a related party at
December 31, 2016 and 2015:
|
|
|
Line
of credit convertible debenture – related party
|
$
-
|
$
409,192
|
2014
non-convertible debenture – related party
|
-
|
25,000
|
Total
|
-
|
434,192
|
Less
: Debt discount
|
-
|
(17,720
)
|
Carrying
value
|
-
|
416,472
|
Less:
Current portion
|
-
|
(391,472
)
|
Total
long-term debentures – related party
|
$
-
|
$
25,000
|
Line of Credit Convertible Debenture
In
January 2013, we entered into a line of credit convertible
debenture with our President and Chief Executive Officer (the
“LOC Convertible Debenture”). Under the terms of its
original issuance: (1) we could request to borrow up to a maximum
principal amount of $250,000 from time to time; (2) amounts
borrowed bore an annual interest rate of 8%; (3) the amounts
borrowed plus accrued interest were payable in cash at the earlier
of January 14, 2014 or when we complete a Financing, as defined,
and (4) the holder had sole discretion to determine whether or not
to make an advance upon our request.
During
2013, the LOC Convertible Debenture was further amended to: (1)
increase the maximum principal amount available for borrowing to $1
million plus any amounts of salary or related payments paid to Dr.
Damaj prior to the termination of the funding commitment; and (2)
change the holder’s funding commitment to automatically
terminate on the earlier of either (a) when we complete a financing
with minimum net proceeds of at least $4 million, or (b) July 1,
2016. The securities to be issued upon automatic conversion would
have been either our securities that were issued to the investors
in a Qualified Financing or, if the financing did not occur by July
1, 2016, shares of the our common stock based on a conversion price
of $0.312 per share, 80% times the quoted market price of our
common stock on the date of the amendment. The LOC Convertible
Debenture bore interest at a rate of 8% per annum. The other
material terms of the LOC Convertible Debenture were not changed.
We recorded a debt discount for the intrinsic value of the BCF with
an offsetting increase to additional paid-in-capital. The BCF was
being accreted as non-cash interest expense over the expected term
of the LOC debenture to its stated maturity date using the
effective interest rate method.
On
July 22, 2014, we agreed with our CEO to increase the principal
amount that may be borrowed from $1,000,000 to
$1,500,000. All other terms of the LOC Convertible
Debenture remained the same.
On August 12, 2015,
the principal amount that may be borrowed was increased to
$2,000,000 and the automatic termination date described above was
extended to October 1, 2016. The LOC Convertible Debenture was not
renewed upon expiration. The conversion price was $0.16 per share,
80% times the quoted market price of our common stock on the date
of the amendment.
During the years
ended December 31, 2016 and 2015, we borrowed $0 and $114,
respectively, under the LOC Convertible Debenture and recorded a
beneficial conversion feature of $3,444 and $8,321, respectively,
for the amounts borrowed and accrued interest. We repaid the LOC
Convertible Debenture balance and accrued interest in full during
the year ended December 31, 2016.
January 2015 Non-Convertible Debenture - Former CFO
On
January 21, 2015, we entered into a securities purchase agreement
with our former Chief Financial Officer whereby we issued and sold
a promissory note in the principal face amount of $55,000 and
warrants to purchase up to 250,000 shares of our common stock for
gross proceeds of $50,000. We recorded an OID of $5,000
upon issuance.
The
note was due on July 31, 2015 and accrued a one-time interest
charge of 8% on the closing date. The warrants are exercisable for
five years from the closing date at an exercise price of $0.30 per
share of common stock. The warrants contain anti-dilution
protection, including protection upon dilutive issuances. The
principal and interest balance of $59,400 was repaid on July 31,
2015.
The
warrants issued in connection with the note, are measured at fair
value and classified as a liability because these warrants contain
anti-dilution protection and therefore, cannot be considered
indexed to our own stock which is a requirement for the scope
exception as outlined under FASB ASC 815. The estimated fair value
of the warrants was determined using the Probability Weighted
Black-Scholes Model, resulting in a fair value of $49,999 on the
date they were issued.
The
allocation of the proceeds of the debt was initially recorded using
the residual method, at $1, net of a debt discount of $54,999 for
the fair value of the warrants and the OID. The discount was
accreted as non-cash interest expense over the expected term of the
note using the effective interest method and the unamortized
balance was expensed upon repayment. The fair value of the warrants
will be affected by changes in inputs to that model including our
stock price, expected stock price volatility, the contractual term
and the risk-free interest rate. We will continue to classify the
fair value of the warrants as a liability until the warrants are
exercised, expire or are amended in a way that would no longer
require these warrants to be classified as a liability, whichever
comes first. The anti-dilution protection for the warrants survives
for the life of the warrants which ends in January 2020 (see Note
9).
2014 Non-Convertible Notes – Related Parties
On January 29,
2014, we issued an 8% note, in the amount of $25,000, to our
President and Chief Executive Officer. The principal amount and
interest were payable on January 22, 2015. This note was amended to
extend the maturity date until January 22, 2017. We repaid the
principal note balance and accrued interest in full in August
2016.
On
May 30, 2014, we issued an 8% debenture, in the amount of $50,000,
to a member of our Board of Directors. The principal amount
and interest were payable on May 30, 2015 and the repayment date
had been extended to May 30, 2016. On August 5, 2015 the debenture
was converted into 313,177 shares of common stock.
On
June 17, 2014, we issued an 8% debenture, in the amount of $50,000,
to our former Chief Financial Officer. The principal and
interest were payable on June 16, 2015 and were repaid in July
2015.
On
August 25, 2014, we issued an 8% debenture, in the amount of
$25,000, to a member of our Board of Directors. The principal
amount and interest were payable on August 25, 2015. In July 2015,
the repayment date was extended to May 30, 2016. On August 5, 2015
the debenture was converted into 156,083 shares of common
stock.
Interest Expense
We recognized
interest expense on the outstanding debentures to related parties
totaling $17,430 and $69,634 during the years ended December 31,
2016 and 2015, respectively. Amortization of the debt discount to
interest expense during the years ended December 31, 2016 and 2015
totaled $21,164 and $122,092, respectively.
NOTE 7 – RELATED PARTY TRANSACTIONS
Related Party Borrowings
There were certain
related party borrowings that were repaid in full or converted into
shares of common stock during the years ended December 31, 2016 and
2015 which are described in more detail in Note 6.
Accrued Compensation – Related Party
Accrued
compensation includes accruals for employee wages, vacation pay and
target-based bonuses. The components of accrued compensation
as of December 31, 2016 and 2015 are as follows:
|
|
|
Wages
|
$
1,455,886
|
$
1,178,909
|
Vacation
|
261,325
|
170,371
|
Bonuses
|
449,038
|
-
|
Payroll
taxes on the above
|
133,344
|
93,510
|
Total
|
2,299,593
|
1,442,790
|
Classified
as long-term
|
(1,531,904
)
|
(906,928
)
|
Accrued
compensation
|
$
767,689
|
$
535,862
|
Accrued employee wages at December 31 2016 and
2015 are entirely related to wages owed to our President and Chief
Executive Officer. Under the terms of his employment
agreement, wages are to be accrued but no payment made for so long
as payment of such salary would jeopardize our ability to continue
as a going concern. The CEO started to receive payment of salary in
July 2016. Under the third quarter 2015 financing agreement,
salaries prior to January 1, 2015
totaling $906,928 could
not be repaid until the debentures were repaid in full or otherwise
extinguished by conversion or other means and, accordingly, the
accrued compensation was shown as a long-term
liability.
During
the year ended December 31, 2016, the Q3 2015 Notes were fully
converted into shares of common stock. We do not expect to pay the
accrued wages and related payroll tax amounts within the next 12
months and thus is classified as a long-term
liability.
NOTE 8 – STOCKHOLDERS’ EQUITY (DEFICIT)
Capital Stock
We
have 292,500,000 authorized shares of common stock with a par value
of $0.001 per share which were increased in November 2016 upon
approval from our stockholders from 150,000,000 authorized shares.
In November 2016, our stockholders approved the Amended and
Restated Articles of Incorporation to authorize a class of
undesignated or "blank check" preferred stock, consisting of
7,500,000 shares at $0.001 par value per share. Shares of preferred
stock may be issued in one or more series, with such rights,
preferences, privileges and restrictions to be fixed by the Board
of Directors.
Issuances of Common Stock
2016 Issuances
On January 6, 2016
and April 5, 2016, we entered into a consulting agreement with a
third party pursuant to which we agreed to issue, over the term of
the agreements, an aggregate of 1,560,000 shares of common stock in
exchange for services to be rendered. During the year ended
December 31, 2016, we issued 1,560,000 shares under the agreement
related to services provided and recognized the fair value of the
shares issued of $184,958 in general and administrative expense in
the accompanying consolidated statement of
operations. The 1,560,000 shares of common stock vested
on the date of issuance and the fair value of the shares of common
stock was based on the market price of our common stock on the date
of vesting.
In January 2016, we
issued 300,000 shares of common stock for services and recorded an
expense of $17,000, which is included in general and administrative
expense in the accompanying consolidated statement of operations.
The 300,000 shares of common stock vested on the date of issuance
and the fair value of the shares of common stock was based on the
market price of our common stock on the date of
vesting.
On February 10,
2016, we entered into a service agreement with a third party
pursuant to which we agreed to issue, over the term of the
agreement, 3,000,000 shares of common stock in exchange for
services to be rendered. During the year ended December 31,
2016, we issued 3,000,000 shares under the agreement related to
services provided and recognized the fair value of the shares
issued of $352,500 in general and administrative expense in the
accompanying consolidated statement of operations. The 3,000,000
shares of common stock vested on the date of issuance and the fair
value of the shares of common stock was based on the market price
of our common stock on the date of vesting.
On
February 19, 2016, we entered into a consulting agreement with a
third party, pursuant to which we agreed to issue, over the term of
the agreement, 1,750,000 shares of common stock in exchange for
services to be rendered. During the year ended December 31,
2016, we issued 1,750,000 shares under the agreement related to
services provided in connection with the acquisition of Beyond
Human® (see Note 3) and recognized the fair value of the
shares issued of $181,013 in general and administrative expense in
the accompanying consolidated statement of operations. The
1,750,000 shares of common stock vested on the date of issuance and
the fair value of the shares of common stock was based on the
market price of our common stock on the date of
vesting.
In April and August
2016, we issued an aggregate of 3,385,354 shares of common stock
upon the cashless exercise of warrants to purchase 5,042,881 shares
of common stock. Upon exercise of certain warrants in
April 2016, the fair value of the warrant derivative liability on
the date of exercise was reclassified to additional paid-in capital
(see Note 9).
In April, May,
August and October 2016, we issued an aggregate of 1,012,500 shares
of common stock for services and recorded an expense of $192,043,
which is included in general and administrative expense in the
accompanying consolidated statement of operations. The 1,012,500
shares of common stock vested on the date of issuance and the fair
value of the shares of common stock was based on the market price
of our common stock on the date of vesting.
On April 27, 2016,
we entered into a service agreement with a third party pursuant to
which we agreed to issue 300,000 shares of common stock in exchange
for services to be rendered over the 3 month term of the
agreement. The shares of common stock issued were
non-forfeitable and the fair value of $28,500 was based on the
market price of our common stock on the date of vesting. During the
year ended December 31, 2016, we recognized $28,500 in general and
administrative expense in the accompanying consolidated statement
of operations.
In May and December
2016, we issued an aggregate of 2,361,111 shares of restricted
common stock to certain note holders in connection with their notes
payable. The relative fair value of the shares of
restricted common stock issued was determined to be $276,167 and
was recorded as a debt discount (see Note 5).
In May and June
2016, the Buyers of the Q3 2015 Notes elected to convert $1,515,635
in principal and interest into 10,104,228 shares of common stock
(see Note 5). Upon conversion, the fair value of the embedded
conversion feature derivative liability on the date of conversion
was reclassified to additional paid-in capital (see Note
9).
On June 16, 2016,
we entered into a consulting agreement with a third party pursuant
to which we agreed to issue 250,000 restricted shares of common
stock in exchange for services to be rendered. In July 2016,
we issued 250,000 fully-vested shares under the agreement related
to services to be provided over the term of the agreement which
ended on December 16, 2016. The fair value of the shares issued of
$47,500 was based on the market price of our common stock on the
date of vesting. On December 16, 2016, we amended the consulting
agreement to extend the term to June 16, 2017 and in connection
with the amendment issued 80,000 fully-vested shares for services
to be provided over the remaining term of the amended agreement.
The fair value of the shares issued of $14,640 was based on the
market price of our common stock on the date of vesting. During the
year ended December 31, 2016, we recognized $48,720 in general and
administrative expense in the accompanying consolidated statement
of operations and the remaining unamortized expense of $13,420 is
included in prepaid expense and other current assets in the
accompanying consolidated balance sheet at December 31,
2016.
In July 2016, we
issued 100,000 shares of common stock to CRI pursuant to the
Amended CRI Asset Purchase Agreement (see Note 2). The
fair value of the restricted shares of common stock of $23,000 was
based on the market price of our common stock on the date of
issuance and is included in research and development expense in the
accompanying consolidated statement of operations.
On August 3, 2016,
we entered into a service agreement with a third party pursuant to
which we issued 75,000 fully-vested restricted shares of common
stock in exchange for services to be rendered over the term of the
agreement which ended on November 10, 2016. The fair value of the
shares issued of $32,250 was based on the market price of our
common stock on the date of vesting. On November 17, 2016, we
entered into a new service agreement with the same third party and
in connection with the new agreement issued 275,000 fully-vested
shares for services to be provided over the term of the new service
agreement through May 17, 2017. The fair value of the shares issued
of $69,575 was based on the market price of our common stock on the
date of vesting. During the year ended December 31, 2016, we
recognized $49,644 in general and administrative expense in the
accompanying consolidated statement of operations and the remaining
unamortized expense of $52,181 is included in prepaid expense and
other current assets in the accompanying consolidated balance sheet
at December 31, 2016.
On August 23, 2016,
we entered into a consulting agreement with a third party pursuant
to which we agreed to issue 1,600,000 restricted shares of common
stock, payable in four equal installments, in exchange for services
to be rendered over the agreement which ends on August 23,
2017. The shares were considered fully-vested and
non-refundable at the execution of the agreement. In September and
December 2016, we issued a total of 800,000 shares of common stock
under the agreement. The fair value of the shares issued of
$360,000 was based on the market price of our common stock on the
date of agreement. As a result of the shares being fully-vested at
the execution of the agreement but payable in equal installments,
we recorded a liability for the fair value of the remaining 800,000
shares of common stock to be issued of $360,000 which is included
in accounts payable and accrued expense in the accompanying
consolidated balance sheet at December 31, 2016. Upon issuance of
the remaining shares, we will reclassify the liability to common
stock and additional paid-in-capital. During the year ended
December 31, 2016, we recognized $255,000 in general and
administrative expense in the accompanying consolidated statement
of operations and the remaining unamortized expense of $465,000 is
included in prepaid expense and other current assets in the
accompanying consolidated balance sheet at December 31,
2016.
On September 1,
2016, we entered into a service agreement with a third party
pursuant to which we agreed to issue, over the term of the
agreement, 2,000,000 shares of common stock in exchange for
services to be rendered. During the year ended December 31,
2016, we issued 1,330,000 shares under the agreement related to
services provided and recognized the fair value of the shares
issued of $332,970 in general and administrative expense in the
accompanying consolidated statement of operations. The 1,330,000
shares of common stock vested on the date of issuance and the fair
value of the shares of common stock was based on the market price
of our common stock on the date of vesting.
In November 2016,
we issued 12,808,796 shares of common stock to Novalere Holdings in
connection with the Amendment and Supplement to a Registration
Rights and Stock Restriction Agreement and $2,971,641 of the
acquisition contingent consideration was reclassified from
liabilities to equity (see Note 3).
During the year
ended December 31, 2016, we issued 215,000 shares of common stock
for legal fees in connection with the Semprae merger transaction
and recognized the fair value of the shares issued of $64,500 in
general and administrative expense in the accompanying consolidated
statement of operations.
During the year
ended December 31, 2016, we issued 19,315,994 shares of common
stock in exchange for vested restricted stock units.
In connection with
the issuance of the 2016 Notes, we issued restricted shares of
common stock totaling 7,500,000 to the Investors. The relative fair
value of the restricted shares of common stock totaling $1,127,225
was recorded as a debt discount (see Note
5).
In the third and
fourth quarter of 2016, certain 2016 Notes holders elected to
convert $1,749,070 in principal and interest into 6,996,280 shares
of common stock (see Note 5). Upon conversion, the fair value of
the embedded conversion feature derivative liability on the date of
conversion was reclassified to additional paid-in capital (see Note
9).
During the year
ended December 31, 2016, five of our warrant holders exercised
their warrants to purchase shares of common stock totaling
1,033,800 at an exercise price of $0.30 per share. We
received gross cash proceeds of $310,140.
2015 Issuances
On
January 17, 2013, we entered into a service agreement with a third
party pursuant to which we agreed to issue over the term of the
agreement 250,000 shares of our common stock in exchange for
services to be rendered. On September 18, 2013, we extended
the term of the agreement and agreed to issue an additional
aggregate of 300,000 shares of common stock in exchange for
services to be rendered. The term was further extended in April
2014 and we agreed to issue an additional 300,000 shares of common
stock in exchange for services to be rendered over the term of the
agreement. During the year ended December 31, 2015, we issued
140,000 and recognized $20,650 of services expense under this
agreement. This agreement was terminated in June 2015.
On
March 17, 2015, we entered into a consulting agreement for
services. In consideration of such services, we issued 28,125
shares of our common stock to the consultant on said date and
valued them at $3,938 based on the closing price of the stock on
the date of issuance. The fair value of such shares was
recognized in general and administrative expense in the
accompanying consolidated statement of operations.
On
August 27, 2014, we agreed to issue 200,000 shares of our common
stock pursuant to a consulting contract with a third party for
services. We extended the consulting contract in January 2015 and
agreed to issue an additional 200,000 shares. The issued shares
have been valued at the closing price of our common stock on the
date of issuance and are expensed over the period that the services
are rendered. We recognized expense of $38,000 during the year
ended December 31, 2015 related to services provided in general and
administrative expense in the accompanying consolidated statement
of operations.
On
January 23, 2015, we entered into a settlement agreement with CRI
whereby CRI returned 200,000 shares of common stock initially
issued for a product license acquired. The share return was in
consideration for us completing certain product development and
regulatory efforts relating to the sale of the product in foreign
territories and reduced the intangible asset value by the fair
value of such shares totaling $38,000.
On September 17,
2015, we issued 500,000 shares of common stock in exchange for
vested restricted stock units.
On
September 29, 2015 we issued 375,000 shares of common stock for
services and recorded an expense of $23,250, which is included in
general and administrative expense in the accompanying consolidated
statement of operations.
We
issued an additional 1,037,500 shares of common stock and expensed
$124,691 during the year ended December 31, 2015 to other
consultants for various services, which is included in general and
administrative expense in the accompanying consolidated statement
of operations. All issued shares have been valued at the closing
price of our common stock on the date of
issuance.
See
Note 5 for more details on the shares of common stock issued in
connection with the Q3 2015 Notes, shares of common stock issued
upon conversion of convertible debentures and note payable and
shares of common stock issued in connection with the extension and
amendment of certain convertible debentures during
2015. See Note 3 for more details on the shares of
common stock issued in connection with the Novalere acquisition
during 2015 and the return of shares of common stock during 2015 in
connection with the Semprae merger transaction.
2013 Equity Incentive Plan
We have issued
common stock, restricted stock units and stock option awards to
employees, non-executive directors and outside consultants under
the 2013 Equity Incentive Plan (“2013 Plan”), which was
approved by our Board of Directors in February of 2013. The
2013 Plan allows for the issuance of up to 10,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. The exercise price for
all equity awards issued under the 2013 Plan is based on the fair
market value of the common stock. Currently, because our
common stock is quoted on the OTCQB, the fair market value of the
common stock is equal to the last-sale price reported by the OTCQB
as of the date of determination, or if there were no sales on such
date, on the last date preceding such date on which a sale was
reported. Generally, each vested stock unit entitles the
recipient to receive one share of our common stock which is
eligible for settlement at the earliest of their termination, a
change in control of us or a specified date. Restricted stock
units can vest according to a schedule or immediately upon
award. Stock options generally vest over a three-year period,
first year cliff vesting with quarterly vesting thereafter on the
three-year awards, and have a ten-year life. Stock options
outstanding are subject to time-based vesting as described above
and thus are not performance-based. As of December 31, 2016, no
shares were available under the 2013 Plan.
2014 Equity Incentive Plan
We have issued
common stock, restricted stock units and stock options to
employees, non-executive directors and outside consultants under
the 2014 Equity Incentive Plan (“2014 Plan”), which was
approved by our Board of Directors in November 2014. The 2014
Plan allows for the issuance of up to 20,000,000 shares of our
common stock to be issued in the form of stock options, stock
awards, stock unit awards, stock appreciation rights, performance
shares and other share-based awards. The exercise price for
all equity awards issued under the 2014 Plan is based on the fair
market value of the common stock. Generally, each vested stock
unit entitles the recipient to receive one share of our common
stock which is eligible for settlement at the earliest of their
termination, a change in control of us or a specified
date. Restricted stock units can vest according to a schedule
or immediately upon award. Stock options generally vest over a
three-year period, first year cliff vesting with quarterly vesting
thereafter on the three-year awards and have a ten-year
life. Stock options outstanding are subject to time-based
vesting as described above and thus are not performance-based. As
of December 31, 2016, 146,314 shares were available under the 2014
Plan.
2016
Equity Incentive Plan
On March 21, 2016,
our Board of Directors approved the adoption of the 2016 Equity
Incentive Plan and on October 20, 2016 adopted the Amended and
Restated 2016 Equity Incentive Plan (“2016
Plan”). The 2016 Plan was then approved by our
stockholders in November 2016. The 2016 Plan allows for the
issuance of up to 20,000,000 shares of our common stock to be
issued in the form of stock options, stock awards, stock unit
awards, stock appreciation rights, performance shares and other
share-based awards. The 2016 Plan includes an evergreen
provision in which the
number of
shares of common stock authorized for issuance and available for
future grants under the 2016 Plan will be increased each January 1
after the effective date of the 2016 Plan by a number of shares of
common stock equal to the lesser of: (a) 4% of the number of shares
of common stock issued and outstanding on a fully-diluted basis as
of the close of business on the immediately preceding December 31,
or (b) a number of shares of common stock set by our Board of
Directors.
The exercise price for all equity awards issued
under the 2016 Plan is based on the fair market value of the common
stock. Generally, each vested stock unit entitles the
recipient to receive one share of our common stock which is
eligible for settlement at the earliest of their termination, a
change in control of the us or a specified date. Restricted
stock units can vest according to a schedule or immediately upon
award. Stock options generally vest over a three-year period,
first year cliff vesting with quarterly vesting thereafter on the
three-year awards and have a ten-year life. Stock options
outstanding are subject to time-based vesting as described above
and thus are not performance-based. As of December 31, 2016,
15,837,500 shares were available under the 2016 Plan.
Stock-Based Compensation
The stock-based compensation expense for the years
ended December 31, 2016 and 2015 was $954,753 and $1,298,240,
respectively, for the issuance of restricted stock units and stock
options to management, directors and consultants. We
calculate the fair value of the restricted stock units based upon
the quoted market value of the common stock at the date of grant.
We calculate the fair value of each stock option award on the date
of grant using Black-Scholes.
As of December 31, 2016, the
remaining unamortized stock-based compensation expense to be
recognized in the consolidated statement of operations was
approximately $1.0 million and will be recognized over a remaining
weighted-average term of 2.5 years.
Stock Options
For
the years ended December 31, 2016 and 2015, the following weighted
average assumptions were utilized for the stock options granted
during the period:
|
|
|
Expected
life (in years)
|
10.0
|
6.0
|
Expected
volatility
|
227.2
%
|
228.8
%
|
Average
risk-free interest rate
|
1.76
%
|
2.16
%
|
Dividend
yield
|
-
|
-
|
Grant
date fair value
|
$
0.18
|
$
0.10
|
The
dividend yield of zero is based on the fact that we have never paid
cash dividends and has no present intention to pay cash
dividends. Expected volatility is based on the historical
volatility of our common stock over the period commensurate with
the expected life of the stock options. Expected life in years
is based on the “simplified” method as permitted by ASC
Topic 718. We believe that all stock options issued under its
stock option plans meet the criteria of “plain vanilla”
stock options. We use a term equal to the term of the stock
options for all non-employee stock options. The risk-free
interest rate is based on average rates for treasury notes as
published by the Federal Reserve in which the term of the rates
correspond to the expected term of the stock options.
The
following table summarizes the number of stock options outstanding
and the weighted average exercise price: