Company Quick10K Filing
Innovus Pharmaceuticals
Price2.21 EPS-2
Shares3 P/E-1
MCap6 P/FCF-3
Net Debt2 EBIT-4
TEV8 TEV/EBIT-2
TTM 2019-09-30, in MM, except price, ratios
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-15
S-1 2019-01-14 Public Filing
10-K 2018-12-31 Filed 2019-04-01
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-14
10-K 2017-12-31 Filed 2018-04-02
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-09
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-03-31
10-Q 2014-09-30 Filed 2014-11-14
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-14
10-K 2013-12-31 Filed 2014-03-28
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-03-19
10-Q 2012-06-30 Filed 2012-08-06
10-Q 2012-03-31 Filed 2012-05-10
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-10-19
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-13
10-K 2010-12-31 Filed 2011-03-25
10-Q 2010-09-30 Filed 2010-11-03
10-Q 2010-06-30 Filed 2010-08-10
10-Q 2010-03-31 Filed 2010-05-12
10-K 2009-12-31 Filed 2010-05-05
8-K 2020-02-14
8-K 2020-02-13
8-K 2019-09-12
8-K 2019-07-23
8-K 2019-07-22
8-K 2019-06-30
8-K 2019-06-19
8-K 2019-06-05
8-K 2019-05-28
8-K 2019-05-28
8-K 2019-04-18
8-K 2019-04-11
8-K 2019-04-01
8-K 2019-03-31
8-K 2019-03-14
8-K 2019-02-22
8-K 2019-01-03
8-K 2018-12-30
8-K 2018-11-14
8-K 2018-08-31
8-K 2018-08-14
8-K 2018-08-10
8-K 2018-07-17
8-K 2018-05-29
8-K 2018-05-29
8-K 2018-05-14
8-K 2018-04-19
8-K 2018-04-02
8-K 2018-04-02
8-K 2018-01-20
8-K 2018-01-08

INNV 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Note 2 - Revenue
Note 3 - Business and Asset Acquisitions
Note 4 - Inventory
Note 5 - Intangible Assets and Goodwill
Note 6 - Notes Payable and Short - Term Loans Payable
Note 7 - Stockholders' Equity
Note 8 - Commitments and Contingencies
Note 10 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_155565.htm
EX-31.2 ex_155566.htm
EX-32.1 ex_155567.htm

Innovus Pharmaceuticals Earnings 2019-09-30

Balance SheetIncome StatementCash Flow
1511841-22012201420172020
Assets, Equity
10.07.14.21.3-1.6-4.52012201420172020
Rev, G Profit, Net Income
4.22.81.40.0-1.4-2.82012201420172020
Ops, Inv, Fin

10-Q 1 innv20190930_10q.htm FORM 10-Q innv20190331_10q.htm
 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 (Mark One)

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period ended September 30, 2019

or

[  ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act.

 

For the transition period from ___ to ____.

 

Commission File Number: 000-52991

 

INNOVUS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

90-0814124

(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification No.)

 

 

8845 Rehco Road

San Diego, CA

92121

(Address of Principal Executive Offices)

(Zip Code)

 

858-964-5123

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐     

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Securities registered pursuant to Section 12(b) of the Act: none

 

Securities registered pursuant to Section 12(g) of the Act: 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

INNV

OTCQB Marketplace

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

 

As of November 13, 2019, the registrant had 2,764,827 shares of common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Financial Statements

 

1

 

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2019 (Unaudited) and December 31, 2018

 

1

 

 

 

 

 

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018

 

2

 

 

 

 

  Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited) for the Nine Months Ended September 30, 2019 and 2018   3
       

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and 2018

 

4

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

5

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

16

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

23

 

 

 

 

Item 4.

Controls and Procedures

 

23

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

Item 1.

Legal Proceedings

 

24

 

 

 

 

Item 1A.

Risk Factors

 

24

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

24

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

25

 

 

 

 

Item 4.

Mine Safety Disclosures

 

25

 

 

 

 

Item 5.

Other Information

 

25

 

 

 

 

Item 6.

Exhibits

 

25

 

 

 

 

 

Signatures

 

26

 

 

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

 INNOVUS PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

 

   

September 30, 2019

   

December 31, 2018

 
   

(Unaudited)

         

ASSETS

               

Assets:

               

Cash

  $ 955     $ 1,248  

Accounts receivable, net

    117       282  

Prepaid expense and other current assets

    1,539       1,116  

Inventories

    1,742       2,370  

Total current assets

    4,353       5,016  
                 

Property and equipment, net

    216       247  
                 

Deposits

    21       21  

Operating lease right-of-use asset

    593       -  

Goodwill

    953       953  

Intangible assets, net

    3,378       3,890  

Total assets

  $ 9,514     $ 10,127  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Liabilities:

               

Accounts payable and accrued expenses

  $ 3,691     $ 2,622  

Operating lease liability

    162       -  

Accrued compensation

    1,341       1,252  

Deferred revenue and customer deposits

    170       108  

Accrued interest payable

    57       32  

Short-term loan payable

    553       266  

Notes payable, net of debt discount of $424 and $1,008, respectively

    2,762       3,073  

Total current liabilities

    8,736       7,353  
                 

Deferred Rent

    -       181  

Operating lease liability, net of current portion

    591       -  

Accrued compensation, net of current portion

    935       1,228  

Contingent consideration

    1,248       1,256  

Total non-current liabilities

    2,774       2,665  
                 

Total liabilities

    11,510       10,018  
                 

Commitments and contingencies

               
                 

Stockholders’ equity:

               

Preferred stock: 7,500,000 shares authorized, at $0.001 par value, no shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

    -       -  

Common stock: 292,500,000 shares authorized, at $0.001 par value, 2,612,379 and 2,103,071 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

    3       2  

Additional paid-in capital

    47,845       43,967  

Accumulated deficit

    (49,844 )     (43,860 )

Total stockholders' equity

    (1,996 )     109  
                 

Total liabilities and stockholders’ equity

  $ 9,514     $ 10,127  

 

See accompanying notes to these condensed consolidated financial statements.

 

 

 

INNOVUS PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except weighted average share and per share amounts)

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net revenue:

                               

Product sales, net

  $ 5,648     $ 6,957     $ 17,430     $ 18,469  

Service revenue

    -       189       156       345  

Cooperative marketing revenue

    102       233       264       417  

License revenue

    5       1       115       6  

Net revenue

    5,755       7,380       17,965       19,237  
                                 

Cost of product sales

    2,215       1,537       6,349       3,740  

Gross Profit

    3,540       5,843       11,616       15,497  
                                 

Operating expense:

                               

Research and development

    86       59       234       93  

Sales and marketing

    2,878       5,264       8,332       14,094  

General and administrative

    2,274       2,023       7,430       5,638  

Total operating expense

    5,238       7,346       15,996       19,825  
                                 

Loss from operations

    (1,698 )     (1,503 )     (4,380 )     (4,328 )
                                 

Other income (expense):

                               

Interest expense

    (538 )     (381 )     (1,514 )     (950 )

Loss on extinguishment of debt

    -       (745 )     (125 )     (1,040 )

Other income (expense), net

    -       -       29       1  

Fair value adjustment for contingent consideration

    -       179       6       198  

Total other expense, net

    (538 )     (947 )     (1,604 )     (1,791 )
                                 

Net loss

  $ (2,236 )   $ (2,450 )   $ (5,984 )   $ (6,119 )
                                 

Net loss per share of common stock – basic and diluted

  $ (0.81 )   $ (1.20 )   $ (2.28 )   $ (3.18 )
                                 

Weighted average number of shares of common stock outstanding – basic and diluted

    2,759,771       2,043,117       2,622,822       1,926,575  

 

See accompanying notes to these condensed consolidated financial statements.

 

 

 

 

INNOVUS PHARMACEUTICALS, INC.

Condensed Consolidated Statement of Stockholder's Equity

(Unaudited)

(In thousands, except share amounts)

 

                   

Additional

                 
   

Common Stock

   

Paid-in

   

Accumulated

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Equity

 
                                         

Balance at December 31, 2017

    1,596,574     $ 2     $ 36,541     $ (35,640 )   $ 903  
                                         

Common stock issued for services

    2,444       -       21       -       21  

Stock-based compensation

    -       -       95       -       95  

Exercise of warrants, net of offering costs

    180,247       -       2,657       -       2,657  

Common stock issued upon conversion of debt and interest

    21,429       -       385       -       385  

Common stock issued in connection with debt

    26,355       -       292       -       292  

Fair value of shares of common stock issued as financing fees in connection with notes payable

    8,916       -       122       -       122  

Reclassification of warrant derivative liability upon adoption of ASU 2017-11

    -       -       -       59       59  

Net loss

    -       -       -       (1,829 )     (1,829 )
                                         

Balances at March 31, 2018

    1,835,965     $ 2     $ 40,113     $ (37,410 )   $ 2,705  
                                         

Common stock issued for services

    159       -       2       -       2  

Stock-based compensation

    -       -       108       -       108  

Common stock issued upon conversion of debt and interest

    14,041       -       196       -       196  

Common stock issued for vested RSUs

    6,797       -       -       -       -  

Net loss

    -       -       -       (1,840 )     (1,840 )
                                         

Balances at June 30, 2018

    1,856,962     $ 2     $ 40,419     $ (39,250 )   $ 1,171  
                                         

Common stock issued for services

    -       -       -       -       -  

Stock-based compensation

    -       -       132       -       132  

Exercise of warrants, net of offering costs

    953       -       14       -       14  

Common stock issued upon conversion of debt and interest

    86,390       -       1,489       -       1,489  

Common stock issued in connection with debt

    34,287       -       402       -       402  

Common stock issued for vested RSUs

    6,086       -       100       -       100  

Net loss

    -       -       -       (2,450 )     (2,450 )
                                         

Balances at September 30, 2018

    1,984,678     $ 2     $ 42,556     $ (41,700 )   $ 858  
                                         
                                         

Balance at December 31, 2018

    2,103,071     $ 2     $ 43,967     $ (43,860 )   $ 109  
                                         

Stock-based compensation

    -       -       138       -       138  

Relative fair value of shares of restricted common stock issued in connection with notes payable

    18,000       -       61       -       61  

Sales of common stock and warrants, net of offering costs

    230,853       -       2,714       -       2,714  

Fair value of shares of common stock issued as financing fees in connection with notes payable

    5,600       -       28       -       28  

Net loss

    -       -       -       (1,989 )     (1,989 )
                                         

Balances at March 31, 2019

    2,357,524     $ 2     $ 46,908     $ (45,849 )   $ 1,061  
                                         

Common stock issued for services

    36,916       -       106       -       106  

Stock-based compensation

    -       -       137       -       137  

Common stock issued upon conversion of debt and interest

    100,000       -       300       -       300  

Relative fair value of shares of restricted common stock issued in connection with notes payable

    74,000       -       173       -       173  

Fair value of shares of common stock issued as financing fees in connection with notes payable

    10,036       -       28       -       28  

Net loss

    -       -       -       (1,759 )     (1,759 )
                                         

Balances at June 30, 2019

    2,578,476     $ 2     $ 47,652     $ (47,608 )   $ 46  
                                         

Common stock issued for services

    32,579       1       52       -       53  

Stock-based compensation

    -       -       139       -       139  

Common stock issued to settle contingent consideration

    1,324               2       -       2  

Net loss

    -       -       -       (2,236 )     (2,236 )
                                         

Balances at September 30, 2019

    2,612,379     $ 3     $ 47,845     $ (49,844 )   $ (1,996 )

 

See accompanying notes to these condensed consolidated financial statements.

 

 

 

INNOVUS PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

For the Nine Months Ended September 30,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net loss

  $ (5,984 )   $ (6,119 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation

    52       32  

Recovery of allowance for doubtful accounts

    (12 )     -  

Common stock, restricted stock units and stock options issued to employees, board of directors and consultants for compensation and services

    414       358  

Loss on extinguishment of debt

    125       1,040  

Change in fair value of contingent consideration

    (6 )     (198 )

Amortization of debt discount

    1,388       899  

Amortization of intangible assets

    542       472  

Changes in operating assets and liabilities, net of acquisition amounts

               

Accounts receivable

    177       (288 )

Prepaid expense and other current assets

    (423 )     (765 )

Inventories

    940       (472 )

Operating lease right-of-use asset and liability, net

    (21 )     -  

Accounts payable and accrued expense

    1,004       (258 )

Accrued compensation

    (204 )     (396 )

Accrued interest payable

    76       38  

Deferred revenue and customer deposits

    62       71  

Net cash used in operating activities

    (1,870 )     (5,586 )
                 

Cash flows used in investing activities:

               

Purchase of property and equipment

    (21 )     (176 )

Asset acquisition

    (343 )     -  
Contingent consideration payment     -       (19 )

Net cash used in investing activities

    (364 )     (195 )
                 

Cash flows from financing activities:

               

Payments on short-term loans payable

    (817 )     (245 )

Proceeds from short-terms loans payable

    1,053       125  

Proceeds from notes payable

    2,650       3,722  

Payments on notes payable

    (3,659 )     (1,535 )

Proceeds from sale of common stock and warrants, net of offering costs

    2,714       -  

Proceeds from stock option and warrant exercises

    -       2,852  

Net cash provided by financing activities

    1,941       4,919  
                 

Net change in cash

    (293 )     (862 )
                 

Cash at beginning of period

    1,248       1,565  
                 

Cash at end of period

  $ 955     $ 703  
                 

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 29     $ 5  
                 

Supplemental disclosures of non-cash investing and financing activities:

               

Common stock issued for conversion of convertible debentures, notes payable and accrued interest

  $ 300     $ 1,288  

Relative fair value of common stock issued in connection with notes payable recorded as debt discount and settlement of contingent consideration

  $ 458     $ 694  

Fair value of common stock issued to consultants for services

  $ 159     $ -  

Offering costs in connection with warrant exercises included in accounts payable and accrued expense

  $ -     $ 181  

Cumulative adjustment to accumulated deficit for the fair value of the warrant derivative liability upon adoption of ASU 2017-11 on January 1, 2018

  $ -     $ 59  

Fair value of common stock issued as financing fees in connection with notes payable recorded as debt discount

  $ 56     $ 223  

 

See accompanying notes to these condensed consolidated financial statements.

 

 

INNOVUS PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

Innovus Pharmaceuticals, Inc., a Nevada incorporated and San Diego-based company, together with its subsidiaries as follows (collectively referred to as “Innovus” or the “Company”): Semprae Laboratories, Inc., a Delaware corporation (“Semprae”); FasTrack Pharmaceuticals, Inc., a Delaware corporation (“FasTrack”); Novalere, Inc., a Delaware corporation (“Novalere”); Supplement Hunt, Inc., a Nevada corporation (“Supplement Hunt”); and Delata Prime Savings Club, Inc., a Nevada corporation (“Delta Prime Savings Club”), is an emerging over-the-counter (“OTC”) consumer goods and specialty pharmaceutical company engaged in the commercialization, licensing and development of safe and effective non-prescription medicine, consumer care products, supplements and certain related devices to improve men’s and women’s health and vitality, urology, brain health, pain, respiratory diseases, among others. The Company delivers innovative and uniquely presented and packaged health solutions through its (a) OTC medicines, devices, consumer and health products, and clinical supplements, which we market directly, (b) commercial retail and wholesale partners, and (c) directly to consumers through the Company’s proprietary Beyond Human® Sales & Marketing Platform including print media, on-line channels, websites, retailers and wholesalers. The Company is dedicated to being a leader in developing and marketing new OTC and branded Abbreviated New Drug Application (“ANDA”) products, supplements and certain related devices. Innovus actively pursues opportunities where existing prescription drugs have recently, or are expected to, change from prescription (or Rx) to OTC. These “Rx-to-OTC switches” require Food and Drug Administration (“FDA”) approval through a process initiated by the New Drug Application (“NDA”) holder.

 

The Company’s business model leverages its ability to (a) develop and build its current pipeline of proprietary products, and (b) to also acquire outright or in-license commercial products that are supported by scientific and/or clinical evidence, place them through the Company’s existing supply chain, retail and on-line (including our Amazon®, eBay®, Wish.com®, Walmart.com®, and Walgreens.com® on-line stores and other e-commerce business platforms) channels to tap new markets and drive demand for such products and to establish physician relationships. The Company currently sells its products direct to consumer primarily in the United States and Canada and sells to international commercial partners in multiple countries around the world.

 

Merger Agreement

 

On September 12, 2019, the Company signed a definitive merger agreement with Aytu Bioscience, Inc. ("Aytu"), a specialty pharmaceutical company focused on identifying, acquiring and commercializing novel products that address significant patient needs.  Pursuant to the terms and conditions of the merger agreement, the Companys shareholders will receive an aggregate of up to $8 million in shares of Aytu common stock, less certain deductions, at the time of closing as consideration for the merger.  Additional consideration for up to $16 million in milestone payments in the form of contingent value rights ("CVRs") may be paid to the Company's shareholders in cash or stock over the next five years if certain revenue and profitability milestones are achieved. Additionally, on August 8, 2019 the Company entered into a promissory note agreement with Aytu for $1 million which is due February 29, 2020 (see note 6). On October 10, 2019 the Company entered into an Addendum No. 1 to Promissory Note upon which Aytu loaned the Company an additional $350,000 with the same maturity as the promissory note agreement. The merger with Aytu is currently estimated to close in the first quarter to first half of 2020.

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated balance sheet as of December 31, 2018, which has been derived from audited consolidated financial statements, and these unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and include all assets, liabilities, revenues and expenses of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. Certain information required by U.S. GAAP has been condensed or omitted in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The results for the period ended September 30, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2019, or for any future period. 

 

Use of Estimates

 

The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such management estimates include the allowance for doubtful accounts, sales returns and chargebacks, realizability of inventories, valuation of deferred tax assets, goodwill and intangible assets, valuation of contingent acquisition consideration, recoverability of long-lived assets and goodwill and the valuation of equity-based instruments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

 

Liquidity

 

The Company’s operations have been financed primarily through proceeds from convertible debentures and notes payable, sales of its common stock and revenue generated from its products domestically and internationally through the Company’s marketing platform and by its partners. These funds have provided Innovus with the resources to operate its business, sell and support its products, attract and retain key personnel and add new products to the Company’s portfolio. The Company has experienced net losses and negative cash flows from operations each year since its inception. As of September 30, 2019, the Company had an accumulated deficit of $49.8 million and a working capital deficit of $4.4 million.

As of September 30, 2019, we had $1.0 million in cash and $0.7 million held by merchant processors reported in other current assets for a total of $1.7 million and as of November 13, 2019 we had approximately $2.0 million in cash and $0.8 million held by merchant processors. During the nine months ended September 30, 2019, we had net cash used in operating activities of $1.9 million. We expect, however, that our existing capital resources, together with revenue from sales of our products and expected upcoming sales milestone payments from the commercial partners signed for our products, will be sufficient to allow us to continue our operations, commence the product development process and launch selected products through at least the next 12 months.

In addition, our CEO, who is also a significant shareholder, has deferred the remaining payment of his salary earned through June 30, 2016, with a current balance totaling $0.9 million, and has agreed to refrain from receipt of any funds which may jeopardize the ability of the Company to operate. During 2019, the Company has paid the CEO approximately $293,000 of the deferred salary balance. Our actual needs will depend on numerous factors, including timing of introducing our new products to the marketplace, our ability to attract additional international distributors for our products and our ability to in-license in non-partnered territories and/or develop new product candidates. Although no assurances can be given, we currently plan to proceed with the planned merger with Aytu pursuant to the terms and conditions of the merger agreement signed on September 12, 2019, and/or raise additional capital through the sale of debt or equity securities to provide additional working capital, pay for further expansion and development of our business, and to meet current obligations. Such capital may not be available to us when we need it or on terms acceptable to us, if at all.

 

 

Fair Value Measurement
 

Our financial instruments are cash, accounts receivable, accounts payable, accrued liabilities, contingent consideration and debt. The recorded values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The fair value of the contingent acquisition consideration is based upon the present value of expected future payments under the terms of the agreements and is a Level 3 measurement.  Based on borrowing rates currently available to us, the carrying values of the notes payable and short-term loans payable approximate their respective fair values.  

 

We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:

 

 

Level 1 measurements are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

 

 

Level 2 measurements are inputs other than quoted prices included in Level 1 that are observable either directly or indirectly.

 

 

Level 3 measurements are unobservable inputs.

 

Revenue Recognition

 

The Company generates revenue from product sales and the licensing of the rights to market and commercialize our products.

 

Revenue is measured based on consideration specified in a contract with a customer. A contract with a customer exists when the Company enters into an enforceable contract with a customer. The contract is based on either the acceptance of standard terms and conditions on the websites for e-commerce customers and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale. Consideration is typically paid prior to shipment via credit card or check when products are sold direct to consumers or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.

 

A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for the Company is transfer of over-the-counter drug and consumer care products to its customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to the carrier who takes control of the product that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. 

 

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to e-commerce and print media customers, upon request, within 30-90 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. The estimated reserve for sales returns and allowances, which is included in accounts payable and accrued expense, was approximately $161,000 and $194,000 at September 30, 2019 and December 31, 2018, respectively.

 

The Company recognizes revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales.

 

The Company enters into exclusive distributor and license agreements that are within the scope of ASC Topic 606. The license agreements we enter into normally generate three separate components of revenue: (1) an initial nonrefundable payment due on signing or when certain specific conditions are met; (2) royalties that are earned on an ongoing basis as sales are made or a pre-agreed transfer price; and (3) sales-based milestone payments that are earned when cumulative sales reach certain levels. Revenue from the initial nonrefundable payments or licensing fee is recognized when all required conditions are met. If the consideration for the initial license fee is for the right to sell the licensed product in the respective territory with no other required conditions to be met, such type of nonrefundable license fee arrangement for the right to sell the licensed product in the territory is recognized ratably over the term of the license agreement. For arrangements with licenses that include sales-based royalties, including sales-based milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. The achievement of the sales-based milestone underlying the payment to be received predominantly relates to the licensee’s performance of future commercial activities.

 

Advertising Expense

 

Advertising costs, which primarily includes print and online media advertisements, are expensed as incurred and are included in sales and marketing expense in the accompanying condensed consolidated statements of operations. Advertising costs were approximately $2.3 million and $4.3 million and $6.4 million and $11.5 million for the three and nine months ended September 30, 2019 and 2018, respectively.

 

 

Net Loss per Share

 

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding and vested but deferred RSUs during the period presented. Diluted net loss per share is computed using the weighted average number of common shares outstanding and vested plus deferred RSUs during the periods plus the effect of dilutive securities outstanding during the periods. For the three and nine months ended September 30, 2019 and 2018, basic net loss per share is the same as diluted net loss per share as a result of our common stock equivalents being anti-dilutive.  See Note 7 for more details.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update requires lessees to recognize most leases on the balance sheet as lease liabilities with corresponding right-of-use assets and to disclose key information about leasing arrangements. We adopted Topic 842 on its effective date in the first quarter of 2019 using a modified retrospective approach. We elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We continue to report our financial position as of December 31, 2018 under the former lease accounting standard (Topic 840) in our condensed consolidated balance sheet. The adoption impact resulted in the recognition of an operating lease liability with a corresponding right-of-use asset based on the present value of our remaining minimum lease payments which offset the previously reported deferred rent balance.

 

The following table summarizes the impact of Topic 842 on our condensed consolidated balance sheet upon adoption on January 1, 2019 (in thousands):

 

   

January 1, 2019

 
   

(unaudited)

 
   

Pre-adoption

   

Adoption Impact

   

Post-adoption

 

Assets

                       

Operating lease right-of-use asset

  $ -     $ 675     $ 675  

Total assets

  $ -     $ 675     $ 675  

Liabilities and Stockholders' Equity

                       

Accrued Liabilities

  $ -     $ 140     $ 140  

Deferred Rent

    181     $ (181 )     -  

Operating lease liabilities, net of current portion

    -     $ 716       716  

Total liabilities and stockholders' equity

  $ 181     $ 675     $ 856  

 

In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The update aligns the accounting for share-based payment awards issued to nonemployees with those issued to employees. Under the new guidance, the nonemployee awards will be measured on the grant date and compensation costs will be recognized when achievement of the performance condition is probable. This new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The adoption of the new guidance does not have a material impact on the Company’s consolidated financial statements.

 

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 the Company is still in the process of completing our analysis on the impact this guidance will have on the consolidated financial statements and related disclosures, the Company does not expect the impact to be material.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement. The update modifies the disclosure requirements for recurring and nonrecurring fair value measurements, primarily those surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU also requires the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. This ASU becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements.

 

In November 2018, the FASB issued ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606, which clarifies when transactions between participants in a collaborative arrangement are within the scope of the FASB’s revenue standard, Topic 606. This ASU becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements.

 

 

 

NOTE 2 – REVENUE

 

Disaggregation of Revenue

 

Our revenue is primarily from distinct fixed-price product sales in the over-the-counter drug and consumer care products market, to similar customers and channels utilizing similar types of contracts that are short term in nature (less than one year). We do not sell service agreements or goods over a period of time and do not sell or utilize customer financing arrangements or time-and-material contracts.

 

The following is a table that presents product sales, net by geographical area:

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

United States

  $ 3,577     $ 5,098     $ 12,775     $ 15,201  

Canada

    2,069       1,854       4,438       3,100  

All Other

    2       5       217       168  

Product sales, net

  $ 5,648     $ 6,957     $ 17,430     $ 18,469  

 

All Other consists of Europe, Australia, Asia, and the Middle East.

 

Contract Balances

 

We do not have any contract assets such as work-in-process but do have certain contract liabilities such as customer advances for product sales under its license agreements. As of September 30, 2019, we had customer advances totaling $134,000 included in deferred revenue and customer deposits in the accompanying condensed consolidated balance sheet for advance payments on the future sale of Zestra® and Zestra Glide® products to Sothema under their license agreement.

 

 

NOTE 3 – BUSINESS AND ASSET ACQUISITIONS

 

Acquisition of Prime Consultants, LLC Assets

 

On January 1, 2019, the Company entered into an Asset Purchase Agreement, pursuant to which the Company acquired substantially all of the assets of Prime Consultants, LLC (“Prime Consultants”) in exchange for $343,000 in cash. The assets acquired include the established Amazon seller platform and inventory totaling $313,000. Prime Consultants is an e-commerce business with sales of products primarily through the Amazon® platform which generated $2.4 million in sales in 2018. The Company recorded intangible assets totaling $30,000.  The Company believes this business complements its existing business while providing an additional sales platform to add to the Company's existing revenue channels.

 

 

Acquisition of Novalere in 2015

 

On February 5, 2015, the Company acquired the worldwide rights to market and sell the FlutiCare® brand (fluticasone propionate nasal spray) and the related third-party manufacturing agreement for the manufacturing of FlutiCare® (“Acquisition Manufacturer”) from Novalere FP. The OTC ANDA for fluticasone propionate nasal spray was filed at the end of 2014 by our third-party manufacturer and partner, who is currently selling the prescription version of the drug, with the FDA and the OTC ANDA was approved in April 2019. An ANDA is an application for a U.S. generic drug approval for an existing licensed medication or approved drug. A prescription ANDA (“RX ANDA”) is for a generic version of a prescription pharmaceutical and an OTC ANDA is for a generic version of an OTC pharmaceutical.

 

Due to the delay in approval of the Acquisition Manufacturer’s OTC ANDA by the FDA, in May 2017, the Company announced a commercial relationship with a different third-party manufacturer (West-Ward Pharmaceuticals International Limited or “WWPIL”) who has an FDA approved OTC ANDA for fluticasone propionate nasal spray under which they have agreed to manufacture our FlutiCare® OTC product for sale in the U.S. (see Note 8). As the Company holds the worldwide rights to market and sell FlutiCare® under the manufacturing agreement with the Acquisition Manufacturer, the Company believes the agreement with the Acquisition Manufacturer will still provide it with the opportunity to market and sell FlutiCare® ex-U.S. and, with the approval of the OTC ANDA in April 2019, a second source of supply within the U.S. is available to Innovus.  In October 2019, the Company terminated its agreement with WWPIL due to their inability to provide us with releasable product in the required timelines.

 

The Novalere Stockholders are entitled to receive, if and when earned, earn-out payments (“Earn-Out Payments”). For every $5.0 million in net revenue realized from the sales of FlutiCare® through the manufacturing agreement with the Acquisition Manufacturer, the Novalere's stockholders will be entitled to receive, on a pro rata basis, $500,000, subject to cumulative maximum earn-out payments of $2.5 million. The Novalere's stockholders are only entitled to the earn-out payments from the Acquisition Manufacturer’s OTC ANDA under review by the FDA and have no earn-out rights to the sales of FlutiCare® supplied by WWPIL under the commercial agreement entered into in May 2017. As of September 30, 2019, there were no earn-out payments accrued for or paid to the Novalere's stockholders.

 

During the three and nine months ended September 30, 2019 and 2018, there was an (decrease) increase in the estimated fair value of the remaining 1,324 ANDA consideration shares totaling $(4,000) and $1,000 and $(6,000) and $4,000, respectively, which is included in fair value adjustment for contingent consideration in the accompanying condensed consolidated statements of operations. The shares were issued in August 2019 for fair value of $2,000.  The fair value of the contingent consideration was $1.3 million and $1.3 million as of September 30, 2019 and December 31, 2018, respectively. 

 

 

NOTE 4 – INVENTORY

 

Inventories consist of the following:

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Raw materials and supplies

  $ 152     $ 238  

Work in process

    16       96  

Finished goods

    1,574       2,036  

Total

  $ 1,742     $ 2,370  
 

NOTE 5 – INTANGIBLE ASSETS AND GOODWILL

 

Intangible Assets

 

Amortizable intangible assets consist of the following:

 

   

September 30, 2019

 
   

Amount

    Accumulated Amortization    

Net Amount

   

Useful Lives (years)

 
                               

Patent & Trademarks

  $ 684     $ (251 )   $ 433     7 – 15  

Customer Contracts

    625       (362 )     263     10  

Sensum+® License (from CRI)

    234       (148 )     86     10  

Vesele® Trademark

    25       (16 )     9     8  

Beyond Human® Website and Trade Name

    222       (141 )     81     5 – 10  

Novalere Manufacturing Contract

    4,681       (2,175 )     2,506     10  

Other Beyond Human® Intangible Assets

    5       (5 )     -     1 – 3  

Total

  $ 6,476     $ (3,098 )   $ 3,378        

 

 

   

December 31, 2018

 
   

Amount

    Accumulated Amortization    

Net Amount

   

Useful Lives (years)

 
                               

Patent & Trademarks

  $ 654     $ (161 )   $ 493     7 – 15  

Customer Contracts

    625       (311 )     314     10  

Sensum+® License (from CRI)

    234       (131 )     103     10  

Vesele® Trademark

    25       (12 )     13     8  

Beyond Human® Website and Trade Name

    222       (112 )     110     5 – 10  

Novalere Manufacturing Contract

    4,681       (1,824 )     2,857     10  

Other Beyond Human® Intangible Assets

    5       (5 )     -     1 – 3  

Total

  $ 6,446     $ (2,556 )   $ 3,890        

 

Amortization expense for the three and nine months ended September 30, 2019 and 2018 was $179,000 and $157,000 and $542,000 and $472,000, respectively. The following table summarizes the approximate expected future amortization expense as of September 30, 2019 for intangible assets:

 

Remainder of 2019

  $ 178  

2020

    714  

2021

    657  

2022

    614  

2023

    578  

Thereafter

    637  

Total Amortization Expense

  $ 3,378  

 

 

NOTE 6 – NOTES PAYABLE AND SHORT-TERM LOANS PAYABLE

 

Notes Payable

 

The following table summarizes the outstanding notes payable at September 30, 2019 and December 31, 2018:

 

   

2019

   

2018

 

Notes payable:

               

January and March 2018 Notes Payable

  $ -     $ 112  

February and March 2018 5% Notes Payable

    -       250  

July 2018 5% Notes Payable

    -       550  

August 2018 Notes Payable

    -       800  

September 2018 5% Notes Payable

    -       390  

October 2018 5% Notes Payable

    375       550  

November and December 2018 Notes Payable

    288       1,429  

March 2019 Note Payable

    250       -  

April 2019 Notes Payable

    940       -  
May 2019 Note Payable     333       -  

August 2019 Note Payable

    1,000       -  

Total notes payable

    3,186       4,081  

Less: Debt discount

    (424 )     (1,008 )

Carrying value

    2,762       3,073  

Less: Current portion

    (2,762 )     (3,073 )

Notes payable, net of current portion

  $ -     $ -  

 

The following table summarizes the future minimum payments as of September 30, 2019 for the notes payable:

 

Remainder of 2019

  $ 1,053  

2020

    2,133  
Total   $ 3,186  

 

March 2019 Note Payable

 

On March 27, 2019, we entered into a securities purchase agreement with an unrelated third-party investor in which the investor loaned us gross proceeds of $400,000 pursuant to a 0% promissory note ("March 2019 Note Payable"). The note has an Original Issue Discount ("OID") of $100,000 and requires payments of $47,000 in principal per month through March 2020.

 

In connection with the March 2019 Note Payable, we issued the investor restricted shares of common stock totaling 18,000 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the March 2019 Note Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $161,000 in March 2019. In connection with the financing, we issued 5,600 restricted shares of common stock in March 2019 to a third-party consultant. The fair value of the restricted shares of common stock issued of $28,000 was recorded as a debt discount to the carrying value of the notes payable. The discount is being amortized to interest expense using the effective interest method over the term of the March 2019 Note Payable.

 

 

April 2019 Notes Payable

 

On April 8, 2019, we entered into two securities purchase agreements with unrelated third-party investors in which the investors purchased 5% promissory notes, resulting in gross proceeds to us of $850,000 (“April 2019 Notes Payable”). The notes have an OID of $90,000 and require payment of principal and interest of $140,000 in October 2019, $704,000 in January 2020, and $132,000 in April 2020.

 

In connection with the April 2019 Notes Payable, we issued the investors restricted shares of common stock totaling 98,334 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the April 2019 Notes Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of approximately $318,000 in April 2019. The discount is being amortized to interest expense using the effective interest method over the term of the April 2019 Notes Payable.

 

October 2018 5% Notes Payable

 

In April 2019, the Company elected to settle a portion of the outstanding principal and interest balance of $175,000 due in connection with certain 5% promissory notes issued by the Company in October 2018 ("October 2018 5% Notes Payable") in exchange for 100,000 shares of common stock.  The fair value of the shares of common stock issued was based on the market price of the Company's common stock on the date of the securities exchange agreement and was determined to be $300,000.  Due to the settlement of the principal and interest balance of $175,000 into shares of common stock, the transaction was recorded as a debt extinguishment and the fair value of the shares of common stock issued in excess of the settled principal and interest balance totaling $125,000 was recorded as a loss on debt extinguishment in the accompanying condensed consolidated statement of operations.  

 

In April 2019, the Company entered into an Amendment to the Promissory Note upon which the maturity date was extended from May 1, 2019 to August 1, 2019. In July 2019, the Company entered into an Amendment #2 to the Promissory Note upon which the maturity date was extended from August 1, 2019 to October 1, 2019 in exchange for 60,000 shares of common stock.  The fair value of the common stock issued was $91,000 and was recorded as an additional debt discount and amortized over the remaining term of the agreement.  On October 1, 2019 this Promissory Note was paid in full to the investor.

 

May 2019 Note Payable

 

On May 13, 2019, we entered into a securities purchase agreement with an unrelated third-party investor in which the investor loaned us gross proceeds of $400,000 pursuant to a 0% promissory note (“May 2019 Note Payable”). The note has an Original Issue Discount (“OID”) of $100,000 and requires payments of $42,000 in principal per month through May 2020.

 

In connection with the May 2019 Note Payable, we issued the investor restricted shares of common stock totaling 34,000 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the May 2019 Note Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of approximately $178,000 in May 2019. In connection with the financing, we issued 10,036 restricted shares of common stock in May 2019 to a third-party consultant. The fair value of the restricted shares of common stock issued of $28,000 was recorded as a debt discount to the carrying value of the notes payable. The discount is being amortized to interest expense using the effective interest method over the term of the May 2019 Note Payable.

 

August 2019 Note Payable

 

On August 8, 2019 the Company entered into a non-secured promissory note agreement with an unrelated investor in which the investor loaned the Company gross proceeds of $1.0 million in consideration for the issuance of a 10% promissory note. The note requires repayment of principal by February 29, 2020. On October 10, 2019, the Company entered into an Addendum No. 1 to Promissory Note upon which an additional $350,000 was loaned to the Company with the same terms as the non-secured promissory note.  This promissory note agreement was entered into in conjunction with the merger agreement (see Note 1).

 

Interest Expense

 

We recognized interest expense on notes payable of $33,000 and $15,000 and $126,000 and $49,000 for the three and nine months ended September 30, 2019 and 2018, respectively. Of the $86,000 in interest expense recognized for the nine months ended September 30, 2019, $57,000 was paid to investors in common stock. Amortization of the debt discount to interest expense during the three and nine months ended September 30, 2019 and 2018 totaled $480,000 and $365,000 and $1.4 million and $899,000, respectively.

 

 

NOTE 7 – STOCKHOLDERS’ EQUITY

 

Issuances of Common Stock

 

Private Placement

 

On January 3, 2019, we completed a sale of common stock and warrants under a Securities Purchase Agreement with an accredited investor (the "Investor"). The gross proceeds to us from the offering were $3.2 million before underwriting discounts and commissions and other offering expenses ($2.7 million of net proceeds after underwriting discounts, commissions and expenses of H.C. Wainwright & Co., LLC ("HCW"), the Company's sole placement agent).

 

Under the terms of the Securities Purchase Agreement, the Company completed the sale of common stock and warrants under a Securities Purchase Agreement with an accredited investor (the “Investor”), pursuant to which the Company sold an aggregate of 431,490 units (“Units”) for $7.35 per unit, with each Unit consisting of (i) one share of the Company’s common stock (“Shares”), (ii) one warrant to purchase one share of common stock at an exercise price of $7.35 per share (“Series A Warrant”), and (iii) one warrant to purchase one share of common stock at an exercise price of $8.40 per share (“Series B Warrant”) (the “Private Placement”); provided, however, that in order to ensure that the Investor’s beneficial ownership did not exceed 9.99% of the outstanding shares of Common Stock, the Investor elected to exercise its right to purchase 200,637 prefunded warrants (“Series C Warrants”) in lieu of the issuance of Shares to the Investor, which Series C Warrants have a nominal exercise price of $0.105 per share. In addition, the Company issued Series B Warrants to purchase 32,362 shares of common stock, an amount equal to 7.5% of the aggregate number of Shares, including Series C Warrants, sold in the Private Placement, at an exercise price of $9.19 per share to the designees of HCW, the Company’s sole placement agent, as compensation for its services in connection with the Private Placement. The fair value of the warrants issued to HCW totaled $221,000 and was determined using Black-Scholes. The fair value of the warrants was recorded as an offering cost but has no net impact to additional paid-in-capital in stockholders' equity in the accompanying consolidated balance sheet.

 

 

Other Stock Issuances and Related Stock-Based Compensation

 

In connection with the March 2019 Notes Payable, we issued 18,000 restricted shares of common stock in March 2019 and 5,600 restricted shares of common stock in March 2019 to a third-party consultant. The fair value of the restricted shares of common stock issued of $118,000 was recorded as a debt discount to the carrying value of the notes payable in March 2019 (see Note 6).

 

In April 2019, the Company entered into two securities purchase agreements relating to the April 2019 Notes Payable upon which the Company issued the investors 98,334 restricted shares of common stock.  The fair value of the restricted shares of common stock issued of approximately $300,000 was recorded as a debt discount to the carrying value of the notes payable in April 2019 (see Note 6).

 

In May 2019, we entered into a securities purchase agreement relating to the May 2019 Note Payable upon which the Company issued the investors 34,000 restricted shares of common stock.  The fair value of the restricted shares of common stock issued of $93,000 was recorded as a debt discount to the carrying value of the notes payable in May 2019. In connection with the May 2019 Notes Payable, the Company also issued 10,036 restricted shares of common stock in May 2019 to a third-party consultant.  The fair value of the restricted share of common stock issued of $28,000 was recorded as a debt discount to the carrying value of the notes payable in May 2019 (see Note 6).

 

During the three and nine months ended September 30, 2019, we issued 32,579 and 69,495 shares of restricted common stock for services and recorded an expense of $53,000 and $159,000 for the three and nine months ended September 30, 2019, which is included in general and administrative expense in the accompanying condensed consolidated statement of operations. The shares of common stock vested on the date of issuance and the fair value of the shares of common stock issued was based on the market price of our common stock on the date of vesting.

 

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 95,268 shares of our common stock to be issued in the form of stock options, stock awards, stock unit awards, stock appreciation rights, performance shares and other share-based awards. As of September 30, 2019, there were no shares available under the 2013 Plan.

 

2014 Equity Incentive Plan

 

We have issued common stock, restricted stock units and stock options to employees, non-executive directors and outside consultants under the 2014 Equity Incentive Plan (“2014 Plan”), which was approved by our Board of Directors in November 2014. The 2014 Plan allows for the issuance of up to 190,477 shares of our common stock to be issued in the form of stock options, stock awards, stock unit awards, stock appreciation rights, performance shares and other share-based awards. As of September 30, 2019, there were no shares 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 190,477 shares of our common stock to be issued in the form of stock options, stock awards, stock unit awards, stock appreciation rights, performance shares and other share-based awards. The 2016 Plan includes an evergreen provision in which the number of shares of common stock authorized for issuance and available for future grants under the 2016 Plan will be increased each January 1 after the effective date of the 2016 Plan by a number of shares of common stock equal to the lesser of: (a) 4% of the number of shares of common stock issued and outstanding on a fully-diluted basis as of the close of business on the immediately preceding December 31, or (b) a number of shares of common stock set by our Board of Directors. In April 2019, our Board of Directors approved an increase of 84,051 shares of common stock to the shares authorized under the 2016 Plan in accordance with the evergreen provision in the 2016 Plan. As of September 30, 2019, 186,379 shares were available under the 2016 Plan.

 

2019 Equity Incentive Plan

 

On April 16, 2019, our Board of Directors approved the adoption of the 2019 Equity Incentive Plan (“2019 Plan”). The 2019 Plan was then approved by our stockholders in May 2019. The 2019 Plan allows for the issuance of up to 400,000 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 2019 Plan includes an evergreen provision in which the number of shares of common stock authorized for issuance and available for future grants under the 2019 Plan will be increased each January 1 after the effective date of the 2019 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. As of September 30, 2019, 400,000 shares were available under the 2019 Plan.

 

 

Stock Options

 

For the nine months ended September 30, 2019 and 2018, the following weighted average assumptions were utilized for the calculation of the fair value of the stock options granted during the period using Black-Scholes:

 

   

2019

   

2018

 

Expected life (in years)

    7.2       6.25  

Expected volatility

    197.6 %     201.3 %

Average risk-free interest rate

    2.80 %     2.79 %

Dividend yield

    0 %     0 %

Grant date fair value

  $ 8.66     $ 0.06  

 

The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the stock options. Expected life in years is based on the “simplified” method as permitted by ASC Topic 718. We believe that all stock options issued under its stock option plans meet the criteria of “plain vanilla” stock options. We use a term equal to the term of the stock options for all non-employee stock options. The risk-free interest rate is based on average rates for treasury notes as published by the Federal Reserve in which the term of the rate corresponds to the expected term of the stock options.

 

The following table summarizes the number of stock options outstanding and the weighted average exercise price:

 

   

Options

    Weighted average exercise price     Weighted remaining contractual life (years)     Aggregate intrinsic value  

Outstanding at December 31, 2018

    4,498     $ 14.63       9.2     $ 190  

Granted

    261       3.03       -       -  

Exercised

    -       -       -       -  

Cancelled

    (1,291 )     (15.34 )     -       -  

Forfeited

    -       -       -       -  

Outstanding at September 30, 2019

    3,468     $ 13.49       8.5     $ 55  
                                 

Vested and Expected to Vest at September 30, 2019

    3,468     $ 13.49       8.5     $ 55  

 

The aggregate intrinsic value is calculated as the difference between the exercise price of all outstanding stock options and the quoted price of our common stock at September 30, 2019.  During the three and nine months ended September 30, 2019 and 2018, we recognized stock-based compensation from stock options of $1,000 and $5,000 and $6,000 and $9,000, respectively. As of September 30, 2019, compensation expense related to unvested options not yet recognized in the condensed consolidated statement of operations was approximately $18,000 and will be recognized over a remaining weighted-average term of 7.2 years.

 

Restricted Stock Units

 

The following table summarizes the restricted stock unit activity for the three months ended September 30, 2019:

 

   

Restricted Stock Units

 

Outstanding at December 31, 2018

    175,765  

Granted

    31,607  

Exchanged

    -  

Cancelled

    -  

Outstanding at September 30, 2019

    207,372  
         

Vested at September 30, 2019

    157,292  

 

The vested restricted stock units at September 30, 2019 have not settled and are not showing as issued and outstanding shares of the Company but are considered outstanding for earnings per share calculations. Settlement of these vested restricted stock units will occur on the earliest of (i) the date of termination of service of the employee or consultant, (ii) change of control of us, or (iii) 10 years from date of issuance. Settlement of vested restricted stock units may be made in the form of (i) cash, (ii) shares, or (iii) any combination of both, as determined by the board of directors and is subject to certain criteria having been fulfilled by the recipient.

 

We calculate the fair value of the restricted stock units based upon the quoted market value of the common stock at the date of grant. The grant date fair value of restricted stock units issued during the three and nine months ended September 30, 2019 was $26,000 and $110,000, respectively. For the three and nine months ended September 30, 2019 and 2018, we recognized $138,000 and $128,000 and $408,000 and $325,000, respectively, of stock-based compensation expense for the vested units. As of September 30, 2019, compensation expense related to unvested shares not yet recognized in the condensed consolidated statement of operations was approximately $525,000 and will be recognized over a remaining weighted-average term of 1.5 years.

 

 

Warrants

 

In January 2015, we issued 2,381 warrants with an exercise price of $31.50 per share to a former executive in connection with the January 2015 debenture. The warrants expire on January 21, 2020. The warrants contain anti-dilution protection, including protection upon dilutive issuances. In connection with the convertible debentures issued in 2015, the exercise price of these warrants was reduced to $9.45 per share and an additional 5,588 warrants were issued per the anti-dilution protection afforded in the warrant agreement during the year ended December 31, 2015. Warrants to purchase 7,969 shares of common stock remain outstanding as of September 30, 2019.

 

In connection with the convertible debentures in 2015, we issued warrants with an exercise price of $31.50 per share and expiration in 2020 to investors and placement agents. Warrants to purchase 7,379 shares of common stock remain outstanding as of September 30, 2019.

 

In connection with the convertible debentures in 2016, we issued warrants to the investors and placement agents with an exercise price of $42.00 per share and expire in 2021. Warrants to purchase 40,201 shares of common stock remain outstanding as of September 30, 2019.

 

In connection with the public equity offering in March 2017, we issued Series A Warrants to purchase 244,455 shares of common stock at $15.75 per share and Series B Warrants to purchase 244,455 shares of common stock at $15.75 per share. The Series A Warrants expire in 2022. During 2018, certain investors elected to exercise 180,247 Series B Warrants and 953 Series A Warrants and the remaining Series B Warrants expired in March 2018. We also issued warrants to purchase 12,223 shares of common stock to our placement agent with an exercise price of $19.69 per share and expire in 2022, as well as in March 2018 we issued our placement agent warrants to purchase 8,219 shares of common stock with an exercise price of $19.69 per share and expire in 2023 in connection with the Series B Warrants exercised. Warrants to purchase 263,944 shares of common stock remain outstanding as of September 30, 2019.

 

In connection with the public equity offering in January 2019, we issued Series A Warrants to purchase 431,490 shares of common stock at $7.35 per share, Series B Warrants to purchase 431,490 shares of common stock at $8.40 per share and Series C Warrants to purchase 200,637 shares of common stock at $7.35 per share. The Series A and B Warrants expire in 2020 and 2024 respectively. The Series C Warrants were prefunded and have a nominal exercise price of $0.105 per share. We also issued warrants to purchase 32,362 shares of common stock to our placement agent with an exercise price of $9.19 per share and expire in 2024. Warrants to purchase 1,095,979 shares of common stock remain outstanding as of September 30, 2019.

 

For the nine months ended September 30, 2019, the following weighted average assumptions were utilized for the calculation of the fair value of the warrants issued during the period using Black-Scholes:

 

   

2019

 

Expected life (in years)

    3.9  

Expected volatility

    147.1 %

Average risk-free interest rate

    2.40 %

Dividend yield

    0 %

 

At September 30, 2019, there are 1,415,472 fully vested warrants outstanding. The weighted average exercise price of outstanding warrants at September 30, 2019 is $10.46 per share, the weighted average remaining contractual term is 2.99 years and the aggregate intrinsic value of the outstanding warrants is $0.

 

Net Loss per Share

 

Restricted stock units that are vested but which the issuance and delivery of the shares are deferred until the employee or director resigns are included in the basic and diluted net loss per share calculations.

 

The weighted average shares of common stock outstanding used in the basic and diluted net loss per share calculation for the three and nine months ended September 30, 2019 and 2018 was 2,081,139 and 2,043,117 and 2,622,822 and 1,926,575, respectively.

 

The weighted average restricted stock units vested but which issuance of the common stock is deferred until there is a change in control, a specified date in the agreement or the employee or director resigns which were used in the basic and diluted net loss per share calculation for the three and nine months ended September 30, 2019 and 2018 was 107,351 and 104,295 and 124,997 and 102,472, respectively.

 

The following table shows the anti-dilutive shares excluded from the calculation of basic and diluted net loss per common share as of September 30, 2019 and 2018: 

 

   

As of September 30,

 
   

2019

   

2018

 

Gross number of shares excluded:

               

Restricted stock units – unvested

    50,080       65,366  

Stock options

    3,468       2,591  

Warrants

    1,415,472       313,496  

Total

    1,469,020       381,453  

 

 

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

In May 2017, we entered into a commercial agreement with WWPIL, a wholly-owned subsidiary of Hikma Pharmaceuticals PLC (“Hikma”) (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY). Pursuant to the commercial agreement, WWPIL provided us with the rights to launch our branded, fluticasone propionate nasal spray USP, 50 mcg per spray (FlutiCare®), under WWPIL’s FDA approved ANDA No. 207957 in the U.S. in mid-November 2017. The initial term of the commercial agreement is for two years, and upon expiration of the initial term, the agreement will automatically renew for subsequent one-year terms unless either party notifies the other party in writing of its desire not to renew at least 90 days prior to the end of the then current term. The agreement requires us to meet certain minimum product batch purchase requirements in order for the agreement to continue to be in effect. In November 2019, we terminated the Hikma agreement because in our view Hikma failed to provide us with releasable product in the required timeline.  We have, however, agreed to purchase the remainder of the one batch that we ordered in 2019.

 

Leases

 

We lease approximately 172,000 square feet of office and warehouse facilities under a non-cancellable operating lease. Our lease has a remaining term of 4 years, which represents the non-cancellable periods of the lease. We exclude extension options that are not reasonably certain to be exercised from our lease terms. Our lease payment consists of fixed rental payments for the right to use the underlying assets over the lease term as well as payments for common-area-maintenance and administrative services. We have also received customary incentives from our landlord for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for the lease.

 

Operating lease right-of-use assets and liabilities on our condensed consolidated balance sheets represent the present value of our remaining lease payments over the remaining lease terms. We do not allocate lease payments to non-lease components; therefore, fixed payments for common-area-maintenance and administrative services are included in our operating lease right-of-use assets and liabilities. We use our incremental borrowing rate to calculate the present value of our lease payments, as the implicit rates in our lease is not readily determinable.

 

As of September 30, 2019, the maturities of our operating lease were as follows (in thousands):

 

   

Remaining Lease Payments

 

2019

  $ 65  

2020

    267  

2021

    274  

2022

    282  

2023

    94  

Total remaining lease payments

    982  

Less: imputed interest

    (229 )

Total operating lease liabilities

    753  

Less: current portion

    (162 )

Long-term operating lease liabilities

    591  

Weighted-average remaining lease term

 

4 years

 

Weighted-average discount rate

    15 %

 

The components of our lease costs included in our condensed consolidated statement of operations consist of operating lease costs of $57,000 and $172,000 for the three and nine months ended September 30, 2019, respectively. Operating lease costs consist of the fixed lease payments included in our operating lease liability and are recorded on a straight-line basis over the lease term.

 

Litigation

 

James L. Yeager, Ph.D., and Midwest Research Laboratories, LLC v. lnnovus Pharmaceuticals, Inc. In November 2019, we signed an amicable settlement term sheet with the Plaintiffs to settle the above matters with definitive settlement agreement expected to be executed on or before December 6, 2019.

 

Marin County District Attorneys Letter. On August 24, 2018, the Company received a letter from the Marin County District Attorney's Office requesting substantiation for certain advertising claims made for certain of the Company's products, DiabaSens®, and Apeaz® that were marketed and sold to customers in that County. The Marin County District Attorney's Office is part of a larger ten county Northern California Task Force of district attorneys to handle customer protection matters. In November 2018, the Company responded through its regulatory attorneys to the Marin County’s District Attorney’s letter. In March 2019, the Company heard back from the Marin County District Attorney.  In April 2019, the Company responded to the letter and in June 2019 the Company met with the Northern California Task Force. The Company is currently responding to additional due diligence requests from the Marin County District Attorney's office.

 

In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject us to litigation. Management believes the outcomes of currently pending claims are not likely to have a material effect on our consolidated financial position and results of operations.

 

 

 

NOTE 10 – SUBSEQUENT EVENTS

 

In November 2019, the Company issued 58,334 shares of common stock to an investor related to the April 2019 Notes Payable which were not issued to such investor at the time of the agreement.  The fair value of the shares of common stock were recorded as an accrued expense prior to the issuance of the shares.

 

In November 2019, the Company issued 60,000 shares of common stock to an investor related to the October 2018 5% Note Payable which were not issued to such investor at the time of the amendment.  The fair value of the shares of common stock were recorded as an accrued expense prior to the issuance of the shares.

 

In November 2019, the Company issued 34,114 shares of common stock to its former chairman of the board following his resignation from the Company.  These shares were previously held as restricted stock units by such individual and in accordance with their terms were eligible to be converted to common shares upon termination.

 

On November 12, 2019, the Company entered into promissory note agreements and securities purchase agreements with two unrelated third-party investors in which the investors loaned the Company gross proceeds of $650,000 in consideration for the issuance of a 5% promissory note.  The notes have an OID of $65,000 and require payment of $715,000 in principal.  The notes bear interest at the rate of 5% per annum and the principal amount and interest are payable at maturity on July 12, 2020.  As additional consideration for the purchase of the note, the Company issued 115,000 shares of restricted common stock to the investors.

 

On November 12, 2019, the Company entered into promissory note agreement and securities purchase agreement with an unrelated third-party investor in which the investor loaned the Company gross proceeds of $400,000 in consideration for the issuance of a 5% promissory note.  The notes have an OID of $46,000 and require payment of $446,000 in principal.  The notes bear interest at the rate of 5% per annum and the principal amount and interest are payable in three tranches on May 12, 2020, August 12, 2020 and November 12, 2020.  As additional consideration for the purchase of the note, the Company issued 81,633 shares of restricted common stock to the investor.

 

On November 12, 2019, the Company entered into promissory note agreement with an unrelated third-party investor in which the investor loaned the Company gross proceeds of $480,000 in consideration for the issuance of a promissory note.  The note has an OID of $120,000 and requires payment of $600,000 in principal.  The note does not bear an interest rate and the principal amount will be paid of approximately $45,000 per month with a remaining lump sum payment at May 30, 2020.  As additional consideration for the purchase of the note, the Company issued 40,000 shares of restricted common stock to the investor.

 

The Company has evaluated subsequent events through the filing date of this Form 10-Q and determined that no additional subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosures in the notes thereto other than as disclosed in the accompanying notes to the condensed consolidated financial statements.

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Innovus Pharmaceuticals, Inc., together with its subsidiaries, are collectively referred to as “Innovus,” the “Company,” “us,” “we,” or “our.” The following information should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see the discussion and analysis included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019, as well as the consolidated financial statements and related notes contained therein.

 

 

Forward Looking Statements

 

Certain statements in this report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs or other statements that are not statements of historical fact. Words such as “may,” “should,” “could,” “would,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” or “projects,” or the negative or other variation of such words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results and the development of our products, are forward-looking statements.

 

Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Factors” below, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We file reports with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

 

Overview

 

We are an emerging over-the-counter (“OTC”) consumer goods and specialty pharmaceutical company engaged in the commercialization, licensing and development of safe and effective non-prescription medicine, consumer care products, supplements and certain related devices to improve men’s and women’s health and vitality, urology, brain health, pain and respiratory diseases. We deliver innovative and uniquely presented and packaged health solutions through our (a) OTC medicines, devices, consumer and health products, and clinical supplements, which we market directly, (b) commercial retail and wholesale partners to primary care physicians, urologists, gynecologists and therapists, and (c) directly to consumers through our proprietary Beyond Human® Sales & Marketing Platform including print media, on-line channels, websites, retailers and wholesalers. We are dedicated to being a leader in developing and marketing new OTC and branded Abbreviated New Drug Application (“ANDA”) products, supplements and certain related devices. We are actively pursuing opportunities where existing prescription drugs have recently, or are expected to, change from prescription (or Rx) to OTC. These “Rx-to-OTC switches” require Food and Drug Administration (“FDA”) approval through a process initiated by the New Drug Application (“NDA”) holder.

 

Our business model leverages our ability to (a) develop and build our current pipeline of proprietary products, and (b) to also acquire outright or in-license commercial products that are supported by scientific and/or clinical evidence, place them through our existing supply chain, retail and on-line (including our Amazon®, eBay®, Wish.com®, Sears.com®, Walmart.com®, and Walgreens.com® on-line stores and other e-commerce business platforms) channels to tap new markets and drive demand for such products and to establish physician relationships. 

 

Recent Developments

 

On September 12, 2019, the Company signed a definitive merger agreement with Aytu Bioscience, Inc. ("Aytu"), a specialty pharmaceutical company focused on identifying, acquiring and commercializing novel products that address significant patient needs.  Pursuant to the terms and conditions of the merger agreement, the Companys shareholders will receive an aggregate of up to $8 million in shares of Aytu common stock, less certain deductions, at the time of closing as consideration for the merger.  Additional consideration for up to $16 million in milestone payments in the form of contingent value rights ("CVRs") may be paid to the Company's shareholders in cash or stock over the next five years if certain revenue and profitability milestones are achieved. 

 

 

Our Strategy

 

Our corporate strategy focuses on the following primary objectives:

 

1.

Developing a diversified product portfolio of exclusive, unique and patented non-prescription OTC and branded ANDA drugs, devices, consumer health products, and clinical supplements through: (a) the introduction of line extensions and reformulations of either our or third-party currently marketed products; (b) the development of new proprietary OTC products, supplements and devices; and (c) the acquisition of products or obtaining exclusive licensing rights to market such products; 

 

2. Building an innovative, U.S. and global sales and marketing model through direct to consumer approaches such as our proprietary Beyond Human® sales and marketing platform, the addition of new online platforms such as Amazon®, eBay®, Wish.com, Sears.com, Walmart.com® and Walgreens.com and commercial partnerships with established international complementary partners that: (a) generates revenue, and (b) requires a lower cost structure compared to traditional pharmaceutical companies, thereby increasing our gross margins; and

 

3.

Developing and acquiring on-line marketplaces such as Supplementhunt.com and Deltaprimesavingsclub.com that focus on certain market segments such as lower priced, soon to expire supplement business with the Supplementhunt.com acquisition and with the select consumer product business through Deltaprimesavingsclub.com among others in which we sell third party, brand or non-branded products.

 

Our Products

 

Marketed Products

 

We currently market and sell over 35 products in the U.S. and more than 10 in multiple countries around the world through our 5 international commercial partners. The following represents the core products:

 

 

1.

Vesele® 

 

2.

UriVarx® 

 

3.

FlutiCare® 

 

4.

Apeaz® 

 

5.

Diabasens® 

 

6.

Prostagorx® 

 

7.

Sensum+® 

  8. Trexar®

 

In addition, we currently expect to launch in the U.S. the following products in 2019 and/or 2020, subject to the applicable regulatory approvals, if required:

 

 

1.

Musclin® is a proprietary supplement made of two FDA Generally Recognized As Safe (GRAS) approved ingredients designed to increase muscle mass, endurance and activity (first half of 2020).  The main ingredient in Musclin® is a natural activator of the transient receptor potential cation channel, subfamily V, member 3 (TRPV3) channels on muscle fibers responsible to increase fibers width resulting in larger muscles;

 

3.

Regenerum™ is a proprietary product containing two natural molecules: the first is an activator of the TRPV3 channels resulting in the increase of muscle fiber width, and the second targets a different unknown receptor to build the muscle's capacity for energy production and increases physical endurance, allowing longer and more intense exercise.  Regenerum™ is being developed for patients suffering from muscle wasting.  We currently expect to launch this product in 2020 pending successful clinical trials in patients with muscle wasting or cachexia; 

 

4.

Octiq™ is an expected FDA ophthalmic OTC monograph compliant product for the treatment of eye redness and eye lubrication (early 2020); and

  5. Regoxidine™ is an ANDA approved 5% Minoxidil foam for men and women for hair growth on the top of the scalp (first half 2020).

 

We currently expect potential supply interruption of Fluticare from its supplier for at least the coming 90 days based on inventory availability.

 

 

Sales and Marketing Channels

 

Print and Direct Mail Marketing

 

Through our Beyond Human® sales and marketing platform, we have access to advertise in the vast majority of newspapers and magazines on a regular basis. We have developed our own proprietary algorithm which allows us to target customers looking for specific health products allowing us to increase the return on our investment and reduce the cost to acquire new customers. We have expanded our reach to Canada with the approval of twelve of our products by Health Canada and successfully expanded our Beyond Human® sales and marketing platform.

 

E-Commerce

 

We have an extensive on-line media channel through our Amazon®, NewEgg®, Walmart.com®, eBay®, Wish.com®, and Walgreens.com® sites, in addition to our own InnovusPharma.com site along with sites for each of our products individually.  Our expertise allows us to successfully drive product sales through proper marketing campaigns through third-party sites as well as through email marketing campaigns to increase traffic to our own sites. Additionally, we have recognized that maintaining a proper e-commerce presence allows those customers who read our advertisements in the newspapers and magazine or receive our direct mail another avenue to purchase products.

 

Retail/Wholesale

 

We are continuously introducing our products to varieties of retail and wholesale partners to enhance the brand and product awareness for our customers. Since 2018, we significantly increased our advertising expenses and improved their efficiency specifically in the Print and Direct Mail Marketing channel which, in turn, has had a direct positive impact to the success of products in retail.  We intend to continue to demonstrate to our retail and wholesale partners the advantages of incorporating our products in their stores, especially due to our proprietary consumer targeted marketing approach that our print advertising allows us to achieve.

 

International Distribution

 

We continue to work with our exclusive commercial partners outside of the U.S. that would be responsible for sales and marketing in those territories. We evaluate the performance of each of these partners to ensure a steady flow of consumer activity for each of our products. Our strategy outside the U.S. is to partner with companies who can effectively market and sell our products in their countries through their direct marketing and sales teams. The strategy of using our partners to commercialize our products is designed to limit our expenses and fix our cost structure, enabling us to increase our reach while minimizing our incremental spending.

 

Results of Operations for the Three and Nine Months Ended September 30, 2019 Compared with the Three and Nine Months Ended September 30, 2018 (in thousands)

 

   

Three Months Ended September 30, 2019

   

Three Months Ended September 30, 2018

   

$ Increase (Decrease)

   

% Increase (Decrease)

 

Net revenue:

                               

Product sales, net

  $ 5,648     $ 6,957     $ (1,309 )     (18.8

)%

Service revenue

    -       189       (189 )     100.0

%

Cooperative marketing revenue

    102       233       (131 )     56.2

%

License revenue

    5       1       -       -

%

Net revenue

    5,755       7,380       (1,625 )     (22.0

)%

                                 

Cost of product sales

    2,215       1,537       678       44.1

%

Gross Profit

    3,540       5,843       (2,303 )     (39.4

)%

                                 

Operating expense:

                               

Research and development

    86       59       27       45.8

%

Sales and marketing

    2,878       5,264       (2,386 )     (45.3

)%

General and administrative

    2,274       2,023       251       12.4

%

Total operating expense

    5,238       7,346       (2,108 )     (28.7

)%

                                 

Loss from operations

    (1,698 )     (1,503 )     (195 )     (13.0

)%

                                 

Other income (expense):

                               

Interest expense

    (538 )     (381 )     (157 )     (41.2

)%

Loss on extinguishment of debt

    -       (745 )     745       100.0

%

Fair value adjustment for contingent consideration

    -       179       (179 )     100.0

%

Total other expense, net

    (538 )     (947 )     409       43.2

%

                                 

Net loss

  $ (2,236 )   $ (2,450 )   $ 214       8.7

%

 

 

 

   

Nine Months Ended September 30, 2019

   

Nine Months Ended September 30, 2018

   

$ Increase (Decrease)

   

% Increase (Decrease)

 

Net revenue:

                               

Product sales, net

  $ 17,430     $ 18,469     $ (1,039 )     (5.6

)%

Service revenue

    156     $ 345       (189 )     54.8

%

Cooperative marketing revenue

    264     $ 417       (153 )     36.7

%

License revenue

    115     $ 6       -       -

%

Net revenue

    17,965       19,237       (1,272 )     (6.6

)%

                                 

Cost of product sales

    6,349       3,740       2,609       69.8

%

Gross Profit

    11,616       15,497       (3,881 )     (25.0

)%

                                 

Operating expense:

                               

Research and development

    234       93       141       151.6

%

Sales and marketing

    8,332       14,094       (5,762 )     (40.9

)%

General and administrative

    7,430       5,638       1,792       31.8

%

Total operating expense

    15,996       19,825       (3,829 )     (19.3

)%

                                 

Loss from operations

    (4,380 )     (4,328 )     (52 )     (1.2

)%

                                 

Other income (expense):

                               

Interest expense

    (1,514 )     (950 )     (564 )     (59.4

)%

Loss on extinguishment of debt

    (125 )     (1,040 )     915       88.0

%

Other income (expense), net

    29       1.00       28       (2,800.0

)%

Fair value adjustment for contingent consideration

    6       198       (192 )     97.0

%

Total other expense, net

    (1,604 )     (1,791 )     187       10.4

%

                                 

Net loss

  $ (5,984 )   $ (6,119 )   $ 135       2.2

%

 


Net Revenue 

 

We recognized net revenue of approximately $5.8 million and $7.4 million and $18.0 million and $19.2 million for the three and nine months ended September 30, 2019 and 2018, respectively. The decrease in net revenue for the three months ended September 30, 2019 compared with the three months ended September 30, 2018 and the  nine months ended September 30, 2019 compared with the nine months ended September 30, 2018 is due to our focus on being more selective of the marketing media utilized which has reduced the overall net sales but has resulted in improved marketing efficiency for the period. During 2019, we focused on increasing revenues from e-commerce channels to continue to diversify our revenue channels.  During 2019, e-commerce sales represented approximately 30% of total net revenue.  

 

Cost of Product Sales

 

We recognized cost of product sales of approximately $2.2 million and $1.5 million and $6.3 million and $3.7 million for the three and nine months ended September 30, 2019 and 2018, respectively. The cost of product sales includes the cost of inventory, internal and third-party shipping and warehouse costs, royalties and salaries and benefits for our warehouse employees. The increase in cost of product sales is a result of higher shipping and fulfillment costs relating to our Supplement Hunt entity, for which we currently utilize the services of a third-party fulfillment company, higher costs of products in the Delta Prime Savings Club entity due to a more diverse product mix and an expense recorded of approximately $250,000 related to expired products. The decrease in the gross margin to 64.7% during the nine months ended September 30, 2019 compared to 80.6% during the nine months ended September 30, 2018 is due to the increase in e-commerce revenues as a percentage of total revenues during the current period, which generate lower gross margins due to pricing competition, as well as an increase in the cost of shipping and fulfillment especially related to Supplement Hunt and Delta Prime Savings Club, which have products that are costlier to ship due to their size and weight and the earlier mentioned expense related to expired products.

 

Research and Development

 

We recognized research and development expense of approximately $86,000 and $59,000 and $234,000 and $93,000 for the three and nine months ended September 30, 2019 and 2018, respectively. Research and development expense includes costs for stability testing, clinical trials of certain products and other development related costs for our products.  The increase in research and development in 2019 as compared with 2018 is due to the development of certain ingredients, the clinical trials performed for Musclin® and the development of an international e-commerce platform.

 

Sales and Marketing

 

We recognized sales and marketing expense of approximately $2.9 million and $5.3 million and $8.3 million and $14.1 million for the three and nine months ended September 30, 2019 and 2018, respectively. Sales and marketing expense consists primarily of print advertisements and sales and marketing support. The decrease in the sales and marketing expense is a direct result of the increased focus on e-commerce channels which do not require as large of upfront marketing costs as the traditional direct-to-consumer channel requires. Additionally, we have focused marketing efforts in the traditional direct-to-consumer channel to those that have experienced lower cost of customer acquisition. 

 

General and Administrative

 

We recognized general and administrative expense of approximately $2.3 million and $2.0 million and $7.4 million and $5.6 million for the three and nine months ended September 30, 2019 and 2018, respectively. The increase in general and administrative expense is directly related to the increase in employee headcount, especially management level employees, from approximately ten employees as of September 30, 2018 to 18 employees as of September 30, 2019.  General and administrative expense consists primarily of investor relation expense, legal, accounting, public reporting costs and other infrastructure expense related to the launch of our products. Additionally, our general and administrative expense includes professional fees, insurance premiums and general corporate expense.