Innovus Pharmaceuticals Earnings 2019-09-30

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)

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:

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: 

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

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.

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:

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):

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 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, Customer’s 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:

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:

NOTE 5 – INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

Amortizable intangible assets consist of the following:

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:

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:

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

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:

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:

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:

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:

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: 

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):

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 Attorney’s 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.