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INNV > SEC Filings for INNV > Form 10-K on 19-Mar-2013All Recent SEC Filings

Show all filings for INNOVUS PHARMACEUTICALS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for INNOVUS PHARMACEUTICALS, INC.


19-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report.

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Overview

We are an emerging pharmaceutical company engaged in the commercialization, licensing, and development of prescription and non-prescription pharmaceutical products with a unique packaging and presentation. Our products are focused in the respiratory, dermatology and autoimmune therapeutic categories and will be marketed to primary care physicians, pediatricians, dermatologists and rheumatologists. Our business model leverages our ability to acquire and in-license commercial products, ongoing product development, business development and established physician relationships, to drive strong growth in demand for our core products. Our future success is very dependent on these ongoing efforts.

Our corporate strategy focuses on two primary objectives:

Developing a diversified product portfolio of exclusive branded products through:

o acquisition of approved or late stage drug candidates awaiting approval from the U.S. Food and Drug Administration, or FDA;

o acquisition of proven brands;

o packaging our products in a kit format designed for better patient compliance and results;

o introduction of line extensions, reformulations; and

o strategic development of our own products.

Building an innovative, global sales and marketing model through commercial partnerships with established complimentary partners that:

o generate revenue; and

o lower costs compared to traditional pharmaceutical companies.

Our strategy is underway, but we are a development stage company, and we have not yet generated revenue from any of our products. We have signed two binding term sheets to acquire presecription and non-prescription products. See "Part I. Business-Pharmaceutical Products." We have limited assets and operations and we are dependent on our President and Chief Executive Officer for operating capital through the end of 2013. Additional capital will be required to maintain our corporate operations and we will need to seek additional funding for our product selection and development.

Financial Transactions

Reverse Merger

In December 2011, our company, then known as North Horizon, Inc., entered into a business combination transaction with FasTrack Pharmaceuticals, Inc. pursuant to which FasTrack became a wholly owned subsidiary of North Horizon. FasTrack was a specialty pharmaceutical company with a development pipeline of one prescription and one OTC product. The transaction closed on December 7, 2011. The transaction has been accounted for as a reverse merger, whereby North Horizon is the legal acquirer and FasTrack is the legal acquiree and the accounting acquirer.

Immediately before the closing of the transaction, North Horizon's issued and outstanding shares of common stock (an aggregate of 13,251,250) were subject to a reverse split on the basis of ten shares into one share (10:1) The reverse split was effective on December 6, 2011.

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In connection with the transaction, we changed our name from North Horizon, Inc. to Innovus Pharmaceuticals, Inc.

In connection with the transaction, we issued to the former FasTrack stockholders an aggregate of 15,238,938 shares of our common stock. Immediately following the closing of the transaction, the former FasTrack stockholders held in the aggregate 92% of our common stock on a fully diluted basis.

Upon the completion of this transaction, we issued warrants to purchase approximately 380,973 shares of our common stock with a term of seven years and an exercise price of $0.10 per share to designees of the placement agent. We also issued a promissory note, bearing interest at 8% per annum, to the placement agent in the original principal amount of $50,000. Such note was due and payable on December 6, 2012, and in January 2013, we paid $54,548 to fully discharge such note.

Questions arose as to whether we complied with federal and applicable state securities laws in connection with the issuance of shares of our common stock to the FasTrack stockholders in connection with the transaction. In February 2012, we made a rescission offer and provided detailed information to the FasTrack stockholders. The offer expired and no FasTrack stockholder accepted the offer. The rescission offer may not have been effective to extinguish liabilities we may have to the former FasTrack stockholders under federal or applicable state securities laws. Accordingly, liability may not lapse until all applicable statutes of limitation run. The former FasTrack stockholders reside in different jurisdictions and the statutes of limitation in those jurisdictions have different terms, the longest being four years. In some cases, claims may not be extinguished at the expiration of such limitation periods. We are unable to predict if any former FasTrack stockholder will make a claim or if pursued what the outcome may be. Any successful claim, or even the possibility of such claims, could have a material adverse effect on our financial condition and ability to raise capital. The potential amount payable to the former FasTrack stockholders in respect of the rescission offer was presented as a liability in the accompanying consolidated balance sheet as of December 31, 2011. Management concluded that the potential liability after the rescission offer is neither probable nor reasonably estimable, and accordingly, upon expiration of the rescission offer, the amount of such liabilitiy was reclassified to stockholders' deficit, and no liability is recorded for this contingency in the accompanying consolidated balance sheet as of December 31, 2012.

Results of Operations

For the years ended December 31, 2012 and 2011

Overview

For the years ended December 31, 2012 and 2011, we had no revenues, and consequently, no cost of sales or gross profits. During 2012, we had little resources available to develop or acquire products.

Operating Expenses

Operating expenses for the years ended December 31, 2012 and 2011 totaled $219,484 and $2,188,535, respectively, a $1,969,051 (90%) decrease year-over-year. 2011 expenses include the fair value of warrants issued to a placement agent for services valued at $1,904,865. We did not issue any warrants for services in 2012. Research and development expenses decreased from $58,960 in 2011 to $2,000 in 2012, a difference of $56,960, as a result of not conducting any proof of concept formulation studies in 2012. The reduction in research and development expenses also contributed to the overall decrease in operating expenses.

Other Income

We recognized interest expense of $17,031 and $67,717 for the years ended December 31, 2012 and 2011, respectively, a decrease of $50,686 year-over-year. This decrease was primarily the result of a decrease in the amount of debt during 2012 compared to 2011 and a $48,920 discount recorded in 2011 relating to the conversion of convertible notes.

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Net Loss

We recognized a net loss in the amount of $236,515 and $2,256,252 for the years ended December 31, 2012 and 2011, respectively. The decrease in net loss results primarily from the decrease in operating expenses.

Liquidity and Capital Resources

At December 31, 2012, we had $18,445 in cash. At December 31, 2012, we had no other sources of liquidity.

Since December 31, 2012, we have received additional debt financing. In January 2013, we issued an 8% convertible debenture to Henry Esber, Ph.D., a board member, in the amount of $70,000 and entered into a $250,000 convertible debenture with Bassam Damaj, Ph.D., our President and Chief Executive Officer, which provided for requests of funding from time to time by our company, which Dr. Damaj had the right to accept or decline in his discretion. In March 2013, that instrument was amended and restated to increase the maximum principal amount to $500,000, $35,000 of which has been funded through the date of this report. Dr. Damaj is required to provide additional funds under such debenture if we have insufficient liquidity to meet any material payment obligations arising in the ordinary course of business as they come due, up to the maximum of $500,000 in funding. The funding commitment increases by the gross amount of any cash salary, bonus or severance payments provided to Dr. Damaj under his employment agreement with our company. Dr. Damaj's salary has been accrued and not paid under the provision of such employment agreement stating that salary payments will be accrued and not paid for so long as payment of such salary would jeopardize our ability to continue as a going concern. We have the right to pre-pay interest and principal under Dr. Damaj's convertible debenture. We anticipate that Dr. Damaj's salary will continue to be so accrued at least until we have received at least $500,000 in external funding. See "Part III, Item 11. Executive Compensation-Employment Agreements," below. Dr. Damaj's funding commitment terminates on the earlier to occur of (i) the consummation of one or more transactions pursuant to which we raise net proceeds of at least $500,000 or (ii) January 1, 2014.

Each of these convertible debentures bear an annual interest rate of 8% and are payable in cash at the earlier of January 13, 2014, or when we complete a financing with minimum proceeds of $4 million. The holders of the convertible debentures have the option to convert their principal and interest accrued into securities that issued in any future financing of our company with minimum proceeds of $4 million. In the event of a default on repayment, the annual interest rate would increase to 13% and the holders of the convertible debentures would have the option to convert to common stock at a value of $0.05 per share. With the exception of Dr. Damaj's convertible debenture, we do not have the right to pre-pay the convertible debentures.

Also in January 2013, we and each holder of the 8% convertible debentures we issued in January 2012 (totaling $162,668 in principal amount) agreed to extend the maturity date of such notes to January 13, 2014 at the same interest rate of 8% per annum. See "Part II, Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchase of Equity Securities-Recent Sales of Unregistered Securities," above, for more information on the 8% convertible debentures issued in January 2012.

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation as a going concern.

We have experienced net losses and negative cash flows from operations each year since its inception. Through December 31, 2012, we had an accumulated deficit of approximately $2,449,000. Our operations have been financed through advances from officers and directors and related parties and to a lesser extent from outside capital. We have not yet had sufficient funds to significantly develop or commercialize our technologies.

In February 2013 we signed two binding term sheet for the acquisition of portfolios of products. The initial purchase price for these portfolios will be in the form of our common stock, with subsequent milestone and/or royalty payments in cash.

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Management anticipates that we will continue to incur significant losses at least until successful commercialization of one or more of our products. Management has projected that cash on hand, plus the funds available from Dr. Damaj, will be sufficient to allow us to continue our operations and commence the product development process for selected products through January 1, 2014. We may not be successful in commercializing products or raising outside capital to allow us to continue as a going concern beyond that date. We have flexibility to slow down or defer our product development activities if necessary.

Over the next few years, we will require additional funding and this funding will depend, in part, on the timing and structure of potential business arrangements. When we require additional funds, general market conditions or the then-current market price of our common stock may not support capital raising transaction such as additional public or private offerings of our common stock or strategic alliances with third parties on acceptable terms to us, or at all. If we require additional funds and we are unable to obtain them on a timely basis or on terms favorable to us, we may be required to scale back our development of new products, sell or license some or all of our technology or assets, or curtail or cease operations.

Recent Accounting Pronouncements

See Footnote 2 to our consolidated financial statements for the periods ended December 31, 2012 and 2011. The adoption of recently implemented accounting rules and policies did not have any impact on our financial position, results of operations or cash flows.

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