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INNV > SEC Filings for INNV > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for INNOVUS PHARMACEUTICALS, INC.

Form 10-Q for INNOVUS PHARMACEUTICALS, INC.


13-Aug-2013

Quarterly Report


NOTE 2 - LIQUIDITY AND PLAN OF OPERATION

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP), which contemplate continuation of the Company as a going concern.

The Company's operations have been financed primarily through advances from officers and directors and related parties, and to a lesser extent from outside capital.

In February 2013, the Company signed a binding term sheet for the acquisition of a portfolio of products. Subsequent to signing the binding term sheet the respective parties were not able to reach agreement on a definitive agreement and as a result the Company did not acquire the portfolio of products. In April 2013, the Company acquired ex-US rights to CIRCUMserum, a product for male sexual dysfunction. See Note 8.

During the six months ended June 30, 2013, the Company issued a $70,000 convertible debenture to a member of its board of directors, entered into a convertible debenture line of credit agreement with the Company's President and Chief Executive Officer under which the Company may borrow up to $1,000,000, sold a convertible debt instrument to a member of its Business and Finance Advisory Board for $50,000 and sold 416,841 shares of common stock for proceeds of $134,640 to a related party. See Notes 6, 7 and 9. Additionally, certain debenture holders extended the maturity of their debentures to July 1, 2014. See Note 12.

The Company expects that its existing capital resources, including the funds it may borrow under the line of credit convertible debenture entered into with its President and Chief Executive Officer (see Note 6), of which $780,900 remains available to borrow at June 30, 2013, will be sufficient to allow the Company to continue its operations and commence the product development process for selected products through July 1, 2014. However, the Company's actual needs will depend on numerous factors, including timing of introducing its products to the marketplace, its ability to attract ex-US distributors for its products, its ability to in-license or develop new product candidates and its ability to finalize merger and acquisition activities. As a result, the Company's actual capital needs may substantially exceed its anticipated capital needs and the Company may have to substantially modify or terminate current and planned commercial and development operations, enter into strategic relationships or merge or be acquired by another company. As a result, the Company's business may be materially harmed, its stock price may be adversely affected, and its ability to raise additional capital may be impaired.

The Company will need to raise substantial additional funds to support its long-term product development and commercialization programs. The Company regularly consider various fund raising and strategic alternatives, including, for example, debt or equity financing and merger and acquisition alternatives. The Company may also seek additional funding through strategic alliances, collaborations, or license agreements and other financing mechanisms. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its products; obtain funds through arrangements with licensees or others that may require the Company to relinquish rights to certain of its products that it might otherwise seek to develop or commercialize on its own; significantly restructure operations and implement cost saving initiatives, including but not limited to, reductions in salaries and/or elimination of employees and consultants or cessation of operations; or, merge or be acquired by another company.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation and Principles of Consolidation

These unaudited condensed consolidated financial statements have been prepared by management in accordance U.S. GAAP, and include all assets, liabilities, revenues and expenses of the Company and its wholly owned subsidiary; FasTrack Pharmaceuticals, Inc. 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 financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. Certain information required by U.S. GAAP has been condensed or omitted in accordance with the rules and regulations of the SEC. The results for the period ended June 30, 2013 are not necessarily indicative of the results to be expected for the entire fiscal year ended December 31, 2013 or for any future period.

INNOVUS PHARMACEUTICALS, INC.

(Formerly North Horizon, Inc.)

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(b) Use of Estimates

The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such management estimates include income taxes, realizability of deferred tax assets, intangible assets, and equity-based instruments. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from these estimates.

(c) Fair Value Measurement

The Company's financial instruments are cash, trade accounts receivable, accounts payable, accrued liabilities, convertible debentures and a convertible debt instrument. The recorded values of cash, trade accounts receivable, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The recorded values of convertible debentures, and convertible debt, net of the discount, approximate the fair value as the interest rate (stated or effective) approximates market rates.

The Company follows 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 the Company has 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.

(d) Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and trade accounts receivable. Cash held with financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation (FDIC) on such deposits. As of June 30, 2013 and December 31, 2012, the Company has $280 and zero, respectively, in trade accounts receivables. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses. There have been no write-offs of trade accounts receivable during the periods presented.

(e) Concentration of Suppliers

The Company is in the process of entering into agreements with contract manufacturers to manufacture its products, including CIRCUMserum, EjectDelay and the Apeaz line of products. In some instances, the Company will be dependent upon a single vendor. The loss of one of these vendors could have a material adverse effect upon the Company's operations.

(f) Income Taxes

Income taxes are provided for using the asset and liability method whereby deferred tax assets and liabilities are recognized using current tax rates on the difference between the financial statement carrying amounts and the respective tax basis of the assets and liabilities. The Company provides a valuation allowance on deferred tax assets when it is more likely than not that such assets will not be realized.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting this standard, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognized interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying statements of operation. Accrued interest and penalties are included within the related tax liability in the consolidated balance sheets.

INNOVUS PHARMACEUTICALS, INC.

(Formerly North Horizon, Inc.)

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(h) Revenue Recognition, Trade Receivables and Deferred Revenue

The Company recognizes revenue from product sales in accordance with ASC 605, Revenue Recognition. The Company ships product to its customers pursuant to purchase agreements or orders. Revenue from product sales is only recognized when substantially all the risks and rewards of ownership have transferred to its customers, the selling price is fixed and collection is reasonably assured. Revenue from product sales is generally recognized upon customer receipt and acceptance of the product. Beginning in 2013, the Company recognized revenue from sales of CIRCUMserum (See Note 8). The Company expects revenues to increase in the future when it enters into distribution and supply agreement for its products outside the United States and as it begins to promote its product in the United States.

Trade accounts receivables are recorded for product sales and do not bear interest. The Company regularly evaluates the collectability of its trade receivables. An allowance for doubtful accounts is maintained for estimated credit losses. When estimating credit losses, the Company considers a number of factors including the aging of a customer's account, credit worthiness of specific customers, historical trends and other information. The Company reviews its allowance for doubtful accounts monthly. The Company did not incur any losses related to customer bad debts during the three and six months ended June 30, 2013 and 2012. At June 30, 2013 and December 31, 2012, the allowance for doubtful accounts was zero for both periods.

(i) Return Policy

The Company provides a customer satisfaction warranty on all of its products within the first 20 days after product purchase. Estimated return costs are based on historical experience and estimated and recorded when the related sales are recognized. Any additional costs are recorded when incurred or when they can reasonably be estimated.

The estimated return reserve, which is included in accounts payable and accrued liabilities, was insignificant at June 30, 2013 and December 31, 2012.

(j) Research and Development Costs

Research and development (R&D) costs, including research performed under contract by third parties, are expensed as incurred. Major components of R&D expenses consist of testing, clinical trials, material purchases and regulatory affairs.

(k) Stock-based Compensation

The Company accounts for stock based compensation by recognizing the fair value of stock compensation as an expense in the calculation of net income (loss). The Company recognizes stock compensation expense in the period in which the employee is required to provide service, which is generally over the vesting period of the individual equity instruments. Stock and stock options issued in lieu of cash to non-employees for services performed are recorded at the fair value of the stock or stock options at the time they are issued and are expensed as service is provided.

(l) Comprehensive Loss

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting stockholders' equity (deficit) that, under U.S. GAAP, are excluded from net income (loss). Comprehensive income (loss) was the same as net income (loss) for the three and six months ended June 30, 2013 and 2012 as the Company has no other comprehensive income.

(m) Earnings per Share

Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period presented. Diluted earnings per share are computed using the weighted average number of common shares outstanding during the periods plus the effect of dilutive securities outstanding during the periods. For the three and six months ended June 30, 2013 and 2012, basic earnings per share are the same as diluted earnings per share as a result of the Company's common stock equivalents being anti-dilutive.

The following reconciliation shows the anti-dilutive shares excluded from the calculation of basic and diluted earnings (loss) per common share attributable to the Company for the three and six months ended June 30, 2013 and 2012:

                                       As of June 30
                                      2013         2012

Gross number of shares excluded:
Restricted stock units               7,050,000         -
Stock options                           30,000         -
Total                                7,080,000         -

INNOVUS PHARMACEUTICALS, INC.

(Formerly North Horizon, Inc.)

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 4 - RELATED PARTY TRANSACTION

The Company has recorded expenses paid on its behalf by its stockholders as a related party payable. During the six months ended June 30, 2012, the Company repaid $12,500 on this amount, and converted the remaining $74,668 into a convertible debenture (see Note 6).

On June 12, 2013, the Company entered into subscription agreements for the sale of 416,841 shares of common stock at a purchase price of $0.3230 per share, which is the average closing price of the common stock over the 10-day trading period that ended on the day immediately prior to the date the Company entered into the subscription agreement. The Company received gross proceeds of approximately $134,640. The shares were issued to individual retirement accounts for the benefit of a related party (see Notes 6, 7, and 9).

NOTE 5 - CURRENT LIABILITIES



Accrued Compensation



Accrued compensation includes accruals for employee wages and vacation pay. The
components of accrued compensation, inclusive of payroll taxes, are as follows:



                             30-Jun-12       31-Dec-12

Wages                           163,356               -
Vacation                         10,320               -
Total accrued compensation      173,676               -

Accrued employee wages relate primarily to wages owed to the Company's Chief Executive Officer and President. Under the terms of his employment agreement, wages are to be accrued but no payment made for so long as payment of such salary would jeopardize the Company's ability to continue as a going concern.

NOTE 6 - CONVERTIBLE DEBENTURES - RELATED PARTIES

January 2012 Convertible Debentures

On January 13, 2012, the Company's Board of Directors authorized the issuance of 8% convertible debentures in the aggregate principal amount of $174,668 (the "January 2012 Debentures") to six individuals. One of the January 2012 Debentures, in the principal amount of $74,668, was issued to one accredited investor in exchange for the liabilities assumed from North Horizon, Inc. upon the 2011 reverse merger. The five other January 2012 Debentures, in an aggregate principal amount of $100,000, were issued in exchange for new cash infusion by five individuals, three of whom are members of the Company's Board of Directors.

Under the terms of their original issuance, the January 2012 Debentures bear an annual interest rate of 8% and were payable in cash at the earlier of January 13, 2013 or when the Company completes a financing with minimum proceeds of $4 million (the "Financing"). The holders of the January 2012 Debentures had the right to convert their principal and interest accrued into the Company's securities that are issued to the investors in the Financing. In the event the Company defaulted on repayment, or if the Company failed to complete the Financing within one year of the date the notes were issued, the annual interest rate would increase to 13% and the holders would have the right to convert the principal and interest accrued into shares of the Company's common stock at $0.05 per share. The Company does not have the right to pre-pay the January 2012 Debentures.

INNOVUS PHARMACEUTICALS, INC.

(Formerly North Horizon, Inc.)

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The embedded conversion feature is contingent upon the occurrence of the Financing. The value of the contingent conversion feature, if beneficial, will be recognized when the contingencies are resolved.

Through December 31, 2012, $12,000 (plus accrued interest of $435) of the January 2012 Debentures were converted into 16,580 shares of common stock (see Note 4), leaving an aggregate principal balance under the January 2012 Debentures of $162,668 at December 31, 2012 and June 30, 2013. Interest expense recognized for the three months ended June 30, 2013 and 2012 was $3,244 and $3,474, respectively, and interest expense recognized during the six months ended June 30, 2013 and 2012 was $6,453 and $6,461, respectively.

On January 29, 2013, the holders of the outstanding January 2012 Debentures (totaling $162,668 in principal) agreed to extend the maturity date of their debentures to January 14, 2014 at the same interest rate of 8% per annum, and to extend the date for optional conversion to common stock to January 14, 2014. Additionally, on May 6, 2013, three holders of the outstanding January 2012 Debentures (each of whom is a member of the Company's Board of Directors and who hold a total of $68,000 in principal of the debentures) agreed to extend the maturity date of their debentures from January 14, 2014 to July 1, 2014 at the same interest rate of 8% per annum, and to extend the date for optional conversion to common stock to July 1, 2014. Finally, on August 9, 2013, a fourth holder of an outstanding January 2012 Debenture in the principal amount of $74,668 agreed to extend the maturity date of his debenture from January 14, 2014 to July 1, 2014 at the same interest rate of 8% per annum, and to extend the date for optional conversion to common stock to July 1, 2014.

As of the filing of this report as a result of amendments to the January 2012 Debentures, four of those debentures (totaling $142,668 in principal) have a maturity date and optional conversion date of July 1, 2014, and the fifth and final such debenture ($20,000 in principal) has a maturity date and optional conversion date of January 14, 2014.

January 2013 Convertible Debenture

On January 15, 2013, the Company borrowed $70,000 from a director of the Company in the form of a convertible debenture (the "January 2013 Debenture"). The terms of the January 2013 Debenture are identical to those of the January 2012 Debentures as amended on January 29, 2013, and as such, the January 2013 Debenture matures on January 14, 2014.

Line of Credit - Convertible Debenture

On January 22, 2013, the Company entered into a convertible debenture with its President and Chief Executive Officer ("LOC Convertible Debenture"). Under the terms of its original issuance: (1) the Company could request to borrow up to a maximum principal amount of $250,000 from time to time; (2) amounts borrowed bore an annual interest rate of 8%; (3) the amounts borrowed plus accrued interest is payable in cash at the earlier of January 14, 2014 or when the Company completes a financing with minimum gross proceeds of $4,000,000; and (4) the holder had sole discretion to determine whether or not to make an advance upon the Company's request.

On March 18, 2013, the LOC Convertible Debenture was amended and restated. Under its amended and restated terms: (1) the Company could request to borrow up to $500,000; (2) amounts borrowed bore an annual interest rate of 8%; (3) the amounts borrowed plus accrued interest is payable in cash at the earlier of January 14, 2014 or when the Company completes a financing with minimum gross proceeds of $4,000,000; (4) the holder committed to advance funds (up to the maximum amount borrowable thereunder) to the Company upon its request if and to the extent the Company will have insufficient liquidity to meet any material payment obligations arising in the ordinary course of business as they come due; and (5) the holder's funding commitment automatically terminated on the earlier of January 1, 2014 or when the Company completed a financing with minimum net proceeds of at least $500,000. In addition, the holder's funding commitment increases by the gross amount of any cash salary, bonus or severance payments provided to the holder under his employment agreement with the Company. The holder'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 the Company's ability to continue as a going concern.

On May 6, 2013, the LOC Convertible Debenture was further amended (as amended and restated on March 18, 2013 and as further amended on May 6, 2013, the to:
(1) extend its maturity date from January 14, 2014 to July 1, 2014 (or, if earlier, when the Company completes a financing with minimum gross proceeds of $4,000,000); (2) increase the maximum principal amount borrowable thereunder from $500,000 to $1,000,000; and (3) change the automatic termination of the holder's funding commitment to the earlier of July 1, 2014 or when the Company completes a financing with minimum net proceeds of at least $1,000,000. The other material terms of the debenture were not changed.

INNOVUS PHARMACEUTICALS, INC.

(Formerly North Horizon, Inc.)

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

(Unaudited)

During the six months ended June 30, 2013, the Company borrowed $219,100 under the LOC Convertible Debenture. As of June 30, 2013, the Company owed a balance of $219,100 in principal amount under the LOC Convertible Debenture.

At June 30, 2013 and December 31, 2012, there was an aggregate of $451,768 and $162,668, respectively, in principal amount due under the January 2012 Debentures, the January 2013 Debenture and the LOC Convertible Debenture of which $90,000 is a current liability.

NOTE 7 - CONVERTIBLE DEBT - RELATED PARTY

On May 15, 2013, the Company issued a convertible debt instrument to a member of its Business and Finance Advisory Board in exchange for $50,000. The debt converts on the first of the following to occur: (1) the first anniversary of May 15, 2013; (2) the delivery of notice by the Company to the investor of the Company's election to convert the convertible debt into shares of the Company's common stock, which notice the Company can deliver at any time prior to the first anniversary of May 15, 2013; (3) the effective date of a liquidation event (as defined below); or (4) the closing of a financing in which the Company receives gross proceeds of at least $4 million. A "liquidation event" is defined as the merger of the Company, the sale of all or substantially all of the Company's assets or the dissolution, consolidation or other corporate reorganization of the Company, in each case, in which the Company's stockholders immediately prior to such transaction own capital stock of the surviving entity representing less than 50% of the combined voting power of the outstanding securities of such successor or combined entity immediately following such transaction.

If the debt converts as a result of the events described in clauses (1), (2) or
(3) above, the Company must issue to the investor such number of shares of the Company's common stock equal to (a) $50,000 plus 8% per annum simple interest accruing from May 15, 2013 and ending on the date of conversion, which we refer to as the "convertible amount," divided by (b) 90% of the average closing price of our common stock for the 10 trading days immediately prior to the date of conversion or, in the event of conversion as a result of a liquidation event, 90% of the value of the consideration to be received in respect of a share of the Company's common stock upon the liquidate event. If the debt converts as a result of the event described in clause (4) above, the Company must issue to the investor such number of the securities that the Company issued in the financing equal to (a) the convertible amount divided by (b) the per unit price of the securities that the Company issued in such financing.

The Company recorded the $50,000 in convertible debt as a liability at June 30, 2013. This amount has been reduced by $7,007 which represents the unamortized estimated fair value of debt discount relating to the 10% stock discount under the term of this convertible debt. The estimated fair value of the debt discount will be accreted through interest expense over the one year life of the convertible debt instrument. During the six months ended June 30, 2013 the Company accreted $1,010 of the debt discount as interest expense.

NOTE 8 - LICENSE AGREEMENT

On April 19, 2013, the Company and Centric Research Institute, Inc. ("CRI") entered into an asset purchase agreement (the "CRI Asset Purchase Agreement") pursuant to which the Company acquired:

all of CRI's rights in past, present and future CIRCUMserumTM product formulations and presentations, and
an exclusive, perpetual license to commercialize CIRCUMserumTM products in all territories except for the United States of America.

CRI will retain commercialization rights for CIRCUMserumTM in the United States.

In consideration for such assets and license, the Company agreed to issue to CRI shares of the Company's common stock valued at $250,000 within 10 days of the closing. The Company issued 631,313 shares to CRI in this regard. The Company will be required to issue to CRI shares of the Company's common stock valued at $100,000 within 30 days of receiving human safety data showing no serious adverse events and minimal-to-no adverse events related to use of the product. The Company will be required to issue to CRI additional shares of the Company's common stock valued at $100,000 within 30 days of receiving statistically significant positive human clinical efficacy safety data in a certain indication for the product. In each case, the number of shares to be issued was or will be determined based on the average of the closing price for the 10 trading days immediately preceding the issue date. CRI will have certain "piggyback" registration rights with respect to the shares described above, which rights provide that, if the Company registers shares of its common stock under the . . .

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