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INNV > SEC Filings for INNV > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for INNOVUS PHARMACEUTICALS, INC.


14-Nov-2013

Quarterly Report


NOTE 2 - LIQUIDITY AND PLAN OF OPERATION

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.

On September 9, 2013, the Company entered into a license and distribution agreement with Ovation Pharma SARL ("Ovation") under which it granted to Ovation an exclusive license to market and sell the Company's topical treatment for reduced penile sensitivity, CIRCUMserum™, in Morocco. Ovation may pay the Company up to approximately $11.25 million upon achievement of commercial milestones. In addition, Ovation has agreed to certain upfront minimum purchases of CIRCUMserum™ based upon an agreed upon transfer price and yearly minimum purchases. The Company expects its first pre-paid orders to arrive in the fourth quarter of 2013 and to begin shipping products related to this agreement in the first quarter of 2014 (see Note 7).

On September 9, 2013, the Company entered into a second license and distribution agreement with Ovation under which it granted to Ovation an exclusive license to market and sell the Company's topical premature ejaculation treatment, EjectDelay™, in Morocco. Ovation may pay the Company up to approximately $18.6 million - allocated among a fixed upfront license fee and the achievement of regulatory and commercial milestones. In addition, Ovation has agreed to certain upfront minimum purchases of EjectDelay™ based upon an agreed upon transfer price and minimum yearly purchases. The Company expects products to begin shipping related to this agreement in the fourth quarter of 2013. For the quarter ended September 30, 2013, the Company recorded $75,000 in deferred revenue, related to the upfront fee, and is entitled to a second regulatory payment in 2014. The Company expects to ship products as soon as the product is registered in Morocco (see Note 7).

During the nine months ended September 30, 2013, the Company issued $120,000 of convertible debt, of which $50,000 (plus accrued interest) has been converted into 83,103 shares of the Company's common stock. The Company also 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, and sold 416,841 shares of common stock for proceeds of $134,640 to its President and Chief Executive Officer and spouse (see Notes 4, 6 and
8). Additionally, certain debenture holders extended the maturity of their debentures (see Notes 6 and 11).

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 $673,392 remains available to borrow at September 30, 2013, will be sufficient to allow the Company to continue its operations, commence the product development process, and launch selected products through October 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. The Company's actual capital needs may 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, 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 considers various fundraising 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.

INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)

(A Development Stage Company)

(Notes to Condensed Consolidated Financial Statements)

(Unaudited)

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 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 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 U.S. Securities and Exchange Commission ("SEC"). The results for the period ended September 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. The accompanying financial statements have been prepared in conformity with U.S. GAAP. Certain items have been reclassified to conform to the current presentation.

(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 equity-based instruments, income taxes, realizability of deferred tax assets, and intangible assets. 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 under different assumptions or conditions.

(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 September 30, 2013 and December 31, 2012, the Company has $75,166 and zero, respectively, in trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. There have been no write-offs of trade accounts receivable during the periods presented.

(e) Concentration of Suppliers The Company has manufacturing relationships with a number of vendors or manufacturers for its products including: CIRCUMserumTM, EjectDelayTM and the ApeazTM line of products. Pursuant to these relationships, the Company purchases product through purchase orders with its manufacturers. The Company is in the process of entering into more formal agreements with certain of these manufacturers.

INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)

(A Development Stage Company)

(Notes to Condensed Consolidated Financial Statements)

(Unaudited)

(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.

(g) Revenue Recognition, Trade Receivables and Deferred Revenue The Company generates revenues from product sales and the licensing of the rights to market and commercialize its products.

The Company recognizes revenue in accordance with ASC 605, Revenue Recognition. Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) price to the buyer is fixed or determinable; and
(4) collectability is reasonably assured.

Product Sales. The Company ships product to its customers pursuant to purchase agreements or orders. Revenue from product sales is 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. Product sales under its license agreements are "EX Works". The Company has recognized net revenue from product sales that have occurred through Centric Research Institute, Inc.'s ("CRI") website. Net revenue is recognized net of cost of the product, warehousing, shipping and royalty costs. Certain product sales have been recorded as deferred revenue where the product is currently not available.

License Arrangements. Payments received by the Company under license arrangements to market and commercialize its products may include non-refundable upfront fees, license fees, milestone payments for specific achievements designated in the agreements, and royalties on sales of products. The Company considers a variety of factors in determining the appropriate method of accounting under its license arrangements, including whether the various elements can be separated and accounted for individually as separate units of accounting.

(h) Return Policy The Company provides a customer satisfaction warranty on all of its products to customers for a specified amount of time after product delivery. Estimated return costs are based on historical experience and estimated and recorded when the related sales are recognized. Any additional costs are recorded when incurred or when they can reasonably be estimated.

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

(i) 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.

(j) 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, stock units or stock options at the time they are issued and are expensed as service is provided.

(k) 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 nine months ended September 30, 2013 and 2012 as the Company has no other comprehensive income.

INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)

(A Development Stage Company)

(Notes to Condensed Consolidated Financial Statements)

(Unaudited)

(l) Earnings per Share Basic earnings per share are computed by dividing net 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 nine months ended September 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 loss per common share attributable to the Company for the three and nine months ended September 30, 2013 and 2012:

                                      As of September 30
                                         2013         2012
Gross number of shares excluded:
Stock units                               6,300,000       -
Stock options                                40,500       -
Total                                     6,340,500       -

The Company's convertible debentures provide for automatic conversion of outstanding principal and accrued interest into securities of the Company. Such shares are considered contingently issuable (see Notes 6 and 11).

NOTE 4 - RELATED PARTY TRANSACTIONS

On June 12, 2013, the Company entered into a subscription agreement 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 the Company's President and Chief Executive Officer and his spouse (see Note 8).

The Company has several convertible debentures outstanding to related parties (see Note 6).

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:

                              September 30, 2013     December 31, 2012

Wages                                     259,839                     -
Vacation                                   21,743                     -
Total accrued compensation                281,582                     -

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. There was no accrued compensation for the period ended December 31, 2012.

INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 6 - CONVERTIBLE DEBENTURES - RELATED PARTIES

January 2012 Convertible Debentures

In January 2012, the Company issued 8% convertible debentures in the aggregate principal amount of $174,668 (the "January 2012 Debentures") to six individuals.
Under their original terms, the January 2012 Debentures were payable in cash at the earlier of January 13, 2013 or when the Company completes a financing with minimum gross proceeds of $4 million (the "Financing"), the holders had the right to convert outstanding principal and interest accrued into the Company's securities that were issued to the investors in the Financing, and, in the event the Company defaulted on repayment, or if the Company failed to complete the Financing by January 13, 2013, the annual interest rate would increase to 13% and the holders would have the option 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. 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.

The January 2012 Debentures contain an embedded conversion feature which 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, leaving an aggregate principal balance of $162,668 at December 31, 2012.

The Financing did not occur by January 13, 2013. However, in January 2013, the five remaining holders of the outstanding January 2012 Debentures agreed to extend the maturity date 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. In May and August 2013, four of the five holders of the outstanding January 2012 Debentures agreed to further extend the maturity date to July 1, 2014 at the same interest rate of 8% per annum, and to further extend the date for optional conversion to common stock to July 1, 2014. On November 11, 2013, four of the five holders of the outstanding January 2012 Debentures agreed to amend and restate the debentures to provide for automatic conversion into securities of the Company upon the earlier of either (a) the closing of the Financing and (b) July 1, 2016 (see Note 11). As of the date of this report as a result of the amendment and restatement of four of the January 2012 Debentures, only one of the January 2012 Debentures (totaling $20,000 in principal) has a maturity date and optional conversion date of January 14, 2014. All such debentures continue to bear interest at a rate of 8% per annum.

January 2013 Convertible Debenture

In January 2013, the Company issued a convertible debenture in the principal amount of $70,000 to a director of the Company (the "January 2013 Debenture"). The terms of the January 2013 Debenture are identical to those of the January 2012 Debentures.

On November 11, 2013, the holder of the outstanding January 2013 Debenture agreed to amend and restate the debenture to provide for automatic conversion into securities of the Company upon the earlier of either (a) the closing of the Financing and (b) July 1, 2016 (see Note 11). The January 2013 Debenture continues to bear interest at a rate of 8% per annum.

Line of Credit - Convertible Debenture

On January 22, 2013, the Company entered into a line of credit convertible debenture with its President and Chief Executive Officer (the "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; 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; (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.

INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements
(Unaudited)

On May 6, 2013, the LOC Convertible Debenture was further amended to: (1) extend its maturity date from January 14, 2014 to July 1, 2014 (or, if earlier, when the Company completes a Financing); (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.

During the nine months ended September 30, 2013, the Company borrowed $326,608 under the LOC Convertible Debenture. As of September 30, 2013, the Company owed a balance of $326,608 in principal amount under the LOC Convertible Debenture, and there was $673,392 remaining available to use.

On November 11, 2013, the LOC Convertible Debenture was amended and restated (see Note 11). The LOC Convertible Debenture continues to bear interest at a rate of 8% per annum.

May 2013 Convertible Debt Instrument

In May 2013, the Company issued convertible debt in the amount of $50,000, which, together with $1,458 of accrued interest, was converted in September 2013 into 83,103 shares of the Company's common stock in accordance with the terms of the instrument, thereby fully extinguishing the debt. During the five months that the debt was outstanding, the Company accreted $8,017 of the debt discount as interest expense.

Interest Expense

The Company recognized total interest expense on the January 2012 Debentures, the January 2013 Debenture and the LOC Convertible Debenture including amortization of the discount, of $19,070 and $4,288 for the three months ended September 30, 2013 and 2012, respectively, and $35,128 and $12,308 for the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013 and December 31, 2012, there was an aggregate of $559,276 and $162,668, respectively, in principal amount due under the January 2012 Debentures, the January 2013 Debenture and the LOC Convertible Debenture, classified as short and long term liabilities as appropriate. All such debentures continue to bear interest at a rate of 8% per annum.

NOTE 7 - LICENSE AGREEMENTS

On April 19, 2013, the Company and 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.

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 an aggregate of $200,000 for milestones relating to additional clinical data received. 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 Securities Act in connection with a public offering, CRI will have the right to include such shares in that registration, subject to certain exceptions. The Company recorded an asset totaling $250,000 related to the CRI Asset Purchase Agreement and will amortize this amount over its estimated useful life of 10 years. The Company will begin to record amortization of this asset in the fourth quarter of 2013 when it will commence use. The Company has recorded net sales of CIRCUMserumTM of $445 which relate to Ex US sales from CRI's website.

The CRI Asset Purchase Agreement also requires the Company to pay to CRI up to $7 million in cash milestone payments based on first achievement of annual net sales targets plus a royalty based on annual net sales. The obligation for these payments expires on April 19, 2023 or the expiration of the last of CRI's patent . . .

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