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:
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•
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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.
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•
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Level 2 measurements are inputs other than quoted prices included in Level 1 that are observable either directly or indirectly.
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•
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Level 3 measurements are unobservable inputs.
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(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:
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As of June 30
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2013
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2012
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Gross number of shares excluded:
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Restricted stock units
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7,050,000
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-
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Stock options
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30,000
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-
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Total
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7,080,000
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-
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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:
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30-Jun-12
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31-Dec-12
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Wages
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163,356
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-
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Vacation
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10,320
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-
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Total accrued compensation
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173,676
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-
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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:
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·
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all of CRI’s rights in past, present and future CIRCUMserum
TM
product formulations and presentations, and
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·
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an exclusive, perpetual license to commercialize CIRCUMserum
TM
products in all territories except for the United States of America.
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CRI will retain commercialization rights
for CIRCUMserum
TM
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 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
did not record amortization in the three or sixth months ended June 30, 2013 due to its immateriality. The Company commenced sales
of CIRCUMserum in May 2013.
INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)
(A Development Stage Company)
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
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 claims covering the product or its use outside the United States, whichever is sooner.
In connection with
this transaction, the Company engaged a consultant to assist in the technology transfer and manufacturing of the product. In consideration
of such services, the Company agreed to issue to the consultant shares of its common stock valued at $25,000 on each of the 30
th
,
60
th
and 90
th
day following the closing of the CRI transaction. In each case, the number of shares issuable
is determined based on the average of the closing price of the Company’s common stock for the 10 trading days immediately
preceding the issue date (see Note 9).
NOTE 9 – SHAREHOLDERS’ EQUITY
Capital Stock
The Company is authorized
to issue 150.0 million shares, all of which are common stock with a par value of $.001 per share.
Reverse Merger Between Innovus Pharmaceuticals,
Inc. (formerly North Horizon) and FasTrack
On December 7, 2011,
North Horizon, Inc. and FasTrack Pharmaceuticals, Inc. underwent a combination whereby both companies survived as legal entities,
but FasTrack became a wholly-owned subsidiary of North Horizon. Pursuant to the merger agreement, North Horizon changed its name
to Innovus Pharmaceuticals, Inc. The transaction was accounted as a reverse acquisition under provisions of ASC Topic 805 “Business
Combinations.” As a result, the accompanying consolidated financial statements are issued under the name of the Company,
which is the “legal acquirer,” but these financial statements are a continuation of FasTrack, the “accounting
acquirer,” for all periods presented.
Subsequent to the December
7, 2011 reverse merger, questions arose as to whether the Company complied with federal and applicable state securities laws in
connection with the issuance of shares of common stock to the FasTrack stockholders in connection with the Reverse Merger. On February
29, 2012, the Company made a rescission offer and provided detailed information to the FasTrack stockholders.
Former holders of FasTrack
shares as of the record date of December 7, 2011 had the opportunity to accept or reject the rescission offer of $6 per share ($.002
giving effect of conversion ratio) within thirty days of the date of receipt of the information, or at the latest April 14, 2012.
No FasTrack stockholder
accepted the offer. Through the date of rescission offer expiration (April 14, 2012), the Company recognized the amounts potentially
refundable under this offer as a liability. The rescission offer may not have been effective to extinguish liabilities the Company
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. The Company is unable to predict if any former FasTrack stockholder
will make a claim or if pursued what the outcome may be. The Company determined that the potential liability after completion of
the rescission offer is neither probable nor reasonably estimable, and accordingly, upon expiration of the rescission offer, the
amount of such liability was reclassified to stockholders’ deficit, and no liability is recorded for this contingency in
the accompanying consolidated balance sheet as of December 31, 2012 or thereafter.
In addition, shares
related to the convertible note of Apricus Bio (see Note 4), which was converted on December 21, 2011, were issued as of March
31, 2012 due to administrative delays.
INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)
(A Development Stage Company)
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following table
presents selected information as of December 31, 2011 as if all shares under the rescission rights and shares to Apricus Bio upon
conversion of the notes payable were issued and outstanding as of December 31, 2011:
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31-Dec-11
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Shares issued and outstanding
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1,325,125
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Potential shares subject to recission rights
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14,722,077
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Shares issuable for conversion of Apricus Bio notes
|
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135,888
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Shares, which would have been issued and outstanding as if recission rights and outstanding as if recission rights were not granted and Apricus Bio shares were issued at the date of the Merger
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16,183,090
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Issuances of Common Stock
On January 17, 2013,
the Company entered into an investor relations agreement with a third party pursuant to which the Company agreed to issue an aggregate
of 250,000 shares of common stock in exchange for investor relations services to be rendered. The 250,000 shares were to be issued
as follows: (1) 50,000 shares to be issued on the date Company’s Board of Directors approves the agreement; and (2) an additional
50,000 shares to be issued on each of the following dates: February 17, 2013, March 17, 2013, April 17, 2013 and May 17, 2013.
As of June 30, 2013, the Company has issued all 250,000 shares. All issued shares have been valued at the closing price of the
Company’s common stock on the date of issuance. The aggregate value of the 250,000 shares issued was $133,450, which corresponds
to the service period of the investor relations services. The Company recognized expense of $85,950 and $133,450, respectively,
under the investor relations agreement during the three and six months ended June 30, 2013.
On
February 15, 2013, the Company entered into a restricted stock unit agreement with a consultant. Under the terms of the agreement,
the Company issued 300,000 restricted stock units, with one thirty-sixth of the units vesting on the 7
th
of each month
beginning on March 7, 2013, subject to the consultant’s continued service to the Company as of the vesting date. The Company
will issue the shares subject to vested stock units on the date the consultant’s service to the Company terminates. Through
June 30, 2013, 33,332 of the 300,000 restricted stock units had vested pursuant to the agreement. These restricted stock units
were valued at the closing market price of the common stock on the date of vesting, for an aggregate value of $12,541. The restricted
stock units were issued under the Company’s 2013 Equity Incentive Plan.
On April 19, 2013,
the Company issued 631,313 shares of common stock to CRI pursuant to the CRI Asset Purchase Agreement which had a fair value of
$250,000 (see Note 8).
On May 19, 2013 and
June 18, 2013, the Company issued a total of 161,165 shares of common stock to a consultant under a consulting agreement (see Note
8). The shares were issued under the Company’s 2013 Equity Incentive Plan.
On June 21, 2013, the
Company issued an aggregate of 416,841 shares of common stock for proceeds of $134,640 to a related party (see Note 4).
On June 28, 2013, the
Company entered into an agreement with a consultant to provide GLP and non GLP drug development pre-clinical consulting services
for CIRCUMserum and EjectDelay. In consideration of such services, the Company agreed to issue the consultant shares of its common
stock valued at $80,200 in three installments. The first two issuances are to be made 15 and 45 days, respectively, following June
28, 2013. The third and final payment will be paid upon the delivery of the final study reports of certain pre-clinical studies.
In each case, the number of shares to be issued will be determined based on the average of the closing price of the Company’s
common stock for the 10 trading days immediately preceding the issue date. The shares will be issued under the Company’s
2013 Equity Incentive Plan.
Equity Plan
The Company has issued
share-based stock and option awards to employees, non-executive directors and outside consultants under the Company’s 2013
Equity Incentive Plan (the “Incentive Plan”). The exercise price for all equity awards issued under the Incentive Plan
is based on the fair market value of the common stock. Currently, because the Company’s common stock is quoted on the OTC
Bulletin Board, the fair market value of the common stock is equal to the last-sale price reported by the OTC Bulletin Board as
of the date of determination, or if there were no sales on such date, on the last date preceding such date on which a sale was
reported. Stock options generally vest over a three-year period, first year cliff vesting with quarterly vesting thereafter on
the three-year awards, and have a ten year life. Stock options outstanding are subject to time-based vesting as described above
and thus are not performance-based.
INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)
(A Development Stage Company)
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The Incentive Plan
allows for the issuance of restricted stock awards, restricted stock unit awards, stock appreciation rights, performance shares
and other share-based awards, in addition to stock options. As of June 30, 2013, there were 7,050,000 restricted stock units and
30,000 shares subject to options outstanding and 2,758,835 shares were available for future grants under the Incentive Plan.
Stock-based Compensation
The Company accounts
for stock based compensation in accordance with ASC 718,
Stock Based Compensation
, which requires the recognition of the
fair value of stock compensation as an expense in the calculation of net income. ASC 718 requires that stock-based compensation
expense be based on awards that are ultimately expected to vest. Stock-based compensation for the three and six months ended June 30,
2013 and 2012 have been reduced for estimated forfeitures. When estimating forfeitures, voluntary termination behaviors, as well
as trends of actual option forfeitures, are considered. To the extent actual forfeitures differ from the Company’s current
estimates, cumulative adjustments to stock-based compensation expense are recorded.
Except for transactions
with employees and directors that are within the scope of ASC 718, all transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably measurable.
The stock-based compensation
expense for the three and six months ended June 30, 2013 was $1,612,647 and $1,682,510, respectively. The Company calculates the
fair value of each equity award on the date of grant using the Black-Scholes option pricing model. The Company did not grant any
equity awards during the six months ended June 30, 2012. For the three and six months ended June 30, 2013 the following weighted
average assumptions were utilized for the stock option granted during the period:
|
|
|
30-Jun-13
|
|
|
Expected life (in years)
|
|
|
6.0
|
|
|
Expected volatility
|
|
|
235.70
|
%
|
|
Average risk free interest rate
|
|
|
1.75
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
The dividend yield
of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends.
Expected volatility is based on the historical volatility of the Company’s common shares over the period commensurate with
the expected life of the options. Expected life in years is based on the “simplified” method as permitted by ASC Topic
718. The Company believes that all stock options issued under its stock option plans meet the criteria of “plain vanilla”
stock options. The Company uses a term of 6 years for all employee stock options. The risk free interest rate is based on average
rates for 5 and 7 year treasury notes as published by the Federal Reserve.
INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)
(A Development Stage Company)
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
The following table
summarizes the number of options outstanding and the weighted average exercise price:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
remaining
|
|
|
|
|
|
|
|
|
|
|
average exercise
|
|
|
contractual life
|
|
|
Aggregate
|
|
|
|
|
Options
|
|
|
price
Weighted
|
|
|
(years)
|
|
|
intrinsic value
|
|
|
Value Outstanding at December 31 ,2012
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
30,000
|
|
|
|
0.34
|
|
|
|
10
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at June 30, 2013
|
|
|
30,000
|
|
|
$
|
0.34
|
|
|
|
10
|
|
|
|
-
|
|
|
Vested at June 30, 2013
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The aggregate intrinsic
value is calculated as the difference between the exercise price of all outstanding options and the quoted price of the Company’s
common shares that were in the money at June 30, 2013.
30,000 options were
granted in the six months ended June 30, 2013. The weighted average grant date fair value per share of options granted in the six
months ended June 30, 2013 was $0.3387. No options were granted during the six months ended June 30, 2012.
At June 30, 2013 and
2012, the aggregate intrinsic value of all outstanding options was zero. No options were exercised under the Incentive Plan during
the six months ended June 30, 2013 or 2012.
As of June 30, 2013,
approximately $9,880 and $2,192,250 of total unrecognized compensation expense related to stock options and restricted stock units,
respectively, is expected to be recognized over a period of approximately twelve quarters.
Restricted Stock Units
The following table
summarizes the number of restricted stock units outstanding:
|
|
|
Restricted Stock Units
|
|
|
Units Outstanding at December 31 ,2012
|
|
|
-
|
|
|
Granted
|
|
|
7,050,000
|
|
|
Expired
|
|
|
-
|
|
|
Cancelled
|
|
|
-
|
|
|
Forfeited
|
|
|
-
|
|
|
Outstanding at June 30, 2013
|
|
|
7,050,000
|
|
|
Vested at June 30, 2013
|
|
|
2,533,332
|
|
The vested restricted
stock units at June 30, 2013 have not settled and are not showing as issued and outstanding shares of the Company. Settlement of
these vested restricted stock units will occur on the earliest of (i) Employee’s termination date, (ii) change of control
of the Company, or (iii) 10 years from date of issuance. Settlement of vested stock units may be made in the form of (i) cash,
(ii) shares, or (iii) any combination of both, as determined by the committee. Compensation expense was recognized for the vested
portion of the restricted stock for the periods ended June 30, 2013.
INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)
(A Development Stage Company)
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
NOTE 10 – NON CASH FINANCING ACTIVITIES
Six-month period
ended June 30, 2013:
|
|
·
|
The Company issued of 631,313 shares of common stock (valued at $250,000) in connection with the CRI Asset Purchase Agreement, as described in Note 8.
|
Six-month period
ended June 30, 2012:
|
|
·
|
$74,668 payable to a related party was converted into a convertible note, as described in Note 4.
|
|
|
·
|
The Company issued 135,888 shares of common stock related to the conversion of the Apricus Bio convertible promissory note that was originally issued in December 2011 and deemed contributed to capital in March 2012.
|
|
|
·
|
A convertible debenture in the principal amount of $12,000 plus accrued interest of $435 was converted into 16,580 shares of common stock, as described in Note 6.
|
|
|
·
|
Contingent liability in the amount
of $28,926 was reclassified to equity due to expiration of the rescission rights, none of which were exercised.
|
NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS
In December 2011, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11,
Disclosures
about Offsetting Assets and Liabilities.
The standard requires enhanced disclosures about assets and liabilities that are subject
to a master netting agreement or when the right of offset exists. In January 2013, the FASB issued ASU No. 2013-01,
Clarifying
the Scope of Disclosures about Offsetting Assets and Liabilities.
This pronouncement limits the scope of ASU No. 2011-1. The
standards’ disclosure requirements are retrospective and were effective beginning in first quarter 2013. The adoption of
ASU 2011-11 had no impact on the Company’s financial position or results of operations.
In February 2013, the
FASB issued ASU No. 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”)
.
This standard requires reporting, in one place, information about reclassifications out of AOCI by component. An entity is required
to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the
respective line items of net income, but only if the amount is reclassified in its entirety in the same reporting period. For amounts
that are not required to be reclassified to net income in their entirety, an entity is required to cross-reference to other currently
required disclosures that provide additional detail about those amounts. The information required by this standard must be presented
in one place, either parenthetically on the face of the financial statements by income statement line item or in a note. The adoption
of ASU 2013-02 had no impact on the Company’s financial position or results of operations.
NOTE 12 – SUBSEQUENT EVENTS
Amendments to January 2012 Debenture
On August 9, 2013,
the Company and the holder of one of the outstanding January 2012 Debentures agreed to extend the maturity date of such debenture
from January 14, 2014 to July 1, 2014. This debentures has an aggregate principal amount of $74,668 and is held by a related party.
The other terms of this debenture were not changed (see Note 5).
|
|
ITEM 2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
Innovus Pharmaceuticals, Inc., together
with its subsidiaries are collectively referred to as “Innovus”, the “Company”, “we”, or “our”.
The following information should be read in conjunction with the consolidated financial statements and notes thereto appearing
elsewhere in this report. For additional context with which to understand our financial condition and results of operations, see
the discussion and analysis included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012,
filed with the SEC on March 19, 2013, as amended, as well as the consolidated financial statements and related notes contained
therein.
INNOVUS PHARMACEUTICALS, INC.
(Formerly North Horizon, Inc.)
(A Development Stage Company)
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
Forward Looking Statements
This section and other
parts of this report contain forward-looking statements that involve risks and uncertainties. Forward-looking statements provide
current expectations of future events based on certain assumptions and include any statement that does not directly relate to any
historical or current fact. Forward-looking statements may refer to such matters as anticipated financial performance, future revenues
or earnings, business prospects, projected ventures, new products and services, anticipated market performance, and similar matters.
Such words as “may”, “will”, “expect”, “continue”, “estimate”, “project”,
and “intend” and similar terms and expressions are intended to identify forward looking statements. Forward-looking
statements are not guarantees of future performance and our actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in
Part II, Item 1A (Risk Factors) of this Form 10-Q, those discussed in Part I, Item 1A (Risk Factors) of our Annual Report on Form
10-K for the year ended December 31, 2012, filed with the SEC on March 19, 2013, and those discussed in other reports and documents
we file with the SEC. Except as required by applicable law, we assume no obligation to revise or update any forward-looking statements
for any reason.
Overview
We are an emerging
pharmaceutical company engaged in the commercialization, licensing, and development of non-prescription and prescription pharmaceutical
and non-pharmaceutical products with unique packaging and presentation. Our products are focused in the sexual dysfunction, arthritis,
hemorrhoids, cough and cold and acne therapeutic areas and will be marketed via the web or to dermatologists, urologists and sex
therapists either directly in the United States or through distributors ex-US. 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
|
lower costs compared to traditional pharmaceutical companies.
|
Recent Updates
Our strategy is underway
but we are still a development stage company. Our current product portfolio is comprised of EjectDelay (for premature ejaculation
(“PE”)), CIRCUMserum (for reduced penile sensitivity (“RPS”)) and our line of creams, gels, lozengers and
pads (for arthritis, hemorrhoids, cough and cold and acne). We acquired the ex-US rights to the patented CIRCUMserum product to
help with RPS in circumcised men and diabetic patients during the second quarter of 2013. CIRCUMserum works by making the skin
more sensitive with the continuous use of the product. During the second quarter of 2013 we generated insignificant revenues from
one of our products, CIRCUMserum. To bolster our sexual dysfunction franchise, we developed a proprietary treatment for PE, a market
targeting approximately 30% of men. According to an article in
The Journal of Sexual Medicine
in 2007, 20-30% of men experience
PE worldwide. The product, EjectDelay, is based on the active drug benzocaine which has been shown to delay ejaculation by over
4 minutes in clinical trials. We are actively looking for additional products to complement our sexual dysfunction franchise.
We have also developed multiple products
that target arthritis, hemorrhoids, cough and cold and acne. The arthritis and hemorrhoids products are topical. Apeaz for arthritis
pain is based on the strong anti-inflammatory methyl salicylate, and Xyralid
TM
for hemorrhoids is based on the active
drug lidocaine, which works by anesthetizing inflamed tissue. Zinc lozenges for cough and cold is a high dose of zinc acetate that
provides extended relief after dissolving the lozenge in mouth. Innovus Acne Care uses benzoyl peroxide to penetrate pores to clear
acne pimples.
We have developed the following corporate
objectives for 2013:
|
|
1.
|
Expand management team.
|
|
|
2.
|
Secure financing for our on-going operations.
|
|
|
3.
|
Increase cash reserves.
|
|
|
4.
|
Secure “clean” audit opinion on our 2012 Annual Financial Statements.
|
|
|
5.
|
Build a strong and global pipeline in large markets.
|
|
|
6.
|
Launch three of our OTC or consumer health products.
|
|
|
7.
|
Begin generating revenue from product sales.
|
|
|
8.
|
Sign commercial partnerships for our products.
|
We have already accomplished
many of our 2013 objectives and expect to accomplish all of them by December 31, 2013. During 2013 we have added several key members
to our senior management team including Dr. Bassam Damaj as our Chief Executive Officer and President, Morgan Brown as our Executive
Vice President and Chief Financial Officer and Robert Verfurth as our Vice President of Sales and Marketing.
During
the six months ended June 30, 2013, we issued a $70,000 convertible debenture to a member of our board of directors; entered into
a convertible debenture line of credit agreement with our President and Chief Executive Officer under which we may borrow up to
$1,000,000; sold convertible debt to a member of our Business and Finance Advisory Board for $50,000; and, sold 416,841 shares
of our common stock to
individual retirement accounts for the benefit
of a related party for aggregate gross proceeds of $134,640. However, we continue to have limited assets and operations and we
expect to be dependent on our President and Chief Executive Officer for operating capital through the second quarter of 2014. We
expect to generate revenues in the third and fourth quarters of 2013 as we continue our product launch of CIRCUMserum and as we
begin to market additional products in the United States and enter into license and distribution agreements outside the United
States for our products. We recently signed a licensing and distribution binding term sheet with a third-party for rights to CIRCUMserum
and EjectDelay in Morocco. We anticipate that similar agreements will be signed in other countries. Additional capital will be
required to maintain our corporate operations and we will need to seek additional funding for our product selection and development.
As noted earlier, on
April 19, 2013, we entered into an Asset Purchase Agreement with Centric Research Institute, Inc. (“CRI”) pursuant
to which we acquired on the same day:
|
|
·
|
all of CRI’s rights in past, present and future CIRCUMserum product formulations and presentations, and
|
|
|
·
|
an exclusive, perpetual license to commercialize CIRCUMserum products in all territories except for the United States of America.
|
CRI will retain commercialization rights
for CIRCUMserum in the United States.
In consideration for
such assets and license, we issued to CRI shares of our common stock valued at $250,000. Under the terms of the Asset Purchase
Agreement, we will be required to issue to CRI additional shares of our common stock valued at an aggregate of $200,000 upon the
achievement of specified milestones. The Asset Purchase Agreement also requires us 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 claims covering the product or its use outside
the United States, whichever is sooner.
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.
Results of Operations for the Three and Six Months Ended
June 30, 2013 Compared with the Three and Six Months Ended June 30, 2012
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Revenues
|
|
$
|
396
|
|
|
$
|
-
|
|
|
$
|
396
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
117
|
|
|
|
-
|
|
|
|
117
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (loss)
|
|
|
279
|
|
|
|
-
|
|
|
|
279
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation
|
|
|
1,612,647
|
|
|
|
-
|
|
|
|
1,682,510
|
|
|
|
-
|
|
|
General and administrative
|
|
|
494,328
|
|
|
|
49,849
|
|
|
|
756,281
|
|
|
|
106,126
|
|
|
Total operating expenses
|
|
|
2,106,975
|
|
|
|
49,849
|
|
|
|
2,438,791
|
|
|
|
106,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,106,696
|
)
|
|
|
(49,849
|
)
|
|
|
(2,438,512
|
)
|
|
|
(106,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(10,525
|
)
|
|
|
(4,472
|
)
|
|
|
(16,058
|
)
|
|
|
(8,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders
|
|
|
(2,117,221
|
)
|
|
|
(54,321
|
)
|
|
|
(2,454,570
|
)
|
|
|
(114,581
|
)
|
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
16,973,163
|
|
|
|
13,764,648
|
|
|
|
16,614,686
|
|
|
|
7,593,514
|
|
|
Basic and diluted income (loss) per common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
share
|
|
$
|
(0.12
|
)
|
|
$
|
-
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.02
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Revenue
:
Sales of CIRCUMserum ex-US accounted for all of our revenue during the three and six months ended June 30, 2013. For the
three months ended June 30, 2013 and 2012, we had $396 and no revenues, respectively, and for the six months ended June 30, 2013
and 2012, we had $396 and no revenues, respectively. Revenues for both the three and six months ended June 30, 2013 related to
ex-US sales of CIRCUMserum on CRI’s website. We have not begun to promote the CIRCUMserum ourselves outside the United States
nor have we entered into any ex-US distribution agreements.
Cost of goods
sold:
For the three and six months ended June 30, 2013, cost of goods sold was $117 compared to cost of goods sold
of zero for the same periods in 2012. Cost of goods sold for the three and six months ended June 30, 2013 consisted of the
cost of CIRCUMserum sold that was purchased from CRI.
General and administrative:
General and administrative expenses consist primarily of payroll and related expenses for executives, sales, marketing,
accounting, legal and administrative personnel. Additionally, our general and administrative expenses include professional fees,
investor communication expenses, insurance premiums, public reporting costs and general corporate expenses.
General and administrative
expenses for the three months ended June 30, 2013 increased by $444,479, compared with the three months ended June 30,
2012. The increase is primarily due to an increase in professional fees ($197,906), including an increase in legal fees of $63,401
and an increase in consulting expense of $136,291; an increase in payroll and employee compensation expense ($129,687); and an
increase in general office and administrative related expense ($47,024), which includes increases in rent expense, advertising
expense, press release expense and travel expense.
General and administrative
expenses for the six months ended June 30, 2013 increased by $650,155, compared with the six months ended June 30, 2012.
The increase is primarily due to an increase in professional fees ($372,098), including an increase in legal fees of $113,245,
an increase in consulting expense of $141,847 and an increase in investor relations fees of $107,595; an increase in payroll and
employee compensation expense ($199,550); and an increase in general office and administrative related expense ($78,507), which
includes increases in rent expense, advertising expense, press release expense and travel related expenses.
Stock compensation:
Stock compensation expenses consist primarily of stock compensation related to restricted stock units and stock options
granted to employees and officers of the Company. Stock compensation expenses for the three and six months ended June 30,
2013 increased by $1,612,647 and $1,682,510, respectively, compared with the same periods in the prior year. During the three and
six months ended June 30, 2013 and 2012, we recorded $1,612,647 and $1,682,510, respectively, in stock-based compensation
expense. We did not record any stock compensation expense in the three and six months ended June 30, 2012.
Interest expense:
For the three months ended June 30, 2013, interest expense was $10,525 compared with $4,472 for the three months ended June 30,
2012. For the six months ended June 30, 2013, interest expense was $16,058 compared to $8,455 with the six months ended June 30,
2012. The increases in both periods were the result of an increase in the amount of outstanding debt during 2013 compared to 2012.
Liquidity and Capital Resources
Historically, we have
funded losses from operations through the sale of equity and issuance of debt instruments, primarily to related parties including
directors and officers. Combined with minimal revenue, these funds have provided us with the resources to operate our business,
to begin to sell and support our products, attract and retain key personnel, fund our research and development programs and clinical
studies, and apply for and obtain the necessary regulatory approvals. However, we have not yet had sufficient funds to significantly
develop or commercialize our technologies. To date, we have experienced net losses and negative cash flows from operations each
year since our inception. Through June 30, 2013, we had an accumulated deficit of approximately $4,903,391. At June 30, 2013, we
had $137,579 in cash as compared to $18,445 at December 31, 2012.
During the six months
ended June 30, 2013, we received the following debt and equity financing:
In January 2013, we
issued an 8% convertible debenture to a board member in the amount of $70,000. This debenture bears an annual interest rate of
8% and is payable in cash at the earlier of January 14, 2014, or when we complete a financing with minimum proceeds of $4 million.
The holder has the option to convert the principal and interest accrued into securities that may be 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 holder would have the option to convert principal and interest accrued into shares of our common stock at a conversion
rate of $0.05 per share. We do not have the right to pre-pay this debenture.
Additionally in January
2013, we entered into a line of credit convertible debenture with our Chief Executive Officer and President. That debenture was
amended and restated in March 2013 and further amended in May 2013. Under its current terms: (1) we can request to borrow up to
$1,000,000; (2) amounts borrowed bear an annual interest rate of 8%; (3) the amounts borrowed plus accrued interest are payable
in cash at the earlier of July 1, 2014 or when we complete a financing with minimum gross proceeds of $4,000,000; (4) Dr. Damaj
is committed to advance funds (up to the maximum amount borrowable thereunder) to us upon our request if and to the extent we will
have insufficient liquidity to meet any material payment obligations arising in the ordinary course of business as they come due;
and (5) Dr. Damaj’s funding commitment automatically terminates on the earlier of July 1, 2014 or when we complete a financing
with minimum net proceeds of at least $1,000,000. In addition, Dr. Damaj’s funding commitment increases by the gross amount
of any cash salary, bonus or severance payments provided to him under his employment agreement with us. His salary has been accrued
and not paid under the provision of his 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. Through the date of this report, we have
borrowed $219,100 under this debenture. Through June 30, 2013, Dr. Damaj earned compensation of $163,356, which has not been paid.
Finally in January
2013, we and the six holders of the 8% convertible debentures we issued in January 2012 (totaling $162,668 in principal amount)
agreed to extend the maturity date of such debentures to January 14, 2014. In May 2013, we and the holders of three such debentures
(totaling $68,000 in principal), each of whom is a director of our Company, agreed to further extend the maturity date of such
debentures to July 1, 2014 and in August 2013, we and a fourth holder of such debentures (totaling $74,668), agreed to further
extend the maturity day of such debenture to July 1, 2014. All such debentures continue to bear interest at a rate of 8% per annum.
As of the filing of this report, as a result of amendments to the debentures issued in January 2012, four of those debentures (totaling
$142,668 in principal) have a maturity date and optional conversion date of July 1, 2014, and the fifth such debenture ($20,000
in principal) has a maturity date and optional conversion date of January 14, 2014.
In May 2013, we issued
a convertible debt instrument to a member of our 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) our delivery of notice to the investor of
our election to convert the debt into shares of our common stock, which notice we 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 we
receive gross proceeds of at least $4 million. A “liquidation event” is defined as the merger of our company, the sale
of all or substantially all of our assets or the dissolution, consolidation or other corporate reorganization of our company, in
each case, in which our 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, we must issue to the
investor such number of shares of our 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
our common stock upon the liquidate event. If the debt converts as a result of the event described in clause (4) above, we must
issue to the investor such number of the securities that we issued in the financing equal to (a) the convertible amount divided
by (b) the per unit price of the securities that we issued in such financing.
In June 2013, we entered
into a subscription agreement pursuant to which we sold an aggregate of 416,841 shares of our common stock for aggregate proceeds
of $134,640. The purchasers of such shares were individual retirement accounts for the benefit of a related party. Each share was
sold at a purchase price of $0.3230 per share, which was the average closing price of our common stock over the 10-day trading
period that ended on the day immediately prior to the date we entered into the subscription agreement.
At June 30, 2013,
we had cash of $137,579 compared to a total of $18,455 as of December 31, 2012. For the six months ended June 30, 2013,
cash used in operating activities was $304,606, consisting primarily of the net loss for the period of $2,454,570, $1,682,510 for
non-cash stock compensation expense, $195,991 for common stock issued for services and $1,009 for non-cash accretion of debt discount
to interest expense. Additionally, working capital changes consisted of cash increases related to a $92,697 increase in accounts
payable, a $173,676 increase in accrued compensation and a $10,500 increase in interest payable, offset by cash decreases related
to a $2,939 increase in prepaid expenses, a $3,200 increase in deposits and a $280 increase in accounts receivables. For the six
months ended June 30, 2013, cash used in investing activities was $-0-. For the six months ended June 30, 2013, cash
provided by financing activities was $423,740 relating primarily to increases of $134,640 in proceeds from stock issued for cash,
$50,000 in proceeds from convertible debt, and $289,100 in proceeds from convertible debt – related party, offset by a decrease
of $50,000 in repayment of notes payable.
For the six months
ended June 30, 2012, cash used in operating activities was $119,788, consisting primarily of the net loss for the period of
$114,581. Additionally, working capital changes consisted of cash increases related to an $8,455 increase in interest payable,
offset by cash decreases related to a $12,500 decrease in related-party payables and a $1,162 decrease in accounts payable. For
the six months ended June 30, 2012, cash used in investing activities was $-0-. For the six months ended June 30, 2012,
cash provided by financing activities was $200,500 relating primarily to increases of $100,500 in proceeds from stock issued for
cash and $100,000 in proceeds from convertible debt – related party.
We expect that our
existing capital resources, including the funds we may borrow under the line of credit convertible debenture entered with our President
and Chief Executive Officer, of which $780,900 is still available as of June 30, 2013, will be sufficient to allow us to continue
our operations and commence the product development process for selected products through July 1, 2014. However, our actual needs
will depend on numerous factors, including timing of introducing our products to the marketplace, our ability to attract ex-US
distributors for our products, our ability to in-license or develop new product candidates and our ability to finalize merger and
acquisition activities. As a result, our actual capital needs may substantially exceed our anticipated capital needs and we 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, our business may be materially harmed, our stock price may be adversely
affected, and our ability to raise additional capital may be impaired.
We will need to raise
substantial additional funds to support our long-term product development and commercialization programs. We regularly consider
various fund raising and strategic alternatives, including, for example, debt or equity financing and merger and acquisition alternatives.
We 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, we may be required to delay, reduce the scope of, or eliminate one or more of our products; obtain funds through arrangements
with licensees or others that may require us to relinquish rights to certain of our products that we might otherwise seek to develop
or commercialize on our 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.
Critical Accounting Policies and Estimates
For a discussion of
our critical accounting policies, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012.
New Accounting Standards
Refer to Note 11, in
“Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of new accounting standards.
Off- Balance Sheet Arrangements
None.
