INNOVUS PHARMACEUTICALS, INC. (Form: 10-Q, Received: 08/13/2019 16:03:33)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period ended June 30, 2019

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act.

For the transition period from ___ to ____.

Commission File Number: 000-52991

INNOVUS PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Nevada		90-0814124
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

8845 Rehco Road San Diego, CA		92121
(Address of Principal Executive Offices)		(Zip Code)

858-964-5123

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Securities registered pursuant to Section 12(b) of the Act: none

Securities registered pursuant to Section 12(g) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	INNV	OTCQB Marketplace

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of August 6, 2019, the registrant had 2,604,476 shares of common stock outstanding.

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TABLE OF CONTENTS

		Page

PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements		1

	Condensed Consolidated Balance Sheets at June 30, 2019 (Unaudited) and December 31, 2018		1

	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2019 and 2018		2

	Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited) for the Six Months Ended June 30, 2019 and 2018		3

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2019 and 2018		4

	Notes to Condensed Consolidated Financial Statements (Unaudited)		5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		23

Item 4.	Controls and Procedures		23

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings		24

Item 1A.	Risk Factors		24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 3.	Defaults Upon Senior Securities		25

Item 4.	Mine Safety Disclosures		25

Item 5.	Other Information		25

Item 6.	Exhibits		25

	Signatures		26

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INNOVUS PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

	June 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Assets:
Cash	$	1,574		$	1,248
Accounts receivable, net		319			282
Prepaid expense and other current assets		1,711			1,116
Inventories		1,853			2,370
Total current assets		5,457			5,016

Property and equipment, net		227			247

Deposits		21			21
Operating lease right-of-use asset		622			-
Goodwill		953			953
Intangible assets, net		3,557			3,890
Total assets	$	10,837		$	10,127

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Accounts payable and accrued expense	$	2,949		$	2,622
Operating lease liability		155			-
Accrued compensation		1,648			1,252
Deferred revenue and customer deposits		83			108
Accrued interest payable		38			32
Short-term loan payable		681			266
Notes payable, net of debt discount of $813 and $1,008, respectively		2,321			3,073
Total current liabilities		7,875			7,353

Deferred Rent		-			181
Operating lease liability, net of current portion		634			-
Accrued compensation, net of current portion		1,032			1,228
Contingent consideration		1,250			1,256
Total non-current liabilities		2,916			2,665

Total liabilities		10,791			10,018

Commitments and contingencies

Stockholders’ equity:
Preferred stock: 7,500,000 shares authorized, at $0.001 par value, no shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		-			-
Common stock: 292,500,000 shares authorized, at $0.001 par value, 2,578,476 and 2,103,071 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		2			2
Additional paid-in capital		47,652			43,967
Accumulated deficit		(47,608	)		(43,860	)
Total stockholders' equity		46			109

Total liabilities and stockholders’ equity	$	10,837		$	10,127

See accompanying notes to these condensed consolidated financial statements.

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INNOVUS PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(in thousands, except weighted average share and per share amounts)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2019			2018			2019			2018
Net revenue:
Product sales, net	$	6,594		$	6,970		$	11,783		$	11,512
Service revenue		56			156			156			156
Cooperative marketing revenue		91			183			162			184
License revenue		107			3			110			5
Net revenue		6,848			7,312			12,211			11,857

Cost of product sales		2,356			1,339			4,134			2,203
Gross Profit		4,492			5,973			8,077			9,654

Operating expense:
Research and development		91			23			148			34
Sales and marketing		2,858			5,529			5,453			8,831
General and administrative		2,724			1,919			5,158			3,615
Total operating expense		5,673			7,471			10,759			12,480

Loss from operations		(1,181	)		(1,498	)		(2,682	)		(2,826	)

Other income (expense):
Interest expense		(486	)		(326	)		(976	)		(568	)
Loss on extinguishment of debt		(125	)		(38	)		(125	)		(294	)
Other income (expense), net		29			-			29			-
Fair value adjustment for contingent consideration		4			22			6			19
Total other expense, net		(578	)		(342	)		(1,066	)		(843	)

Net loss	$	(1,759	)	$	(1,840	)	$	(3,748	)	$	(3,669	)

Net loss per share of common stock – basic and diluted	$	(0.66	)	$	(0.94	)	$	(1.47	)	$	(1.96	)

Weighted average number of shares of common stock outstanding – basic and diluted		2,660,435			1,953,400			2,553,212			1,867,338

See accompanying notes to these condensed consolidated financial statements.

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INNOVUS PHARMACEUTICALS, INC.

Condensed Consolidated Statement of Stockholder's Equity

(Unaudited)

For the Months Ended June 30, 2019 and 2018

(In thousands, except share amounts)

					Additional
	Common Stock				Paid-in		Accumulated			Stockholders'
	Shares		Amount		Capital		Deficit			Equity

Balance at December 31, 2017		1,596,574	$	2	$	36,541	$	(35,640	)	$	903

Common stock issued for services		2,444		-		21		-			21
Stock-based compensation		-		-		95		-			95
Exercise of warrants, net of offering costs		180,247		-		2,657		-			2,657
Common stock issued upon conversion of debt and interest		21,429		-		385		-			385
Common stock issued in connection with debt		26,355		-		292		-			292
Fair value of shares of common stock issued as financing fees in connection with notes payable		8,916		-		122		-			122
Reclassification of warrant derivative liability upon adoption of ASU 2017-11		-		-		-		59			59
Net loss		-		-		-		(1,829	)		(1,829	)

Balances at March 31, 2018		1,835,965	$	2	$	40,113	$	(37,410	)	$	2,705

Common stock issued for services		159		-		2		-			2
Stock-based compensation		-		-		108		-			108
Common stock issued upon conversion of debt and interest		14,041		-		196		-			196
Common stock issued for vested RSUs		6,797		-		-		-			-
Net loss		-		-		-		(1,840	)		(1,840	)

Balances at June 30, 2018		1,856,962	$	2	$	40,419	$	(39,250	)	$	1,171


Balance at December 31, 2018		2,103,071	$	2	$	43,967	$	(43,860	)	$	109

Stock-based compensation		-		-		138		-			138
Relative fair value of shares of restricted common stock issued in connection with notes payable		18,000		-		61		-			61
Sales of common stock and warrants, net of offering costs		230,853		-		2,714		-			2,714
Fair value of shares of common stock issued as financing fees in connection with notes payable		5,600		-		28		-			28
Net loss		-		-		-		(1,989	)		(1,989	)

Balances at March 31, 2019		2,357,524	$	2	$	46,908	$	(45,849	)	$	1,061

Common stock issued for services		36,916		-		106		-			106
Stock-based compensation		-		-		137		-			137
Common stock issued upon conversion of debt and interest		100,000		-		300		-			300
Relative fair value of shares of restricted common stock issued in connection with notes payable		74,000		-		173		-			173
Fair value of shares of common stock issued as financing fees in connection with notes payable		10,036		-		28		-			28
Net loss		-		-		-		(1,759	)		(1,759	)

Balances at June 30, 2019		2,578,476	$	2	$	47,652	$	(47,608	)	$	46

See accompanying notes to these condensed consolidated financial statements.

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INNOVUS PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	For the Six Months Ended June 30,
	2019			2018

Cash flows from operating activities:
Net loss	$	(3,748	)	$	(3,669	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		35			19
Recovery of allowance for doubtful accounts		(11	)		-
Common stock, restricted stock units and stock options issued to employees, board of directors and consultants for compensation and services		275			225
Loss on extinguishment of debt		125			294
Change in fair value of contingent consideration		(6	)		(19	)
Amortization of debt discount		908			534
Amortization of intangible assets		363			315
Changes in operating assets and liabilities, net of acquisition amounts
Accounts receivable		(27	)		(219	)
Prepaid expense and other current assets		(596	)		(331	)
Inventories		830			(503	)
Operating lease right-of-use asset and liability, net		(14	)		-
Accounts payable and accrued expense		301			474
Accrued compensation		201			(677	)
Accrued interest payable		33			23
Deferred revenue and customer deposits		(25	)		73
Net cash used in operating activities		(1,356	)		(3,461	)

Cash flows used in investing activities:
Purchase of property and equipment		(16	)		(135	)
Asset acquisition		(343	)		-
Net cash used in investing activities		(359	)		(135	)

Cash flows from financing activities:
Payments on short-term loans payable		(664	)		(58	)
Proceeds from short-terms loans payable		1,053			125
Proceeds from notes payable		1,650			1,873
Payments on notes payable		(2,712	)		(1,133	)
Proceeds from sale of common stock and warrants, net of offering costs		2,714			-
Proceeds from stock option and warrant exercises		-			2,839
Net cash provided by financing activities		2,041			3,646

Net change in cash		326			50

Cash at beginning of period		1,248			1,565

Cash at end of period	$	1,574		$	1,615

Supplemental disclosures of cash flow information:
Cash paid for interest	$	29		$	2

Supplemental disclosures of non-cash investing and financing activities:
Common stock issued for conversion of convertible debentures, notes payable and accrued interest	$	300		$	167
Relative fair value of common stock issued in connection with notes payable recorded as debt discount	$	367		$	292
Fair value of common stock issued to consultants for services	$	106		$	-
Offering costs in connection with warrant exercises included in accounts payable and accrued expense	$	-		$	181
Cumulative adjustment to accumulated deficit for the fair value of the warrant derivative liability upon adoption of ASU 2017-11 on January 1, 2018	$	-		$	59
Fair value of common stock issued as financing fees in connection with notes payable recorded as debt discount	$	56		$	123

See accompanying notes to these condensed consolidated financial statements.

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INNOVUS PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2019

(Unaudited)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Innovus Pharmaceuticals, Inc., a Nevada incorporated and San Diego-based company, together with its subsidiaries as follows (collectively referred to as “Innovus” or the “Company”): Semprae Laboratories, Inc., a Delaware corporation (“Semprae”); FasTrack Pharmaceuticals, Inc., a Delaware corporation (“FasTrack”); Novalere, Inc., a Delaware corporation (“Novalere”); Supplement Hunt, Inc., a Nevada corporation (“Supplement Hunt”); and Prime Savings Club, Inc., a Nevada corporation (“Prime Savings Club”), is an emerging over-the-counter (“OTC”) consumer goods and specialty pharmaceutical company engaged in the commercialization, licensing and development of safe and effective non-prescription medicine, consumer care products, supplements and certain related devices to improve men’s and women’s health and vitality, urology, brain health, pain, respiratory diseases, among others. The Company delivers innovative and uniquely presented and packaged health solutions through its (a) OTC medicines, devices, consumer and health products, and clinical supplements, which we market directly, (b) commercial retail and wholesale partners, and (c) directly to consumers through the Company’s proprietary Beyond Human® Sales & Marketing Platform including print media, on-line channels, websites, retailers and wholesalers. The Company is dedicated to being a leader in developing and marketing new OTC and branded Abbreviated New Drug Application (“ANDA”) products, supplements and certain related devices. Innovus actively pursues opportunities where existing prescription drugs have recently, or are expected to, change from prescription (or Rx) to OTC. These “Rx-to-OTC switches” require Food and Drug Administration (“FDA”) approval through a process initiated by the New Drug Application (“NDA”) holder.

The Company’s business model leverages its ability to (a) develop and build its current pipeline of proprietary products, and (b) to also acquire outright or in-license commercial products that are supported by scientific and/or clinical evidence, place them through the Company’s existing supply chain, retail and on-line (including our Amazon®, eBay®, Wish.com®, Walmart.com®, and Walgreens.com® on-line stores and other e-commerce business platforms) channels to tap new markets and drive demand for such products and to establish physician relationships. The Company currently sells its products direct to consumer primarily in the United States and Canada and sells to international commercial partners in multiple countries around the world.

Basis of Presentation and Principles of Consolidation

The condensed consolidated balance sheet as of December 31, 2018, which has been derived from audited consolidated financial statements, and these unaudited condensed consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), and include all assets, liabilities, revenues and expenses of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. Certain information required by U.S. GAAP has been condensed or omitted in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The results for the period ended June 30, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2019, or for any future period.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such management estimates include the allowance for doubtful accounts, sales returns and chargebacks, realizability of inventories, valuation of deferred tax assets, goodwill and intangible assets, valuation of contingent acquisition consideration, recoverability of long-lived assets and goodwill and the valuation of equity-based instruments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.

Liquidity

The Company’s operations have been financed primarily through proceeds from convertible debentures and notes payable, sales of its common stock and revenue generated from its products domestically and internationally through the Company’s marketing platform and by its partners. These funds have provided Innovus with the resources to operate its business, sell and support its products, attract and retain key personnel and add new products to the Company’s portfolio. The Company has experienced net losses and negative cash flows from operations each year since its inception. As of June 30, 2019, the Company had an accumulated deficit of $47.6 million and a working capital deficit of $2.4 million.

As of June 30, 2019, we had $1.6 million in cash and $0.7 million held by merchant processors reported in other current assets for a total of $2.3 million and as of August 9 , 2019 we had $1.5 million in cash and $0.6 million held by merchant processors. During the six months ended June 30, 2019, we had net cash used in operating activities of $1.4 million. We expect that our existing capital resources, together with revenue from sales of our products and upcoming sales milestone payments from the commercial partners signed for our products, will be sufficient to allow us to continue our operations, commence the product development process and launch selected products through at least the next 12 months.

In addition, our CEO, who is also a significant shareholder, has deferred the remaining payment of his salary earned through June 30, 2016, with a current balance totaling $1.0 million, and has agreed to refrain from receipt of any funds which may jeopardize the ability of the Company to operate. During 2019, the Company has paid the CEO approximately $195,000 of the deferred salary balance. Our actual needs will depend on numerous factors, including timing of introducing our new products to the marketplace, our ability to attract additional international distributors for our products and our ability to in-license in non-partnered territories and/or develop new product candidates. Although no assurances can be given, we currently intend to raise additional capital through the sale of debt or equity securities to provide additional working capital, pay for further expansion and development of our business, and to meet current obligations. Such capital may not be available to us when we need it or on terms acceptable to us, if at all.

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Fair Value Measurement

Our financial instruments are cash, accounts receivable, accounts payable, accrued liabilities, contingent consideration and debt. The recorded values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The fair value of the contingent acquisition consideration is based upon the present value of expected future payments under the terms of the agreements and is a Level 3 measurement. Based on borrowing rates currently available to us, the carrying values of the notes payable and short-term loans payable approximate their respective fair values.

We follow a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving significant unobservable inputs (Level 3). The three levels of the fair value hierarchy are as follows:

●

Level 1 measurements are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have 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.

Revenue Recognition

The Company generates revenue from product sales and the licensing of the rights to market and commercialize our products.

Revenue is measured based on consideration specified in a contract with a customer. A contract with a customer exists when the Company enters into an enforceable contract with a customer. The contract is based on either the acceptance of standard terms and conditions on the websites for e-commerce customers and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale. Consideration is typically paid prior to shipment via credit card or check when products are sold direct to consumers or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.

A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for the Company is transfer of over-the-counter drug and consumer care products to its customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to the carrier who takes control of the product that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract.

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to e-commerce and print media customers, upon request, within 30-90 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. The estimated reserve for sales returns and allowances, which is included in accounts payable and accrued expense, was approximately $191,000 and $194,000 at June 30, 2019 and December 31, 2018, respectively.

The Company recognizes revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales.

The Company enters into exclusive distributor and license agreements that are within the scope of ASC Topic 606. The license agreements we enter into normally generate three separate components of revenue: (1) an initial nonrefundable payment due on signing or when certain specific conditions are met; (2) royalties that are earned on an ongoing basis as sales are made or a pre-agreed transfer price; and (3) sales-based milestone payments that are earned when cumulative sales reach certain levels. Revenue from the initial nonrefundable payments or licensing fee is recognized when all required conditions are met. If the consideration for the initial license fee is for the right to sell the licensed product in the respective territory with no other required conditions to be met, such type of nonrefundable license fee arrangement for the right to sell the licensed product in the territory is recognized ratably over the term of the license agreement. For arrangements with licenses that include sales-based royalties, including sales-based milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. The achievement of the sales-based milestone underlying the payment to be received predominantly relates to the licensee’s performance of future commercial activities.

Advertising Expense

Advertising costs, which primarily includes print and online media advertisements, are expensed as incurred and are included in sales and marketing expense in the accompanying condensed consolidated statements of operations. Advertising costs were approximately $ 2.1 million and $4.5 million and $ 4.1 million and $7.2 million for the three and six months ended June 30, 2019 and 2018, respectively.

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Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding and vested but deferred RSUs during the period presented. Diluted net loss per share is computed using the weighted average number of common shares outstanding and vested plus deferred RSUs during the periods plus the effect of dilutive securities outstanding during the periods. For the three and six months ended June 30, 2019 and 2018, basic net loss per share is the same as diluted net loss per share as a result of our common stock equivalents being anti-dilutive. See Note 7 for more details.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The update requires lessees to recognize most leases on the balance sheet as lease liabilities with corresponding right-of-use assets and to disclose key information about leasing arrangements. We adopted Topic 842 on its effective date in the first quarter of 2019 using a modified retrospective approach. We elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We continue to report our financial position as of December 31, 2018 under the former lease accounting standard (Topic 840) in our condensed consolidated balance sheet. The adoption impact resulted in the recognition of an operating lease liability with a corresponding right-of-use asset based on the present value of our remaining minimum lease payments which offset the previously reported deferred rent balance.

The following table summarizes the impact of Topic 842 on our condensed consolidated balance sheet upon adoption on January 1, 2019 (in thousands):

	January 1, 2019
	(unaudited
	Pre-adoption	Adoption Impact	Post-adoption
Assets
Operating lease right-of-use asset	$ -	$ 675	$ 675
Total assets	$ -	$ 675	$ 675
Liabilities and Stockholders' Equity
Accrued Liabilities	$ -	$ 140	$ 140
Deferred Rent	181	$ (181)	-
Operating lease liabilities, net of current portion	-	$ 716	716
Total liabilities and stockholders' equity	$ 181	$ 675	$ 856

In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting . The update aligns the accounting for share-based payment awards issued to nonemployees with those issued to employees. Under the new guidance, the nonemployee awards will be measured on the grant date and compensation costs will be recognized when achievement of the performance condition is probable. This new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The adoption of the new guidance does not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. This update is effective for annual and interim periods beginning after December 15, 2019, and interim periods within that reporting period. While the Company is still in the process of completing our analysis on the impact this guidance will have on the consolidated financial statements and related disclosures, the Company does not expect the impact to be material.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement . The update modifies the disclosure requirements for recurring and nonrecurring fair value measurements, primarily those surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Customer ’ s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU also requires the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. This ASU becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, Clarifying the Interaction Between Topic 808 and Topic 606 , which clarifies when transactions between participants in a collaborative arrangement are within the scope of the FASB’s revenue standard, Topic 606. This ASU becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this ASU will have on its consolidated financial statements.

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NOTE 2 – REVENUE

Disaggregation of Revenue

Our revenue is primarily from distinct fixed-price product sales in the over-the-counter drug and consumer care products market, to similar customers and channels utilizing similar types of contracts that are short term in nature (less than one year). We do not sell service agreements or goods over a period of time and do not sell or utilize customer financing arrangements or time-and-material contracts.

The following is a table that presents product sales, net by geographical area:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2019		2018		2019		2018
United States	$	4,690	$	5,919	$	9,199	$	10,103
Canada		1,693		892		2,369		1,246
All Other		211		159		215		163
Product sales, net	$	6,594	$	6,970	$	11,783	$	11,512

All Other consists of Europe, Australia, Asia, and the Middle East.

Contract Balances

We do not have any contract assets such as work-in-process but do have certain contract liabilities such as customer advances for product sales under its license agreements. As of June 30, 2019, we had customer advances totaling $ 35,000 included in deferred revenue and customer deposits in the accompanying condensed consolidated balance sheet for advance payments on the future sale of Zestra® and Zestra Glide® products to Sothema under their license agreement.

NOTE 3 – BUSINESS AND ASSET ACQUISITIONS

Acquisition of Prime Consultants, LLC Assets

On January 1, 2019, the Company entered into an Asset Purchase Agreement, pursuant to which the Company acquired substantially all of the assets of Prime Consultants, LLC (“Prime Consultants”) in exchange for $343,000 in cash. The assets acquired include the established Amazon seller platform and inventory totaling $313,000. Prime Consultants is an e-commerce business with sales of products primarily through the Amazon® platform which generated $2.4 million in sales in 2018. The Company recorded intangible assets totaling $30,000. The Company believes this business complements its existing business while providing an additional sales platform to add to the Company's existing revenue channels.

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Acquisition of Novalere in 2015

On February 5, 2015, the Company acquired the worldwide rights to market and sell the FlutiCare® brand (fluticasone propionate nasal spray) and the related third-party manufacturing agreement for the manufacturing of FlutiCare® (“Acquisition Manufacturer”) from Novalere FP. The OTC ANDA for fluticasone propionate nasal spray was filed at the end of 2014 by our third-party manufacturer and partner, who is currently selling the prescription version of the drug, with the FDA and the OTC ANDA was approved in April 2019. An ANDA is an application for a U.S. generic drug approval for an existing licensed medication or approved drug. A prescription ANDA (“RX ANDA”) is for a generic version of a prescription pharmaceutical and an OTC ANDA is for a generic version of an OTC pharmaceutical.

Due to the delay in approval of the Acquisition Manufacturer’s OTC ANDA by the FDA, in May 2017, we announced a commercial relationship with a different third-party manufacturer (West-Ward Pharmaceuticals International Limited or “WWPIL”) who has an FDA approved OTC ANDA for fluticasone propionate nasal spray under which they have agreed to manufacture our FlutiCare® OTC product for sale in the U.S. (see Note 8). As we hold the worldwide rights to market and sell FlutiCare® under the manufacturing agreement with the Acquisition Manufacturer, we believe the agreement with the Acquisition Manufacturer will still provide us with the opportunity to market and sell FlutiCare® ex-U.S. and, with the approval of the OTC ANDA in April 2019, a second source of supply within the U.S. is available to Innovus.

The Novalere Stockholders are entitled to receive, if and when earned, earn-out payments (“Earn-Out Payments”). For every $5.0 million in net revenue realized from the sales of FlutiCare® through the manufacturing agreement with the Acquisition Manufacturer, the Novalere's stockholders will be entitled to receive, on a pro rata basis, $500,000, subject to cumulative maximum earn-out payments of $2.5 million. The Novalere's stockholders are only entitled to the earn-out payments from the Acquisition Manufacturer’s OTC ANDA under review by the FDA and have no earn-out rights to the sales of FlutiCare® supplied by WWPIL under the commercial agreement entered into in May 2017. As of June 30, 2019, there were no earn-out payments accrued for or paid to the Novalere's stockholders.

During the three and six months ended June 30, 2019 and 2018, there was an (decrease) increase in the estimated fair value of the remaining 1,323 ANDA consideration shares totaling $ (4,000) and $(1,000) and $ (6,000) and $3,000, respectively, which is included in fair value adjustment for contingent consideration in the accompanying condensed consolidated statements of operations. The fair value of the contingent consideration was $ 1.3 million and $1.3 million as of June 30, 2019 and December 31, 2018, respectively.

NOTE 4 – INVENTORY

Inventories consist of the following:

	June 30,		December 31,
	2019		2018
Raw materials and supplies	$	240	$	238
Work in process		4		96
Finished goods		1,609		2,036
Total	$	1,853	$	2,370

NOTE 5 – INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

Amortizable intangible assets consist of the following:

	June 30, 2019
	Amount		Accumulated Amortization			Net Amount		Useful Lives (years)

Patent & Trademarks	$	684	$	(223	)	$	461		7 – 15
Customer Contracts		625		(345	)		280		10
Sensum+® License (from CRI)		234		(142	)		92		10
Vesele® Trademark		25		(15	)		10		8
Beyond Human® Website and Trade Name		222		(131	)		91		5 – 10
Novalere Manufacturing Contract		4,681		(2,058	)		2,623		10
Other Beyond Human® Intangible Assets		5		(5	)		-		1 – 3
Total	$	6,476	$	(2,919	)	$	3,557

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	December 31, 2018
	Amount		Accumulated Amortization			Net Amount		Useful Lives (years)

Patent & Trademarks	$	654	$	(161	)	$	493		7 – 15
Customer Contracts		625		(311	)		314		10
Sensum+® License (from CRI)		234		(131	)		103		10
Vesele® Trademark		25		(12	)		13		8
Beyond Human® Website and Trade Name		222		(112	)		110		5 – 10
Novalere Manufacturing Contract		4,681		(1,824	)		2,857		10
Other Beyond Human® Intangible Assets		5		(5	)		-		1 – 3
Total	$	6,446	$	(2,556	)	$	3,890

Amortization expense for the three and six months ended June 30, 2019 and 2018 was $ 179,000 and $157,000 and $363,000 and $315,000, respectively. The following table summarizes the approximate expected future amortization expense as of June 30, 2019 for intangible assets:

Remainder of 2019	$	357
2020		714
2021		657
2022		614
2023		578
Thereafter		637
Total Amortization Expense	$	3,557

NOTE 6 – NOTES PAYABLE AND SHORT-TERM LOANS PAYABLE

Notes Payable

The following table summarizes the outstanding notes payable at June 30, 2019 and December 31, 2018:

	2019			2018
Notes payable:
January and March 2018 Notes Payable	$	-		$	112
February and March 2018 5% Notes Payable		-			250
July 2018 5% Notes Payable		-			550
August 2018 Notes Payable		200			800
September 2018 5% Notes Payable		117			390
October 2018 5% Notes Payable		375			550
November and December 2018 Notes Payable		668			1,429
March 2019 Note Payable		375			-
April 2019 Notes Payable		940			-
May 2019 Note Payable		459			-
Total notes payable		3,134			4,081
Less: Debt discount		(813	)		(1,008	)
Carrying value		2,321			3,073
Less: Current portion		(2,321	)		(3,073	)
Notes payable, net of current portion	$	-		$	-

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

Remainder of 2019	$	1,993
2020		1,141
	$	3,134

March 2019 Note Payable

On March 27, 2019, we entered into a securities purchase agreement with an unrelated third-party investor in which the investor loaned us gross proceeds of $400,000 pursuant to a 0% promissory note ("March 2019 Note Payable"). The note has an Original Issue Discount ("OID") of $100,000 and requires payments of $47,000 in principal per month through March 2020.

In connection with the March 2019 Note Payable, we issued the investor restricted shares of common stock totaling 18,000 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the March 2019 Note Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $161,000 in March 2019. In connection with the financing, we issued 5,600 restricted shares of common stock in March 2019 to a third-party consultant. The fair value of the restricted shares of common stock issued of $28,000 was recorded as a debt discount to the carrying value of the notes payable. The discount is being amortized to interest expense using the effective interest method over the term of the March 2019 Note Payable.

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April 2019 Notes Payable

In connection with the April 2019 Notes Payable, we issued the investors restricted shares of common stock totaling 98,334 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the April 2019 Notes Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $318,000 in April 2019. The discount is being amortized to interest expense using the effective interest method over the term of the April 2019 Notes Payable.

October 2018 5% Notes Payable

In April 2019, the Company elected to settle a portion of the outstanding principal and interest balance of $175,000 due in connection with certain 5% promissory notes issued by the Company in October 2018 ("October 2018 5% Notes Payable") in exchange for 100,000 shares of common stock. The fair value of the shares of common stock issued was based on the market price of the Company's common stock on the date of the securities exchange agreement and was determined to be $300,000. Due to the settlement of the principal and interest balance of $175,000 into shares of common stock, the transaction was recorded as a debt extinguishment and the fair value of the shares of common stock issued in excess of the settled principal and interest balance totaling $125,000 was recorded as a loss on debt extinguishment in the accompanying condensed consolidated statement of operations.

May 2019 Note Payable

In connection with the May 2019 Note Payable, we issued the investor restricted shares of common stock totaling 34,000 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the May 2019 Note Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $178,000 in May 2019. In connection with the financing, we issued 10,036 restricted shares of common stock in May 2019 to a third-party consultant. The fair value of the restricted shares of common stock issued of $28,000 was recorded as a debt discount to the carrying value of the notes payable. The discount is being amortized to interest expense using the effective interest method over the term of the May 2019 Note Payable.

Interest Expense

We recognized interest expense on notes payable of $18,000 and $21,000 and $35,000 and $34,000 for the three and six months ended June 30, 2019 and 2018, respectively. Amortization of the debt discount to interest expense during the three and six months ended June 30, 2019 and 2018 totaled $447,000 and $305,000 and $908,000 and $534,000, respectively.

NOTE 7 – STOCKHOLDERS’ EQUITY

Issuances of Common Stock

Private Placement

On January 3, 2019, we completed a sale of common stock and warrants under a Securities Purchase Agreement with an accredited investor (the "Investor"). The gross proceeds to us from the offering were $3.2 million before underwriting discounts and commissions and other offering expenses ($2.7 million of net proceeds after underwriting discounts, commissions and expenses of H.C. Wainwright & Co., LLC ("HCW"), the Company's sole placement agent).

Under the terms of the Securities Purchase Agreement, the Company completed the sale of common stock and warrants under a Securities Purchase Agreement with an accredited investor (the “Investor”), pursuant to which the Company sold an aggregate of 431,490 units (“Units”) for $7.35 per unit, with each Unit consisting of (i) one share of the Company’s common stock (“Shares”), (ii) one warrant to purchase one share of common stock at an exercise price of $7.35 per share (“Series A Warrant”), and (iii) one warrant to purchase one share of common stock at an exercise price of $8.40 per share (“Series B Warrant”) (the “Private Placement”); provided, however, that in order to ensure that the Investor’s beneficial ownership did not exceed 9.99% of the outstanding shares of Common Stock, the Investor elected to exercise its right to purchase 200,637 prefunded warrants (“Series C Warrants”) in lieu of the issuance of Shares to the Investor, which Series C Warrants have a nominal exercise price of $0.105 per share. In addition, the Company issued Series B Warrants to purchase 32,362 shares of common stock, an amount equal to 7.5% of the aggregate number of Shares, including Series C Warrants, sold in the Private Placement, at an exercise price of $9.19 per share to the designees of HCW, the Company’s sole placement agent, as compensation for its services in connection with the Private Placement. The fair value of the warrants issued to HCW totaled $221,000 and was determined using Black-Scholes. The fair value of the warrants was recorded as an offering cost but has no net impact to additional paid-in-capital in stockholders' equity in the accompanying consolidated balance sheet.

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Other Stock Issuances and Related Stock-Based Compensation

In connection with the March 2019 Notes Payable, we issued 18,000 restricted shares of common stock in March 2019 and 5,600 restricted shares of common stock in March 2019 to a third-party consultant. The fair value of the restricted shares of common stock issued of $118,000 was recorded as a debt discount to the carrying value of the notes payable in March 2019 (see Note 6).

In April 2019, the Company entered into two securities purchase agreements relating to the April 2019 Notes Payable upon which the Company issued the investors 98,334 restricted shares of common stock. The fair value of the restricted shares of common stock issued of $300,000 was recorded as a debt discount to the carrying value of the notes payable in April 2019 (see Note 6).

In May 2019, we entered into a securities purchase agreements relating to the May 2019 Note Payable upon which the Company issued the investors 34,000 restricted shares of common stock. The fair value of the restricted shares of common stock issued of $93,000 was recorded as a debt discount to the carrying value of the notes payable in May 2019. In connection with the May 2019 Notes Payable, the Company also issued 10,036 restricted shares of common stock in May 2019 to a third-party consultant. The fair value of the restricted share of common stock issued of $28,000 was recorded as a debt discount to the carrying value of the notes payable in May 2019 (see Note 6).

During the three and six months ended June 30, 2019, we issued 36,916 shares of restricted common stock for services and recorded an expense of $106,000 for the three and six months ended June 30, 2019, which is included in general and administrative expense in the accompanying condensed consolidated statement of operations. The 36,916 shares of common stock vested on the date of issuance and the fair value of the shares of common stock issued was based on the market price of our common stock on the date of vesting.

2013 Equity Incentive Plan

We have issued common stock, restricted stock units and stock option awards to employees, non-executive directors and outside consultants under the 2013 Equity Incentive Plan (“2013 Plan”), which was approved by our Board of Directors in February of 2013. The 2013 Plan allows for the issuance of up to 95,268 shares of our common stock to be issued in the form of stock options, stock awards, stock unit awards, stock appreciation rights, performance shares and other share-based awards. As of June 30, 2019, there were no shares available under the 2013 Plan.

2014 Equity Incentive Plan

We have issued common stock, restricted stock units and stock options to employees, non-executive directors and outside consultants under the 2014 Equity Incentive Plan (“2014 Plan”), which was approved by our Board of Directors in November 2014. The 2014 Plan allows for the issuance of up to 190,477 shares of our common stock to be issued in the form of stock options, stock awards, stock unit awards, stock appreciation rights, performance shares and other share-based awards. As of June 30, 2019, there were no shares available under the 2014 Plan.

2016 Equity Incentive Plan

On March 21, 2016, our Board of Directors approved the adoption of the 2016 Equity Incentive Plan and on October 20, 2016 adopted the Amended and Restated 2016 Equity Incentive Plan (“2016 Plan”). The 2016 Plan was then approved by our stockholders in November 2016. The 2016 Plan allows for the issuance of up to 190,477 shares of our common stock to be issued in the form of stock options, stock awards, stock unit awards, stock appreciation rights, performance shares and other share-based awards. The 2016 Plan includes an evergreen provision in which the number of shares of common stock authorized for issuance and available for future grants under the 2016 Plan will be increased each January 1 after the effective date of the 2016 Plan by a number of shares of common stock equal to the lesser of: (a) 4% of the number of shares of common stock issued and outstanding on a fully-diluted basis as of the close of business on the immediately preceding December 31, or (b) a number of shares of common stock set by our Board of Directors. In April 2019, our Board of Directors approved an increase of 84,051 shares of common stock to the shares authorized under the 2016 Plan in accordance with the evergreen provision in the 2016 Plan. As of June 30, 2019, 211,453 shares were available under the 2016 Plan.

2019 Equity Incentive Plan

On April 16, 2019, our Board of Directors approved the adoption of the 2019 Equity Incentive Plan (“2019 Plan”). The 2019 Plan was then approved by our stockholders in May 2019. The 2019 Plan allows for the issuance of up to 400,000 shares of our common stock to be issued in the form of stock options, stock awards, stock unit awards, stock appreciation rights, performance shares and other share-based awards. The 2019 Plan includes an evergreen provision in which the number of shares of common stock authorized for issuance and available for future grants under the 2019 Plan will be increased each January 1 after the effective date of the 2019 Plan by a number of shares of common stock equal to the lesser of: (a) 4% of the number of shares of common stock issued and outstanding on a fully-diluted basis as of the close of business on the immediately preceding December 31, or (b) a number of shares of common stock set by our Board of Directors. As of June 30, 2019, 400,000 shares were available under the 2019 Plan.

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Stock Options

For the six months ended June 30, 2019 and 2018, the following weighted average assumptions were utilized for the calculation of the fair value of the stock options granted during the period using Black-Scholes:

	2019			2018
Expected life (in years)		3.7			6.25
Expected volatility		198.7	%		201.3	%
Average risk-free interest rate		2.82	%		2.79	%
Dividend yield		0	%		0	%
Grant date fair value	$	3.51		$	0.06

The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the stock options. Expected life in years is based on the “simplified” method as permitted by ASC Topic 718. We believe that all stock options issued under its stock option plans meet the criteria of “plain vanilla” stock options. We use a term equal to the term of the stock options for all non-employee stock options. The risk-free interest rate is based on average rates for treasury notes as published by the Federal Reserve in which the term of the rate corresponds to the expected term of the stock options.

The following table summarizes the number of stock options outstanding and the weighted average exercise price:

	Options			Weighted average exercise price			Weighted remaining contractual life (years)		Aggregate intrinsic value
Outstanding at December 31, 2018		4,498		$	14.63			9.2	$	190
Granted		174			3.71			-		-
Exercised		-			-			-		-
Cancelled		(1,099	)		(14.96	)		-		-
Forfeited		-			-			-		-
Outstanding at June 30, 2019		3,573		$	14.00			8.8	$	-

Vested and Expected to Vest at June 30, 2019		3,573		$	14.00			8.8	$	-

The aggregate intrinsic value is calculated as the difference between the exercise price of all outstanding stock options and the quoted price of our common stock at June 30, 2019. During the three and six months ended June 30, 2019 and 2018, we recognized stock-based compensation from stock options of $ 2,000 and $1,000 and $ 5,000 and $4,000 , respectively. As of June 30, 2019, compensation expense related to unvested options not yet recognized in the condensed consolidated statement of operations was approximately $ 50,000 and will be recognized over a remaining weighted-average term of 8.8 years.

Restricted Stock Units

The following table summarizes the restricted stock unit activity for the three months ended June 30, 2019:

	Restricted Stock Units
Outstanding at December 31, 2018		175,765
Granted		13,007
Exchanged		-
Cancelled		-
Outstanding at June 30, 2019		188,772

Vested at June 30, 2019		131,651

The vested restricted stock units at June 30, 2019 have not settled and are not showing as issued and outstanding shares of the Company but are considered outstanding for earnings per share calculations. Settlement of these vested restricted stock units will occur on the earliest of (i) the date of termination of service of the employee or consultant, (ii) change of control of us, or (iii) 10 years from date of issuance. Settlement of vested restricted stock units may be made in the form of (i) cash, (ii) shares, or (iii) any combination of both, as determined by the board of directors and is subject to certain criteria having been fulfilled by the recipient.

We calculate the fair value of the restricted stock units based upon the quoted market value of the common stock at the date of grant. The grant date fair value of restricted stock units issued during the three and six months ended June 30, 2019 was $24,000 and $84,000, respectively. For the three and six months ended June 30, 2019 and 2018, we recognized $135,000 and $105,000 and $270,000 and $197,000 , respectively, of stock-based compensation expense for the vested units. As of June 30, 2019, compensation expense related to unvested shares not yet recognized in the condensed consolidated statement of operations was approximately $ 636,000 and will be recognized over a remaining weighted-average term of 1.8 years.

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Warrants

In January 2015, we issued 2,381 warrants with an exercise price of $31.50 per share to a former executive in connection with the January 2015 debenture. The warrants expire on January 21, 2020. The warrants contain anti-dilution protection, including protection upon dilutive issuances. In connection with the convertible debentures issued in 2015, the exercise price of these warrants was reduced to $9.45 per share and an additional 5,588 warrants were issued per the anti-dilution protection afforded in the warrant agreement during the year ended December 31, 2015. Warrants to purchase 7,969 shares of common stock remain outstanding as of June 30, 2019.

In connection with the convertible debentures in 2015, we issued warrants with an exercise price of $31.50 per share and expiration in 2020 to investors and placement agents. Warrants to purchase 7,379 shares of common stock remain outstanding as of June 30, 2019.

In connection with the convertible debentures in 2016, we issued warrants to the investors and placement agents with an exercise price of $42.00 per share and expire in 2021. Warrants to purchase 40,201 shares of common stock remain outstanding as of June 30, 2019.

In connection with the public equity offering in March 2017, we issued Series A Warrants to purchase 244,455 shares of common stock at $15.75 per share and Series B Warrants to purchase 244,455 shares of common stock at $15.75 per share. The Series A Warrants expire in 2022. During 2018, certain investors elected to exercise 180,247 Series B Warrants and 953 Series A Warrants and the remaining Series B Warrants expired in March 2018. We also issued warrants to purchase 12,223 shares of common stock to our placement agent with an exercise price of $19.69 per share and expire in 2022, as well as in March 2018 we issued our placement agent warrants to purchase 8,219 shares of common stock with an exercise price of $19.69 per share and expire in 2023 in connection with the Series B Warrants exercised. Warrants to purchase 263,944 shares of common stock remain outstanding as of June 30, 2019.

In connection with the public equity offering in January 2019, we issued Series A Warrants to purchase 431,490 shares of common stock at $7.35 per share, Series B Warrants to purchase 431,490 shares of common stock at $8.40 per share and Series C Warrants to purchase 200,637 shares of common stock at $7.35 per share. The Series A and B Warrants expire in 2020 and 2024 respectively. The Series C Warrants were prefunded and have a nominal exercise price of $0.105 per share. We also issued warrants to purchase 32,362 shares of common stock to our placement agent with an exercise price of $9.19 per share and expire in 2024. Warrants to purchase 1,095,979 shares of common stock remain outstanding as of June 30, 2019.

For the six months ended June 30, 2019, the following weighted average assumptions were utilized for the calculation of the fair value of the warrants issued during the period using Black-Scholes:

	2019
Expected life (in years)		3.9
Expected volatility		147.1	%
Average risk-free interest rate		2.40	%
Dividend yield		0	%

At June 30, 2019, there are 1,415,472 fully vested warrants outstanding. The weighted average exercise price of outstanding warrants at June 30, 2019 is $10.46 per share, the weighted average remaining contractual term is 3.25 years and the aggregate intrinsic value of the outstanding warrants is $284,000.

Net Loss per Share

Restricted stock units that are vested but which the issuance and delivery of the shares are deferred until the employee or director resigns are included in the basic and diluted net loss per share calculations.

The weighted average shares of common stock outstanding used in the basic and diluted net loss per share calculation for the three and six months ended June 30, 2019 and 2018 was 2,536,530 and 1,851,910 and 2,432,338 and 1,768,635, respectively.

The weighted average restricted stock units vested but which issuance of the common stock is deferred until there is a change in control, a specified date in the agreement or the employee or director resigns which were used in the basic and diluted net loss per share calculation for the three and six months ended June 30, 2019 and 2018 was 123,905 and 101,490 and 120,874 and 98,703, respectively.

The following table shows the anti-dilutive shares excluded from the calculation of basic and diluted net loss per common share as of June 30, 2019 and 2018:

	As of June 30,
	2019		2018
Gross number of shares excluded:
Restricted stock units – unvested		57,121		65,366
Stock options		3,573		2,591
Warrants		1,415,472		313,496
Total		1,476,166		381,453

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NOTE 8 – COMMITMENTS AND CONTINGENCIES

In May 2017, we entered into a commercial agreement with WWPIL, a wholly-owned subsidiary of Hikma Pharmaceuticals PLC (“Hikma”) (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY). Pursuant to the commercial agreement, WWPIL provided us with the rights to launch our branded, fluticasone propionate nasal spray USP, 50 mcg per spray (FlutiCare®), under WWPIL’s FDA approved ANDA No. 207957 in the U.S. in mid-November 2017. The initial term of the commercial agreement is for two years, and upon expiration of the initial term, the agreement will automatically renew for subsequent one-year terms unless either party notifies the other party in writing of its desire not to renew at least 90 days prior to the end of the then current term. The agreement requires us to meet certain minimum product batch purchase requirements in order for the agreement to continue to be in effect. We have met the minimum product batch purchase requirements through August 2019.

Leases

We lease approximately 172,000 square feet of office and warehouse facilities under a non-cancellable operating lease. Our lease has a remaining term of 4 years, which represents the non-cancellable periods of the lease. We exclude extension options that are not reasonably certain to be exercised from our lease terms. Our lease payment consists of fixed rental payments for the right to use the underlying assets over the lease term as well as payments for common-area-maintenance and administrative services. We have also received customary incentives from our landlord for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for the lease.

Operating lease right-of-use assets and liabilities on our condensed consolidated balance sheets represent the present value of our remaining lease payments over the remaining lease terms. We do not allocate lease payments to non-lease components; therefore, fixed payments for common-area-maintenance and administrative services are included in our operating lease right-of-use assets and liabilities. We use our incremental borrowing rate to calculate the present value of our lease payments, as the implicit rates in our lease is not readily determinable.

As of June 30, 2019, the maturities of our operating lease were as follows (in thousands):

	Remaining Lease Payments
2019	$ 130
2020	267
2021	274
2022	282
2023	94
Total remaining lease payments	1,047
Less: imputed interest	(258)
Total operating lease liabilities	789
Less: current portion	(155)
Long-term operating lease liabilities	634
Weighted-average remaining lease term	4 years
Weighted-average discount rate	15%

The components of our lease costs included in our condensed consolidated statement of operations consist of operating lease costs of $ 115,000 . Operating lease costs consist of the fixed lease payments included in our operating lease liability and are recorded on a straight-line basis over the lease term.

Litigation

James L. Yeager, Ph.D., and Midwest Research Laboratories, LLC v. lnnovus Pharmaceuticals, Inc. On January 18, 2018, Dr. Yeager and Midwest Research Laboratories (the "Plaintiffs") filed a complaint in the Illinois Northern District Court in Chicago, Illinois, which Plaintiffs amended on February 26, 2018 ("Amended Complaint''). The Amended Complaint alleges that the Company violated Dr. Yeager's right of publicity and made unauthorized use of his name, likeness and identity in advertising materials for its product Sensum+®. Plaintiffs seek actual and punitive damages, costs and attorney's fees, an injunction and corrective advertising. In October 2018, we filed a motion to dismiss the action. In February 2019, the Judge in the Illinois action issued a ruling invalidating some of Plaintiff’s causes of action, while accepting others and the case continues in that jurisdiction. The parties are currently engaged in discovery.

We believe that the Plaintiffs’ allegations and claims are wholly without merit, and we intend to defend the case vigorously and assert counterclaims against the Plaintiffs. More specifically, we believe that we secured and paid for all of the rights claimed by Dr. Yeager from his company Centric Research Institute (“CRI”) pursuant to agreements with CRI (the “CRI Agreements”) and that CRI has indemnification obligations under the CRI Agreements for all expenses and losses associated with the claims made by the Plaintiffs.

On January 23, 2019 we filed a complaint in the U.S. Federal District Court for the Southern District located in San Diego, California against Dr. Yeager, Servet Buyuktimken and Nadir Buyuktimkin (the “021 Patent Claimed Inventors”), who are all the inventors names on the US issued patent number 9,821,021 entitled Sensitization Composition and Methods of Action (the “021 Patent”), for copyright infringement relating to a clinical study table (the “Innovus Pharm Clinical Study Table”) included in the 021 Patent. We claim that the 021 Patent Claimed Inventors illegally stole and used the Innovus Pharm Clinical Study Table and the suit requests certain damages and injunctive relief described therein.

Marin County District Attorney ’ s Letter . On August 24, 2018, the Company received a letter from the Marin County District Attorney's Office requesting substantiation for certain advertising claims made for certain of the Company's products, DiabaSens®, and Apeaz® that were marketed and sold to customers in that County. The Marin County District Attorney's Office is part of a larger ten county Northern California Task Force of district attorneys to handle customer protection matters. In November 2018, the Company responded through its regulatory attorneys to the Marin County’s District Attorney’s letter. In March 2019, the Company heard back from the Marin County District Attorney. In April 2019, the Company responded to the letter and in June 2019 the Company met with the Northern California Task Force. The Company is currently responding to additional due diligence requests from the Marin County District Attorney's office.

In the ordinary course of business, we may face various claims brought by third parties and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property disputes, contractual disputes and other commercial disputes. Any of these claims could subject us to litigation. Management believes the outcomes of currently pending claims are not likely to have a material effect on our consolidated financial position and results of operations.

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NOTE 9 – SUBSEQUENT EVENTS

In July 2019, the Company issued 26,000 shares of common stock to two vendors in exchange for services rendered.

In July 2019, the Company entered into an Amendment to the Promissory Note Agreement relating to the October 2018 5% Note Payable to extend the maturity date to October 1, 2019 in exchange for the future issuance of 60,000 restricted shares of common stock.

On August 8, 2019, the Company entered into a non-secured promissory note agreement with an unrelated investor in which the investor loaned the Company gross proceeds of $1 million in consideration for the issuance of a 10% promissory note. The note requires repayment of principal by February 29, 2020.

The Company has evaluated subsequent events through the filing date of this Form 10-Q and determined that no additional subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosures in the notes thereto other than as disclosed in the accompanying notes to the condensed consolidated financial statements.

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,” “us,” “we,” or “our.” The following information should be read in conjunction with the condensed 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, 2018, filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019, as well as the consolidated financial statements and related notes contained therein.

Forward Looking Statements

Certain statements in this report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs or other statements that are not statements of historical fact. Words such as “may,” “should,” “could,” “would,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” or “projects,” or the negative or other variation of such words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results and the development of our products, are forward-looking statements.

Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Risks Factors” below, as well as those discussed elsewhere in this Quarterly Report on Form 10-Q. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We file reports with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

Overview

We are an emerging over-the-counter (“OTC”) consumer goods and specialty pharmaceutical company engaged in the commercialization, licensing and development of safe and effective non-prescription medicine, consumer care products, supplements and certain related devices to improve men’s and women’s health and vitality, urology, brain health, pain and respiratory diseases. We deliver innovative and uniquely presented and packaged health solutions through our (a) OTC medicines, devices, consumer and health products, and clinical supplements, which we market directly, (b) commercial retail and wholesale partners to primary care physicians, urologists, gynecologists and therapists, and (c) directly to consumers through our proprietary Beyond Human™ Sales & Marketing Platform including print media, on-line channels, websites, retailers and wholesalers. We are dedicated to being a leader in developing and marketing new OTC and branded Abbreviated New Drug Application (“ANDA”) products, supplements and certain related devices. We are actively pursuing opportunities where existing prescription drugs have recently, or are expected to, change from prescription (or Rx) to OTC. These “Rx-to-OTC switches” require Food and Drug Administration (“FDA”) approval through a process initiated by the New Drug Application (“NDA”) holder.

Our business model leverages our ability to (a) develop and build our current pipeline of proprietary products, and (b) to also acquire outright or in-license commercial products that are supported by scientific and/or clinical evidence, place them through our existing supply chain, retail and on-line (including our Amazon®, eBay®, Wish.com®, Sears.com®, Walmart.com®, and Walgreens.com® on-line stores and other e-commerce business platforms) channels to tap new markets and drive demand for such products and to establish physician relationships.

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Our Strategy

Our corporate strategy focuses on the following primary objectives:

Developing a diversified product portfolio of exclusive, unique and patented non-prescription OTC and branded ANDA drugs, devices, consumer health products, and clinical supplements through: (a) the introduction of line extensions and reformulations of either our or third-party currently marketed products; (b) the development of new proprietary OTC products, supplements and devices; and (c) the acquisition of products or obtaining exclusive licensing rights to market such products;

Building an innovative, U.S. and global sales and marketing model through direct to consumer approaches such as our proprietary Beyond Human® sales and marketing platform, the addition of new online platforms such as Amazon®, eBay®, Wish.com, Sears.com, Walmart.com® and Walgreens.com and commercial partnerships with established international complementary partners that: (a) generates revenue, and (b) requires a lower cost structure compared to traditional pharmaceutical companies, thereby increasing our gross margins; and

Developing and acquiring on-line marketplaces such as Supplementhunt.com and Primesavingsclub.com that focus on certain market segments such as lower priced, soon to expire supplement business with the Supplementhunt.com acquisition and with the select consumer product business through Primesavingsclub.com among others in which we sell third party, brand or non-branded products.

Our Products

Marketed Products

We currently market and sell over 35 products in the U.S. and more than 10 in multiple countries around the world through our 12 international commercial partners. The following represents the core products:

	1.	Vesele®
	2.	UriVarx®
	3.	FlutiCare®
	4.	Apeaz®
	5.	Diabasens®
	6.	Prostagorx®
	7.	Sensum+®

In addition, we currently expect to launch in the U.S. the following products in 2019 and/or 2020, subject to the applicable regulatory approvals, if required:

	1.	Trexar ™ is a supplement that provides neuropathy support and enhanced sensation (third quarter of 2019);
	2.	Musclin® is a proprietary supplement made of two FDA Generally Recognized As Safe (GRAS) approved ingredients designed to increase muscle mass, endurance and activity (second half of 2019). The main ingredient in Musclin® is a natural activator of the transient receptor potential cation channel, subfamily V, member 3 (TRPV3) channels on muscle fibers responsible to increase fibers width resulting in larger muscles;
	3.	Regenerum™ is a proprietary product containing two natural molecules: the first is an activator of the TRPV3 channels resulting in the increase of muscle fiber width, and the second targets a different unknown receptor to build the muscle's capacity for energy production and increases physical endurance, allowing longer and more intense exercise. Regenerum™ is being developed for patients suffering from muscle wasting. We currently expect to launch this product in 2020 pending successful clinical trials in patients with muscle wasting or cachexia;
	4.	Octiq™ is an expected FDA ophthalmic OTC monograph compliant product for the treatment of eye redness and eye lubrication (late 2019/early 2020); and
	5.	Regoxidine™ is an ANDA approved 5% Minoxidil foam for men and women for hair growth on the top of the scalp (second half 2019).

We currently expect potential supply interruption of Fluticare from its supplier for the coming 90-180 days based on inventory availability.

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Sales and Marketing Channels

Print and Direct Mail Marketing

Through our Beyond Human ® sales and marketing platform, we have access to advertise in the vast majority of newspapers and magazines on a regular basis. We have developed our own proprietary algorithm which allows us to target customers looking for specific health products allowing us to increase the return on our investment and reduce the cost to acquire new customers. We have expanded our reach to Canada with the approval of twelve of our products by Health Canada and successfully expanded our Beyond Human ® sales and marketing platform.

E-Commerce

We have an extensive on-line media channel through our Amazon®, NewEgg®, Walmart.com®, eBay®, Wish.com®, and Walgreens.com® sites, in addition to our own InnovusPharma.com site along with sites for each of our products individually. Our expertise allows us to successfully drive product sales through proper marketing campaigns through third-party sites as well as through email marketing campaigns to increase traffic to our own sites. Additionally, we have recognized that maintaining a proper e-commerce presence allows those customers who read our advertisements in the newspapers and magazine or receive our direct mail another avenue to purchase products.

Retail/Wholesale

We are continuously introducing our products to varieties of retail and wholesale partners to enhance the brand and product awareness for our customers. Since 2018, we significantly increased our advertising expenses specifically in the Print and Direct Mail Marketing channel which, in turn, has had a direct positive impact to the success of products in retail. We intend to continue to demonstrate to our retail and wholesale partners the advantages of incorporating our products in their stores, especially due to our proprietary consumer targeted marketing approach that our print advertising allows us to achieve.

International Distribution

We continue to work with our exclusive commercial partners outside of the U.S. that would be responsible for sales and marketing in those territories. We evaluate the performance of each of these partners to ensure a steady flow of consumer activity for each of our products. Our strategy outside the U.S. is to partner with companies who can effectively market and sell our products in their countries through their direct marketing and sales teams. The strategy of using our partners to commercialize our products is designed to limit our expenses and fix our cost structure, enabling us to increase our reach while minimizing our incremental spending.

Results of Operations for the Three and Six Months Ended June 30, 2019 Compared with the Three and Six Months Ended June 30, 2018

	Three Months Ended June 30, 2019	Three Months Ended June 30, 2018	$ Increase (Decrease)	% Increase (Decrease)
Net revenue:
Product sales, net	$ 6,594	$ 6,970	$ (376)	(5.4)	%
Service revenue	56	156	(100)	64.1	%
Cooperative marketing revenue	91	183	(92)	50.3	%
License revenue	107	3	-	-	%
Net revenue	6,848	7,312	(464)	(6.3)	%

Cost of product sales	2,356	1,339	1,017	76.0	%
Gross Profit	4,492	5,973	(1,481)	(24.8)	%

Operating expense:
Research and development	91	23	68	295.7	%
Sales and marketing	2,858	5,529	(2,671)	(48.3)	%
General and administrative	2,724	1,919	805	41.9	%
Total operating expense	5,673	7,471	(1,798)	(24.1)	%

Loss from operations	(1,181)	(1,498)	317	21.2	%

Other income (expense):
Interest expense	(486)	(326)	(160)	(49.1)	%
Loss on extinguishment of debt	(125)	(38)	(87)	(228.9)	%
Other income (expense), net	29	-	29	(100.0)	%
Fair value adjustment for contingent consideration	4	22	(18)	81.8	%
Total other expense, net	(578)	(342)	(236)	(69.0)	%

Net loss	$ (1,759)	$ (1,840)	$ 81	4.4	%

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	Six Months Ended June 30, 2019	Six Months Ended June 30, 2018	$ Increase (Decrease)	% Increase (Decrease)
Net revenue:
Product sales, net	$ 11,783	$ 11,512	$ 271	2.4	%
Service revenue	156	$ 156	-	-	%
Cooperative marketing revenue	162	$ 184	(22)	12.0	%
License revenue	110	$ 5	-	-	%
Net revenue	12,211	11,857	354	3.0	%

Cost of product sales	4,134	2,203	1,931	87.7	%
Gross Profit	8,077	9,654	(1,577)	(16.3)	%

Operating expense:
Research and development	148	34	114	335.3	%
Sales and marketing	5,453	8,831	(3,378)	(38.3)	%
General and administrative	5,158	3,615	1,543	42.7	%
Total operating expense	10,759	12,480	(1,721)	(13.8)	%

Loss from operations	(2,682)	(2,826)	144	5.1	%

Other income (expense):
Interest expense	(976)	(568)	(408)	(71.8)	%
Loss on extinguishment of debt	(125)	(294)	169	57.5	%
Other income (expense), net	29	-	29	(100.0)	%
Fair value adjustment for contingent consideration	6	19	(13)	68.4	%
Total other expense, net	(1,066)	(843)	(223)	(26.5)	%

Net loss	$ (3,748)	$ (3,669)	$ (79)	(2.2)	%

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Net Revenue

We recognized net revenue of approximately $6.8 million and $7.3 million and $12.2 million and $11.9 million for the three and six months ended June 30, 2019 and 2018, respectively. The decrease in net revenue for the three months ended June 30, 2019 compared with the three months ended June 30, 2018 is due to our focus on being more selective of the marketing media utilized which has reduced the overall net sales but has resulted in improved marketing efficiency for the period. The increase in net revenue for the six months ended June 30, 2019 compared with the six months ended June 30, 2018 was primarily the result of the addition of the Supplement Hunt and Prime Savings Club platforms, which were acquired in December 2018 and January 2019, respectively. During 2019, we focused on increasing revenues from e-commerce channels to continue to diversify our revenue channels. During 2019, e-commerce sales represented approximately 30% of total net revenue. During the three and six months ended June 30, 2019 and 2018, we shipped 201,164 and 165,116 units and 364,855 and 248,989 units of our core products, respectively.

Cost of Product Sales

We recognized cost of product sales of approximately $2.4 million and $1.3 million and $4.1 million and $2.2 million for the three and six months ended June 30, 2019 and 2018, respectively. The cost of product sales includes the cost of inventory, internal and third-party shipping and warehouse costs, royalties and salaries and benefits for our warehouse employees. The increase in cost of product sales is a result of higher shipping and fulfillment costs relating to our Supplement Hunt entity, for which we currently utilize the services of a third-party fulfillment company, and higher costs of products in the Prime Savings Club entity due to a more diverse product mix. The decrease in the gross margin to 66.1% in 2019 compared to 81.4% in 2018 is due to the increase in e-commerce revenues as a percentage of total revenues during the current period, which generate lower gross margins due to pricing competition, as well as an increase in the cost of shipping and fulfillment especially related to Supplement Hunt and Prime Savings Club, which have products that are costlier to ship due to their size and weight.

Research and Development

We recognized research and development expense of approximately $91,000 and $23,000 and $148,000 and $34,000 for the three and six months ended June 30, 2019 and 2018, respectively. Research and development expense includes costs for stability testing, clinical trials of certain products and other development related costs for our products.

Sales and Marketing

We recognized sales and marketing expense of approximately $2.9 million and $5.5 million and $5.5 million and $8.8 million for the three and six months ended June 30, 2019 and 2018, respectively. Sales and marketing expense consists primarily of print advertisements and sales and marketing support. The decrease in the sales and marketing expense is a direct result of the increased focus on e-commerce channels which do not require as large of upfront marketing costs as the traditional direct-to-consumer channel requires. Additionally, we have focused marketing efforts in the traditional direct-to-consumer channel to those that have experienced lower cost of customer acquisition.

General and Administrative

We recognized general and administrative expense of approximately $2.7 million and $1.9 million and $5.2 million and $3.6 million for the three and six months ended June 30, 2019 and 2018, respectively. The increase in general and administrative expense is directly related to the increase in employee headcount, especially management level employees, from approximately ten employees as of June 30, 2018 to 21 employees as of June 30, 2019. General and administrative expense consists primarily of investor relation expense, legal, accounting, public reporting costs and other infrastructure expense related to the launch of our products. Additionally, our general and administrative expense includes professional fees, insurance premiums and general corporate expense.

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Other Income and Expense

We recognized interest expense of approximately $486,000 and $326,000 and $976,000 and $568,000 for the three and six months ended June 30, 2019 and 2018, respectively. Interest expense primarily includes interest related to our debt and amortization of debt discounts (see Note 6 to the accompanying condensed consolidated financial statements). Due to the shares and cash discounts provided to our lenders, the effective interest rate is significantly higher than the coupon rate. The increase in interest expense in 2019 is due to the larger amount of debt discount amortization in 2019 compared to 2018 as a result of the note payable financings completed in both 2018 and 2019.

We recognized a loss on extinguishment of debt of approximately $125,000 and $38,000 and $125,000 and $294,000 during the three and six months ended June 30, 2019 and 2018, respectively . The loss on debt extinguishment in 2019 was the result of securities exchange agreement entered in with a note holder in May 2019. In exchange for the issuance of 100,000 shares of common stock with a fair value of $300,000, we settled a principal and interest balance of $175,000 with the note holder. The loss on debt extinguishment in 2018 was the result of the securities exchange agreement entered into with certain note payable holders. In exchange for the issuance of 35,470 shares of common stock with a fair value of approximately $581,000, we settled the principal balance totaling $332,000 with the noteholders. The remaining loss on debt extinguishment was the write off of the remaining unamortized debt discount as of the date of settlement.

Net Loss

Net loss for the three and six months ended June 30, 2019 was approximately $1.8 million or $0.66 basic and diluted net loss per share and $3.7 million or $1.47 basic and diluted net loss per share, respectively, compared to a net loss of $1.8 million or $0.94 basic and diluted net loss per share and $3.7 million or $1.96 basic and diluted net loss per share for the three and six months ended June 30, 2018, respectively.

Liquidity and Capital Resources

Historically, we have funded losses from operations through the sale of equity and issuance of debt instruments. Combined with revenue, these funds have provided us with the capital to operate our business, to sell and support our products, attract and retain key personnel, and add new products to our portfolio. To date, we have experienced net losses each year since our inception. As of June 30, 2019, we had an accumulated deficit of $47.6 million and working capital deficit of $2.4 million.

As of June 30, 2019, we had approximately $1.6 m illion in cash and $0.7 million held by merchant processors reported in other current assets for a total of $2.3 million and as of August 9, 2019 we had approximately $1.6 million in cash and $0.5 million held by merchant processors for a total of $2.1 million. Although no assurances can be given, we currently plan to raise additional capital through the sale of equity or debt securities. We expect, however, that our existing capital resources, revenue from sales of our products and upcoming new product launches and sales milestone payments from the commercial partners signed for our products, and equity instruments available to pay certain vendors and consultants, will be sufficient to allow us to continue our operations, commence the product development process and launch selected products through at least the next 12 months. In addition, our CEO, who is also a significant shareholder, has deferred the remaining payment of his salary earned through June 30, 2016 totaling $1.0 million for at least the next 12 months if such receipt would jeopardize the ability of the Company to operate.

Our actual needs will depend on numerous factors, including timing of introducing our new products to the marketplace, our ability to attract additional Ex-U.S. distributors for our products and our ability to in-license in non-partnered territories and/or develop new product candidates. In addition, we continue to seek new licensing agreements from third-party vendors to commercialize our products in territories outside the U.S., which could result in upfront, milestone, royalty and/or other payments.

We currently intend to raise additional capital through the sale of debt or equity securities to provide additional working capital, for further expansion and development of our business, and to meet current obligations, although no assurances can be given. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders. If we raise funds by incurring additional debt, we may be required to pay significant interest expense and our leverage relative to our earnings or to our equity capitalization may increase. Obtaining commercial loans, assuming they would be available, would increase our liabilities and future cash commitments and may impose restrictions on our activities, such as financial and operating covenants. Further, we may incur substantial costs in pursuing future capital and/or financing transactions, including investment banking fees, legal fees, accounting fees, printing and distribution expense and other costs. We may also be required to recognize non-cash expense in connection with certain securities we may issue, such as convertible notes and warrants, which would adversely impact our financial results. We may be unable to obtain financing when necessary as a result of, among other things, our performance, general economic conditions, conditions in the pharmaceuticals industries, or our operating history. In addition, the fact that we are not and have never been profitable could further impact the availability or cost to us of future financings. As a result, sufficient funds may not be available when needed from any source or, if available, such funds may not be available on terms that are acceptable to us. If we are unable to raise funds to satisfy our capital needs when needed, then we may need to forego pursuit of potentially valuable development or acquisition opportunities, we may not be able to continue to operate our business pursuant to our business plan, which would require us to modify our operations to reduce spending to a sustainable level by, among other things, delaying, scaling back or eliminating some or all of our ongoing or planned investments in corporate infrastructure, business development, sales and marketing and other activities, or we may be forced to discontinue our operations entirely.

The Company’s principle debt instruments include the following:

August 2018 Notes Payable

In August 2018, we entered into securities purchase agreements with two unrelated third-party investors, pursuant to which the investors loaned us gross proceeds of $1,000,000 pursuant to 0% promissory notes (“August 2018 Notes Payable”). The August 2018 Notes Payable have an OID of $200,000 and require twelve payments of $100,000 in principal per month through August 2019. The August 2018 Notes Payable bear no interest per annum. In connection with the August 2018 Notes Payable, we issued the investors restricted shares of common stock totaling 1,000,000 shares. The remaining principal balance under these notes was $200,000 at June 30, 2019.

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September 2018 5% Notes Payable

In September 2018, we entered into a promissory note agreement and a securities purchase agreement with an unrelated third-party investor, pursuant to which the investor loaned us gross proceeds of $350,000 pursuant to 5% promissory notes (“September 2018 5% Notes Payable”). The September 2018 5% Notes Payable have an OID of $40,000 and require aggregate payments of $390,000 in principal. The September 2018 5% Notes Payable bear interest at the rate of 5% per annum and the principal amount and accrued interest are payable in three installments on March 12, 2019, June 12, 2019 and September 12, 2019. In connection with the September 2018 5% Notes Payable, we issued the investor restricted shares of common stock totaling 1,000,000. The remaining principal balance under these notes was $117,000 at June 30, 2019.

October 2018 5% Notes Payable

On October 22, 2018, the Company entered into a promissory note agreement and securities purchase agreement with an unrelated third-party investor in which the investor loaned the Company gross proceeds of $500,000 pursuant to 5% promissory notes (“October 2018 5% Notes Payable”). The notes have an OID of $50,000 and require payments of $550,000 in principal. The notes bear interest at the rate of 5% per annum and the principal amount and interest are payable at maturity on May 1, 2019. In connection with the October 2018 5% Notes Payable, the Company issued the investor restricted shares of common stock totaling 15,239 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the October 2018 5% Notes Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $176,000. In April, the Company elected to settle a portion of the October 2018 5% Note Payable outstanding principal and interest balance of $175,000 in exchange for 100,000 shares of common stock. The fair value of the shares of common stock issued was based on the market price of the Company's common stock on the date of the securities exchange agreement. The exchange agreement also extended the maturity date to October 1, 2019. The remaining principal balance under this note was $375,000 at June 30, 2019.

November and December 2018 Notes Payable

On November 6, 2018, November 8, 2018 and December 12, 2018, the Company entered into promissory note agreements and securities purchase agreements with three unrelated third-party investors, pursuant to which the investors loaned the Company gross proceeds of $1.25 million pursuant to 0% promissory notes (“November and December 2018 Notes Payable”). The notes have an OID of $270,000 and require aggregate payments of $1.52 million in principal. The notes bear interest at the rate of 0% per annum. In connection with the November and December 2018 Notes Payable, the Company issued the investors restricted shares of our common stock totaling 14,763 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the November and December 2018 Notes Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $374,000 in November 2018 and $125,000 in December 2018. The remaining principal balance under these notes was $668,000 at June 30, 2019.

March 2019 Note Payable

On March 27, 2019, we entered into a promissory note agreement and securities purchase agreement with an unrelated third-party investor in which the investor loaned us gross proceeds of $400,000 pursuant to a 0% promissory note (“March 2019 Note Payable”). The note has an OID of $100,000 and requires payments of $47,000 in principal per month through March 2020. In connection with the March 2019 Note Payable, we issued the investor restricted shares of common stock totaling 18,000 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the March 2019 Note Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $161,000 in March 2019. In connection with the financing, we issued 5,600 restricted shares of common stock in March 2019 to a third-party consultant. The fair value of the restricted shares of common stock issued of $28,000 was recorded as a debt discount to the carrying value of the notes payable. The remaining principal balance under this note was $375,000 at June 30, 2019.

April 2019 Notes Payable

On April 8, 2019, we entered into two securities purchase agreements with unrelated third-party investors in which the investors purchased 5% promissory notes, resulting in gross proceeds to us of $850,000 (“April 2019 Notes Payable”). The notes have an OID of $90,000 and require payment of principal and interest of $140,000 in October 2019, $704,000 in January 2020, and $132,000 in April 2020. In connection with the April 2019 Notes Payable, we issued the investors restricted shares of common stock totaling 98,334 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the April 2019 Notes Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $318,000 in April 2019. The discount is being amortized to interest expense using the effective interest method over the term of the April 2019 Notes Payable.

May 2019 Note Payable

On May 13, 2019, we entered into a securities purchase agreement with an unrelated third-party investor in which the investor loaned us gross proceeds of $400,000 pursuant to a 0% promissory note (“May 2019 Note Payable”). The note has an Original Issue Discount (“OID”) of $100,000 and requires payments of $42,000 in principal per month through May 2020. In connection with the May 2019 Note Payable, we issued the investor restricted shares of common stock totaling 34,000 shares. The fair value of the restricted shares of common stock issued was based on the market price of our common stock on the date of issuance of the May 2019 Note Payable. The allocation of the proceeds received to the restricted shares of common stock based on their relative fair value and the OID resulted in us recording a debt discount of $178,000 in May 2019. In connection with the financing, we issued 10,036 restricted shares of common stock in May 2019 to a third-party consultant. The fair value of the restricted shares of common stock issued of $28,000 was recorded as a debt discount to the carrying value of the notes payable. The discount is being amortized to interest expense using the effective interest method over the term of the May 2019 Note Payable.

Net Cash Flows

	Six Months Ended June 30, 2019	Six Months Ended June 30, 2018
Net cash used in operating activities	$ (1,356)	$ (3,461)
Net cash used in investing activities	(359)	(135)
Net cash provided by financing activities	2,041	3,646
Net change in cash	326	50
Cash at beginning of period	1,248	1,565
Cash at end of period	$ 1,574	$ 1,615

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Operating Activities

For the six months ended June 30, 2019, cash used in operating activities was approximately $1.4 million, consisting primarily of the net loss for the period of approximately $3.7 million, which was primarily offset by non-cash common stock, restricted stock units and stock options issued for services and compensation of approximately $275,000, amortization of debt discount of $908,000, and amortization of intangible assets of $363,000. Additionally, working capital changes consisted of cash increases of approximately $0.8 million related primarily to the reduction of inventory levels due to improved management of inventory purchasing and more experience to understand inventory turnover for each product as well as an increase in customer deposit for sales occurring toward the end of the first quarter.

Investing Activities

For the six months ended June 30, 2019, cash used in investing activities was approximately $359,000, which consisted of the purchase of assets from the Prime Consultants LLC entity on January 1, 2019 and the purchase of property and equipment of $16,000.

Financing Activities

For the six months ended June 30, 2019, cash provided by financing activities was approximately $2.0 million, consisting primarily of the net proceeds from the private placement completed on January 3, 2019, for a total net proceeds of $2.7 million and the issuance of a promissory note agreements and short-term loans of $2.7 million in 2019 offset by the repayment of outstanding notes payable and short-term loans of $3.4 million during the period.

Critical Accounting Policies and Estimates

On January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) ASU 2016-02, Leases (Topic 842) . This ASU requires lessees to recognize most leases on the balance sheet as lease liabilities with corresponding right-of-use assets and to disclose key information about leasing arrangements. We elected the available package of practical expedients upon adoption, which allowed us to carry forward our historical assessment of whether existing agreements contained a lease and the classification of our existing operating leases. We continue to report our financial position as of December 31, 2018 under the former lease accounting standard (Topic 840) in our condensed consolidated balance sheet. The adoption impact resulted in the recognition of an operating lease liability with a corresponding right-of-use asset based on the present value of our remaining minimum lease payments which offset the previously reported deferred rent balance.

On January 1, 2019, we adopted FASB ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting . The update aligns the accounting for share-based payment awards issued to nonemployees with those issued to employees. Under the new guidance, the nonemployee awards will be measured on the grant date and compensation costs will be recognized when achievement of the performance condition is probable. This new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The adoption of the new guidance does not have a material impact on its consolidated financial statements.

For the six months ended June 30, 2019, there were no other material changes to the “Critical Accounting Policies” discussed in Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Annual Report on Form 10-K for the year ended December 31, 2018.

Off- Balance Sheet Arrangements

None.

Recent Accounting Pronouncements

See Note 1 to our condensed consolidated financial statements included in this Quarterly Report.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

As of June 30, 2019, we evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).

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Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2019, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including chief executive officer and vice president, finance, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of the disclosure controls and procedures are met. The design of any disclosure control and procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in internal control over financial reporting.

During the quarter ended June 30, 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

James L. Yeager, Ph.D., and Midwest Research Laboratories, LLC v. lnnovus Pharmaceuticals, Inc. On January 18, 2018, Dr. Yeager and Midwest Research Laboratories (the "Plaintiffs") filed a complaint in the Illinois Northern District Court in Chicago, Illinois, which Plaintiffs amended on February 26, 2018 ("Amended Complaint''). The Amended Complaint alleges that the Company violated Dr. Yeager's right of publicity and made unauthorized use of his name, likeness an identity in advertising materials for its product Sensum+®. Plaintiffs seek actual and punitive damages, costs and attorney's fees, an injunction and corrective advertising. In October 2018, we filed a motion to dismiss the action. In February 2019, the Judge in the Illinois action issued a ruling invalidating some of Plaintiff’s causes of action, while accepting others and the case continues in that jurisdiction. The parties are currently engaged in discovery.

Marin County District Attorney ’ s Letter. On August 24, 2018, the Company received a letter from the Marin County District Attorney’s Office requesting substantiation for certain advertising claims made for certain of the Company's products, DiabaSens® and Apeaz® that were marketed and sold to customers in that County. The Marin County District Attorney’s Office is part of a larger ten county Northern California Task Force of district attorneys to handle consumer protection matters. In November 2018, the Company responded through its regulatory attorneys, Olshan, to the Marin County’s District Attorney’s letter. In March 2019, the Company received a response from the Marin County District Attorney. In April 2019 we responded to the letter and in June 2019 the Company met with the Northern California Task Force. The Company is currently responding to additional due diligence requests from the Marin County District Attorney's office.

From time to time, in addition to the matters identified above, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in the matter identified above or other matters may harm our business.

ITEM 1A.

RISK FACTORS

The risks described in Part I , Item 1A , Risk Factors , in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, could materially and adversely affect our business, financial condition and results of operations. These risk factors do not identify all of the risks that we face. Our business, financial condition and results of operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial. There have been no material changes to the “Risk Factors” section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

In April 2019, we entered into a securities purchase agreement with unrelated third-party investors in which the investors loaned us gross proceeds of $850,000 and we issued such investors (i) promissory notes in the aggregate principal amount of $1 million, and (ii) 98,334 restricted shares of common stock.

In April 2019, we elected to settle a portion of the October 2018 5% Notes Payable outstanding principal and interest balance of $175,000 in exchange for 100,000 restricted shares of common stock.

In May 2019, we entered into a securities purchase agreement with an unrelated third-party investor in which the investor loaned us gross proceeds of $400,000 and we issued such investor (i) a promissory note in the aggregate principal amount of $500,000, and (ii) 34,000 restricted shares of common stock.

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We believe that each of the offers, sales and issuances of securities described were exempt from registration under the Securities Act pursuant to Regulation D under the Securities Act or pursuant to Section 4(a)(2) of the Securities Act regarding transactions not involving a public offering. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the stock certificates and instruments issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us.

Use of Proceeds from the Sale of Registered Securities

On February 12, 2019, our registration statement on Form S-1 (File No. 333-229223) was declared effective by the SEC for our public offering pursuant to which we sold an aggregate of 230,853 shares of our common stock at an offering price of $7.35 per share. There has been no material change in our use of proceeds from our public offering as described in our final prospectus filed with the SEC on February 13, 2019, pursuant to Rule 424(b).

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit No.		Description
4.1		Form of Promissory Note, dated August 8, 2019
31.1*		Certification of Bassam Damaj, Ph.D., principal executive officer, pursuant to Rule 13-a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Ryan Selhorn, CPA, principal financial officer, pursuant to Rule 13-a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Bassam Damaj, Ph.D., principal executive officer, and Ryan Selhorn, CPA, principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation by reference language of such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Innovus Pharmaceuticals, Inc.
	(Registrant)

Date: August 13, 2019	/s/ Bassam Damaj
	Bassam Damaj, Ph.D. President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ Ryan Selhorn

Ryan Selhorn, CPA

Vice President, Chief Financial Officer

(Principal Financial Officer)

Date: August 13, 2019	/s/ Ryan Selhorn
	Ryan Selhorn
	Vice President, Chief Financial Officer
	(Principal Financial Officer)