UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 0-26790
INNOVUS CORPORATION
(Exact name of small business issuer as specified in its charter)
DELAWARE 87-0461856
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
4600 Campus Drive
Newport Beach, CA 92660
(Address of principal executive offices)
(949) 833-1220
(Issuer's telephone number, including area code)
___________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for 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 X No
The number of common shares outstanding at August 20, 1998:
13,187,145
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVUS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1998 1997
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . $ - $ 91,690
Prepaid expenses. . . . . . . . . . . . . . . . . . - 29,159
----------- -----------
Total Current Assets . . . . . . . . . . . . . . - 120,849
----------- -----------
Property and Equipment, net. . . . . . . . . . . . . 46,669 57,190
----------- -----------
Total Assets . . . . . . . . . . . . . . . . . . . . $ 46,669 $ 178,039
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . $ 500,212 $ 811,333
Accrued compensation. . . . . . . . . . . . . . . . - 21,598
Accrued liabilities . . . . . . . . . . . . . . . . 2,275 3,025
Notes payable . . . . . . . . . . . . . . . . . . . 128,000 28,098
Capital lease obligations . . . . . . . . . . . . . 768 1,912
Preferred dividends payable . . . . . . . . . . . . 32,682 318,528
----------- -----------
Total Current Liabilities. . . . . . . . . . . . 663,937 1,184,494
----------- -----------
Stockholders' Deficit
Preferred stock - $0.001 par value;
1,000,000 shares authorized; 4,300
and 77,358 shares issued and outstanding,
respectively; liquidation preference of
$215,000 at June 30, 1998 . . . . . . . . . . . . 4 77
Common stock - $0.001 par value; 15,000,000
shares authorized; 11,938,746 and 7,633,135
shares issued and outstanding, respectively . . . 11,939 7,633
Additional paid-in capital. . . . . . . . . . . . . 18,690,383 18,245,808
Accumulated deficit . . . . . . . . . . . . . . . . (19,319,594) (19,259,973)
------------ -----------
Total Stockholders' Deficit. . . . . . . . . . . (617,268) (1,006,455)
------------ -----------
Total Liabilities and Stockholders' Deficit. . . . . $ 46,669 $ 178,039
============ ===========
See the accompanying notes to the condensed financial statements.
INNOVUS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------- ---------------------
1998 1997 1998 1997
---------- ----------- -------- -----------
Net Sales. . . . . . . . . . . $ - $ 3,385 $ 24,208 $ 276,859
---------- ----------- -------- -----------
Costs and Operating Expenses
Costs of products and services
sold . . . . . . . . . . . . - 8,487 1,752 102,065
Amortization of software
development costs . . . . . . - 242,859 5,260 499,979
Selling and marketing . . . . - 410,939 40,734 980,268
General and administrative. . 25,263 370,021 111,590 596,801
---------- ----------- -------- -----------
Total Costs and Operating
Expenses. . . . . . . . . . . 25,263 1,032,306 159,336 2,179,113
---------- ----------- -------- -----------
Operating Loss . . . . . . . . (25,263) (1,028,921) (135,128) (1,902,254)
---------- ----------- -------- -----------
Other Income (Expense)
Interest income . . . . . . . - 4,726 - 13,046
Interest expense . . . . . . (2,075) (174,280) (3,654) (558,743)
Other income. . . . . . . . . 1,513 9,963 1,513 16,605
---------- ----------- -------- -----------
Other Expense, Net . . . . . . (562) (159,591) (2,141) (529,092)
---------- ----------- -------- -----------
Loss Before Extraordinary Item (25,825) (1,188,512) (137,269) (2,431,346)
Extraordinary Gain from Debt
Forgiveness . . . . . . . . . 240,536 - 240,536 -
---------- ----------- -------- -----------
Net Income (Loss). . . . . . . 214,711 (1,188,512) 103,267 (2,431,346)
Preferred Dividends. . . . . . (81,747) (84,832) (162,887) (200,074)
---------- ----------- -------- -----------
Income (Loss) Applicable to
Common Shares . . . . . . . $ 132,964 $(1,273,344) $(59,620) $(2,631,420)
========== =========== ======== ===========
Basic and Diluted Income
(Loss) Per Common Share
Loss Before Extraordinary
Item. . . . . . . . . . . $ (0.01) $ (0.21) $ (0.03) $ (0.46)
========== ========== ========= ==========
Net Income (Loss) . . . . $ 0.01 $ (0.21) $ (0.01) $ (0.46)
========== ========== ========= ==========
Weighted number of shares
of common stock used in per
share calculation . . . . . . 10,471,999 6,007,021 9,060,409 5,744,255
========== ========== ========= ==========
See the accompanying notes to the condensed financial statements.
INNOVUS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
-------------------------
1998 1997
----------- -----------
Cash Flows from Operating Activities
Net income (loss). . . . . . . . . . . . . . . . $ 103,267 $(2,431,346)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . 10,521 595,871
Expenses for issued warrants. . . . . . . . . - 278,552
Forgiveness of debt . . . . . . . . . . . . . (240,536) -
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . - 90,262
Inventories. . . . . . . . . . . . . . . . . - (77,788)
Prepaid expenses . . . . . . . . . . . . . . 29,159 83,734
Accounts payable and accrued expenses. . . . (47,933) (328,533)
Other. . . . . . . . . . . . . . . . . . . . 74 24,505
----------- -----------
Net Cash Used in Operating Activities . . . . (145,448) (1,764,743)
----------- -----------
Cash Flows From Investing Activities
Acquisition of property and equipment . . . . . - (13,921)
Increase in software development costs. . . . . - (835,717)
----------- -----------
Net Cash Used in Investing Activities . . . . - (849,638)
----------- -----------
Cash Flows From Financing Activities
Proceeds from borrowing . . . . . . . . . . . . 53,758 168,000
Payments to reduce long-term debt and
capital lease obligations. . . . . . . . . . . - (497,502)
Net proceeds from issuance of preferred
and common stock . . . . . . . . . . . . . . . - 2,082,060
----------- -----------
Net Cash Provided by (Used in)
Financing Activities . . . . . . . . . . . . 53,758 1,752,558
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents . . . . . . . . . . . . . . . (91,690) (861,823)
Cash and Cash Equivalents at Beginning
of Period . . . . . . . . . . . . . . . . . . 91,690 886,122
----------- -----------
Cash and Cash Equivalents at End of Period . . . $ - $ 24,299
=========== ===========
Noncash Investing and Financing Activities
During the six months ended June 30, 1998, accounts payable in the
amount of $45,000 were converted into 10% Series B Convertible
debentures. Additionally, 73,058 shares of preferred stock were
converted into 4,305,611 shares of common stock.
See the accompanying notes to the condensed financial statements.
INNOVUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - CONDENSED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial
statements contain all necessary adjustments, consisting of normal
recurring adjustments accept as disclosed herein, for a fair
presentation of financial position and the results of operations.
The results of operations of the interim periods presented are not
necessarily indicative of the results to be expected for the
remainder of 1998.
The financial statements have been prepared on the basis of the
Company being a going concern. The Company has had continued
losses, and currently has a substantial accumulated deficit and
lack of financial resources, which conditions raise substantial
doubt regarding the Company's ability to continue as a going
concern. The Company has entered into a reorganization agreement
with Intermark, as discussed in Note 5. Accorgingly, the financial
statements do not include any adjustments that might result from the
outcome of such uncertainty.
The accompanying unaudited financial statements have been
condensed pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures
normally included in financial statements have been condensed or
omitted. These financial statements should be read in connection
with the Company's annual financial statements included in the
Company's annual report on Form 10-KSB, as of December 31, 1997.
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation. The
reclassifications are not material.
NOTE 2 - TERMINATION OF BUSINESS ACTIVITIES
The Company's operations have been as a provider of software
development tools designed for building modifiable media-intensive
business information management systems. These tools provided
links for customers to databases through open data base
connectivity, object linking and embedding technology. During
1997, the Company wrote off all of its inventory and substantially
all of its property and equipment, concluded its software development
activity and fully amortized the remaining cost of capitalized
software products. During 1998, the Company terminated its
remaining sales and marketing activities. As a result, the Company
does not have any significant assets or continuing operations.
Management's recent activities have been to restructure the
Company in preparation for reorganization of Intermark Corporation,
as discussed in Note 5.
NOTE 3 - NOTES PAYABLE
On April 2, 1998, the Board of Directors authorized the Company to
issue 10% Series A and Series B Convertible Debentures. As a result,
$75,000 of Series A debentures were issued for cash in April 1998, of
which $25,000 were issued to an officer and director of the Company. In
addition, $45,000 of Series B convertible debentures were issued at the
end of June 1998 for the conversion of accounts payable. The debentures
total $120,000 at June 30, 1998 and are due October 31, 1998. The debentures
and related accrued interest are convertible into common shares at $0.125
per share, subject to availability of authorized and unissued common stock.
The Company granted the holders of the debentures registration rights with
respect to the underlying common stock issuable upon conversion and has
agreed to pay the costs of such registration. The Company granted the
holders of the debentures, as a group, a security interest in substantially
all assets of the Company.
As an additional incentive to existing investors to purchase
debentures, the Company agreed to repriced existing warrants and
options held by each investor to $0.15 per share if the investor
purchased debentures of at least $25,000. The market value of the
underlying common stock was less than the new exercise price on
the date the warrants and options were repriced; accordingly, no
additional interest expense or compensation expense was recognized
in connection with the repricing of the warrants and options.
During the second quarter of 1998, the Company received advances
from an officer/director in the amount of $8,000 which were
included with additional proceeds received during July 1998 in a
$14,000 promissory note payable to the officer/director. The note
is due on demand and is unsecured.
NOTE 4 - PREFERRED STOCK CONVERSION
Series C, D, F and G Preferred Stock were converted into 4,305,611
shares of common stock during April and May 1998. Additionally, 4,300
shares of Series G Preferred Stock which converted into 215,000 common
shares during July 1998. Common shares were issued upon conversion
of each share of Preferred Stock, and related accrued dividends, at the
following rates: Series C - 49 common shares; Series D - 23 common shares;
Series F - 57 common shares; and Series G - 43 common shares. Dividends
in the amount of $448,808 were paid with common shares in connection with
the conversion of the Preferred Stock during the six months ended June 30,
1998. The remaining $32,682 of unpaid accrued dividends at June 30, 1998
were paid with common stock upon conversion of the remaining shares of
Preferred Stock in July 1998.
NOTE 5 - SUBSEQUENT EVENT - AGREEMENT WITH INTERMARK CORPORATION
On August 5, 1998, the Company finalized an Agreement and Plan of
Share Exchange with Intermark Corporation ("Intermark"). Under the
Agreement, as amended, the shareholders of Intermark exchanged all
of the outstanding capital stock of Intermark for 1,033,670 shares
of common stock of the Company and for 2,665 shares of the
Company's newly created Series H Preferred stock convertible into
approximately 44,272,241 shares of Common Stock. In addition, the
Company assumed Intermark options which are now exercisable to
purchase up to 6,316,524 shares of the Company's common stock. In
connection with the Agreement, the Board of Directors has approved
a 1-for-10 reverse stock split pending shareholder approval. The
accompanying financial statements do not reflect the effects of
the proposed stock split.
NOTE 6 - FORGIVENESS OF DEBT
The Company has negotiated reductions in accounts payable during
the second quarter 1998 in the amount of $240,536. Additional
reductions continue to be negotiated subsequent to June 30, 1998.
The forgiveness of accounts payable have been accounted for as an
extraordinary gain.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The following discussion should be read in conjunction with the
financial statements and notes thereto found elsewhere herein. The
discussion assumes that the reader is familiar with or has access to
the Company's financial statements for the year ended December 31,
1997 found in the Company's Form 10-KSB/A.
The financial statements have been prepared on the basis of the
Company being a going concern. The Company has had continued losses,
and currently has a substantial accumulated deficit and lack of
financial resources. There may be substantial doubt regarding the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the
outcome of such uncertainty.
The Company had been engaged in the sale of multimedia authoring and
presentation software, with related application templates and media
packages. Due to lagging sales and lack of resources, the Company
ceased development and marketing activities in late 1997. In May,
1998, the Company signed an Agreement and Plan of Share Exchange
with Intermark Corporation ("Intermark"). Pursuant to the terms of
the Intermark Agreement, as amended, current Intermark shareholders
would obtain securities representing 79.1% of the Company's voting
power. The Intermark Agreement was consummated on August 5, 1998.
The financial information contained in this report does not reflect
the effect of the subsequent closing of the Intermark Agreement.
Results of Operations
During the six months ended June 30, 1998, sales were negligible.
Net sales were $24,208, compared to $276,859 for the comparable
period of the prior year. During the second quarter ended June 30,
1998, the Company's principal distributor of INNOVUS Multimedia
software returned all unsold inventory. Based upon this and the
market shift to web-based software, the Company believes that
further sales of the software without large scale revisions is unlikely.
The costs of products and services sold in the six months ended
March 31, 1998 and 1997 were $1,752 and $102,065 respectively. Due
to the low amount of net sales for the current period, comparison of
the costs of sales between periods may not be meaningful.
Operating loss for the six months ended June 30, 1998 was $135,128
compared to an operating loss of $1,902,254 for the six months ended
June 30, 1997. The reduction in operating loss reflects the
substantial reduction in business activity by the Company.
Comparison of the current period when the Company was doing little
other than attempting to determine a new business plan to the first
half of 1997 when the Company was actively attempting to market its
software is not meaningful. Operating loss for the first half of 1998
reflects the full amortization of software development costs at December
31, 1997. Accordingly, amortization for the period consists only of
$5,260 in depreciation, compared to $499,979 amortization of software
development costs in the first half of 1997.
The Company incurred $3,654 and $545,697 in net interest expense during
the six months ended June 30, 1998 and 1997, respectively.
An extraordinary gain in the amount of $240,536 was recognized during
the six months ended June 30, 1998 relating to the forgiveness of debt.
The Company sustained net loss applicable to common shares of $59,620 for
the six months ended June 30, 1998 compared to a net loss of $2,631,420
for the six months ended June 30, 1997.
Statements regarding the Company's expectations as to future sales
of software, future capital resources and certain other statements
presented in this Form 10-QSB constitute forward looking information
within the meaning of the Private Securities Litigation Reform Act
of 1995. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge
of its business and operations, there can be no assurance that
actual results will not differ materially from expectations. In
addition to matters affecting the Company's industry generally,
factors which could cause actual results to differ from expectations
include, but are not limited to (i) sales of the Company's software
may never rise to the level of profitability; (ii) due to the
rapidly changing and competitive nature of the industry, competitors
may introduce new products with significant competitive advantages
over the Company's products; and (iii) the Company may not have
sufficient resources, including any future financing it is able to
obtain, to sustain marketing and other operations.
Liquidity and Capital Resources
At June 30, 1998 the Company had $0 of cash and cash equivalents and
a deficit in working capital (current liabilities in excess of
current assets) of $663,937. The Company has substantially ceased
the operations of Innovus Multimedia, its operating subsidiary, due
to the inability to sustain additional losses, even at the reduced
levels of the first quarter of 1998. After June 30, 1998, the
Intermark transaction was consummated. It is contemplated that
Innovus Multimedia will be dissolved and its software sold, with the
proceeds used to defray existing indebtedness of the subsidiary.
The Company had been relying upon short-term borrowings from
affiliates and others, as well as increases in accounts payable owed
to vendors and a second mortgage on the Company's building, to
provide the means to maintain the minimal remaining operations of
Innovus Multimedia.
Management's efforts to obtain additional equity financing were
unsuccessful. Therefore, in order to improve the Company's capital
structure, and to make additional equity financing practicable,
Management undertook during the second quarter to eliminate the
market overhang caused by variable conversion features of certain
series of the Company's preferred stock (other than the Series H
Preferred Stock issued in the Intermark transaction), some of which
had been converted into Common Stock on or prior to June 30, and the
remaining balance of which was converted into Common Stock, and
therefore eliminated, after June 30, 1998.
The Company estimates that during the period from June 30, 1998 to
the closing of the Intermark transaction it was using approximately
$20,000 more cash each month than was generated by operations.
During the second quarter, the Company borrowed $75,000 from an
officer and director and two other persons pursuant to convertible
debentures. The debentures are secured by substantially all the
assets of the Company. In addition, $45,000 of acounts payable were
converted into debentures.
At June 30, 1998, the Company had no long term liabilities. This
reflects the sale of the Company's building, relieving the Company
from the first and second mortgages, as well as the sale of
telephone equipment subject to a lease obligation. The remaining
liabilities which might be considered long term have been classified
as current liabilities due to the Company's financial condition.
The Company has determined that Innovus Multimedia cannot continue
operations, and has determined to liquidate Innovus Multimedia. The
result of the liquidation will be that the assets of Innovus
Multimedia will be sold to pay creditors of Innovus Multimedia, and
no assurance is possible that the value obtained in such sale will
exceed the book value of Innovus Multimedia's assets.
The Company has settled and resolved a portion of the indebtedness
of Innovus Multimedia, and intends to continue to do so in
connection with the dissolution of Innovus Multimedia. Funding to
settle indebtedness was made available by Intermark in connection
with the Intermark transaction.
Management's plans also include private equity financing for
purposes of development and marketing of the products acquired in
the Intermark transaction, and for potential acquisitions of other
complementary products and businesses. No assurance can be made that
such financing shall be forthcoming in sufficient amounts, and the
Company may be required to delay or change its plans absent
sufficient financing.
The Company's Form 8-K as filed May 12, 1998 and its Form 8-K as
filed August 20, 1998 describes the transaction with Intermark.
Financial information and pro forma financial information concerning
the Company, that includes financial information of Intermark, will
be filed by the Company with the Securities and Exchange Commission,
in accordance with its rules and the instructions to Form 8-K, in a
future amendment to the Form 8-K as filed August 20, 1998.
PART II Item 2 - Changes in Securities
(c) The following securities were issued by the Company during
the quarter ended June 30, 1998 without registration under the
Securities Act of 1933 (other than issuances pursuant to Regulation S):
(i) During the quarter ended June 30, 1998, the Company issued
4,305,611 shares of its common stock upon conversion of
or in exchange for shares of its Series C, D, F and G
Preferred Stock. As a result of these transactions, at
June 30, 1998, the only Preferred Stock outstanding was
4,300 shares of Series G Preferred Stock, which were
converted into 215,000 shares of common stock during July
1998. The conversions and exchanges were made to a
limited number of accredited investors solely in exchange
for outstanding securities of the Company. No commissions
or similar fees were paid. The Company believes the
transactions were exempt from registration pursuant to
Sections 4(2) and 3(a)(9) of the Securities Act of 1933.
(ii) During the quarter, the Company issued $75,000 of its
Series A convertible debentures and approximately $45,000
of its Series B convertible debentures to four accredited
investors, including Mr. Mock. In connection with the issuance
of the Series A debentures, options or warrants of the Company
held by the debenture investors were re-priced to current
market. The Company believes the transactions were exempt
from registration pursuant to Section 4(2) of the Securities
Act of 1933.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits.
Those exhibits previously filed with the Securities and
Exchange Commission as required by Item 601 of Regulation
S-K, are incorporated herein by reference in accordance
with the provisions of Rule 12b-32.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
During the period covered by this report:
1. The Company filed a Form 8-K dated April 13, 1998 reporting
under Item 5 the filing of an extension for its 10-KSB,
preliminary unaudited financial information for 1997 and the
letter of intent with Intermark.
2. The Company filed a Form 8-K dated May 8, 1998 reporting under
Item 1 the execution of the Intermark Agreement and Plan of Share
Exchange. No financial statements were filed with such report.
3. The Company filed a Form 8-K dated June 1, 1998 reporting under
Item 4 the retention of Hansen Barnett & Maxwell as the Company's
independent auditor and the dismissal of Grant Thornton, LLP.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: August 28, 1998
INNOVUS CORPORATION
By: /S/ Tom Hemingway
---------------------
Tom Hemingway, Chief
Executive Officer and
Authorized Officer
By: /S/ Kirit Goradia
---------------------
Kirit Goradia, Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of June 30, 1998, and statements of operations for the six months ended
June 30, 1998, and is qualified in its entirety by reference to such financial
sttements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 113,036
<DEPRECIATION> (66,366)
<TOTAL-ASSETS> 46,669
<CURRENT-LIABILITIES> 663,937
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<COMMON> 11,939
<OTHER-SE> (629,211)
<TOTAL-LIABILITY-AND-EQUITY> (617,268)
<SALES> 24,208
<TOTAL-REVENUES> 24,208
<CGS> 1,752
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<OTHER-EXPENSES> 157,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,654
<INCOME-PRETAX> (137,269)
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<EXTRAORDINARY> 240,536
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