ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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.
Our Strategy
Our corporate strategy focuses on the following primary objectives:
1.
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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;
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2.
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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
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3.
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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.
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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:
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1.
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Vesele®
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2.
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UriVarx®
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3.
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FlutiCare®
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4.
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Apeaz®
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5.
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Diabasens®
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6.
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Prostagorx®
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7.
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Sensum+®
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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:
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1.
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Trexar
™
is a supplement that provides neuropathy support and enhanced sensation (third quarter of 2019);
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2.
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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;
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3.
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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;
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4.
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Octiq™ is an expected FDA ophthalmic OTC monograph compliant product for the treatment of eye redness and eye lubrication (late 2019/early 2020); and
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5.
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Regoxidine™ is an ANDA approved 5% Minoxidil foam for men and women for hair growth on the top of the scalp (second half 2019).
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We currently expect potential supply interruption of Fluticare from its supplier for the coming 90-180 days based on inventory availability.
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
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Three Months Ended June 30, 2019
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Three Months Ended June 30, 2018
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|
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$ Increase (Decrease)
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|
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% Increase (Decrease)
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Net revenue:
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|
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|
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Product sales, net
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$ 6,594
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$ 6,970
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$ (376)
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(5.4)
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%
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Service revenue
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56
|
|
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156
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|
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(100)
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64.1
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%
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Cooperative marketing revenue
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91
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183
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(92)
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50.3
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%
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License revenue
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107
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3
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|
|
-
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|
|
-
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%
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Net revenue
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6,848
|
|
|
7,312
|
|
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(464)
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(6.3)
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%
|
|
|
|
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|
|
|
|
|
|
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Cost of product sales
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2,356
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1,339
|
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|
1,017
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|
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76.0
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%
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Gross Profit
|
|
4,492
|
|
|
5,973
|
|
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(1,481)
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(24.8)
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%
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|
|
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|
|
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Operating expense:
|
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|
|
|
|
|
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Research and development
|
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91
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23
|
|
|
68
|
|
|
295.7
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%
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Sales and marketing
|
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2,858
|
|
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5,529
|
|
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(2,671)
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(48.3)
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%
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General and administrative
|
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2,724
|
|
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1,919
|
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|
805
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41.9
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%
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Total operating expense
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5,673
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7,471
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(1,798)
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(24.1)
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%
|
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Loss from operations
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(1,181)
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(1,498)
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|
|
317
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21.2
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%
|
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|
|
|
|
|
|
|
|
|
|
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Other income (expense):
|
|
|
|
|
|
|
|
|
|
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Interest expense
|
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(486)
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|
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(326)
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|
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(160)
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|
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(49.1)
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%
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Loss on extinguishment of debt
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(125)
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|
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(38)
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|
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(87)
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(228.9)
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%
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Other income (expense), net
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29
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|
-
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29
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(100.0)
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%
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Fair value adjustment for contingent consideration
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4
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22
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(18)
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81.8
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%
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Total other expense, net
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(578)
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(342)
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|
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(236)
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(69.0)
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%
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|
|
|
|
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Net loss
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$ (1,759)
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$ (1,840)
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$ 81
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4.4
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%
|
|
|
Six Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2018
|
|
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$ Increase (Decrease)
|
|
|
% Increase (Decrease)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
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Product sales, net
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$ 11,783
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$ 11,512
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|
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$ 271
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2.4
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%
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Service revenue
|
|
156
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|
|
$ 156
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|
|
-
|
|
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-
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%
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Cooperative marketing revenue
|
|
162
|
|
|
$ 184
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(22)
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|
|
12.0
|
%
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License revenue
|
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110
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|
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$ 5
|
|
|
-
|
|
|
-
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%
|
Net revenue
|
|
12,211
|
|
|
11,857
|
|
|
354
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|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales
|
|
4,134
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|
|
2,203
|
|
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1,931
|
|
|
87.7
|
%
|
Gross Profit
|
|
8,077
|
|
|
9,654
|
|
|
(1,577)
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|
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(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)
|
%
|
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.
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.
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
|
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.