10-K



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

(Mark One)

 

x

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2015


 

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from _________ to ________


Commission File Number 000-32141


NUTRA PHARMA CORP.


(Exact name of registrant as specified in its charter)


California

91-2021600

(State or Other Jurisdiction of
Incorporation or organization)

(IRS Employer Identification Number)


12538 W. Atlantic Blvd, Coral Springs, FL

33071

(Address of principal executive offices)

(Zip Code)


Registrant’s telephone number, including area code:

(954) 509-0911


Securities registered under Section 12(b) of the Exchange Act:


 

Title of each class

Name of each exchange on which registered

 

None

None


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


Common stock, $0.001 par value

(Title of Class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ¨ No x

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 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ¨

 

Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)

 

Smaller reporting company x


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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the registrant’s most recently completed second quarter: $3,698,590.

As of April 14, 2016, there were 106,894,580 shares of common stock.





INDEX


Part I

3

Item 1.

Business

3

Item 1A.

Risk Factors

21

Item 1B.

Unresolved Staff Comments

25

Item 2.

Properties

25

Item 3.

Legal Proceedings

25

Item 4.

Mine Safety Disclosures

27

 

 

 

Part II

28

Item 5.

Market for Registrant’s Common Equity; Related Stockholder Matters and Issuer Purchases
of Equity Securities

28

Item 6.

Selected Financial Data

33

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

38

Item 8.

Financial Statements and Supplementary Data

38

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

38

Item 9A.

Controls and Procedures

38

Item 9B.

Other Information

39

 

 

 

Part III

40

Item 10.

Directors, Executive Officers and Corporate Governance

40

Item 11.

Executive Compensation

42

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43

Item 13.

Certain Relationships and Related Transactions, and Director Independence

43

Item 14.

Principal Accountant Fees and Services

44

 

 

 

Part IV

45

Item 15.

Exhibits and Financial Statement Schedules

45

 

 

 

Signatures

 

46


Nutra Pharma Corp and its wholly owned subsidiary, ReceptoPharm, Inc. (“ReceptoPharm”) are referred to herein as “we”, “our” or “us” (ReceptoPharm is also individually referred to herein).


Forward Looking Statements


This Annual Report on Form 10-K for the period ending December 31, 2015 contains forward-looking statements that involve risks and uncertainties, most significantly, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operation), as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The words or phrases “would be,” “will allow, “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements.” All statements other than statements of historical fact, are statements that could be deemed forward-looking statements, including any projections of revenue, gross margin, expenses, earnings or losses from operations, synergies or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statement concerning developments, plans, or performance. Unless otherwise required by applicable law, we do not undertake and we specifically disclaim any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.








PART I


Item 1.   Business


Introduction


We were incorporated in California on February 1, 2000. We have conducted our operations since October 2003. We are a biopharmaceutical company that engages in the acquisition, licensing and commercialization of pharmaceutical products and technologies as well as homeopathic and ethical drugs for the management of pain, neurological disorders, cancer, autoimmune and infectious diseases. Homeopathic drugs are natural products that contain ingredients listed in the HPUS (Homeopathic Pharmacopoeia of the United States). An ethical drug is a licensed drug that has obtained Federal Drug Administration (“FDA”) approval after extensive pre-clinical and clinical testing. We seek strategic licensing partnerships to reduce the risks associated with the drug development process.


Our wholly owned subsidiary and drug discovery arm, ReceptoPharm, has carried out our homeopathic and drug discovery research and clinical development and has fully developed four homeopathic drugs for the treatment of pain:


·

Cobroxin®, an over-the-counter pain reliever designed to treat moderate to severe (Stage 2) chronic pain; and

·

Nyloxin® and Nyloxin® Extra Strength: stronger versions of Cobroxin®

·

Pet Pain-Away: an over-the-counter pain reliever designed to treat pain in cats and dogs


Our business plan will continue its efforts to produce, market and distribute our Cobroxin®, Nyloxin® and Pet Pain-Away branded products both domestically and internationally.


From October 2009 until December 31, 2015, our operations centered on the marketing of Cobroxin® and Nyloxin® and Nyloxin® Extra Strength. In December of 2014, we launched Pet Pain-Away and began actively marketing the product. Through the sales of Cobroxin®, Nyloxin®, Nyloxin® Extra Strength and Pet Pain-Away we have earned accumulated net revenues of $291,302. During fiscal year 2015, we earned revenues of $279,969 from sales of Nyloxin® and $11,333 from sales of Pet Pain-Away.


Additionally, the Company has developed two drug candidates:


·

RPI-78M, to treat neurological diseases and autoimmune diseases, including; Multiple Sclerosis (MS), Adrenomyeloneuropathy (AMN), Amyotrophic Lateral Sclerosis (ALS or Lou Gehrig’s disease), Rheumatoid Arthritis (RA) and Myasthenia Gravis; and

·

RPI-MN, to treat viral diseases, including HIV/AIDS and Herpes.


The Company has developed proprietary therapeutic protein products primarily for the prevention and treatment of viral and neurological diseases, including Multiple Sclerosis (MS), Adrenomyeloneuropathy (AMN), Human Immunodeficiency Virus (HIV) and pain in humans. These potential products are subject to FDA approval.


We continue to identify biotechnology related intellectual property and companies with which we may potentially be able to enter into arrangements, agreements or to potentially acquire.


Industry Overview of the Pain Market


Pain is the most common symptom for patients seeking medical attention. Acute and chronic pain affects large numbers of Americans, with approximately 100 million U.S. adults burdened by chronic pain alone. The annual national economic cost associated with chronic pain is estimated to be $560-635 billion. (Institute of Medicine, Relieving Pain in America, 2011).


The global market for pain management products, including prescription and nonprescription analgesics, reached over $50 billion in 2009 according to an August 2010 article published in the journal Nature Reviews Drug Discovery. The current market for pain drugs is expected to continue to grow according to BCC Research, a market research firm that believes the aging baby boomer population will continue to trigger growth in this market resulting in a $44.3 billion US market size by 2020.


Our Products


Cobroxin®


We offer Cobroxin®, our over-the-counter pain reliever that has been clinically proven to treat moderate to severe (Stage 2) chronic pain. Cobroxin® is not currently being marketed. In August 2009, we completed an agreement with XenaCare Holdings (“XenaCare”) granting it the exclusive license to market and distribute Cobroxin® within the United States. In mid-October 2009, XenaCare began selling Cobroxin® online through its product website, www.Cobroxin.com.




3



In November 2009, XenaCare began selling Cobroxin® to brick-and-mortar retailers, including distribution to CVS in March 2010 and Walgreens in May 2010. On April 1, 2011, we notified our Cobroxin® Distributor, XenaCare that they were in breach of our agreement. As a result of this, the distribution agreement was terminated effective April 10, 2011. XenaCare had a large stock of the product that they had ordered from us and we had allowed them to continue to market their existing inventory of Cobroxin®. In October 2011 we discontinued their website at www.Cobroxin.com. All current traffic to that website is now redirected to www.Nyloxin.com. It is our plan to eventually re-launch Cobroxin®.


Cobroxin® was available as a two ounce topical gel for treating joint pain and pain associated with arthritis and repetitive stress, and as a one ounce oral spray for treating lower back pain, migraines, neck aches, shoulder pain, cramps, and neuropathic pain. Both the topical gel and oral spray are packaged and sold as a one-month supply.


Cobroxin® offers several benefits as a pain reliever. With increasing concern about consumers using opioid and acetaminophen-based pain relievers, Cobroxin® provides an alternative that does not rely on opiates or non-steroidal anti-inflammatory drugs, otherwise known as NSAIDs, for its pain relieving effects. Cobroxin® also has a well-defined safety profile. Since the early 1930s, the active pharmaceutical ingredient (API) of Cobroxin®, Asian cobra venom, has been studied in more than 46 human clinical studies. The data from these studies provide clinical evidence that cobra venom provides an effective treatment for pain with few side effects and has the following benefits:


·

safe and effective;

·

all natural;

·

long-acting;

·

easy to use;

·

non-narcotic;

·

non-addictive; and

·

analgesic and anti-inflammatory.


Potential side effects from the use of Cobroxin® are rare, but may include headache, nausea, vomiting, sore throat, allergic rhinitis and coughing.


Nyloxin®/Nyloxin® Extra Strength


Nyloxin® and Nyloxin® Extra Strength are similar to Cobroxin® because they both contain the same active ingredient as Cobroxin®, Asian cobra venom. The primary difference between Nyloxin®, Nyloxin® Extra Strength and Cobroxin® is the dilution level of the venom. The approximate dilution levels for Nyloxin®, Nyloxin® Extra Strength and Cobroxin® are:


Nyloxin®


·

Topical Gel: 30 mcg/mL

·

Oral Spray: 70 mcg/mL


Nyloxin® Extra Strength


·

Topical Gel: 60 mcg/mL

·

Oral Spray: 140 mcg/mL


Cobroxin®


·

Topical Gel: 20 mcg/mL

·

Oral Spray: 35 mcg/mL


In December 2009, we began marketing Nyloxin® and Nyloxin® Extra Strength at www.nyloxin.com. Both Nyloxin® and Nyloxin® Extra Strength are packaged in a roll-on container, squeeze bottle and as an oral spray. Additionally, Nyloxin® topical gel is available in an 8 ounce pump bottle.


In December of 2013, we announced an agreement with MyNyloxin.com for the exclusive rights to market and distribute Nyloxin® in the Network Marketing channel. In January of 2014, we announced the first product shipments to the MyNyloxin Independent Entrepreneurs (MIEs). In November of 2014, MyNyloxin.com changed their name to Lumaxa. Lumaxa provides a business opportunity to their Distributors to earn commissions on the sale of our products through their Distributor groups. Lumaxa conducts webinars, conference calls and live meetings to support recruitment of new distributors as well as to provide product and business education.



4



We are currently marketing Nyloxin® and Nyloxin® Extra Strength as treatments for moderate to severe chronic pain. Nyloxin® is available as an oral spray for treating back pain, neck pain, headaches, joint pain, migraines, and neuralgia and as a topical gel for treating joint pain, neck pain, arthritis pain, and pain associated with repetitive stress. Nyloxin® Extra Strength is available as an oral spray and gel application for treating the same physical indications, but is aimed at treating the most severe (Stage 3) pain that inhibits one’s ability to function fully.


Nyloxin® Military Strength


In December 2012, we announced the availability of Nyloxin® Military Strength for sale to the United States Military and Veteran's Administration. Over the past few years, the U.S. Department of Defense has been reporting an increase in the use and abuse of prescription medications, particularly opiates. In 2009, close to 3.8 million prescriptions for pain relievers were written in the military. This staggering number was more than a 400% increase from the number of prescriptions written in the military in 2001. But prescription drugs are not the only issue. The most common and seemingly harmless way to treat pain is with non steroidal, anti-inflammatory drugs (NSAIDS). But there are risks. Overuse can cause nausea, vomiting, diarrhea, heartburn, ulcers and internal bleeding. In severe cases chest pain, heart failure, kidney dysfunction and life-threatening allergic reactions can occur. It is reported that approximately 7,600 people in America die from NSAID use and some 78,000 are hospitalized. Ibuprofen, also an NSAID has been of particular concern in the military. The terms “Ranger Candy” and “Military Candy” refer to the service men and women who are said to use 800mg doses of Ibuprofen to control their pain. But when taking anti-inflammatory Ibuprofen in high doses for chronic pain, there is potential for critical health risks; abuse can lead to serious stomach problems, internal bleeding and even kidney failure. There are significantly greater health risks when abuse of this drug is combined with alcohol intake. Our goal is that with Nyloxin®, we can greatly reduce the instances of opiate abuse and overuse of NSAIDS in high risk groups like the US military. The Nyloxin® Military Strength represents the strongest version of Nyloxin® available and is approximately twice as strong as Nyloxin® Extra Strength. We are working with outside consultants to register Nyloxin® Military Strength and the other Nyloxin® products for sale to the US government and the various arms of the military as well as the Veteran's Administration. To date, we have been unable to get our products onto the Federal Supply Schedule for eventual sales to governmental agencies or to the US Military, but will continue these efforts. In February of 2016, we announced the addition of Thomas W. Northrop as the Company's Senior Commercial Development Officer. Mr. Northrop, working with Tri-State Capital Partners, LLC, a New York-based management advisory & investment firm, will be spearheading our efforts to gain approval with the US government buying agencies and the Veterans Administration.


We are pursuing international drug registrations in Canada, Mexico, India, Central and South America and Europe. Since European rules for homeopathic drugs are different than the rules in the US, we cannot estimate when this process will be completed. On March 25, 2013 we announced the publication of our patent and trademark for Nyloxin® in India.  We are currently working with potential Distributors in India. In February, 2015 we completed the first test shipments to India through our importer, S.Zhaveri Pharmakem. We plan to begin active sales and marketing in India by the end of 2016. On April 30, 2015 we announced that we had received notification of the acceptance of Nyloxin® by the China International Exchange and Promotive Association for Medical and Healthcare (CPAM). This process was successfully conducted by the Vancouver Commodities Group (VCG) that had been hired by Nutra Pharma to begin the process of identifying and vetting potential distributors in China. With this approval, we have been working with several groups to find a large distributor for our products in the People's Republic of China. We expect to announce a distribution partner by the third quarter of 2016. On May 14, 2015 we announced that we had engaged the Nature's Clinic to begin the process of regulatory approval of our Company's Over-the-Counter pain drug, Nyloxin® for marketing and distribution in Canada. The Nature’s Clinic has already begun setting up their Chatham, Ontario warehouse and expect to complete the approval process to begin distributing Nyloxin® by mid-2016. Additionally, we plan to complete several human clinical studies aimed at comparing the ability of Nyloxin® Extra Strength to replace prescription pain relievers. We have provided protocols to several hospitals and will provide details and timelines when those protocols have been accepted. We cannot provide any timeline for these studies until adequate financing is available.


To date, our marketing efforts have been limited due to lack of funding. As sales increase, we plan to begin marketing more aggressively to increase the sales and awareness of our products.


Pet Pain-Away


During June of 2013, we announced the launch of our new homeopathic formula for the treatment of chronic pain in companion animals, Pet Pain-Away. Pet Pain-Away is a homeopathic, non-narcotic, non-addictive, over-the-counter pain reliever, primarily aimed at treating moderate to severe chronic pain in companion animals. It is specifically indicated to treat pain from hip dysplasia, arthritis pain, joint pain, and general chronic pain in dogs and cats. The initial product run was completed in December of 2014 and launched through Lumaxa Distributors on December 19, 2014.




5



Equine Nyloxin®


In October of 2013, we announced that we were in the process of launching the newest addition to our line of homeopathic treatments for chronic pain, Equine Nyloxin®, a topical therapy for horses that is packaged as a two piece kit: Nyloxin® Topical Gel comprises Step 1 and a solution of DMSO (dimethylsulfoxide) comprises Step 2. We have been working with trainers and veterinarians in the equine industry and have already identified distributors for the product. The Equine Nyloxin® represents the Company's first topical solution for the animal market. The product is now undergoing market evaluation and is expected to be commercially available by the end of 2016.


Regulation


The active pharmaceutical ingredient (API) in Cobroxin®, Nyloxin® and Nyloxin® Extra Strength, Asian cobra venom, has an approved United States monograph under the Homeopathic Pharmacopoeia of the United States (HPUS), which allowed us to register them with the FDA as homeopathic drugs. A United States monograph is a prescribed formulation for the production of any drug or product that is recognized by law for a specific application and that may be introduced into commerce. The FDA requires this registration process to maintain full compliance of companies marketing and selling medicines classified as homeopathic. In August 2009, we successfully completed submission of final packaging and labeling to the FDA to begin selling our over-the-counter pain reliever, Cobroxin®. In December 2009, we completed our submission of final packaging and labeling to the FDA of Nyloxin® and Nyloxin® Extra Strength.


Manufacturing


ReceptoPharm oversees Cobroxin® and Nyloxin®’s manufacturing activities, both at its Good Manufacturing Practice (“GMP”) certified facility and at a third-party manufacturing and bottling facility. ReceptoPharm is also responsible for acquiring appropriate amounts of Asian cobra venom required to manufacture Cobroxin® and Nyloxin®.


Subject to availability of funds, ReceptoPharm also plans to begin additional clinical studies for our pain relievers. These studies will be designed to compare the efficacy of Nyloxin® Extra Strength to other prescription strength pain relievers. A ReceptoPharm study published in Toxicon, which is the journal of the International Society of Toxinology, showed that ReceptoPharm’s leading drug product for the treatment of pain (RPI-78) had pain-reducing effects that lasted four times as long as morphine without the negative side effects associated with opioid-based pain relievers. Another study published in the journal Neuropharmacology showed a new mechanism on the use of Alpha-Cobratoxin as a treatment for pain. Alpha-Cobratoxin is the main component of the cobra venom used in Nyloxin® and Cobroxin®.


The FDA requires those companies manufacturing homeopathic medicines to have their facilities certified as GMP. As of October 2005, ReceptoPharm’s manufacturing and laboratory facility has been fully compliant with its GMP certification. In March 2009, ReceptoPharm received an ISO Class 5 certification for its clean room facility. An ISO Class 5 certification is a type of classification granted for a clean room facility according to the number and size of particles permitted per volume of air. An ISO Class 5 clean room has at most, 3,500 particles per square meter.


Manufacturing Cobroxin® and Nyloxin® entails a two-step process, the first of which consists of ReceptoPharm manufacturing the bulk raw materials and completing the dilution levels of Cobroxin®’s and Nyloxin®’s active pharmaceutical ingredient (“API”) as provided for in the Homeopathic Pharmacopeia of the United States, which is a compilation of continuously updated statements of Homeopathic Pharmacopoeia standards and monographs as recognized by that organization. Once this process is completed, the second step entails transport of raw materials to a third-party manufacturer that completes the final mixing, bottling and shipping processes.


We began limited manufacturing of Nyloxin® in November 2010. We scaled up manufacturing in the first quarter of 2011. Our production level is contingent upon product demand level and we can scale up as sales demand increases. We began manufacturing Pet Pain-Away in late 2014 and completed the first run of products for distribution on December 19, 2014.


Marketing and Distribution


In August 2009, we completed an agreement with XenaCare granting them the exclusive license to market and distribute Cobroxin® within the United States. To maintain this market exclusivity, XenaCare was required to meet certain minimum performance requirements. On April 1, 2011, we notified our Cobroxin® Distributor, XenaCare Holdings that they were in breach of our agreement. As a result of this, the distribution agreement was terminated effective April 10, 2011. XenaCare had a large stock of the product that they had ordered from us and we have allowed them to continue to market their existing inventory of Cobroxin®. In October 2011 we discontinued their website at www.Cobroxin.com. All current traffic to that website is now redirected to www.Nyloxin.com. It is our plan to eventually re-launch Cobroxin® with an eventual return to retail stores.




6



In December of 2013, we announced an agreement with MyNyloxin.com for the exclusive rights to market and distribute Nyloxin® in the Network Marketing channel. In November of 2014, MyNyloxin.com changed their name to Lumaxa. They provide a business opportunity to their Distributors to earn commissions on the sale of our products through their Distributor groups. In January of 2014, we announced the first product shipments to the MyNyloxin Independent Entrepreneurs (MIEs). Lumaxa conducts webinars, conference calls and live meetings to support recruitment of new distributors as well as to provide product and business education.


We are continuing our efforts to find strategic partnerships for the promotion, marketing, registration, licensing and sales of our products domestically and internationally.


Dependence on one or a Few Major Customers


With respect to Nyloxin®, Nyloxin® Extra Strength and Pet Pain-Away, we have been distributing the products online and to various retailers. We are seeking both domestic and international distributors for these products. It may be that a larger distributor may require exclusivity in the US or any particular foreign market. If so, we would be dependent on that distributor for those Nyloxin® sales. Currently, Lumaxa is the exclusive global Nyloxin® and Pet Pain-Away Distributor in the Network Marketing channel.


International Drug Registrations


We are continuing our efforts to complete the registration process internationally. On March 25, 2013 we announced the publication of our patent and trademark for Nyloxin® in India.  We are currently working with potential Distributors in India. In February, 2015 we completed the first test shipments to India through our importer, S.Zhaveri Pharmakem. We plan to begin active sales and marketing in India by the end of 2016. In April of 2015 we announced the engagement of the Vancouver Commodity Group to identify potential distribution partners in China. Later that month, we announced the acceptance of Nyloxin® by the China International Exchange and Promotive Association for Medical and Healthcare (CPAM). With this approval, we have been working with several groups to find a large distributor for our products in the People's Republic of China. We expect to announce a distribution partner by the third quarter of 2016.


While many countries adopt similar regulation to the United States for registering homeopathic drugs, the international application process is more complex and may be lengthier. We will continue to seek qualified, well-funded distributors for the international distribution of Cobroxin® and Nyloxin®.


ReceptoPharm’s Homeopathic Drug Pain Relief Studies


MS Neuropathic Pain Phase IV


Pending adequate financing or revenues, we will continue our research and development into this area, with the ultimate goal of improving product claims for Nyloxin™ Extra Strength, which is a treatment for stage 3 pain. Our original start and completion dates were March 2010 and September 2010, respectively, which includes a 10-week patient trial period. We have thus far incurred costs of $5,000 with a total estimated budget of $130,000. Due to our poor financial condition, we have currently discontinued all of our clinical activities. We have no way of knowing at this time, if or when we will have adequate funding to reinitiate these trials.


Chronic Back Pain Phase I


Pending adequate financing or revenues, we will continue our research and development in this area, with the ultimate goal of completing development of our future product, Recet, which is an injectable version of Cobratoxin. Our original start and completion dates were April 2010 and November 2011, respectively, which includes a 4-week patient trial period. We have thus far incurred costs of $25,000 with a total estimated budget of $250,000. Due to our poor financial condition we have currently discontinued all of our clinical activities. We have no way of knowing at this time, if or when we will have adequate funding to reinitiate these trials.


Chronic Back Pain Phase IV


Pending adequate financing or revenues, we will continue our research and development, with this ultimate goal of improving product claims for Nyloxin® Extra Strength, which is a treatment for stage 3 pain. Our original start and completion dates were April 2010 and November 2010, respectively, which includes a 4-week patient trial period. We have an estimated budget of $250,000. We have not yet incurred any costs associated with the Chronic Back Pain Phase IV project. Due to our poor financial condition, we have currently discontinued all of our clinical activities. We have no way of knowing at this time, if or when we will have adequate funding to reinitiate these trials.


All of these studies have been delayed since June of 2010 due to our lack of revenues and funding. We will reassess our start and completion dates upon generating a sufficient amount of revenues, if ever.




7



ReceptoPharm – Research and Development


ReceptoPharm was engaged in the research and development of novel anticholinergic therapeutic protein products for the treatment of autoimmune and neurologic disorders, including Human Immunodeficiency Virus (HIV), Multiple Sclerosis (MS) Adrenomyeloneuropathy (AMN), Rheumatoid Arthritis (RA) and pain.


Drug Applications


We have set forth below a summary of ReceptoPharm’s proposed drugs and their potential applications.


Drug

 

Potential Applications

RPI-78M

 

MS, AMN, Myasthenia Gravis (MG) and Amyotrophic Lateral Sclerosis (ALS)

RPI-MN

 

HIV, general anti-viral applications

RPI-78

 

Pain, Arthritis

RPI-70

 

Pain


We believe that ReceptoPharm’s pharmaceutical products have a wide range of applications in a number of chronic, inherited and/or life-threatening viral, autoimmune and neuromuscular degenerative diseases, even though none of these products have FDA or other approval for the treatment of such diseases. These disorders target nerve cells, especially one specific type of cell receptor that is sensitive to the neurotransmitter, acetylcholine, which plays an important role in the transmission of nerve impulses at synapses and myoneural (muscle-nerve) junctions.


Primary Disease Targets


Through ReceptoPharm’s research program, our goal is to obtain required regulatory approvals of ReceptoPharm’s HIV, MS, and AMN products, so that they can be marketed. In September of 2015 we were granted Orphan Designation by the US-FDA for the treatment of Pediatric Multiple Sclerosis. We have also applied for Orphan drug status for Myasthenia Gravis. The Orphan designation may greatly reduce the costs of clinical trials and shorten the timeline to potential drug approval. ReceptoPharm secures confidentiality agreements prior to initiating contract research in order to protect any patentable opportunities.


Human Immunodeficiency Virus (HIV) Infection


The analytic firm GBI Research reported in November 2012 that the HIV/AIDS therapeutics market reached $13.5 billion in 2011 in seven top markets: the United States, the United Kingdom, Germany, France, Italy, Spain and Japan. GBI Research predicts these markets will continue to grow to reach $21.8 billion by 2018. According to UNAIDS, an estimated 35.3 million people were living with HIV in 2012 with 69% of all HIV sufferers in sub-Saharan Africa. There were 2.3 million new infections in 2012 and 1.6 million people died of AIDS-related illnesses. Since the beginning of the epidemic, more than 75 million people have contracted HIV and nearly 36 million have died of HIV-related causes. Growth in the HIV therapy market will continue to be driven by the rapidly growing HIV and AIDS population. In the absence of therapeutic intervention, the vast majority of individuals infected with HIV will ultimately develop AIDS, on average in about 10 years, which has a mortality rate approaching 100%. Experts say that the drugs currently available may extend life as much as 40 years, but all of these therapies have negative side effects and fail over time as the virus mutates. These facts make new therapies a necessity. The foregoing information was obtained from the World Health Organization website at www.who.int and the UNAIDS website at www.unaids.org.


To cause infection, HIV needs to gain entry into cells through the attachment to receptors on the cell membrane. These receptors are called chemokine receptors. There are two principal types, CCR5 and CXCR4. Different HIV strains use one of these types. A single drug that would block all of the chemokine receptors (“tropism-independent”) could be more useful, for several reasons, than a mixture of molecules that would have to be used to do the same.


HIV infection therapy currently uses antiviral drug therapies that are associated with the virus’s attachment, fusion with and entry into the host cell. At the present time, there are 35-licensed antiretroviral drugs employed to combat HIV-1 infection and two licensed by the FDA that act as binding/entry inhibitory drugs.


New drugs and adjunct therapies with novel mechanisms of action or unique resistance profiles are needed in the fight against HIV. Constant innovation, in terms of efficacy, side effect profile and dosing are occurring. Current research and development for HIV is focused on adjunctive therapy, which when combined with existing HAART (Highly Active Anti-Retroviral Therapy) regimens reduce side effects, enhance the efficacy of existing treatments and delay the progression of the HIV virus.




8



Both of ReceptoPharm’s drugs inhibited HIV replication in MAGI cells by 50-60% and peripheral mononuclear cells by 90% in testing conducted by Dr. Juan Lama of the La Jolla Institute for Molecular Medicine in San Diego, California. Separate Phase I studies by Cure Aids Now of Miami, Florida, were conducted by Dr. Jamal with orally and parentally administered RPI-78M in HIV patients confirmed safety, tolerability and provided preliminary evidence of efficacy.


RPI-MN demonstrated the ability to inhibit the replication of highly drug-resistant strains of HIV isolates. Drug resistance has become a critical factor in long-term management of HIV infection with some viral strains developing resistance in as little as 3 weeks.


Multiple Sclerosis (MS)


Multiple Sclerosis (MS) is thought to be an autoimmune disease that primarily causes central nervous system problems. In MS, the insulating fatty material surrounding the nerve fibers, also known as myelin, which functions to speed signaling from one end of the nerve cell to the other, is attacked by cells of the immune system causing problems in signal transduction. MS is the most common of demyelinating disorders, having a prevalence of approximately 1 per 1,000 persons in most of the United States and Europe. According to the Accelerated Cure Project for Multiple Sclerosis, a national nonprofit organization, 400,000 people in the US are affected by MS and another 2 million globally, with 10,000 new cases diagnosed in the US every year. According to the National Multiple Sclerosis Society, although MS occurs most commonly in adults, it is also diagnosed in children and adolescents. Estimates suggest that 8,000-10,000 children (up to 18 years old) in the United States have MS, and another 10,000-15,000 have experienced at least one symptom suggestive of MS. Studies suggest that two to five percent of all people with MS have a history of symptom onset before age 18.


People with MS may experience diverse signs and symptoms. MS symptoms may include pain, fatigue, cognitive impairment, tremors, loss of coordination and muscle control, loss of touch sensation, slurred speech and vision impairment. The course of the disease is unpredictable and for most MS patients, the disease initially manifests a “relapsing-remitting” pattern. Periods of apparent stability are punctuated by acute exacerbations that are sudden unpredictable episodes that might involve impaired vision, diminished ability to control a limb, loss of bladder control, or a great variety of other possible neurologic deficits. In relapsing-remitting MS, some or all of the lost function returns, however, the patient sustains an unceasing, often insidious, accumulation of neuronal damage. As the burden of neural damage grows, new lesions are more likely to produce irreversible impairment of function. Typically, about eight to fifteen years after onset, MS patients enter the secondary-progressive phase. Eventually, progressive MS sufferers become wheelchair-bound, and may become blind and even incapable of speech. There is currently no FDA approved drug that reverses the course of the progressive form of MS.


RPI-78M has shown efficacy in animal models (EAE) for MS and ReceptoPharm is planning new animal studies to gain more insight into the levels of protection that the drugs afford. In one study conducted in August 2007, all members of an untreated animal control group developed signs of disease with different levels of paralysis/muscle weakness. A similar group in the August 2007 study treated with RPI-78M showed no disease in 90% of the animals in both acute and chronic applications of the test. Moreover, there were no toxicities reported though the animals which received doses the equivalent of 280 times a human dose.


Furthermore, we believe that the ability to modulate the host immunostimulatory environment could form the basis of an effective strategy for the long-term control of autoimmunity in diseases like MS and Myasthenia gravis (MG) and is being studied as a therapeutic model for other neuromuscular diseases. Also, we believe our data suggest that it is possible that our novel therapeutic proteins could have a general application in autoimmune diseases based on human studies in Rheumatoid Arthritis and anecdotal reports from patients with Multiple Sclerosis.


In August of 1984, Biogenix applied for and received an Intrastate Investigational Drug (FSDHRS Protocol RA-1 (002)) from the Department of Health and Rehabilitation (HRS) in Florida that permitted the 4-week study of RPI-MN in 13 patients with Rheumatoid arthritis ranging in age from 49 to 81. Patients were enrolled for a period of 4 weeks; the results showed 30% to 49% improvement in range of joint motion, early morning stiffness and stamina (this data, along with other supporting intellectual property was acquired by ReceptoPharm from Biogenix). We believe that the data obtained from the examination of clinical efficacy in these three diseases can augment information from prior clinical studies and lead to the future investigation of treatments for other chronic conditions.


Adrenomyeloneuropathy (AMN), Pediatric MS and other Orphan Indications


Adrenoleukodystrophy, or ALD, is a genetically determined neurological disorder that, according to the Adrenoleukodystrophy Foundation, affects 1 in every 17,900 boys worldwide. The presentation of symptoms occurs between the ages of 4 and 10, and affects the brain with demyelination, which is the stripping away of the fatty coating that keeps nerve pulses confined and maintains the integrity of nerve signals. This process inhibits the nerves’ ability to conduct properly, which causes neurological deficits, including visual disturbances, auditory discrimination, impaired coordination, dementia and seizures. Demyelination is an inflammatory response and nerve cells throughout the brain are destroyed.




9



Adrenomyeloneuropathy (AMN) is the most common form of X-ALD, a maternally inherited type of ALD. AMN affects about 40-45% of X-ALD patients and usually presents itself in adolescence or adult life and may be preceded by hypoadrenalism. It is characterized by spastic paraplegia and a peripheral neuropathy, often being diagnosed as Multiple Sclerosis (MS). Nerve conduction studies in AMN show a predominant axonal neuropathy and show a loss of all axons. Lorenzo’s oil, a mixture of glyceryltrioleate and glyceryltrierucate, has been used for over a decade in an open, unblinded fashion with mixed results.


RPI-78M has been utilized in two clinical studies, which were completed at the Charles Dent Metabolic Unit located in London, England. The last trial was classified as a Phase IIb/IIIa study. These studies provided important safety data, showing RPI-78M to be well tolerated by the patients. Further study is warranted to provide data on the potential efficacy of RPI-78M to treat the symptoms of AMN.


In September of 2015 we were granted Orphan Designation by the US-FDA for the treatment of Pediatric Multiple Sclerosis. We are currently working with potential sites of care to conduct a Phase I/II in Pediatric MS. The designation of RPI-78M as an Orphan Drug provides Nutra Pharma with a 7-year period of market exclusivity in the U.S. once the drug is approved. Additional benefits over conventional drug applications include: tax credits for clinical research costs, the ability to apply for grant funding, clinical trial design assistance, plus assistance from the FDA in the drug development process and the waiver of Prescription Drug User Fee Act (PDUFA) filing fees which could be in excess of $2.5 million. The granting of Orphan Drug Designation allows the Company to move forward with their preparation of an Investigative New Drug Application and proposal of clinical trials. The FDA grants Orphan Drug Designation status to products that treat rare diseases, providing incentives to sponsors developing drugs or biologics. According to the FDA, the Orphan Drug program has successfully enabled the development and marketing of more than 400 drugs and biologic products for rare diseases since 1983. Evaluate Ltd., in its 2014 EvaluatePharma Orphan Drug Report, estimated that orphan drug sales will constitute 19% of the total share of prescription drug sales by 2020, totaling $176bn.


In December of 2015, we announced that we had applied for an Orphan Drug designation from the US-FDA for the Company's RPI-78M drug candidate for the treatment of Myasthenia Gravis (MG). The application is still under review.


Pain and Arthritis


Protein or peptide-based drugs are penetrating the pain market with neurotoxins taking the lead. Botox (Allergan) and Prialt (Elan) have the potential to substitute over the long-term for morphine and other opiates in chronic pain indications. Opiates, though potent painkillers, suffer from drawbacks because they are addictive, short acting, and drug-resistance inducing. We plan to assess the effects of several peptides in animal models of pain in association with Soochow University in China. Several peptides have demonstrated positive effects and the research and development continues.


August 2007 studies at Soochow University proved the potential of ReceptoPharm’s drug candidates, RPI-78 and RPI-70. When compared to Dolantin, an opiate-based drug subordinate to morphine, the effects were very encouraging. While Dolantin provided immediate pain relief it began wearing off just as RPI-70 began to take effect. The effects of RPI-70 do not seem dramatic in contrast to Dolantin, considering the quantity of drug employed in this animal model. The concentration of RPI-70 was approximately 100 times less than the opiate product. Also, RPI-70 showed real potential for combining with other pain killing medications. RPI-78 was calculated to be 150,000 times more potent than aspirin. This product can be injected systemically providing evidence of a more practical application than Prialt, which must be administered intrathecally (into the spinal cord). Opiate drugs induce tolerance and dependence. This problem is not encountered with RPI-70 and RPI-78.


In February 2009, ReceptoPharm filed a patent application with the United States Patent and Trademark Office for the use of RPI-78 as a novel method for treating arthritis in humans. Also in February 2009, ReceptoPharm, in collaboration with Soochow University in China published positive data from its recent animal studies on the use of RPI-78 (Cobratoxin) as a method for treating arthritis. In March of 2011, ReceptoPharm was issued a patent for the use of cobratoxin as an analgesic (US patent #7,902,152). In February of 2012, ReceptoPharm, in collaboration with Soochow University published another study that demonstrated a novel mechanism of action for the use of RPI-78 as a treatment for pain.


Market Values


Human Immunodeficiency Virus (HIV)


The analytic firm GBI Research reported in November 2012 that the HIV/AIDS therapeutics market reached $13.5 billion in 2011 in seven top markets: the United States, the United Kingdom, Germany, France, Italy, Spain and Japan. GBI Research predicts these markets will continue to grow to reach $21.8 billion by 2018. According to UNAIDS, an estimated 35.3 million people were living with HIV in 2012 with 69% of all HIV sufferers in sub-Saharan Africa. There were 2.3 million new infections in 2012 and 1.6 million people died of AIDS-related illnesses. Since the beginning of the epidemic, more than 75 million people have contracted HIV and nearly 36 million have died of HIV-related causes. Growth in the HIV therapy market will continue to be driven by the rapidly growing HIV and AIDS population. In the absence of therapeutic intervention, the vast majority of individuals infected with HIV will



10



ultimately develop AIDS, on average in about 10 years, which has a mortality rate approaching 100%. Experts say that the drugs currently available may extend life as much as 40 years, but all of these therapies have negative side effects and fail over time as the virus mutates. These facts make new therapies a necessity. The foregoing information was obtained from the World Health Organization website at www.who.int and the UNAIDS website at www.unaids.org.


According to the Centers for Disease Control and Prevention, in the United States alone, an estimated 1,144,500 people are infected with an estimated 50,000 Americans becoming infected with HIV each year. The majority undergoes treatment for HIV-related conditions at an individual cost of $14,000 (HAART) to $34,000 (AIDS patients). According to DataMonitor; the HIV market was worth $9.3 billion in 2007. GBI Research predicts these markets will continue to grow to reach $21.8 billion by 2018, driven by the increasing prevalence of HIV worldwide and the longer life expectancy of patients receiving treatment.


Multiple Sclerosis (MS)


MS affects an estimated 2.5 million people globally with approximately 400,000 sufferers in the United States. There are 5 approved drugs for the treatment of this disease. The average annual cost of these drugs is $12,000 per person. In 2010, sales by one manufacturer, Biogen-Idec, were reported to be $2.5 billion for its drug, Avonex. According to a report by Piribo (Pharmaceutical Market Research), the total worldwide market for MS disease-modifying therapies is expected to grow at an 8.1% compound annual growth rate (CAGR) from 2010 through 2015, with sales reaching nearly $16.7 billion by the end of 2015 from $11.3 billion in 2010. ReceptoPharm’s MS drug, RPI-78M is considered to be a ‘Biologic’. Biologics represent the largest class of MS disease-modifying therapies by sales and by number of approved therapies. This sector is valued at $7.8 billion in 2010 and is expected to increase at a 2.5% compound annual growth rate (CAGR) to reach a value of $8.8 billion in 2015.


Adrenomyeloneuropathy (AMN)


AMN/ALD affects an estimated 30,000 people in the US with some estimates exceeding this number.


Pediatric Multiple Sclerosis (pediatric-MS)


According to the National Multiple Sclerosis Society, although MS occurs most commonly in adults, it is also diagnosed in children and adolescents. Estimates suggest that 8,000-10,000 children (up to 18 years old) in the United States have MS, and another 10,000-15,000 have experienced at least one symptom suggestive of MS. Studies suggest that two to five percent of all people with MS have a history of symptom onset before age 18.


Myasthenia Gravis (MG)


According to the Myasthenia Gravis Foundation of America, the prevalence of MG in the United States is estimated to be about 64,000 patients. However, MG is probably under diagnosed and the prevalence may be higher.


Current Technologies


ReceptoPharm, operating in its capacity as a clinical stage biotechnology company, created a process that safely modifies proteins derived from cobra venom. ReceptoPharm also has rights to a drug delivery method that uses an aerosol formulation, which is administered under the tongue. By using this shared aerosol delivery technology, oral delivery is attainable, an important step for a biologic product. The system is 50% efficient and affects drug delivery in approximately 40% of patients in which it was tested. Topical preparations are being examined for future applications in treatment of such conditions as pain and Rheumatoid Arthritis (RA).


Business Strategy


Pending adequate financing or revenues, ReceptoPharm seeks to develop proprietary pharmaceutical products for human illnesses that qualify for “Fast-Track” or “Orphan Drug” status under FDA regulations, which can expedite regulatory review. For some conditions, the FDA has created the “two animal rule” which permits ReceptoPharm to collect data from ongoing animal research for human treatment applications.


We believe the results from ReceptoPharm’s research will assist in getting its applications processed through the FDA’s “Fast-Track” approval process and enable ReceptoPharm to plan the commercialization of each product independently and/or through joint ventures, partnerships and licensing arrangements. “Fast-Track” denotes life-threatening illnesses, while “Orphan” status refers to serious ailments affecting less than 200,000 individuals nationwide. AMN qualifies under both labels because it is considered an orphan disease and has no known cure. Pediatric MS and Myasthenia Gravis are also considered "Orphan" diseases because of the disease prevalence as well as the lack of effective therapies.




11



In the areas of HIV and MS, ReceptoPharm plans to conduct clinical studies of its HIV and MS drugs under development. These “Phase II” studies will either prove or disprove the preliminary efficacy of ReceptoPharm's HIV and MS drugs under development. ReceptoPharm is in the process of attempting to secure agreements with third parties to conduct such clinical studies.


We believe that ReceptoPharm’s proposed unique pharmaceutical products can be used alone or licensed for use in combination with other therapeutic products and may be of interest to other established pharmaceutical companies as a means of extending the patent life of their proprietary products.


Short-term Goal


Although we focused our drug development efforts from 2006 to 2008 on clinical trials for ReceptoPharm’s HIV drug, RPI-MN, our primary focus now is on RPI-78M for the treatment of MS and MG. With the recent Orphan designation for Pediatric MS, we expect to move into Phase I/II clinical studies in the next 12 months.


Mid-term Goal


Our midterm strategy is to license ReceptoPharm’s AMN, MS and HIV technologies in our attempt to bring these technologies to market within 5 years, should we obtain adequate financing.


Long-Term Goal


Our long-term goal is the use of drugs developed by ReceptoPharm in the field of neurological diseases, infectious diseases and autoimmune disorders. Due to our limited financial and operational resources, this goal will require us to establish strategic partners or alliances with pharmaceutical companies, academic institutions, biotechnology companies, and clinical diagnostic laboratories, which will: (a) complement ReceptoPharm’s research and development efforts; (b) reduce the risks associated with undertaking the entire process of drug development and marketing; and (c) generate licensing based revenue streams. Additionally, we plan to continue identifying intellectual property and companies in the biotechnology arena as potential acquisition candidates.


Compassionate Release Programs


Certain countries, such as Canada and the United Kingdom permit their citizens to have access to investigational medications without being approved for any applications by their respective “FDA type” agencies, and permit physicians to prescribe drugs they believe are of possible benefits to the patients. Through these “Compassionate Release Programs” ReceptoPharm has supplied RPI-78M, its drug under investigation for MS and AMN, to physicians in the United Kingdom. The FDA does not offer this program.


Clinical Trial Applications


ReceptoPharm has developed Common Technical Documents (CTD) for both RPI-78M and RPI-MN that are used to support any clinical trial application. The CTD is a complete history of the individual drug, including all of the in-vitro and in-vivo work accomplished to date, as well as pre-clinical development work on the drug. Having these completed documents allows for expedited due diligence from regulatory bodies reviewing ReceptoPharm’s applications for trials and approvals. With these documents, ReceptoPharm has successfully applied for approval to conduct a clinical investigation in the United Kingdom under the regulation of the Medicines Health and Regulatory Agency (MHRA), which is the British equivalent of the US-FDA.


Current Research and Development Projects


Neurological Studies


Pain Studies


In an effort to further support Nyloxin® Extra Strength, ReceptoPharm had planned to complete two human clinical studies aimed at comparing the ability of Nyloxin® Extra Strength to replace prescription pain relievers. ReceptoPharm originally estimated that these studies would begin during the second quarter of 2010; however, these studies have been delayed because of lack of funding. We have no way of knowing at this time, if or when we will have adequate funding to reinitiate these trials.


AMN Phase II


ReceptoPharm has been conducting research and development in this area since February 2006 with an original expected completion date of September 2010, which includes a 12-month patient trial period that has already been completed. We have thus far expended approximately $400,000, because ReceptoPharm has completed its AMN Phase II project, there is no further budget for this project.




12



AMN Phase III


ReceptoPharm had planned to continue research and development, with the ultimate goal of completing development of its future drug, RPI-78M. ReceptoPharm’s originally estimated start and completion dates are July 2010 and December 2011, respectively, which includes a 12-month patient trial period. ReceptoPharm has thus far incurred costs of $5,000. ReceptoPharm has an estimated budget of $500,000. We have no way of knowing at this time, if or when we will have adequate funding to reinitiate these trials.


MS Phase II (Pediatric MS Phase I/II)


Pending adequate financing or revenues, ReceptoPharm will continue its research and development, with the ultimate goal of completing development of its future drug, RPI-78M. ReceptoPharm’s originally estimated start and completion dates are October 2010 and October 2012, respectively, which includes a 12-month patient trial period. ReceptoPharm has thus far incurred costs of $40,000. ReceptoPharm has an estimated budget of $2,000,000. We have no way of knowing at this time, if or when we will have adequate funding to reinitiate these trials.


Currently, ReceptoPharm’s total estimated costs for all of the above projects are approximately $3,000,000.


All of these studies have been delayed due to a lack of revenues and funding. Upon obtaining sufficient revenues, if ever, ReceptoPharm will provide updated estimates of start and completion dates.


Since receiving Orphan designation for the treatment of Pediatric MS, our plans have changed. We are now working with potential sites of care to initiate a Phase I/II clinical trial in Pediatric MS. Our next step is to have a pre-IND meeting with the FDA to go over the proposed trial protocols. It is our goal to begin these trials by the end of 2016.


Research and Development


During 2015 and 2014, we had research and development costs of $0 and $341, respectively.


Dependence on one or a Few Major Customers


We have no customers with respect to our research and development projects since we have not received FDA approval for our drug candidates and have not licensed any of our technologies.


Marketing


We currently do not have a marketing program for our drug candidates because none of ReceptoPharm’s products have received FDA approval. Our lack of financing has hampered our efforts to navigate the regulatory process in a timely fashion; however, if and when we have FDA-approved drug treatments, we plan to develop a marketing strategy to market ReceptoPharm’s products through pharmaceutical companies, other biotechnology companies, and diagnostic laboratories. Our Chief Executive Officer will market the treatments to licensing and development officers of those companies and will otherwise direct our marketing program. Additionally, we will attempt to secure consulting agreements with marketing consultants who will actively market our products to such companies and/or provide our Chief Executive Officer with marketing guidance.


Potential Revenue Segments


Our potential revenue segments are composed of our attempt to generate revenues from license agreements, joint ventures in foreign countries and drug sales.


To date, we have not earned any revenues regarding any FDA drug candidate.


Product Liability


We maintain product liability insurance for our commercial products. Even so, product liability claims may result in significant legal costs related to our defense of such actions if damage amounts exceed our product liability insurance coverage. The design, development, and manufacture of drug products or diagnostic tests involves an inherent risk of product liability claims and corresponding damage to our brand name reputation, including claims of product failure or harm caused by the drug product.


Sources and Availability of Raw Materials


ReceptoPharm uses the raw material, cobra venom, for the drugs that it studies and in Cobroxin® and Nyloxin® production. We currently have two US suppliers of cobra venom that we use according to product demand. In addition, there are other suppliers in



13



China, Thailand and India. ReceptoPharm’s management is responsible for locating cobra venom suppliers on an as-needed basis, which involves obtaining a small test amount from a supplier for scientific validation of that raw material prior to purchase. Apart from cobra venom, we do not currently use raw materials in our business.


Compliance with Government Regulations and Need for Government Approval


The production and marketing of potential drug products as well as research and development activities generally are subject to regulation by numerous governmental authorities in the United States and other countries. In the United States, vaccines, drugs and certain diagnostic products are subject to FDA review of safety and efficacy. The Federal Food, Drug and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of such products. Noncompliance with applicable requirements can result in criminal prosecution and fines, recall or seizure of products, total or partial suspension of production, or refusal of the government to approve Biological License Applications (“BLAs”), Product License Applications (“PLAs”), New Drug Applications (“NDAs”) or refusal to allow a company to enter into supply contracts. The FDA also has the authority to revoke product licenses and establishment licenses previously granted.


In order to obtain FDA approval to market a new biological or pharmaceutical product, proof of product safety, purity, potency and efficacy, and reliable manufacturing capability must be submitted. This requires companies to conduct extensive laboratory, pre clinical and clinical tests. This testing, as well as preparation and processing of necessary applications, is expensive, time-consuming and often takes several years to complete. There is no assurance that the FDA will act favorably in making such reviews. Our potential partners, or we, may encounter significant difficulties or costs in their efforts to obtain FDA approvals, which could delay or preclude from marketing any products that may be developed. The FDA may also require post-marketing testing and surveillance to monitor the effects of marketed products or place conditions on any approvals that could restrict the commercial applications of such products. Product approvals may be withdrawn if problems occur following initial marketing, such as, compliance with regulatory standards is not maintained. Delays imposed by governmental marketing approval processes may materially reduce the period during which a company will have the exclusive right to exploit patented products or technologies. Refusals or delays in the regulatory process in one country may make it more difficult and time consuming to obtain marketing approvals in other countries.


The FDA approval process for a new biological or pharmaceutical drug involves completion of preclinical studies and the submission of the results of these studies to the FDA in an Initial New Drug application, which must be approved before human clinical trials may be conducted. The results of preclinical and clinical studies on biological or pharmaceutical drugs are submitted to the FDA in the form of a BLA, PLA or NDA for product approval to commence commercial sales. In responding to a BLA, PLA or NDA, the FDA may require additional testing or information, or may deny the application. In addition to obtaining FDA approval for each biological or chemical product, an Establishment License Application (“ELA”) must be filed and the FDA must inspect and license the manufacturing facilities for each product. Product sales may commence only when both BLA/ PLA/ NDA and ELA are approved. In certain instances in which a treatment for a rare disease or condition is concerned, the manufacturer may request the FDA to grant the drug product Orphan Drug status for a particular use. “Orphan Drug” status refers to serious ailments affecting less than 250,000 individuals. In this event, the developer of the drug may request grants from the government to defray the costs of certain expenses related to the clinical testing of such drug and be entitled to marketing exclusivity and certain tax credits.


In order to gain broad acceptance in the marketplace of a medical device, our partners or we will need to receive approval from the FDA and other equivalent regulatory bodies outside of the United States. This approval will be based upon clinical testing programs at major medical centers. Data obtained from these institutions will enable us, or our partners, to apply to the FDA for acceptance of its technology as a “device” through a 510(k) application or exemption process. Once the data have been fully gleaned, it is expected that this process would take ninety days.


According to the FDA, a “device” is: “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.”


The FDA classifies devices as either Class I/II-exempt, Class II, or Class III.


Class III: Pre-Marketing Approval, or PMA: A Pre-Marketing Approval or PMA is the most stringent type of device marketing application required by FDA. A PMA is an application submitted to FDA to request clearance to market, or to continue marketing of a Class III medical device. A PMA is usually required for products with which FDA has little previous experience and in such cases where the safety and efficacy must be fully demonstrated on the product. The level of documentation is more extensive than for a 510(k) application and the review timeline is usually longer. Under this level of FDA approval, the manufacturing facility will be



14



inspected as well as the clinical sites where the clinical trials are being or have been conducted. All the appropriate documents have to be compiled and available on demand by the FDA. The manufacturing facility is registered with the FDA and the product or device is registered with the FDA.


Class II: 510(k). This is one level down from the PMA and it is applied to devices with which the FDA has had previous experience. A 510(k) is a pre-marketing submission made to FDA to demonstrate that the device to be marketed is as safe and effective, that is, substantially equivalent, to a legally marketed device that is not subject to pre-market approval. Applicants must compare their 510(k) device to one or more similar devices currently on the U.S. market and make and support their substantial equivalency claims. The legally marketed device to which equivalence is drawn is known as the “predicate” device. Applicants must submit descriptive data and, when necessary, performance data to establish that their device is SE to a predicate device. Again, the data in a 510(k) is to show comparability, that is, substantial equivalency (SE) of a new device to a predicate device. Under this level of approval, the manufacturing facility is registered with the FDA and the product or device is registered with the FDA. Inspections under this classification are possible. All the appropriate cGMP and clinical data backing the claims made must be on file and available on demand by the FDA.


Class I/II Exemption: This is the lowest level of scrutiny. Most Class I devices and a few Class II devices are exempt from the pre-marketing notification requirements subject to the limitations on exemptions. However, these devices are not exempt from other general controls. All medical devices must be manufactured under a quality assurance program, be suitable for the intended use, be adequately packaged and properly labeled, and have establishment registration and device listing forms on file with the FDA. However, as described above, all the appropriate documentation including cGMP and clinical data supporting the claims being made has to be on hand and available on demand by the FDA. The data must be available to support all the product claims.


Sales of biological and pharmaceutical products and medical devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Whether or not FDA approval has been obtained, approval of a product or a device by a comparable regulatory authority of a foreign country must generally be obtained prior to the commencement of marketing in that country.


Effect of Compliance with Federal, State, and Local Provisions for the Protection of the Environment


We have no present or anticipated direct future costs associated with environmental compliance, since we are not and will not be directly involved in manufacturing drug products as result of our research and development; however, we may be affected in the percentage licensing fees we receive, since a company may consider the environmental expense as an offset to a determination of the percentage amount we receive. ReceptoPharm produces a drug that has limited waste issues and related costs, but handles environmentally related matters through the FDA's Good Manufacturing Practices, the FDA mandated guidelines pertaining to the production of drugs in the United States.


Ability to Compete


The biotechnology research and development field is extremely competitive and is characterized by rapid change. Our competitors have substantially greater financial, scientific, and human resources, and as a result greater research and product development capabilities. Our competitors have competitive advantages with greater potential to develop revenue streams. Our competitors are located in the United States as well as around the world. We will attempt to compete by establishing strategic partners or alliances with pharmaceutical companies, academic institutions, biotechnology companies, and clinical diagnostic laboratories, which will enter into joint ventures, emphasizing that the drugs RPI-MN and RPI-78M possess the following properties:

 

·

They lack measurable toxicity but are still capable of attaching to and affecting the target site on the nerve cells. This means that patients cannot overdose.

·

They display no significant adverse side effects following years of investigations in humans and animals.

·

The products are stable and resistant to heat, which gives the drug a long shelf life. The drugs’ stability has been determined to be over 4 years at room temperature.


RPI-78M can be administered orally; however, ReceptoPharm has not yet developed an orally administered RPI-78M. RPI-78M has been routinely delivered by injection in a manner similar to insulin, but research over the past two years has given rise to administration by mouth. Oral delivery presents patients with additional “quality of life” benefits by eliminating or decreasing the requirements for routine injections. Should we receive adequate funding, ReceptoPharm plans to develop an orally administered RPI-78M by initiating new trials with an oral version of that drug.


Main Competitors (Biologics)


Competition is intense among companies that develop and market products based on advanced cellular and molecular biology. ReceptoPharm’s competitors, including Amgen, Sanofi-Aventis, Biogen-Idec, Cephalon, Genetech, Genzyme, Novartis, Regeneron



15



and Bayer, which have far superior financial, technological and operational resources. We face significant competition from these and other biotechnology and pharmaceutical firms in the United States, Europe and elsewhere. Certain specialized biotechnology firms have also entered into cooperative arrangements with major companies for development and commercialization of products, creating an additional source of competition.


Any products or technologies that successfully address viral or neurological indications could negatively impact the market potential for RPI-78M or RPI-MN. These include products that could receive approval for indications similar to those for which RPI-78M or RPI-MN seeks approval, development of biologic or pharmaceutical treatments that are more effective than existing treatments and the development of other modalities with reduced toxicity and side effects.


Interferon-based drugs and their indications represent target markets for ReceptoPharm. Sales of interferon-based drugs annually exceed $6 billion and have attracted the participation of several major drug companies, including Bayer and Roche. Currently, there are six interferon-based drugs licensed in Canada and the U.S.; four for the treatment of the milder Relapsing-Remitting form of MS and two for Hepatitis C. These interferons are also used in the treatment of other conditions where treatment options are limited. The interferons for MS are Betaseron (Bayer), Avonex (Biogen-Idec) and Rebif (Serono and Pfizer). Since the launch of these drugs, the number of patients undergoing treatment has stabilized at current levels, indicating that there is a high turnover rate of patients in the administration of these individual drugs due to cost and side effects. Biogen developed Avonex in the early 1990’s and has been shipping the drug since late 1996. In the United Kingdom, the National Institute for Clinical Efficiency (NICE) has called for the withdrawal of Betaseron and another unrelated drug, Copaxone (Teva), from the market based on poor cost/effectiveness.


Gilead Sciences markets Harvoni as a 'cure' for Hepatitis C. It combines two drugs: Sovaldi (sofosbuvir) and ledipasvir. Harvoni is taking over the market as Gilead has turned Hepatitis C into a curable illness and has generated over $25B in sales.


Main Competitors (Venom-Based Drugs)


We view our main competitors as those who also engage in the development of protein-based neurotoxins as therapeutics. Employing venoms as therapeutics is not new. A large number of well-known pharmaceutical companies are developing novel therapies derived from snake venoms and other reptiles. Most of those using snake venoms employ the anticoagulant enzymes usually from viperids (adders and rattlesnakes) though elapids (cobra family) are also being investigated.


We have set forth below a summary of venom-based drugs and their potential applications.


Company

Drug

Application

Pentapharm

Batroxobin

Anticoagulant from Lancehead viper 

Knoll Pharmaceutical

Ancrod

Anticoagulant from rattlesnakes

Bristol-Myers Squibb

Capoten

Antihypertensive from Brazilian Pit Viper

Medicure

Aggrastat

Antiplatelet drug from vipers

Millennium Pharmaceutical

Integrilin

Antiplatelet drug from rattlesnakes

Amylin Pharmaceuticals

Byetta

Treatment for type 2 diabetes and obesity from Gila Monster

Elan Pharmaceuticals

Prialt

Intrathecal drug from cone snails for intractable pain


Current cobra venom-based therapies include Keluoqu, a pain-killing drug on the market in China since 1978. Keluoque contains cobrotoxin as its primary ingredient and is used to control severe pain in advanced cancer patients and for post-operative pain.


Bio-Therapeutics, Inc.


On October 3, 2003, we entered into a non-assignable license agreement between Bio-Therapeutics, Inc. and us, which was then amended to make the license agreement assignable. This agreement was in settlement of a lawsuit that we filed against Bio-Therapeutics alleging that Bio-Therapeutics owed us $850,000 in connection with a merger agreement between Bio-Therapeutics and us that was cancelled.


The 2003 license agreement provides that for a non-exclusive license to certain intellectual property of Bio-Therapeutics, Inc., which consists of the following two distinct technology platforms:


·

Alteration of Proteins and Peptides - These include patented methods for altering the 3-Dimensional structure of certain proteins and peptides. The natural peptides bind to receptors in the body with toxic effects. This technology allows us to alter the structure of these peptides, preserving their receptor-binding characteristics, while making them non-toxic and therapeutic. Different receptors have various functions in many disease states. By the peptides binding to these receptors in a controlled fashion, certain disease symptoms may be treated. In connection with MS, binding to the acetylcholine receptor on the nerves allows for more efficient nerve conduction. With HIV, binding to chemokine receptors may prevent the virus from entering and infecting new cells.



16




·

Non- Exclusive License for “Buccal Delivery System”(“Buccal”) – An innovative aerosolized drug delivery system that is patent pending. Many therapeutic agents cannot be effectively delivered by aerosol formulation due to their large size and/or irregular shapes. Since these therapeutic agents cannot be ingested orally without being degraded by the digestive system, patients have no alternative but to directly inject these drugs. We have a non-exclusive license to the Buccal patent pending proprietary aerosol formulation, which greatly enhances the permeability of the mucous membranes found on the roof of the mouth and the back of the throat. This allows for the easy and efficient systemic delivery into the bloodstream of a much wider variety of proteins and peptides. This non-exclusive license for “Buccal Delivery System” and patent pending application includes claims that identify the active mucosal enhancer, its combination with therapeutic agents and the mode of delivery through aerosol. This may allow for the effective and pain-free delivery of peptide and protein therapeutics for the treatment of HIV and MS.


Patents, Trademarks, Licenses and Intellectual Property


We have the following patents expiring at various dates indicated below:


Bio-Therapeutics Patents


We hold the license to certain intellectual property belonging to Bio-Therapeutics that has either been granted a patent or is in the patent application process as follows:


U.S. Patent No. 5,989,857, Polypeptide compositions and methods was granted in November 1999 with 10 claims. The patent outlines a method of preparing a bioactive polypeptide in a stable, inactivated form, the method comprising the step of treating the polypeptide with ozonated water in order to oxidize and/or stabilize the cysteine residues, and in turn, prevent the formation of disulfide bridges necessary for bioactivity. This patent expires on May 10, 2016.


U.S. Patent No. 6,670,148, Compositions comprising bioactive peptides prepared without formation of native disulfide bonds was granted in December 2003, with 9 claims. The patent further describes a method of preparing a bioactive polypeptide in a stable, inactivated form, the method comprising the step of treating the polypeptide with ozonated water in order to oxidize and/or stabilize the cysteine residues, and in turn, prevent the formation of disulfide bridges necessary for bioactivity. The method can involve the use of ozonated water to both oxidize the disulfide bridges in a bioactive polypeptide, and to then stabilize the resultant cysteine residues. Optionally, and preferably, the method can involve the use of ozonated water to stabilize the cysteine residues, and thereby prevent the formation of disulfide bridges, in a polypeptide produced by recombinant means in a manner that allows the polypeptide to be recovered with the disulfide bridges unformed. This Patent expires on May 10, 2016.


U.S. Patent Application Number 11/415377, Buccal Delivery System, with 20 claims. The patent describes a delivery formulation and system for delivering inactivated bioactive peptides to the body. The formulation includes effective amounts of the peptide as well as a mucosal permeation enhancer selected from the group consisting of quaternary ammonium salts. The system can be used by spraying the formulation into the buccal cavity, e.g., to the roof of the mouth. This application is currently listed as abandoned as of December 2009.


U.S. Patent Application Number 11/431126, Immunokine composition and method with 31 claims. The patent describes a composition and method for preventing HIV infection of mammalian cells. One aspect of the invention relates to an anti-immunodeficiency virus immunokine capable of binding to a cellular protein in a manner that prevents HIV infection of that cell. The compositions can include either an active bioactive polypeptide, such as native cobratoxin, and/or an inactivated bioactive polypeptide, such as cobratoxin in which one or more of the native disulfide bridges have been prevented from forming. The term “immunokine” is used to refer to an inactivated bioactive polypeptide, whether inactivated by chemical, genetic, and/or synthetic means as described herein, with the proviso that a corresponding active bioactive polypeptides can be included where applicable (e.g., for in vitro use). This application is currently listed as abandoned as of June 2009.


ReceptoPharm Patents


ReceptoPharm has three issued and several patents pending with the United States Patent and Trademark Office. These patents include:


U.S. Patent No. 8,034,777, Modified Anticholinergic Neurotoxins as Modulators of the Autoimmune Reaction was granted in October 2011with 7 claims. The patent describes a method of treatment of a human patient suffering from Multiple Sclerosis comprising the administration of a disease-mitigating amount of a composition consisting of detoxified and modified alpha-cobratoxin in a saline solution. This patent is meant to protect and support our work in the production of drugs for the treatment of auto-immune diseases.




17



U.S. Patent No. 7,902,152, Use of cobratoxin as an analgesic was granted in March 2011 with 16 claims. The patent describes a composition of matter for an analgesic and its method of use is disclosed. The method of use is for the treatment of chronic pain, especially to the treatment of heretofore intractable pain as associated with advanced cancer. The pain associated with neurological conditions, rheumatoid arthritis, viral infections and lesions is also contemplated. The method includes administering to a host an alpha-neurotoxin that is characterized by its ability to blocking of the action of acetylcholine at nicotinic acetylcholine receptors. Currently, this would be applied to the Company's current and future drugs for the treatment of pain.


U.S. Patent No. 7,758,894, Modified elapid venoms as stimulators of the immune reaction was granted in July, 2010 with 14 claims. The patent describes a method of protection from infections by administering a detoxified and neurotropically active modified venom containing alpha-cobratoxin. Protection includes bacterial, viral and parasitic infections. This patent is meant to protect and support our work in our production of anti-infective treatments. Currently, this would be applied to RPI-MN and RPI-78.


U.S. Patent Application Number 11/217,713, Modified venom and venom components as anti-retroviral agents with 10 claims was filed in September 2005. The present invention describes a method of treatment of human subject suffering from infection with HIV, comprising administering a disease mitigating amount of a detoxified, modified cobra venom composition in an amount effective to ameliorate at least one symptom of said infection. This patent is meant to protect and support our work in the production of anti-viral treatments. Currently, this would be applied to RPI-MN and RPI-78.


U.S. Patent Application Number 11/784,607, Treatment of Autoimmune Disorders Using Detoxified Cobratoxin was filed in April 2007. The patent describes a method of treating patients suffering from autoimmune disorders comprising the administration of detoxified cobra venom. This patent is meant to protect and support our work in the production of drugs for the treatment of auto-immune diseases. Currently, this would be applied to RPI-78MN.


U.S. Patent Application Number 12/317,115, Alpha-neurotoxin Proteins with Anti-inflammatory Properties and Uses Thereof was filed in December 2008. The patent describes a method of treating an arthritic condition comprising the administration to a subject in need thereof an effective amount of a pharmaceutical composition comprising an isolated alpha-neurotoxin protein or an effective fragment thereof. This patent is meant to protect and support our work in the production of drugs for the treatment of inflammatory diseases.


Patents Assigned to Us by Nanologix, Inc.


Because we have focused on our drugs, we have not continued any activity in our former Designer Diagnostics division since June, 2011. As results become available through the validation process taking place at National Jewish Hospital in Denver and funding becomes available, we may revisit the technology and re-engage our efforts in Designer Diagnostics.


On January 24, 2006 we entered into an Agreement with NanoLogix whereby we exchanged our entire holding of NanoLogix common stock for intellectual property pertaining to the manufacture of test kits for the rapid isolation, detection and antibiotic sensitivity testing of certain mycobacteria. The agreement provides that: (a) NanoLogix has reassigned to us 11 key patents protecting the diagnostics test kit technology in exchange for our entire holding of NanoLogix stock represented by 4,556,174 shares of that stock; (b) NanoLogix has licensed to us the remaining 18 patents that protect the diagnostics test kit technology in exchange for a 6% royalty on the gross sales of the products based on the licensed technology or escalating minimum payments starting at $20,000 annually; (c) we issued to NanoLogix 1 million options of our restricted common stock at $.20 per share; and (d) we will allow NanoLogix to continue their use of these patents for development of their hydrogen technology and other technologies unrelated to medical diagnostic test kits.


On or about July 2009, we ceased paying the minimum royalties to Nanologix for the licensed patents and have allowed full rights to those patents to revert back to Nanologix.


We own 11 issued U.S. patents covering technologies related to growing, detecting, identifying, defining antibiotic sensitivity and designing apparatus for the detection of 32 different paraffin-eating microorganisms that were assigned to us by Nanologix, Inc. These patents will be used by our wholly owned subsidiary, Designer Diagnostics, should it again become operational.


U.S. Patent No. 5,989,902, Method for determining the antimicrobial agent sensitivity of a nonparaffinophilic hydrophobic microorganism and an associated apparatus was granted in November 1999 with 3 claims. The patent describes a method for determining a sensitivity of a nonparaffinophilic hydrophobic microorganism to an antimicrobial agent. The method includes providing at least one receptacle containing an aqueous broth including a carbon source and introducing the nonparaffinophilic hydrophobic microorganism into the receptacle. The method further includes placing into the receptacle (i) a slide coated with a hydrophobic material and (ii) a predetermined quantity of the antimicrobial agent to be tested. By observing the nonparaffinophilic hydrophobic microorganism growth or lack thereof on the slide, it can be determined whether the predetermined quantity of the antimicrobial agent is effective in inhibiting growth of the nonparaffinophilic hydrophobic microorganism on the slide. An associated apparatus is also disclosed. This Patent expires on November 13, 2017.



18




U.S. Patent No. 5,981,210, Method for determining a presence or absence of a nonparaffinophilic hydrophobic microorganism in a body specimen by using a DNA extraction procedure and a novel DNA extraction procedure was granted in November 1999 with 17 claims. The method of the invention involves providing a first receptacle and a second receptacle. The first receptacle contains a sterile aqueous broth and the second receptacle contains an aqueous broth including a carbon source. The method then includes placing into the first receptacle a first support surface having a paraffin wax coating thereon and placing into the second receptacle a second support surface having a hydrophobic material coating thereon. A body specimen, such as sputum, is then introduced into each of the first and second receptacles. The presence of a nonparaffinophilic hydrophobic microorganism in the body specimen is determined by observing (i) a lack of microorganism growth on the paraffin coated material of the first support surface and (ii) a presence of microorganism growth on the hydrophobic material coating of the second support surface. The presence of the nonparaffinophilic hydrophobic microorganism can be further confirmed by performing a DNA extraction. An associated DNA extraction procedure is also provided. This Patent expires on November 13, 2017.


U.S. Patent No. 5,935,806, Method and apparatus for speciating and identifying MAI (Mycobacterium Avium Intracellulare) and testing the same for antibiotic sensitivity was granted in August 1999 with 3 claims. The patent describes a method of speciating and identifying MAI in a specimen comprises placing a paraffin coated slide in a receptacle containing a sterile aqueous solution inoculated with the specimen, analyzing the slide after exposure to the specimen to determine the presence or absence of atypical Mycobacteria, and after the analysis step, if atypical Mycobacteria are determined to be present, performing at least one speciation assay to ascertain if the atypical Mycobacteria are MAI. A related apparatus is also disclosed for speciating and identifying MAI in a specimen comprising a paraffin-wax coated slide, a tube having a sterile aqueous solution contained therein, the tube adapted to hold the slide, and at least one speciation assay means for performing an assay to determine the presence or absence of MAI in the specimen after the specimen is introduced into the tube holding the solution and the slide. An apparatus and method for determining the sensitivity of MAI to different antibiotics and dosages thereof is also provided. This Patent expired on October 24, 2009 for failure to timely pay maintenance fees.


U.S. Patent No. 5,882,920, Apparatus for determining the presence or absence of a paraffinophilic microorganism was granted in March 1999 with 4 claims. The patent describes a method of determining the presence of a paraffinophilic microorganism in a specimen taken from a patient. The method includes providing a receptacle containing an aqueous solution and adjusting the solution to mimic the in vivo clinical conditions of the patient. The method then further includes inoculating the solution with the specimen and then placing in the receptacle a paraffin coated slide to bait the paraffinophilic microorganism. The slide is then analyzed after exposure to the specimen to determine the presence or absence of the paraffinophilic microorganism. An associated apparatus is also disclosed. This Patent expired on November 9, 2015.


U.S. Patent No. 5,854,014, Apparatus for testing paraffinophilic microorganisms for antimicrobial sensitivity was granted in December 1998 with 2 claims. The patent describes an apparatus for determining the antimicrobial agent sensitivity of a paraffinophilic microorganism from a specimen obtained from a patient. The apparatus includes a receptacle containing an aqueous solution, an amount of antimicrobial agent to be tested and the specimen. The apparatus further consists of a paraffin coated slide placed into the receptacle. This Patent expired October 24, 2009 for failure to timely pay maintenance fees.


U.S. Patent No. 5,846,760, Method for determining a presence or absence of a nonparaffinophilic hydrophobic microorganism in a body specimen and an associated kit was granted in December 1998 with 15 claims. The method of the invention involves providing a first receptacle and a second receptacle. The first receptacle contains a sterile aqueous broth and the second receptacle contains an aqueous broth including a carbon source. The method then includes placing into the first receptacle a first support surface having a paraffin wax coating thereon and placing into the second receptacle a second support surface having a hydrophobic material coating thereon. A body specimen, such as sputum, is then introduced into each of the first and second receptacles. The presence of a nonparaffinophilic hydrophobic microorganism in the body specimen is determined by observing (i) a lack of microorganism growth on the paraffin coated material of the first support surface and (ii) a presence of microorganism growth on the hydrophobic material coating of the second support surface. An associated kit is also disclosed. This Patent expires on November 13, 2017.


U.S. Patent No. 5,776,722, Method of testing a body specimen taken from a patient for the presence or absence of a microorganism and a further associated method and associated apparatus was granted in July 1998 with 40 claims. The patent describes a method of testing a body specimen taken from a patient for the presence or absence of a microorganism. A transport/isolator assembly is provided which includes a receptacle and a baiting assembly including a baiting section having disposed thereon a coating material. A baiting liquid and the body specimen are then introduced into the receptacle. The method further comprises securing the baiting assembly to the receptacle so that at least a portion of the coated section is introduced into the baiting liquid. The transport/isolator assembly containing the baiting liquid and the body specimen are then transported to a laboratory for subsequent observation of the coated section for growth or lack thereof of the microorganism. A further method of processing the body specimen and an associated isolator/transport assembly kit as well as an associated isolator/transport assembly are also disclosed. This Patent expires on September 25, 2017.




19



U.S. Patent No. 5,569,592, Apparatus for testing MAI (Mycobacterium Avium Intracellulare) for antimicrobial agent sensitivity was granted in October 1996 with 3 claims. The patent describes an apparatus for determining the sensitivity of MAI to different antimicrobial agents and dosages thereof is provided. The apparatus comprises a plurality of test tubes adapted to contain an amount of an antimicrobial agent to be tested and MAI complex organisms to be assayed and a separate paraffin coated slide adapted for placement in each of the test tubes. The growth of the MAI complex organisms on the slide can be used to determine the concentration of the antimicrobial agent necessary to resist MAI complex organism growth on the slide. An associated method is also disclosed. This Patent expired on October 29, 2013.


U.S. Patent No. 5,472,877, Apparatus for determining the presence or absence of MAI (Mycobacterium Avium Intracellulare) was granted in December 1995 with 6 claims. The patent describes a method of speciating and identifying MAI in a specimen comprises placing a paraffin coated slide in a receptacle containing a sterile aqueous solution inoculated with the specimen, analyzing the slide after exposure to the specimen to determine the presence or absence of atypical Mycobacteria, and after the analysis step, if atypical Mycobacteria are determined to be present, performing at least one speciation assay to ascertain if the atypical Mycobacteria are MAI. A related apparatus is also disclosed for speciating and identifying MAI in a specimen comprising a paraffin-wax coated slide, a tube having a sterile aqueous solution contained therein, the tube adapted to hold the slide, and at least one speciation assay means for performing an assay to determine the presence or absence of MAI in the specimen after the specimen is introduced into the tube holding the solution and the slide. An apparatus and method for determining the sensitivity of MAI to different antibiotics and dosages thereof is also provided. This Patent expired on December 5, 2012.


U.S. Patent No. 5,316,918, Method and apparatus for testing MAI (Mycobacterium Avium Intracellulare) for antimicrobial agent sensitivity was granted in May 1994 with 7 claims. The patent describes an apparatus and method for determining the sensitivity of MAI to different antimicrobial agents and dosages thereof is provided. The apparatus comprises a plurality of test tubes adapted to contain an amount of an antimicrobial agent to be tested and MAI complex organisms to be assayed and a separate paraffin coated slide adapted for placement in each of the test tubes. The growth of the MAI complex organisms on the slide can be used to determine the concentration of the antimicrobial agent necessary to resist MAI complex organism growth on the slide. An associated method is also disclosed. This Patent expired on May 31, 2011.


U.S. Patent No. 5,153,119, Method for speciating and identifying MAI (Mycobacterium Avium Intracellulare) was granted in October 1992 with 15 claims. The patent describes a method of speciating and identifying MAI in a specimen comprises placing a paraffin coated slide in a receptacle containing a sterile aqueous solution inoculated with the specimen, analyzing the slide after exposure to the specimen to determine the presence or absence of atypical Mycobacteria, and after the analysis step, if atypical Mycobacteria are determined to be present, performing at least one speciation assay to ascertain if the atypical Mycobacteria are MAI. A related apparatus is also disclosed for speciating and identifying MAI in a specimen comprising a paraffin-wax coated slide, a tube having a sterile aqueous solution contained therein, the tube adapted to hold the slide, and at least one speciation assay means for performing an assay to determine the presence or absence of MAI in the specimen after the specimen is introduced into the tube holding the solution and the slide. An apparatus and method for determining the sensitivity of MAI to different antibiotics and dosages thereof is also provided. This Patent expired on October 24, 2009.


Our business is dependent upon our ability to protect our proprietary technologies and processes. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain and use proprietary information. We will rely on patent and trade secret law and nondisclosure and other contractual arrangements to protect such proprietary information. We will file patent applications for our proprietary methods and devices for patient treatments. Our efforts to protect our proprietary technologies and processes are subject to significant risks, including that others may independently develop equivalent proprietary information and techniques, gain access to our proprietary information, our proprietary information being improperly disclosed, or that we may ineffectively protect our rights to unpatented trade secrets or other proprietary information.


Employees


We employ a total of 4 employees, consisting of: (a) our Chief Executive Officer (b) Our Director of Marketing (c) our Interim President of ReceptoPharm, and (d) our Warehouse Manager. We utilize outside consultants, legal and accounting personnel as necessary and as funding permits.


Report to Security Holders


We are subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly and other reports and information with the Securities and Exchange Commission. You may read and obtain a copy of these reports in Washington, D.C. Our filings are also available to the public from commercial document retrieval services and the Internet world wide website maintained by the Securities and Exchange Commission at www.sec.gov.




20



Item 1A. Risk Factors


You should carefully consider the risks described below regarding our operations, financial condition, financing, our common stock and other matters. If any of the following or other material risks actually occur, our business, financial condition, or results or operations could be materially adversely affected.


Our ability to continue as a going concern is in doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.


We incurred net losses of $5,391,981 and $2,532,985 for the years ended December 31, 2015 and 2014. We anticipate that these losses will continue for the foreseeable future. We have a significant working capital deficiency, and have not reached a profitable level of operations, which raises substantial doubt about our ability to continue as a going concern. Our continued existence is dependent upon our achieving sufficient sales levels of our Cobroxin® , Nyloxin® and Pet Pain Away products and obtaining adequate financing. Unless we can begin to generate material revenue, we may not be able to remain in business. We cannot assure you that we will raise enough money or generate sufficient sales to meet our future working capital needs.


We have a limited revenue producing history with significant losses and expect losses to continue for the foreseeable future.


We have yet to establish any history of profitable operations. We have incurred annual losses of $5,391,981 and $2,532,985 during the fiscal years of operations ending December 31, 2015 and 2014 respectively. As a result, at December 31, 2015 we had an accumulated deficit of $49,911,786. Our revenues have been insufficient to sustain our operations and we expect our revenues will be insufficient to sustain our operations for the foreseeable future. Our potential profitability will require the successful commercialization of our Cobroxin®, Nyloxin® and Pet Pain-Away products; or a potential licensing of our therapies under development.


We will require additional financing to sustain our operations and without it will be unable to continue operations.


At December 31, 2015 we had a working capital deficit of $3,404,497. Our recurring losses from operations and working capital deficiency raise substantial doubt about our ability to continue as a going concern. We have a negative cash flow from operations of approximately $1.02 million and $0.15 million for the years ended December 31, 2015 and 2014, respectively. We have insufficient financial resources to fund our operations.


As of December 31, 2015 we owe $146,770 to our Chief Executive Officer and the Companies owned by him.


Our Chief Executive Officer may be unwilling or unable to continue funding our operations.


Our Chief Executive Officer has historically funded our operations by providing loans to us. As of December 31, 2015, we owe $146,770 to Mr. Deitsch and the companies owned by him. Mr. Deitsch may be unwilling or unable to fund our operations in the future. If we have no other source of funding and we are unable to secure additional loans from Mr. Deitsch, our operations will be negatively affected.


We have a history of failed distributors, which has negatively affected our revenues and may continue to do so if we fail to locate a successful distributor.


Due to poor performance, we cancelled our distribution agreement with our Cobroxin® distributor, XenaCare in April, 2011. We plan to re-launch Cobroxin®, but we have not yet ordered product or provided planned sales. To date, we have only limited sales of Nyloxin® and Pet Pain-Away through outside distributors. Most of the current sales are through Lumaxa. If we fail to improve our own marketing and distribution or fail to find a competent outside distributor our operations and financial condition will be negatively affected.


If we cannot sell a sufficient volume of our products, we will be unable to continue in business.


To date, sales of Cobroxin® have been limited and inconsistent. Total sales of Cobroxin® have been $1,995,673 since the fourth quarter of 2009, with no significant sales since the second quarter of 2010.


To date, sales of Nyloxin® have been limited and inconsistent. During 2011, we sold $66,568 of Nyloxin®. During 2012, we sold $199,231 of Nyloxin®. During 2013, we sold $119,898 of Nyloxin®. During 2014, we sold $587,804 of Nyloxin®. During 2015, we sold $279,969 of Nyloxin®. We launched Pet Pain-Away in late December of 2014 and generated $6,701 in 2014. During 2015, we sold $11,333 of Pet Pain-Away. If we cannot achieve sufficient sales levels of our Cobroxin®, Nyloxin® and Pet Pain-Away products or we are unable to secure financing our operations will be negatively affected.




21



We have a limited history of generating revenues on which to evaluate our potential for future success and to determine if we will be able to execute our business plan; accordingly, it is difficult to evaluate our future prospects and the risk of success or failure of our business.


Our total sales of Cobroxin® from November 2009 until December 31, 2015 are $1,995,673. Our total sales of Nyloxin® from January 1, 2011 to December 31, 2015 are $1,253,470. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage revenue producing company. These risks include:


·

our ability to effectively and efficiently market and distribute our products;

·

our ability to obtain market acceptance of our current products and future products that may be developed by us; and

·

our ability to sell our products at competitive prices which exceed our per unit costs.


We may be unable to address these risks and difficulties, which could materially and adversely affect our revenue, operating results and our ability to continue to operate our business.


Our growth strategy reflected in our business plan may be unachievable or may not result in profitability.


We may be unable to implement our growth strategy reflected in our business plan rapidly enough for us to achieve profitability. Our growth strategy is dependent on a number of factors, including market acceptance of our Cobroxin®, Nyloxin® and Pet Pain-Away products and the acceptance by the public of using these products as pain relievers. We cannot assure you that our products will be purchased in amounts sufficient to attain profitability.


Among other things, our efforts to expand our sales of Cobroxin®, Nyloxin® and Pet Pain-Away will be adversely affected if:


·

we are unable to attract sufficient customers to the products we offer in light of the price and other terms required in order for us to attain the level of profitability that will enable us to continue to pursue our growth strategy;

·

adequate penetration of new markets at reasonable cost becomes impossible limiting the future demand for our products below the level assumed by our business plan;

·

we are unable to scale up manufacturing to meet product demand, which would negatively affect our revenues and brand name recognition;

·

we are unable to meet regulatory requirements in the intellectual marketplace that would otherwise allow us for wider distribution; and

·

we are unable to meet FDA regulatory requirements that would potentially expand our product base and potential revenues.


If we cannot manage our growth effectively, we may not become profitable.


Businesses, which grow rapidly often, have difficulty managing their growth. If we grow rapidly, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully.


Among other things, implementation of our growth strategy would be adversely affected if we were not able to attract sufficient customers to the products and services we offer or plan to offer in light of the price and other terms required in order for us to attain the necessary profitability.


If we are unable to protect our proprietary technology, our business could be harmed.


Our intellectual property, including patents, is our key asset. We currently have 21 patents that we either own or have the rights to from third parties. 16 of these patents have been approved and 5 are pending. Competitors may be able to design around our patents for our Cobroxin®, Nyloxin® and Pet Pain-Away products and compete effectively with us. The cost to prosecute infringements of our intellectual property or the cost to defend our products against patent infringement or other intellectual property litigation by others could be substantial. We cannot assure you that:

 

·

pending and future patent applications will result in issued patents,

·

patents licensed by us will not be challenged by competitors,

·

our patents, licensed and other proprietary rights from third parties will not result in costly litigation;

·

pending and future patent applications will result in issued patents,

·

the patents or our other intellectual property will be found to be valid or sufficiently broad to protect these technologies or provide us with a competitive advantage,

·

if we are sued for patent infringement, whether we will have sufficient funds to defend our patents, and

·

we will be successful in defending against future patent infringement claims asserted against our products.




22



Should any risks pertaining to the foregoing occur, our brand name reputation, results of operation and revenues will be negatively affected.


We are subject to substantial FDA regulations pertaining to Cobroxin®, Nyloxin® and Pet Pain-Away, which may increase our costs or otherwise adversely affect our operations.


Our Cobroxin®, Nyloxin® and Pet Pain-Away products are subject to FDA regulations, including manufacturing and labeling, approval of ingredients, advertising and other claims made regarding Cobroxin®, Nyloxin® and Pet Pain-Away, and product ingredients disclosure. If we fail to comply with current or future regulations, the FDA could force us to stop selling Cobroxin®, Nyloxin® and Pet Pain-Away or require us to incur substantial costs from adopting measures to maintain FDA compliance.


The inability to provide scientific proof for product claims may adversely affect our sales.


The marketing of Cobroxin®, Nyloxin® and Pet Pain-Away involves claims that they assist in reducing Stage 2 chronic pain, while Nyloxin® Extra Strength and Nyloxin® Military Strength involves claims that they assist in reducing Stage 3 chronic pain. The marketing of Pet Pain-Away involves claims that they assist in relieving pain in dogs and cats. Under FDA and Federal Trade Commission (“FTC”) rules, we are required to have adequate data to support any claims we make concerning Cobroxin®, Nyloxin® and Pet Pain-Away. We have scientific data for our Cobroxin®, Nyloxin® and Pet Pain-Away product claims; however, we cannot be certain that these scientific data will be deemed acceptable to the FDA or FTC. If the FDA or FTC requests supporting information and we are unable to provide support that it finds acceptable, the FDA or FTC could force us to stop making the claims in question or restrict us from selling the products.


None of our ethical drug candidates have received FDA approval.


Our non-homeopathic or ethical products require a complex and costly FDA regulation process that takes several years for drug approval, if ever. None of the drug applications we have submitted to the FDA have received FDA approval. If we do not receive FDA approval for our drug applications, our operations and financial condition will be negatively affected.


If we are unable to secure sufficient cobra venom from available suppliers, our operating results will be negatively affected.


We secure cobra venom on an as-needed basis. If we do not have an available supplier to fill customer orders, there will be distribution delays and/or our failure to fulfill purchase orders, either of which will negatively affect our brand name reputation and operating results.


Our Cobroxin®, Nyloxin® and Pet Pain-Away products may be unable to compete against our competitors in the pain relief market.


The pain relief market is highly competitive. We compete with companies that have already achieved product acceptance and brand recognition, including multi-billion dollar private label manufacturers and more established pharmaceutical and health products companies, or low cost generic drug manufacturers. Most such companies have far greater financial and technical resources and production and marketing capabilities than we do. Additionally, if consumers prefer our competitors’ products, or if these products have better safety, efficacy, or pricing characteristics, our results could be negatively impacted. If we fail to develop and actualize strategies to compete against our competitors we may fail to compete effectively, which will negatively affect our operations and operating results.


If we incur costs resulting from product liability claims, our operating results will be negatively affected.


If we become subject to product liability claims for Cobroxin®, Nyloxin® and Pet Pain-Away that exceed our product liability policy limits, we may be subject to substantial litigation costs or judgments against us, which will negatively impact upon our financial and operating results.


Loss of any of our key personnel could have a material adverse effect on our operations and financial results.


We are dependent upon a limited number of our employees: (a) our Chief Executive Officer who directs our operations; and (b) ReceptoPharm’s employees who conduct our research and development activities. Our success depends on the continued services of our senior management and key research and development employees as well as our ability to attract additional members to our management and research and development teams. The unexpected loss of the services of any of our management or other key personnel could have a material adverse effect upon our operations and financial results.




23



We may be unable to maintain and expand our business if we are not able to retain, hire and integrate key management and operating personnel.


Our success depends in large part on the continued services and efforts of key management personnel. Competition for such employees is intense and the process of locating key personnel with the combination of skills and attributes required to execute our business strategies may be lengthy. The loss of key personnel could have a material adverse impact on our ability to execute our business objectives. We do not have any key man life insurance on the lives of any of our executive officers.


Risks Related to Our Common Stock


Because the market for our common stock is limited, persons who purchase our common stock may not be able to resell their shares at or above the purchase price paid by them.


Our common stock trades on the OTC-Market, which is not a liquid market. There is currently only a limited public market for our common stock. We cannot assure you that an active public market for our common stock will develop or be sustained in the future. If an active market for our common stock does not develop or is not sustained, the price may decline.


Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock, which adversely affects its liquidity and market price.


The SEC has adopted regulations, which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the OTCQB has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.


Because the majority of our outstanding shares are freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.


As of December 31, 2015, we had 79,770,782 outstanding shares that were subject to the limitations of Rule 144 under the Securities Act of 1933. In general, Rule 144 provides that any our non-affiliates, who have held restricted common stock for at least six-months, are entitled to sell their restricted stock freely, provided that we stay current in our SEC filings. After one year, a non-affiliate may sell without any restrictions.


An affiliate may sell after one year with the following restrictions: (i) we are current in ours filings, (ii) certain manner of sale provisions, (iii) filing of Form 144, and (iv) volume limitations limiting the sale of shares within any three-month period to a number of shares that does not exceed 1% of the total number of outstanding shares. A person who has ceased to be an affiliate at least three months immediately preceding the sale and who has owned such shares of common stock for at least one year is entitled to sell the shares under Rule 144 without regard to any of the limitations described above.


An investment in our common stock may be diluted in the future as a result of the issuance of additional securities or the exercise of options or warrants.


In order to raise additional capital to fund our strategic plan, we may issue additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to any person who purchases our common stock. Because we have a negative net tangible book value, purchasers will suffer substantial dilution. We cannot assure you that we will be successful in raising funds from the sale of common stock or other equity securities.


Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any dividends for the foreseeable future.


We have not and do not intend to pay any dividends in the foreseeable future, as we intend to retain any earnings for development and expansion of our business operations. As a result, you will not receive any dividends on your investment for an indefinite period of time.




24



Due to factors beyond our control, our stock price may continue to be volatile.


The market price of our common stock has been and is expected to be highly volatile. Any of the following factors could affect the market price of our common stock:


·

our failure to generate revenue,

·

our failure to achieve and maintain profitability,

·

short selling activities,

·

the sale of a large amount of common stock by our shareholders including those who invested prior to commencement of trading,

·

actual or anticipated variations in our quarterly results of operations,

·

announcements by us or our competitors of significant contracts, new products, acquisitions, commercial relationships, joint ventures or capital commitments,

·

the loss of major customers or product or component suppliers,

·

the loss of significant business relationships,

·

our failure to meet financial analysts’ performance expectations,

·

changes in earnings estimates and recommendations by financial analysts, or

·

changes in market valuations of similar companies.


In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.


Item 1B.   Unresolved Staff Comments


None


Item 2.   Properties


As of February 1, 2013, we leased approximately 2,200 square feet at 12502 West Atlantic Blvd, Coral Springs, Florida. Our lease term expired on January 31, 2016. We paid monthly rent of approximately $4,100. In February of 2016 we moved offices to 12538 West Atlantic Blvd, Coral Springs, Florida. We have a 3-year lease that expires on February 1, 2019 with an option to renew for an additional 3 years. Our offices are comprised of a reception area, conference room, 6 offices, a restroom, a kitchen and a file room. Our offices are adequate for our needs. We pay monthly rent of approximately $3,200.


Since May 13, 2004, ReceptoPharm has leased their office space at 1537 NW 65th Avenue, Plantation, Florida for three consecutive two-year terms. ReceptoPharm's 5,500 square foot facilities include a reception area, conference room and five offices, a warehouse and a laboratory. On May 10, 2010 ReceptoPharm renewed the lease with Shelter Developers of America (“Shelter”) for the last two-year term beginning on June 1, 2010 and ending May 31, 2012. On July 9, 2012 ReceptoPharm entered into a new lease agreement for a five year period beginning on August 1, 2012. In February of 2016 we signed a lease extension agreement in exchange for certain leasehold improvements that extended our lease through July 31, 2022. The lease calls for current monthly payments of approximately $6400, which includes base rent, common area expenses, real estate taxes and insurance.


We incurred rent expense of $126,339 and $119,215 for the years ended December 31, 2015 and 2014.


Item 3.   Legal Proceedings


Patricia Meding, et. al. v. ReceptoPharm, Inc. f/k/a Receptogen, Inc.


On August 18, 2006, ReceptoPharm was named as a defendant in Patricia Meding, et. al. v. ReceptoPharm, Inc. f/k/a Receptogen, Inc., Index No.: 18247/06 (New York Supreme Court, Queens County). The original proceeding claimed that ReceptoPharm owed the Plaintiffs, including Patricia Meding, a former ReceptoPharm officer and shareholder and several corporations that she claims to own, the sum of $118,928.15 plus interest and counsel fees on a series promissory notes that were allegedly executed in 2001 and 2002. On August 23, 2007, the Queens County New York Supreme Court issued a decision denying Plaintiffs motion for summary judgment in lieu of a complaint, concluding that there were issues of fact concerning the enforceability of the promissory notes. On May 23, 2008, the Plaintiffs filed an amended complaint in which they reasserted their original claims and asserted new claims seeking damages of no less than $768,506 on their claims that in or about June 2004 ReceptoPharm breached its fiduciary duty to the Plaintiffs as shareholders of ReceptoPharm by wrongfully canceling certain of their purported ReceptoPharm share certificates. In late 2010, Plaintiffs further amended their complaint alleging that ReceptoPharm violated Plaintiffs contractual and statutory rights by cancelling an additional 30,370 share certificates and failing to permit the Plaintiffs to exercise dissenting shareholder rights with respect to those



25



share certificates. The damages associated with the Plaintiffs' claims could rise as the result of increases in our share price as the Receptopharm shares may be convertible into our common shares. The potential exposure may exceed $10,000,000 if the Plaintiffs are successful with all of their claims.


On June 1, 2015, the parties executed a settlement agreement whereby ReceptoPharm would pay the Plaintiffs a total of $360,000 over 35 months. The first payment of $20,000 was made on July 1, 2015. A second payment of $20,000 was made on August 17, 2015. The settlement requires 32 subsequent monthly $10,000 payments to be made on the 15th of every month. Payments have been made every month and are current. In the event of default on any of the payments due under the settlement agreement, the settlement amount would increase by an additional $200,000. As of December 31, 2015, the Company has accrued the legal settlement amount at present value of $243,164 and an additional contingency of $200,000. The settlement agreement is personally guaranteed by Rik Deitsch, our CEO.


Liquid Packaging Resources, Inc. v. Nutra Pharma Corp. and Erik “Rik” Deitsch


On April 21, 2011, Nutra Pharma Corp. and its CEO, Erik Deitsch, were named as defendants in Liquid Packaging Resources, Inc. v. Nutra Pharma Corp. and Erik “Rik” Deitsch, Superior Court of Fulton County, Georgia, Civil Action No. 2011-CV-199562. Liquid Packaging Resources, Inc. (“LPR”) claimed that Nutra Pharma Corp. and Mr. Deitsch, directly or through other companies, placed orders with LPR that required LPR to purchase components from third parties. LPR sought reimbursement for those third party expenses in the amount of not less than $359,826.85 plus interest. LPR also sought punitive damages in the amount of not less than $500,000 and attorney's fees.


Mr. Deitsch and Nutra Pharma Corp. then removed the action to the United States District Court, Northern District of Georgia, Civil Action No. 11-CV-01663-ODE. After removal, LPR amended the Complaint to assert that Nutra Pharma Corp. and Mr. Deitsch were the alter egos of the alleged other companies through whom the subject orders were placed and therefore should be considered one and the same. Mr. Deitsch and Nutra Pharma Corp.  moved to dismiss the Complaint on several grounds including statute of frauds, failure to state a claim, and jurisdiction (only for Mr. Deitsch).


After June 30, 2011, at LPR's request, the parties mediated the dispute before LPR responded to the Motion To Dismiss. At the mediation, the parties worked out an agreement whereby Nutra Pharma Corp. would purchase from LPR the components LPR purchased from third parties at an amount slightly less than the principal amount of the suit and on terms acceptable to us. The agreed price was $350,000 payable over 7 months in equal $50,000 amounts. This agreement was reached by us because it provided tangible value in exchange for the purchase price rather than incurring the expense of litigation, which would likely be substantial and not recouped. While Nutra Pharma Corp.  had counterclaims we could assert, we believe this was a practical resolution. The settlement allowed us to take possession of the components prior to full payment and, in exchange, provided security to LPR in the form of our stock valued at $400,000 at the time of issuance. The stock can only be sold in event of a default of the payment schedule. The litigation was dismissed in August of 2011. We made the August, September and November payments (totaling $150,000) in a timely fashion. We were late for the payment due October 15, 2011 and requested an accommodation from LPR, eventually paying an extra $5,000 towards that payment. At December 31, 2011, Nutra Pharma Corp. had made total payments of $205,000 with an additional $150,000 owed. In order to allow us to skip the December payment, LPR agreed to another accommodation whereby we would pay both the December and January payment with an additional $10,000 on or before January 16, 2012. We were unable to make this payment and on January 26, 2012 signed an amended payment schedule adding an additional $15,000 for a total of $175,000 owed. Our CEO, Rik Deitsch, added additional collateral stock in a separate company that he held personally. $25,000 was paid in January, with subsequent payments of $30,000 due monthly on the 15th of March through the 15th of July, 2012. We failed to make the March payment and was subsequently called in default of the Agreement. Under the original agreement, if we are in default of the agreement, LPR has the right to sell shares of our free trading stock held in escrow by their attorney and receive cash settlements for a total amount of $450,000 representing the new total cash amount due to LPR by the Company.


On June 11, 2012, LPR sold their debt to Southridge Partners, LLP in an agreement to be paid out over time. In August, 2013, LPR cancelled their agreement with Southridge Partners, LLP.  As of September 30, 2015, LPR continues to hold the collateral stock. We are currently negotiating a settlement with LPR. Upon the settlement of the outstanding debt, LPR will return the collateral shares to the Company.


Involuntary Petition of Bankruptcy


On August 31, 2012, certain former ReceptoPharm employees and a former ReceptoPharm consultant filed a Petition for Involuntary Bankruptcy against us in the United States Bankruptcy Court, Southern District of Florida. The Petitioners originally claimed they were owed $990,927 from Nutra Pharma in the form of accrued wages and promissory notes, but amended their claim to $816,662 in a subsequent filing. In response to the Petition, we filed a motion to dismiss the action which, if successful, would avoid the case being converted into an actual bankruptcy action. On September 30, 2013, the Company entered into a Settlement Agreement with the Petitioners, which is effective upon the court dismissal of the action.  In full and final satisfaction of all claims, the Company settled the Agreement with the Petitioners for a total sum of $350,000.  $35,000 was made during the year ended December 31, 2013 and a



26



second lump sum payment was due within 8 months from February 12, 2014, the date the court dismissed the action.  The Parties executed mutual releases exclusive of releases under the Settlement Agreement. On October 21, 2014 we received a Notice of Default from the Petitioners' counsel. We have responded to the notice and will be seeking remedies to the alleged default. As of December 31, 2015, the Petitioner's claims and accruals for a total of $1,085,468 that have passed the statute of limitation were written off, included in the amount was the accrued salary of $815,747, officer’s loan and accrued interest for $129,466, salary and payroll tax payable of $140,255. Since the Petitioners can only reinforce the settlement amount due to passing of statute of limitation, the Company has accrued the settlement for $315,000 and recorded the gain on settlement of $770,968 in other income.


Item 4.   Mine Safety Disclosures


None



27



PART II


Item 5.   Market for Registrant’s Common Equity; Related Stockholder Matters and Issuer Purchases of Equity Securities


Market Information


Our common stock is quoted on the over-the-counter (“OTC-Market”) under the trading symbol “NPHC”. The following table sets forth the high and low bid prices for each quarter within the last two fiscal years.


 

 

2014FiscalYear

 

 

High Bid

 

 

Low Bid

First Quarter

 

$

0.0117

 

 

$

0.0064

Second Quarter

 

$

0.0129

 

 

$

0.003

Third Quarter

 

$

0.0099

 

 

$

0.0059

Fourth Quarter

 

$

0.0081

 

 

$

0.005


 

 

2015FiscalYear

 

 

High Bid

 

 

Low Bid

First Quarter

 

$

0.008

 

 

$

0.0025

Second Quarter

 

$

0.27*

 

 

$

0.0025

Third Quarter

 

$

0.2295

 

 

$

0.052

Fourth Quarter

 

$

0.14

 

 

$

0.0465


*reflects a 1 for 40 reverse split of the outstanding shares in the second quarter of 2015


The above quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.


Penny Stock Considerations


Our shares of common stock are “penny stocks” as that term is generally defined in the Securities Exchange Act of 1934 as equity securities with a price of less than $5.00. Our shares are subject to rules that impose sales practice and disclosure requirements on broker-dealers who engage in certain transactions involving a penny stock.


Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or “accredited investor” must make a special suitability determination regarding the purchaser and must receive the purchaser's written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor.


In addition, under the penny stock regulations the broker-dealer is required to:


·

Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt;

·

Disclose commission payable to the broker-dealer and its registered representatives and current bid and offer quotations for the securities;

·

Send monthly statements disclosing recent price information pertaining to the penny stock held in a customer's account, the account's value and information regarding the limited market in penny stocks; and

·

Make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction, prior to conducting any penny stock transaction in the customer's account.


Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of shareholders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional sales practice and disclosure requirements could impede the sale of our securities. In addition, the liquidity for our securities may be adversely affected, with a corresponding decrease in the price of our securities. Our shares are subject to such penny stock rules and our shareholders will, in all likelihood, find it difficult to sell their securities.




28



Holders


As of April 14, 2016, based upon records obtained from our transfer agent, there were 320 holders of record of our common stock. Our transfer agent records does not account for other holders of our common stock that are held in street name or by broker dealers as custodian for individual holders of our stock. We have one class of common stock outstanding.


Dividends


We have not declared any cash dividends on our common stock since our inception and do not anticipate paying such dividends in the foreseeable future. We plan to retain any future earnings for use in our business. Any decisions as to future payment of dividends will depend on our earnings and financial position and such other factors as our Board of Directors deems relevant. There are no restrictions contained in our bylaws or otherwise pertaining to our issuing dividends.


Equity Compensation Plans


Securities authorized per issuance under Equity Compensation Plans as of December 31, 2015 and 2014 are as follows:


Equity Compensation Plan Information


 

 

Number of

Securities

to be issued

upon exercise

of outstanding

options,

warrants and

rights

 

Weighted-

average

exercise

price of

outstanding

options,

warrants

and rights

 

Number of

Securities

Remaining

available
for future

issuance
under equity

compensation

plans (excluding

securities reflected in column(a))

Plan category

 

(a)

 

(b)

 

(c)

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

0

 

N/A

 

N/A

Equity compensation plans not approved by security holders

 

0

$

4.00

 

6,375

Total

 

0

$

4.00

 

6,375


The figures contained in the above chart are composed of our 2003 and 2007 Employee /Consultant Stock Compensation Plans and two (2) option agreements we have with a corporate entity and our former Chairman of the Board/Executive Chairman, as follows:


2003 Plan


On December 3, 2003, our Board of Directors approved the Employee/Consultant Stock Compensation Plan (the “2003 Plan”). The purpose of the 2003 Plan is to further our growth by allowing us to compensate employees and consultants who have provided bona fide services to us through the award of our common stock. The maximum number of shares of common stock that may be issued under the 2003 Plan is 62,500. As of December 31, 2015 and 2014, we had issued a total of 62,375 shares under the 2003 Plan.


2007 Plan


On June 6, 2007, our Board of Directors approved the 2007 Employee/Consultant Stock Compensation Plan (the “2007 Plan”). The purpose of the 2007 Plan is to further our growth by allowing us to compensate employees and consultants who have provided bona fide services to us through the award of our common stock. The maximum number of shares of common stock that may be issued under the 2007 Plan is 625,000. As of December 31, 2015 and 2014, we had issued a total of 618,750 shares under the 2007 Plan.


Our Board of Directors is responsible for the administration of the 2003 and 2007 Plans and has full authority to grant awards under the Plans. Awards may take the form of stock grants, options or warrants to purchase common stock. The Board of Directors has the authority to determine: (a) the employees and consultants that will receive awards under the Plan, (b) the number of shares, options or warrants to be granted to each employee or consultant, (c) the exercise price, term and vesting periods, if any, in connection with an option grant, and (d) the purchase price and vesting period, if any, in connection with the granting of a warrant to purchase shares of our common stock.




29



Recent Sales of Unregistered Securities


With respect to the securities issuances described below, no solicitations were made and no underwriting discounts were given or paid in connection with these transactions. The Company believes that the issuance of these securities as described below were exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act of 1933.


Stock Split


On April 20, 2015, the Company declared a 1 for 40 reverse common stock split to stockholders. The Stock Split was effectuated on May 18, 2015 based upon filing the appropriate documentation with FINRA. Per share and weighted average amounts have been retroactively restated in the accompanying financial statements and related notes to reflect this stock split.


Private Placements of Common Stock


During March 2016, the Company sold 916,667 shares of restricted common stock to investors at a price per share of $0.06 and received proceeds of $55,000. The Company issued 916,667 warrants to purchase common stock at an exercise price of $0.10 per share.


During May through December, 2015, the Company sold 11,417,666 shares of restricted common stock to investors at a price per share of $0.06 and received proceeds of $685,060. The Company issued 11,417,666 warrants to purchase common stock at an exercise price of $0.20 per share. The warrants expire on June 30, 2016.



During August, 2015, the Company sold 30,000 shares of restricted common stock to an investor at a price per share of $0.10 and received proceeds of $3,000. The Company issued 30,000 warrants to purchase common stock at an exercise price of $0.20 per share. The warrants expire on June 30, 2016.


During September and October, 2015, the Company sold 1,637,334 shares of restricted common stock to investors at a price per share of $0.06 and received proceeds of $98,240. The Company issued 1,637,334 warrants to purchase common stock at an exercise price of $0.20 per share. The warrants expire on September 30, 2016.


Shares Issued to Employees and Directors


During July, 2015, the Board of Directors approved a resolution for the issuance of a total of 10,900,000 shares of the Company’s restricted common stock to directors and employees of the Company. The issuance was valued at $2,016,500 ($0.185 per share), which was the fair value of the Company’s common stock on the date of issuance.


Common Stock Issued for Services


During April 2016, the Company signed an agreement with a consulting company for consulting services for six months. In connection with the agreement, 700,000 shares of company’s restricted common stocks were issued on the date of execution of the agreement.


During October 2015, the Company signed an agreement with a consultant for consulting services for three months. In connection with the agreement, 110,000 shares of company’s restricted common stocks were issued with a fair value of $8,305. The issuance was valued at $0.0755 per share.


During October 2015, the Company signed an agreement with a consultant for consulting services for a year. In connection with the agreement, 2,500,000 shares of company’s restricted common stocks were granted. 1,000,000 shares of Common Stock of the Company were issued on the date of execution of the agreement. 500,000 shares of Common Stock of the Company are to be issued quarterly, beginning on the first day of the third month following the effective date. Cash payment of $3,000 is expected to be paid on a monthly basis. The 2,500,000 shares granted are valued at the end of each quarter until the consultants complete their performance in October 2016. The 2,500,000 shares granted were valued at $0.055 per share which is the stock price at December 31, 2015. The Company recorded an equity compensation charge of $28,906 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $26,594 is related to non-vested equity-based compensation.


During September 2015, the Company signed an agreement with a consultant for investor relation services for three months. In connection with the agreement, 200,000 shares of company’s restricted common stocks were issued. The share was valued at $0.10 per share. The Company recorded an equity compensation charge of $19,800 during the year ended December 31, 2015.




30



During September 2015, the Company signed an agreement with a consultant for investor relation services for twelve months. In connection with the agreement, 250,000 shares of company’s restricted common stocks were issued. The share was valued at $0.12 per share. The Company recorded an equity compensation charge of $7,705 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $22,295 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


During September 2015, the Company signed an agreement with a consultant for investor relation services for twelve months. In connection with the agreement, 300,000 shares of company’s restricted common stocks were issued. The share was valued at $0.12 per share. The Company recorded an equity compensation charge of $9,246 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $26,754 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


During August 2015, the Company signed an agreement with a consultant for investor relation services for six months. In connection with the agreement, 750,000 shares of company’s restricted common stocks were issued. The share was valued at $0.15 per share. The Company recorded an equity compensation charge of $92,935 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $19,565 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


During August 2015, the Company signed an agreement with two consultants for investor relation services for six months. In connection with the agreement, 500,000 shares of company’s restricted common stocks were issued. The share was valued at $0.15 per share. The Company recorded an equity compensation charge of $61,957 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $13,043 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


During May 2015, the Company signed an agreement with a consultant for investor relation services for one month. In connection with the agreement, 200,000 shares of company’s restricted common stocks were issued with a fair value of $26,000.   The share was valued at $0.13 per share.


During January 2015, the Company signed an agreement with a consultant for investor relation services for one month. In connection with the agreement, 100,000 shares of company’s restricted common stocks were issued with a fair value of $24,400.   The share was valued at $0.244 per share.


During January 2015, the Company issued 250,000 shares of the Company’s restricted common stock to a consultant for services for six months. The share was valued at $0.244 per share. The Company recorded an equity compensation charge of $61,000 during the year ended December 31, 2015.


During February 2015, the Company signed an agreement with a consultant for investor relation services for one month. In connection with the agreement, 50,000 shares of company’s restricted common stocks were issued with a fair value of $14,000.  The share was valued at $0.28 per share.


During March 2015, the Company issued 1,250,000 shares of the Company’s restricted common stock to a consultant for services for a year. The share was valued at $0.104 per share. The Company recorded an equity compensation charge of $101,773 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $28,227 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


Common Stock Issued for Debt Modification


During February 2015, the Company issued a total of 25,000 restricted shares to the Michael McDonald Trust due to the default on repayment of the promissory note of $75,000. The shares were valued at a fair value of $6,000.


During February and August, 2015, the Company amended the maturity dates for notes of $100,000 from a non-related party to August 3, 2015 and February 3, 2016, respectively. The Company issued 25,000 restricted shares each (total 50,000 shares) to the note holder per the amendment. The shares were valued at a fair value of $7,000 and $3,750, respectively.


Common Stock Issued with Debts


In January 2016, the Company issued a promissory note to a non-related party in the amount of $100,000 bearing monthly interest at a rate of 2%. The note is due in six months from the execution and funding of the note. In connection with the issuance of this promissory note, the Company issued 68,000 shares of the Company's common stocks.




31



In January 2016, the Company issued a promissory note to a non-related party in the amount of $50,000 bearing monthly interest at a rate of 2%. The note is due in six months from the execution and funding of the note. In connection with the issuance of this promissory note, the Company issued 350,000 shares of the Company's common stocks.


In December 2015, in connection with the issuance of a convertible note to a non-related party in the amount of $65,000 which is due in one year from the funding of the note. The Company also issued a total of 300,000 shares of common stocks as part of the agreement.


During December 2015, 1,000,000 warrants were exercised via cashless exercise into 400,000 shares with a fair value of $33,440.


In April 2015, in connection with the issuance of two notes to two non-related Parties in the amount of $550,000 which is due in nine months from the funding of the note. The Company also issued a total of 125,000 shares of common stocks as part of the agreement.


Common Stock Held in Escrow


On July 27, 2011 the Company issued 5,714,286 shares of free trading common stock in certificate form which is held in escrow as security under an agreement reached with Liquid Packaging Resources, Inc.  (“LPR”) on August 2, 2011.


Common Stock Issued for Settlement of Accounts Payable & Debt


During March 2016, the Company issued a total of 1,000,000 shares of the company’s restricted stock to settle the outstanding debt of $10,000 with accrued interest of $1,262 with the Note holder. The shares were recorded at a fair value of $12,600 or $0.02 per share.


During January and February 2016, Vista made five conversions for a total of 3,550,000 shares of the company’s restricted stock satisfying $48,444 of the note.


During January through March, 2016, the Note holder made a conversion of total of 8,348,252 shares of stocks satisfying $58,753 of notes payable of $275,000 originated in April 2015.


During January through March, 2016, Coventry made conversions of a total of 5,494,451 shares of the company’s restricted stock satisfying the note in full


During October 2015, the Company issued 2,200,000 shares of the company’s restricted stock and 2,200,000 warrants to settle the outstanding commissions’ payable in aggregate of $77,000 with TCN. The shares were valued at $0.1035 per share and the warrants were valued at $0.0475 per share. The Company recorded a loss of $255,215 as a selling expense during the year ended December 31, 2015.


During July 2015, the Company issued a total of 4,400,000 shares of the company’s restricted stock and 4,400,000 warrants to settle the outstanding commissions’ payable in aggregate of $59,000 with TCN. The shares were valued at $0.185 per share and the warrants were valued at $0.1009 per share. The Company recorded a loss of $1,198,773 as a selling expense during the year ended December 31, 2015.


During June 2015, the Company issued a total of 150,000 shares of the company’s restricted stock to settle the outstanding legal fees in aggregate of $15,000 with a vendor. The shares were recorded at a fair value of $28,500 or $0.19 per share.


During January 2015, Castaldo converted for a total of 71,429 shares of the company’s restricted stock, with a fair value of $17,428.

Following the assignment of LG’s debt of $70,875 in August 2015, Coventry made a conversion of a total of 749,625 shares of the company’s restricted stock satisfying $50,000 of the note with a fair value of $128,478. On October 23, 2015, Coventry made another conversion of 451,846 shares of the company’s restricted stock satisfying the remaining of $20,875 of the note in full with a fair value of $44,363.


Following the assignment of debt of $144,642 on December 15, 2015, Coventry made a conversion of 1,322,751 shares of the company’s restricted stock satisfying $50,000 of the note with a fair value of $112,447.




32



During August through December 2015, one Note holder made conversions for a total of 1,456,440 satisfying $60,870 of the note with a fair value of $131,125.


Date

 

Number of

shares converted

 

Fair Value of Debt Converted

8/28/2015

 

300,000

 

36,000

9/29/2015

 

300,000

 

22,037

11/2/2015

 

300,000

 

25,239

12/3/2015

 

275,000

 

22,645

12/8/2015

 

281,440

 

25,203


Following the assignment of Michael McDonald’s debt of $92,310 in June 2014, Coventry made the following conversions of a total of 461,548 shares of the company’s restricted stock with a fair value of $146,912.


Following the assignment of Michael McDonald’s debt of $84,666 in the year ended December 31, 2015, Coventry made the following conversions of a total of 1,324,341 shares of the company’s restricted stock satisfying the notes in full with a fair value of $201,894.


Date

 

Number of shares converted

 

Fair Value of Debt Converted

4/20/2015

 

489,964

 

$60,034

6/03/2015

 

453,000

 

$68,392

6/22/2015

 

381,377

 

$73,468


During June 2015, one of the convertible Notes holders made the conversion of 196,850 shares of the company’s restricted stock satisfying the notes in the amount of $25,000 with a fair value of $43,716.


During June, 2015, Coventry made the conversion for a total of 250,000 shares of the company’s restricted stock in satisfying the note of $20,000 in full with a fair value of $44,277.


During January 2015, Mr. Deitsch accepted a total of 125,000 shares of the Company’s restricted common stock as a repayment to discharge $10,000 of his outstanding loan to the Company. The shares were valued at the note payable amount due to the fact that it was a related party transaction.


Item 6.   Selected Financial Data


As a Smaller Reporting Company, we are not required to provide information required by Item 6.


Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operation


Critical Accounting Policies and Estimates


In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), we have adopted various accounting policies. Our most significant accounting policies are disclosed in Note 1 to the consolidated financial statements.


The preparation of the consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Our estimates and assumptions, including those related to the ability to continue as going concern, legal proceedings, the recoverability of inventory, long-lived assets, the fair value of stock-based compensation and the fair value of warrant liabilities are updated as appropriate, which in most cases is at least quarterly. We base our estimates on historical experience, or various assumptions that are believed to be reasonable under the circumstances and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Actual results may materially differ from these estimates.


Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Our critical accounting estimates include the following:




33



Revenue Recognition: In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Provision for sales returns will be estimated based on the Company's historical return experience.


Accounts Receivable and Allowance for Doubtful Accounts: Our accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate allowances.


Inventory Obsolescence: Inventories are valued at the lower of average cost or market value. We periodically perform an evaluation of inventory for excess, impairments and obsolete items. At December 31, 2014 our inventory consisted entirely of raw materials that are utilized in the manufacturing of finished goods. These raw materials generally have expiration dates in excess of 10 years. At December 31, 2015 our inventory consisted both raw materials and finished goods.


Long-Lived Assets: The carrying value of long-lived assets is reviewed annually and on a regular basis for the existence of facts and circumstances that may suggest impairment. If indicators of impairment are present, we determine whether the sum of the estimated undiscounted future cash flows attributable to the long-lived asset in question is less than its carrying amount. If less, we measure the amount of the impairment based on the amount that the carrying value of the impaired asset exceeds the discounted cash flows expected to result from the use and eventual disposal of the impaired assets.


Derivative Financial Instrument: We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Management evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial instruments, we use the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. For complex embedded derivatives, we use a Dilution-Adjusted Black-Scholes method to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.


Share-Based Compensation: We record share-based compensation in accordance with FASB ASC 718, Stock Compensation. FASB ASC 718 requires that the cost resulting from all share-based transactions are recorded in the financial statements over the respective service periods. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. FASB ASC 718 also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.


Accomplishments during 2015 & Subsequent Accomplishments


On January 20, 2015 we announced that we added Keith Gordon, DVM as our first Veterinarian to join our Medical Advisory Board. The addition of Dr. Gordon came just a few weeks after the successful launch of our newest product, Pet Pain-Away for the treatment of chronic pain in companion animals.


On February 5, 2015 we announced that we shipped our initial test orders of Nyloxin® to our importer in India, S.Zhaveri Pharmakem for distribution throughout India. In mid-2013 we announced that we had received notification that our patent and trademarks for the Nyloxin® line of pain relievers had been published in India's Official Journal, allowing for patent and brand protection in the country. Since that time, we've been working diligently with importers to arrange for all of the paperwork and regulatory documentation necessary for this initial shipment. We later met with the Distributors in Mumbai.


On February 20, 2015 we announced that Chairman and Chief Executive Officer (CEO) Rik J. Deitsch was interviewed live on iHeart Radio's Health Tech Talk Live hosted by Ben Chodor and broadcasted nationwide on iHeart Radio / Clear Channel Atlanta Studios - 640 WGST AM. The interview was aired on Saturday, February 21, 2015 at 3:00pm ET. In this interview, Mr. Deitsch discussed how Nutra Pharma is currently expanding our OTC retail sales of our pain therapies: Nyloxin® and Pet Pain-Away. He also discussed the clinical development of our first two therapeutic products. The interview can be heard at: https://www.youtube.com/watch?v=EdSmgULYT8Y


On April 15, 2015 we provided an update regarding plans to market Nyloxin® through S.Zhaveri Pharmakem for distribution throughout India. The update stated that our management had been working in Mumbai throughout the week to finalize plans for the national rollout of Nyloxin®.




34



On April 20, 2015, our stockholders voted at a special meeting of the shareholders held in Coral Springs, Florida to approve a one-for-forty reverse stock split of our issued and outstanding shares of common stock.   Under the adopted proposal, each forty shares of our presently issued and outstanding Common Stock as of the close of business on the effective date will be converted automatically into one share of our post-Reverse Split Common Stock. Fractional shares and "odd lots" will rounded up to the nearest whole share. The Reverse Split does not change the number of authorized shares of our Common Stock. The principal effect of the Reverse Split will be the reduction in the number of shares of Common Stock issued and outstanding, from 1,510,950,321 shares as of March 6, 2015 to 39,123,758 shares after the Reverse Split is deemed effective. The Reverse Split will affect all of our shareholders uniformly and will not affect any shareholder’s percentage ownership interest in Nutra or any shareholder’s proportionate voting power. Per share and weighted average amounts have been retroactively restated in the accompanying financial statements and related notes to reflect this stock split.


On April 22, 2015 we announced that we had engaged the Vancouver Commodities Group (VCG) to begin the process of identifying and vetting potential distributors in China for Nyloxin®.


On April 30, 2015 we announced that we had received notification of the acceptance of Nyloxin® by the China International Exchange and Promotive Association for Medical and Healthcare (CPAM). This process was successfully conducted by the Vancouver Commodities Group (VCG) that had been hired by Nutra Pharma to begin the process of identifying and vetting potential distributors in China.


On May 14, 2015 we announced that we had engaged the Nature's Clinic to begin the process of regulatory approval of our Company's Over-the-Counter pain drug, Nyloxin® for marketing and distribution in Canada. The Nature’s Clinic has already begun setting up their Chatham, Ontario warehouse and expect to complete the approval process to begin distributing Nyloxin® by the end of the year.


On May 26, 2015 we announced that we had engaged Medical Strategy Consultants, LLC to aid the company in the filing of Orphan Drug applications with the U.S. Food and Drug Administration ("FDA"). The first application under development is for the treatment of Pediatric Multiple Sclerosis with the Company's lead drug candidate, RPI-78M. In order to create the application, RPI-78M needed to meet several key criteria. This included preclinical data in support of the drug that provided a reasonable rationale for the treatment of the disease based on its potential ability to treat the symptoms of multiple sclerosis. The FDA grants Orphan Drug Designation status to products that treat rare diseases, providing incentives to sponsors developing drugs or biologics. The Orphan Drug Act of 1983 is intended to assist and encourage companies to develop safe and effective therapies for the treatment of rare diseases and disorders, defined as those affecting fewer than 200,000 Americans at any given time. The designation of RPI-78M as an Orphan Drug would provide Nutra Pharma with a 7-year period of market exclusivity in the U.S. upon approval of the drug, as well as tax credits for clinical research costs, the ability to apply for grant funding, clinical trial design assistance, assistance from the FDA in the drug development process and the waiver of Prescription Drug User Fee Act (PDUFA) filing fees which could be in excess of $2.5 million. The decision to proceed with an Orphan Drug Designation submission is part of Nutra Pharma's plan to move forward with the preparation of an Investigative New Drug Application.


On June 9, 2015 we announced that we had entered into a facility and personnel sharing agreement with Nationwide Laboratory Services, Inc. (NLS): Nationwide Laboratory Services, Inc. operates as a clinical diagnostics laboratory, performing routine and specialty human diagnostics. The company also offers clinical trial services, such as specimen and special handling requirements, status of test results, turnaround time, testing, participants test results, channeling calls to technical or professional personnel, communicating specimen issues, notifying investigational site of critical calls, and telephone support with data management training services; and courier tracking services. The collaboration provides NLS with the use of our lab space and equipment and provides us with lab and clinical personnel as well as cost-savings on rent and utilities.


On June 23, 2015 we announced that we had completed a series of projects to update and expand the facilities that house the Asian cobras utilized for the production of Nyloxin®. We also announced the addition of 100 snakes to the existing milking line to increase venom production for the upcoming international orders from India and China.


On June 30, 2015 we announced that we had engaged Pickwick Capital Partners; a leading investment banking, securities and investment management firm, to provide strategic corporate planning and investment banking services. Pickwick will focus on assisting Nutra Pharma in our strategies for maximizing shareholder value through its full scope of investment banking services.


On July 15, 2015 we announced that we had filed an application with the FDA for orphan drug status of the Company's RPI-78M drug candidate for the treatment of Multiple Sclerosis (MS) in children. This represents the first such filing for the company.




35



On September 8, 2015 we announced that we had received Orphan Drug designation from the US-FDA for our RPI-78M drug candidate for the treatment of Multiple Sclerosis (MS) in children. The Orphan designation may greatly reduce the costs of clinical trials and shorten the timeline to potential drug approval.


On October 22, 2015 we announced that our CEO, Rik Deitsch, was interviewed by The Life Sciences Report. The interview can be viewed at: http://tinyurl.com/nutra-lsr


On October 27, 2015 we announced that our CEO, Rik Deitsch, was interviewed by StockNewsNow.com. The interview can be viewed at: http://tinyurl.com/nutra-snn


On December 9, 2015 we announced that we had filed an application with the FDA for orphan drug status of the Company's RPI-78M drug candidate for the treatment of Myasthenia Gravis (MG). This represents the second such filing for the company.


On February 16, 2016 we announced the addition of Thomas W. Northrop as the Company's Senior Commercial Development Officer. Mr. Northrop, along with his affiliates at Tri-State Capital Partners LLC, will lead new marketing efforts in healthcare, governmental and military entities, aging athletes and the elderly, as well as the completion of scientifically rigorous pain relief trials in multiple settings. All of this with the goal of creating new markets and increasing sales for our OTC products.


Results of Operations


Status of Operations


In November, 2014 we announced the recertification of our laboratory facility as the first step in re-engaging our drug development activities. In September, 2015 we received Orphan designation from the FDA for our lead drug candidate, RPI-78M for the treatment of Pediatric Multiple Sclerosis. This will allow us to shorten the timeline on clinical studies and may allow an eventual Fast Track through the approval process. We are currently working with our consultants to prepare a pre-IND meeting with the FDA in order to gain approval of a protocol for a Phase I/II clinical study in Pediatric MS. Our goal is to begin the study by the end of 2016.


We estimate that we will require approximately $600,000 to fund our existing operations and the operations of our subsidiary ReceptoPharm over the next twelve months. These costs include: (i) compensation for four (4) full-time employees; (ii) compensation for various consultants who we deem critical to our business; (iii) general office expenses including rent and utilities; (iv) product liability insurance; and (v) outside legal and accounting services. These costs reflected in (i) – (v) do not include research and development costs or other costs associated with clinical studies.


We began generating revenues from the sale of Cobroxin® in the fourth quarter of 2009 and from the sale of Nyloxin® and Nyloxin® Extra Strength in January of 2011. We began sales of Pet Pain-Away in December 2014. While sales have increased year over year, they have been limited and inconsistent. Our ability to meet our future operating expenses is highly dependent on the amount of such future revenues. If future revenues from the sale of Cobroxin®, Nyloxin® and Pet Pain-Away are insufficient to cover our operating expenses we may need to raise additional equity capital, which could result in substantial dilution to existing shareholders. There can be no assurance that we will be able to raise sufficient equity capital to fund our working capital requirements on terms acceptable to us, or at all. We may also seek additional loans from our officers and directors; however, there can be no assurance that we will be successful in securing such additional loans.


Comparison of Years Ended December 31, 2015 and 2014


Sales for the year ended December 31, 2015 were $291,302 compared to $594,505 for the comparable period in 2014. All of the sales in 2015 and 2014 were related to product sales. The decrease in sales is primarily attributable to an overall decrease in sales of Nyloxin®.


Cost of sales for the year ended December 31, 2015 and 2014 was $65,805 and $114,300. Cost of sales includes the direct costs associated with manufacturing, shipping and handling costs. Our gross profit margin for the year ended December 31, 2015 was $225,497 or 77.4% compared to $480,205 or 80.8% for the year ended December 31, 2014. The decrease in our profit margin is primarily due to increase in the credit card processing fees.


Selling, general and administrative expenses (“SG&A”) increased $3,309,151 or 123.4% from $2,682,479 for the year ended December 31, 2014 to $5,991,630 for the year ended December 31, 2015. The increase is generally due to the increase of stock based compensation of approximately $2,230,000, the increase of approximately $1,450,000 in selling expense related to distributors and loss on settlement of accounts payable, and the increase was offset by the decrease of approximately $370,800 in consulting, investor relations, payroll, travel and professional fees.


Rental income increased $27,564 or 100%, from $0 for the year ended December 31, 2014 to $27,564 for the year ended December 31, 2015.  This increase was due to a sublease agreement entered in April, 2015.




36



Interest expense increased $306,443 or 239.2%, from $128,104 for the year ended December 31, 2014 to $434,547 for the year ended December 31, 2015.  This increase was primarily due to amortization of loan discount for the short term and long term indebtedness in the year ended December 31, 2015 compared to the year ended December 31, 2014.


We carry certain of our debentures and common stock warrants at fair value. For the year ended December 31, 2015 and 2014, the liability related to these hybrid instruments fluctuated, resulting in a loss of $250,121 and $208,190, respectively.

 

Gain on settlement of debt increased $1,025,673 or 18,371.4%, from a gain of $5,583 for the year ended December 31, 2014 to a gain of $1,031,256 for the year ended December 31, 2015.  This increase was due to an increase of approximately of $255,000 in gain on settlement of debts through debt sale and a gain of approximately $770,000 for write-off the ReceptoPharm’s accrued salary, officer’s loan and interest that have passed the statute of limitation.


Our net loss increased by $2,858,996 or 112.9%, from $2,532,985 for the year ended December 31, 2014 to $5,391,981 for the year ended December 31, 2015.


Liquidity and Capital Resources


During December 31, 2015 and 2014, respectively, we have negative cash from operations of approximately $1.02 million and $0.15 million. Our lack of cash, significant losses and working capital and stockholders’ deficits raise substantial doubt about our ability to continue as a going concern. For the years ended December 31, 2015 and 2014, we have experienced significant losses totaling $5,391,981 and $2,532,985, respectively and had an accumulated deficit of $49,911,786 for the period from our inception to December 31, 2015. In addition, we had working capital and stockholders’ deficits at December 31, 2015 of $3,404,497 and $3,574,396, respectively.


Our ability to continue as a going concern is contingent upon our ability to secure additional financing, increase ownership equity and attain profitable operations. In addition, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered in established markets and the competitive environment in which we operate.


As of December 31, 2015, we had $6,890 in cash and as of April 14, 2016, we had approximately $8,000 in cash and we owed approximately $281,280 in vendor payables. We currently do not have sufficient cash to sustain our operations for the next 12 months and will require additional financing or an increase in sales in order to execute our operating plan and continue as a going concern. Our plan is to continue to increase sales of our products and attempt to secure adequate funding to bridge the commercialization of our Cobroxin®, Nyloxin® and Pet Pain-Away products. We cannot predict whether additional financing will be in the form of equity, debt, or another form and we may be unable to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that these financing sources do not materialize, or that we are unsuccessful in increasing our revenues and profits, we may be unable to implement our current plans for expansion, repay our obligations as they become due or continue as a going concern, any of which circumstances would have a material adverse effect on our business prospects, financial condition and results of operations.


Historically, we have relied upon loans from our Chief Executive Officer Rik J Deitsch, to fund costs associated with our operations. These loans are unsecured, accrue interest at a rate of 4.0% per annum and are due on demand. During the year ended December 31, 2015, we borrowed $70,821 and repaid $351,583 to Mr. Deitsch and the companies owned by him.


During the year ended December 31, 2015, we raised $588,289 and $441,500 through the issuance of convertible notes and promissory notes, respectively. We also raised $786,300 through sales of common stocks.


Uncertainties and Trends


Our operations and possible revenues are dependent now and in the future upon the following factors:


·

Whether we successfully develop and commercialize products from our research and development activities.

·

If we fail to compete effectively in the intensely competitive biotechnology area, our operations and market position will be negatively impacted.

·

If we fail to successfully execute our planned partnering and out-licensing of products or technologies, our future performance will be adversely affected.

·

The recent economic downturn and related credit and financial market crisis may adversely affect our ability to obtain financing, conduct our operations and realize opportunities to successfully bring our technologies to market.

·

Biotechnology industry related litigation is substantial and may continue to rise, leading to greater costs and unpredictable litigation.

·

If we fail to comply with extensive legal/regulatory requirements affecting the healthcare industry, we will face increased costs, and possibly penalties and business losses.




37



Off-Balance Sheet Arrangements


We have not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under whom we have:


·

An obligation under a guarantee contract.

·

A retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets.

·

Any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument.

·

Any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.


We do not have any off-balance sheet arrangements or commitments that have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material, other than those which may be disclosed in this Management’s Discussion and Analysis of Financial Condition and the audited Consolidated Financial Statements and related notes.


Item 7A.   Quantitative and Qualitative Disclosures About Market Risk


Not applicable. We have no investments in market risk sensitive instruments or in any other type securities.


Item 8.   Financial Statements and Supplementary Data


The information required by this item begins on page F-1 and is attached hereto and incorporated herein by reference. The index to our annual financial statements as of and for the years ended December 31, 2015 and 2014 can be found under Item 15.


Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


None.


Item 9A.   Controls and Procedures


Section 1.


Evaluation of Disclosure Controls and Procedures:


As of December 31, 2015, we carried out an evaluation under the supervision and the participation of our Chief Executive Officer/Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2015, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”). Based on that evaluation, our management, including our Chief Executive Officer/Chief Financial Officer, concluded that, because of the material weaknesses in internal control over financial reporting discussed in Management’s Report on Internal Control Over Financial Reporting below, our disclosure controls and procedures were not effective, at a reasonable assurance level, as of December 31, 2015. In light of this, we performed additional post-closing procedures and analyses in order to prepare the Consolidated Financial Statements included in this report. As a result of these procedures, we believe our Consolidated Financial Statements included in this report present fairly, in all material respects, our financial condition, results of operations and cash flows for the periods presented. A control system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the company have been detected.


Section 2.


Management’s Annual Report on Internal Control over Financial Reporting


During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2015, our management concluded that its material weaknesses in its internal controls over financial reporting include matters pertaining to: (a) lack of qualified accounting personnel; and (b) the need to enhance the supervision, monitoring and reviewing of financial statement preparation processes due to lack of qualified accounting personnel.




38



Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is the process designed by and under the supervision of our Chief Executive Officer/Chief Financial Officer, or the persons performing similar functions, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management has evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies. Under the supervision and with the participation of our Chief Executive Officer/Chief Financial Officer, our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2015 and concluded that it is ineffective because of the material weaknesses in our internal control over financial reporting described above.


Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.


Changes in Internal Control over Financial Reporting


There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the year ended December 31, 2015 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Item 9B.   Other Information


In conjunction with Item 9A above (Evaluation of Internal Controls over Financial Reporting) and following our management’s assessment and conclusion that our internal control over financial reporting as of December 31, 2015 is ineffective, because of the material weaknesses described above, we are actively seeking a new Chief Financial Officer.





39



PART III


Item 10.   Directors and Executive Officers and Corporate Governance


Paul Reid, PhD resigned as ReceptoPharm’s Chief Executive Officer in November 2011. Since that time our Director, Harold Rumph, has filled the role in running ReceptoPharm operations.


Directors and Executive Officers


Our Board of Directors elects our executive officers annually. Directors are elected to hold office until the next annual meeting. A majority vote of the directors who are in office is required to fill vacancies of our Board of Directors not caused by removal. Each director, including a Director elected to fill a vacancy, will hold office until the expiration of the term for which the Director was elected and until a successor has been elected. Our directors and executive officers are as follows:


Listed below are our executive officers and directors as of December 31, 2015


Name

 

Age

 

Position with the Company

 

Director Since

Rik J. Deitsch

 

48

 

Chairman, President and Chief Executive Officer*

 

2002

Stewart Lonky, M.D.

 

69

 

Director (1)

 

2004

Harold H. Rumph

 

85

 

Director

 

April 2008

Garry R. Pottruck

 

59

 

Director (1)

 

July 2009


(1)

Dr. Lonky and Garry R. Pottruck are members of our Audit Committee and Compensation Committee.

*

Rik Deitsch also served as Chief Financial Officer until the appointment of Bruno Sartori in March 2012. Upon the termination of Mr. Sartori, Mr. Deitsch resumed the role of Chief Financial Officer in September, 2012


Rik J. Deitsch has been our President, Chief Executive Officer and a Director since November 7, 2002 and our Chairman of the Board from December 15, 2003 until June 1, 2005 and from April 1, 2006 to present. Mr. Deitsch served as our Chief Financial Officer from November 2002 until March 2012 and from September 2012 to present. From February 1998 through November 2002, Mr. Deitsch served as the President of NDA Consulting Inc., a biotechnology research group that provided consulting services to the pharmaceutical industry. NDA Consulting specializes in the research of peptides derived from Cone Snail venom and Cobra venom. In October 1999, Mr. Deitsch founded Wellness Industries, a private corporation that provides formulations, research and education in the dietary supplement industry. Research conducted by Rik J Deitsch provided some of the beginning fundamentals for the development of drugs being studied for the treatment of cancer and intractable pain. Mr. Deitsch has prepared several papers and posters on rational drug design using computer simulations. Mr. Deitsch received a B.S. in Chemistry and an M.S. in Biochemistry from Florida Atlantic University in June 1997 and December 1999, respectively. Throughout 1999 and 2000, he conducted research for the Duke University Medical School Comprehensive Cancer Center. Mr. Deitsch has served as an adjunct professor and has taught several courses for Florida Atlantic University's College of Business and Continuing Education Department. Mr. Deitsch also teaches physician CME courses internationally, lecturing on lifestyle choices in the prevention and treatment of chronic disease states. He is the co-author of two books: Are You Age-Wise, a book that reviews current research in healthy aging as it relates to lifestyle choices and supplementation and Invisible Killers, a book that outlines our exposure to environmental toxins. Mr. Deitsch has been the Chairman of Waiora's Scientific Advisory Board since April 2004. Waiora develops and markets natural, science-based dietary supplements and personal care products that provide healthy aging solutions.


Dr. Stewart Lonky has been our director since November 5, 2004. Dr. Lonky was a co-founder of the Trylon Corporation, a medical device firm located in Torrance, California, and served as its Chief Medical Officer from 1990-2005. Trylon Corporation developed diagnostic products for the early diagnosis of cervical and oral cancer, and in connection with that Dr. Lonky's responsibilities included product development, the direction of clinical research and interacting with regulatory agencies, including the U.S. Food and Drug Administration (FDA). In these roles he has been instrumental in successfully bringing a number of products to the medical marketplace. He has continued to be engaged in both clinical and biochemical research, and has published research articles in the peer-reviewed literature in the areas of cervical cancer and cellular pathophysiology. Since 2005, Dr. Lonky has held a similar position with another device company, Histologics, LLC. Dr. Lonky has been a practicing physician in the Los Angeles Area since 1982. He is Board Certified in Internal Medicine, Pulmonary Medicine, and Critical Care Medicine. Prior to entering practice, Dr. Lonky served as a full-time faculty member at the University of California, San Diego in the Department of Medicine, Pulmonary Division, where he was engaged in research in the biochemistry of lung injury. He was a National Institutes of Health (NIH) Postdoctoral Fellow from 1974-77. He has published over twenty articles and abstracts in the peer-reviewed literature during that time, and authored two book chapters.




40



Harold H. Rumph became our Director on April 10, 2008 when ReceptoPharm became our wholly owned subsidiary. Since November of 2011, Mr. Rumph has acted in the capacity as Interim President of ReceptoPharm. From May 2003 to present, Harold H. Rumph has been the President/Director of ReceptoPharm, Inc., a biotechnology company located in Plantation, Florida. From September 1988 to April 2003, Mr. Rumph was the President/Founder of Project Scheduling Services, Inc., a computerized scheduling services company to the construction industry, located in Pompano Beach, Florida. From 1962 to 1988, Mr. Rumph held managerial, marketing , and other positions with IBM, RCA, Xerox , Harris Corporation and was a founder and President of Biogenix, Inc., a biotechnology company located in Boca Raton, Florida. From 1953 to 1962, Mr. Rumph served on active duty with various responsibilities including Tactical Fighter Pilot and at Headquarters United States Air Force Intelligence with the United States Air Force. In 1953, Mr. Rumph received a Bachelor of Science Degree in Military Science from the United States Naval Academy in Annapolis Maryland.


Garry Pottruck became our Director and Chairman of our Audit and Compensation Committees after our December 31, 2008 year-end, in July 2009. Since January 2011, Mr. Pottruck has been employed as a tax principal at the CPA firm of Blum and Blum. From October 2005 until December 2010, he was a principal in the accounting, tax and consulting firm, Argy, Wiltse & Robinson, PC (“Argy”), headquartered in McLean, Virginia. From July 1997 through October 2005, he was managing partner in the certified public accounting firm, Friedberg & Pottruck, PA, located in Deerfield Beach, Florida until Argy acquired the firm. Friedberg & Pottruck specialized in providing accounting, tax and consulting services to physician practices. Mr. Pottruck held financial executive positions with several companies, both public and private, from 1984 through 1994. Prior to 1984, Mr. Pottruck worked for public accounting firms after graduating with a B.S. Degree in Accounting from the C.W. Post School of Professional Accountancy at Long Island University in 1979. He is currently a member of both the Florida and American Institutes of Certified Public Accounting, and is licensed as a Certified Public Accountant in both Missouri and Florida.


Section 16(a) Compliance of Officers and Directors


As of April 14, 2016, based on our review of Forms 3, 4, 5, and Schedule 13D furnished to us during the last fiscal year, all of our officers and directors filed the required reports.


Corporate Governance


a. Committees


(i) Audit Committee


On November 5, 2004, our Board of Directors established an Audit Committee. An audit committee charter was approved by the Board on October 14, 2012. Mr. Pottruck became the Chairman/Member of the Audit Committee as of July 29, 2009. Dr. Lonky also serves on the Audit Committee. During our 2015 Fiscal Year, our Audit Committee met three times in connection with our Fiscal Year audit, at which time the audit committee reviewed the audited financial statements and related notes. In addition, the audit committee met prior to the filing of each of the 2015 quarterly reports to review such reports. The Audit Committee addresses any questions it has to our Board members and officers, and our principal independent accountants.


(ii) Compensation Committee


On November 5, 2004, our Board of Directors established a Compensation Committee. We do not have a Compensation Committee Charter. Dr. Lonky serves on our Compensation Committee and Mr. Pottruck became our Compensation Committee’s Chairman as of July 29, 2009. During our 2015 fiscal year, our Compensation Committee met three times. Our Compensation Committee reviews all salaries, expenses, stock plans, and other compensation paid to our officers, directors, consultants, and others. Our Compensation Committee has not adopted any specific processes or procedures for considering executive and director compensation.


(iii) Nominating Committee


We do not have a Nominating Committee or similar committee performing similar functions nor a written Nominating Committee Charter. Our Board of Directors as a whole decides such matters, including those that would be performed by a standing nominating committee. We have not yet adopted a nominating committee because we have not sufficiently developed revenue-generating operations. We do not currently have any specific or minimum criteria for the election of nominees to our Board of Directors nor do we have any process or procedure for evaluating such nominees.


b. Shareholder Communications


Our Board of Directors does not have any defined policy or procedure requirements for our stockholders to send communications to our Board of Directors, including submission of recommendations for nominating directors. We have not yet adopted a process for our security holders to communicate with our Board of Directors because we have not sufficiently developed our operations and corporate



41



governance structure. We have a toll-free number at (877) 895-5647 available on our website for our shareholders to contact us as well as a dedicated email address at investor.relations@nutrapharma.com.


c. Board of Director Meetings


We had twelve Board of Directors meetings during our 2015 Fiscal Year. Our corporate actions that were subject to Board approval were accomplished by Board resolutions. We request that all of our Directors attend our Board of Director meetings; however, we have no formal policy regarding their attendance.


d. Annual Shareholder Meetings


We held a shareholder meeting on April 20, 2015. During that meeting, the shareholders approved a 1 for 40 reverse split of our outstanding common stock.


We request that all of our Directors attend our Annual Shareholder Meetings; however, we have no formal policy regarding their attendance.


e. Code of Ethics


We have a code of ethics that applies to all of our employees including its principal executive officer, principal financial officer and principal accounting officer. A copy of this code is available without charge on our website at www.nutrapharma.com. We intend to disclose any changes in or waivers from our code of ethics by posting such information on our website or by filing a Form 8-K.


Item 11.   Executive Compensation


The following table summarizes compensation information for the last two fiscal years for (i) our Chief Executive Officer and (ii) the four most highly compensated executive officers other than the Chief Executive Officer who were serving as our executive officers at the end of the fiscal year (collectively, the “Named Executive Officers”).


The following executive compensation disclosure reflects all compensation awarded to, earned by or paid to the executive officers below, for the fiscal years ended December 31, 2015 and 2014.


SUMMARY COMPENSATION TABLE


Name and principal Position

 

Year

 

Salary

($)

 

Bonus

($)

 

Stock
Awards

($)

 

Option
Awards

($)

 

Non- Equity
Incentive
Plan
Compensation

($)

 

Nonqualified
Deferred
Compensation
Earnings

($)

 

All Other
Compensation
($)

 

Total
($)

Rik Deitsch

 

2015

 

130,000

 

 

740,000

 

 

 

 

 

870,000

Chief Executive Officer,

Chief Financial Officer,

President and

Chairman of the Board

 

2014

 

130,000

 

 

121,656

 

 

 

 

 

251,656


The following director compensation disclosure reflects all compensation awarded to, earned by or paid to the directors below for the fiscal year ended December 31, 2015.


DIRECTOR COMPENSATION


Name

 

Fees
Earned

orPaid
in Cash

($)(1)

 

Stock

Awards

($)(2)

 

Option

Awards

($)

 

Non-Equity

Incentive
Plan

Compensation

($)

 

Nonqualified

Deferred
Compensation

Earnings

($)

 

All Other

Compensation

($)

 

Total

($)

Rik Deitsch

 

130,000

 

740,000

 

0

 

0

 

0

 

0

 

740,000

Stewart Lonky

 

0

 

370,000

 

0

 

0

 

0

 

0

 

370,000

Garry Pottruck

 

0

 

370,000

 

0

 

0

 

0

 

0

 

370,000

Harold H. Rumph

 

0

 

370,000

 

0

 

0

 

0

 

0

 

370,000


(1)   Represents salary accrued during 2015

(2)   Represents stocks issued for services at a price per share of $0.185 during July 2015.




42



Director Compensation


There are no standard arrangements to which directors are compensated for services provided to us. Should we obtain adequate funding or sufficient revenues to justify standard arrangements for director compensation, we will consider whether to adopt such a compensation plan.


Stock Option Grants in Last Fiscal Year


We did not grant incentive and non-qualified stock options in 2015 to any executive officer or director.


Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


The following tables sets forth, as of December 31, 2015, certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Information relating to beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days.


Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. We are unaware of any contract or arrangement that could result in a change in control of our company.


The following table assumes based on our stock records, that there are 106,894,580 shares issued and outstanding as of April 14, 2016:


Security Ownership of Management and Beneficial Owners


Name and Address of Director or Executive Officer

 

Shares of
Common Stock
Beneficially Owned

 

Percent of
Common Stock
Outstanding

Rik J. Deitsch
Chief Executive Officer/President
12538 W. Atlantic Blvd
Coral Springs, Florida 33071

 

9,219,275

 

9%

Dr. Stewart Lonky
Director
12936 Discovery Creek
Playa Vista, CA 90094

 

2,755,450

 

3%

Harold Rumph
Director
1537 NW 65th Ave
Plantation, FL 33313

 

2,966,675

 

3%

Garry Pottruck
Director
10768 NW 18 Court
Coral Springs, Florida 33071

 

2,698,775

 

3%

All executive officers and directors
as a group (4) persons

 

17,640,175

 

18%


Item 13.   Certain Relationships and Related Transactions, and Director Independence


Loans by our Chief Executive Officer


During the year ended December 31, 2014, we borrowed a total of $86,464 from Mr. Deitsch and repaid a total of $161,969 to him. In addition, Mr. Deitsch accepted a total of 125,000 shares of the Company’s restricted common stock as a repayment to discharge $100,000 of his outstanding loan on April 10, 2014. The balance owed to our President, Rik Deitsch, at December 31, 2014 was $411,411, which includes accrued interest of $369,983. This demand loan is unsecured and bears interest at a rate of 4.0%.




43



During the year ended December 31, 2015, we borrowed $70,821 and repaid $351,583 to Mr. Deitsch and the companies owned by him. The balance owed to our President, Rik Deitsch, at December 31, 2015 was $279,020 which is primarily accrued interest. The amount due from the Companies owned by him was $132, 250. This demand loan is unsecured and bears interest at a rate of 4.0%.


Subsequent to December 31, 2015, we received additional advances from Mr. Deitsch in the amount of $9,901 and repaid Mr. Deitsch and the Company owned by him $27,800 and $4,200, respectively. The amount owed to Mr. Deitsch as of April 14, 2016 was $264,239 which is primarily the accrued interest. The amount owed to the Companies owned by Mr. Deitsch as of April 14, 2016 was $136,450.


Debt owed to our Directors


At December 31, 2015, we owed Garry Pottruck, a Director of Nutra Pharma, $222,576 including the accrued interest of $187,576. The note is for principal amount of $200,000 with interest calculated at 10% interest for the first month plus 12% per annum calculated after 30 days from funding. The note was issued in the third quarter of 2010 and was expected to be repaid in six months to a year from the date of the loan.


Debt owed to ReceptoPharm’s Former President as of December 31, 2014 and 2013


In addition, at December 31, 2014, we were indebted to Paul Reid, the former President of our wholly owned subsidiary, ReceptoPharm, in the amount of $129,466. This amount includes accrued interest of $49,638. This loan is due on demand and bears interest at a rate of 5% per annum. The loan is secured by certain intellectual property of ReceptoPharm. This Note is included in the settlement of the involuntary action. As of December 31, 2015, the loan and accrued interest for a total of $129,466 were written off due to passing the statute of limitation.


Director Independence


Our common stock is quoted on the OTC-Markets; that trading medium does not have director independence requirements. Under Item 407(a) of Regulation S-K, we have adopted the definition of independence used by the American Stock Exchange, which may be found in the American Stock Exchange Company guide at (s) 121(A) (2) (2007). This definition states that our Board of Directors must affirmatively determine whether any of our directors have a relationship that would interfere with the exercise of independent judgment in carrying out their responsibilities of a director. Based on this definitional standard, our Board of Directors has determined that none of our Directors are independent.


Item 14.   Principal Accountant Fees and Services


Audit Fees


The aggregate fees billed to us for fiscal years ended December 31, 2015 and 2014 by auditors, Liggett & Webb, P.A., were approximately $47,138 and $49,385 for professional services rendered for the audit of our annual financial statements and reviews of our interim consolidated financial statements included in quarterly reports and other services related to statutory and regulatory filings or engagements.


Audit-Related Fees


Audit-related fees represent review of registration statements or services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years, and the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under Audit Fees. No such fees were paid to Liggett & Webb, P.A in 2015 or 2014.


Tax Fees


No such fees were paid to Liggett & Webb, P.A in 2015 or 2014.


All Other Fees


No such fees were paid to Liggett & Webb, P.A in 2015 or 2014.


As of December 31, 2015, the Company did not have a formal documented pre-approval policy for the fees of the principal accountant. The Company has an audit committee which reviewed all fees to the principal accountant. The percentage of hours expended on the principal accountant's engagement to audit our financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was 0%.




44



PART IV


Item 15.   Exhibits and Financial Statement Schedules


(a)   The following Financial Statements are filed as part of this report under Item 7.

 

Report of Independent Registered Certified Public Accounting Firm

F-2

Consolidated Balance Sheets

F-3

Consolidated Statements of Operations

F-4

Consolidated Statements of Cash Flows

F-5

Consolidated Statements of Changes in Stockholders' Deficit for the Years Ended December 31, 2015 and 2014

F-6

Notes to Consolidated Financial Statements

F-7


(b)   The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC:


Exhibit

No.

 

Description

3.1

 

Certificate of Incorporation dated February 1, 2000 (incorporated by reference to the Company’s Registration Statement on Form SB-2/A, Registration No. 33-44398, filed on April 6, 2001)

3.2

 

Certificate of Amendment to Articles of Incorporation dated July 5, 2000 (incorporated by reference to the Company’s Registration Statement on Form SB-2/A, Registration No. 33-44398, filed on April 6, 2001)

3.3

 

Certificate of Amendment to Articles of Incorporation dated October 31, 2001 (incorporated by reference to the Company’s Registration Statement on Form SB-2/A, Registration No. 33-44398, filed on April 6, 2001)

10.1

 

Agreement and Plan of Merger dated April 9, 2008 by and among Nutra Pharma Corp., a California corporation (“Nutra Pharma”), NP Acquisition Corporation, a Nevada corporation wholly owned by Nutra Pharma (“Acquisition”), ReceptoPharm, Inc., a Nevada corporation (“Receptopharm”) and the stockholders of Receptopharm (incorporated by reference from Form 8-K filed on April 14, 2008).

10.18

 

Patent Assignment Agreement dated January 24, 2006 between Nanologix, Inc. and Nutra Pharma Corp. (incorporated by reference from Form 10-K for period ending December 31, 2006)

10.19

 

International License Agreement between NanoLogix, Inc. and Nutra Pharma Corp. (incorporated by reference from Form 10-K for period ending December 31, 2006)

20.3

 

License Agreement between Bio-Therapeutics, Inc. and Nutra Pharma Corp (incorporated by reference from Form 10-KSB for the period ending December 31, 2003)

20.4

 

Amendment to License Agreement between Bio-Therapeutics, Inc. and Nutra Pharma Corp (incorporated by reference from Form 10-KSB for the period ending December 31, 2003)

14.1

 

Code of Ethics (incorporated by reference from Report on Form 10-K/A filed on May 7, 2004).

20.3

 

License Agreement between Bio-Therapeutics, Inc. and Nutra Pharma Corp (incorporated by reference from Form 10-KSB for the period ending December 31, 2003)

20.4

 

Amendment to License Agreement between Bio-Therapeutics, Inc. and Nutra Pharma Corp (incorporated by reference from Form 10-KSB for the period ending December 31, 2003)

21.1

 

Subsidiaries of the Registrant, Nutra Pharma Corp.

31.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1

 

Form 8-K filed on April 14, 2008 under Item 1.01 regarding acquisition of ReceptoPharm, Inc. as Nutra Pharma Corp.'s wholly owned subsidiary and Exhibit 10.1 (April 10, 2008 Agreement and Plan of Merger) attached thereto (incorporated by reference to this Form 10-K for the period ending December 31, 2008).




45




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.


 

NUTRA PHARMA CORP.

 

 

 

/s/ Rik J. Deitsch

 

Rik J. Deitsch, Chairman, President, Chief

 

Executive Officer, Principal Financial

 

Officer, and Principal Accounting Officer


Dated: April 14, 2016


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.


Signature

 

Title

 

Date

 

 

 

 

 

/s/ Rik J. Deitsch

 

Chairman of the Board, President,

 

April 14, 2016

 

 

Chief Executive Officer,

 

 

 

 

Principal Financial Officer,

 

 

 

 

Principal Accounting Officer

 

 

 

 

 

 

 

/s/ Garry R. Pottruck

 

Director

 

April 14, 2016

 

 

 

 

 

/s/ Stewart Lonky

 

Director

 

April 14, 2016

 

 

 

 

 

/s/ Harold H. Rumph

 

Director

 

April 14, 2016


46




Nutra Pharma Corporation

Consolidated Financial Statements

For the years ended December 31, 2015 and 2014

 

Report of Independent Registered Public Accounting Firm

F-2

 

 

Consolidated Balance Sheets as of December 31, 2015 and 2014

F-3

 

 

Consolidated Statements of Operations for the Years Ended December 31, 2015 and 2014

F-4

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 2014

F-6

 

 

Consolidated Statements of Changes in Stockholders' Deficit for the Years Ended December 31, 2015 and 2014

F-5

 

 

Notes to Consolidated Financial Statements

F-7





F-1




[logo001.jpg]

432 Park Avenue South, 10th Floor

New York , NY 10016 / (212) 481-3490


1500 Gateway Boulevard, Suite 202

Boynton Beach, FL 33426 / (561) 752-1721



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors of:

Nutra Pharma Corp.


We have audited the accompanying consolidated balance sheets of Nutra Pharma Corp. and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations and changes in stockholders’ deficit and cash flows for the two years then ended.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Nutra Pharma Corp. and Subsidiaries as of December 31, 2015 and 2014 and the results of its operations and its cash flows for the two years then ended, in conformity with accounting principles generally accepted in the United States of America.


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring, significant losses from operations, and has an accumulated deficit of $49,911,786 at December 31, 2015. In addition, the Company had a working capital deficit and stockholders’ deficit at December 31, 2015 of $3,404,497 and $3,574,396, respectively.  These factors raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Liggett & Webb, P.A.


LIGGETT & WEBB, P.A.

Certified Public Accountants


Boynton Beach, Florida

April 14, 2016





F-2




NUTRA PHARMA CORP.

Consolidated Balance Sheets


 

 

December 31,

 

 

2015

 

2014

ASSETS

 

 

 

 

Current assets:

 

 

 

 

  Cash

$

6,890

$

15,530

   Accounts receivable

 

21,990

 

127,368

Inventory

 

54,034

 

46,945

   Prepaid expenses and other current assets

 

266,579

 

151,968

       Total current assets

 

349,493

 

341,811

 

 

 

 

 

Property and equipment, net

 

18,986

 

29,490

Other assets

 

19,164

 

15,955

       Total assets

$

387,643

$

387,256

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

Current liabilities:

 

 

 

 

  Accounts payable

$

842,024

$

1,243,997

  Accrued expenses

 

1,130,271

 

1,019,673

  Due to officers

 

146,770

 

540,877

  Derivative warrant liability

 

142,556

 

186,549

  Other debt, net of debt discount of $46,523 and $2,611,  respectively

 

1,492,369

 

960,921

      Total current liabilities

 

3,753,990

 

3,952,017

Convertible debts

 

60,870

 

30,000

Legal settlement liability, long term portion

 

147,179

 

-

      Total liabilities

 

3,962,039

 

3,982,017

 

 

 

 

 

Commitments and Contingencies (See Note 8)

 

-

 

-

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 2,000,000,000 shares authorized:79,770,782 and 36,765,781 shares issued and
outstanding at December 31, 2015 and 2014

 

79,771

 

36,766

Additional paid-in capital

 

46,257,619

 

40,888,278

Accumulated deficit

 

(49,911,786)

 

(44,519,805)

Total stockholders' deficit

 

(3,574,396)

 

(3,594,761)

Total liabilities and stockholders' deficit

$

387,643

$

387,256



See the accompanying notes to the consolidated financial statements.



F-3




NUTRA PHARMA CORP.

Consolidated Statements of Operations  


 

 

For the Years Ended December 31,

 

 

2015

 

2014

Net sales

$

291,302

$

594,505

Cost of sales

 

65,805

 

114,300

Gross profit

 

225,497

 

480,205

 

 

 

 

 

Operating expenses:

 

 

 

 

Selling, general and administrative - including stock based compensation of $2,742,441 and $511,668, respectively

 

5,991,630

 

2,682,479

Total other costs and expenses

 

5,991,630

 

2,682,479

Net Loss from Operations

 

(5,766,133)

 

(2,202,274)

 

 

 

 

 

Other Expenses

 

 

 

 

  Rental Income

 

27,564

 

-

  Interest expense

 

(434,547)

 

(128,104)

  Change in fair value of derivatives

 

(250,121)

 

(208,190)

  Gain (loss) on settlement of debt, net

 

1,031,256

 

5,583

Other Expenses

 

374,152

 

(330,711)

Net loss before income taxes

 

(5,391,981)

 

(2,532,985)

Provision for income taxes

 

-

 

-

Net loss

$

(5,391,981)

$

(2,532,985)

 

 

 

 

 

Net loss per share - basic and diluted

$

(0.10)

$

(0.08)

 

 

 

 

 

Weighted average number of shares outstanding during the period - basic and diluted

 

55,598,355

 

30,642,813



See the accompanying notes to the consolidated financial statements.



F-4




NUTRA PHARMA CORP.

Consolidated Statements of Cash Flows


 

 

For the Years Ended December 31,

 

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 Cash collected from customers  

$

862,661

$

1,558,124

 Cash paid for commission

 

(481,978)

 

(748,376)

 Cash paid to suppliers

 

(79,116)

 

(107,747)

 Cash paid to employees

 

(131,284)

 

(100,095)

  Interest paid  

 

(50,358)

 

(34,497)

  Loan origination fees paid

 

 

 

(14,350)

 Other operating cash payments  

 

(1,165,677)

 

(701,188)

 Cash collected from rental income

 

27,564

 

-

Net cash used in operating activities

 

(1,018,188)

 

(148,129)

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

  Acquisition of property and equipment

 

(718)

 

(21,550)

Net cash used in investing activities:

 

(718)

 

(21,550)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

  Common stock sold for cash

 

786,300

 

60,000

  Loans from officers

 

70,821

 

86,464

  Repayment of officers loans

 

(261,583)

 

(161,969)

  Repayments of notes payable-related party

 

(85,000)

 

(60,000)

  Proceeds from convertible notes, net of debt discount and loan issuance cost of $69,560

 

518,729

 

50,000

  Proceeds from other notes payable, net of debt discount of $71,500 and loan issuance cost of $22,505

 

347,495

 

225,000

  Repayments of other notes payable

 

(366,496)

 

(18,926)

Net cash provided by financing activities

 

1,010,266

 

180,569

 

 

 

 

 

Net increase(decrease) in cash

 

(8,640)

 

10,890

 

 

 

 

 

Cash - beginning of period

 

15,530

 

4,640

 

 

 

 

 

Cash - end of period

$

6,890

$

15,530

 

 

 

 

 

Reconciliation of net loss to net cash used in operating activities:

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 Net loss

$

(5,391,981)

$

(2,532,985)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

   Gain on settlement of debt

 

(1,031,256)

 

1,158,417

   Depreciation

 

11,222

 

16,594

   Stock-based compensation

 

2,742,441

 

511,668

   Stock issued for loan extension and accounts payable

 

1,484,238

 

42,325

   Change in fair value of derivative

 

250,121

 

208,190

   Amortization of loan discount

 

321,804

 

15,254

Changes in operating assets and liabilities:

 

 

 

 

   Decrease (increase) in accounts receivables

 

105,378

 

(116,227)

   Increase in inventory

 

(7,089)

 

(41,945)

   Increase in prepaid expenses and other assets

 

(57,206)

 

(76,645)

   Increase in accounts payable

 

27,661

 

558,628

   Increase in accrued expenses

 

526,479

 

108,597

Net cash used in operating activities

 

(1,018,188)

 

(148,129)

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

  Cash paid for interest

$

(50,358)

$

(34,497)

  Cash paid for income taxes

$

-

$

-

Non cash Financing and Investing:

 

 

 

 

   Note issued in settlement of notes and accounts payable

$

151,000

$

320,000

  Shares issued to satisfy debt

$

870,640

$

943,904

  Shares issued to satisfy debt-related party

$

10,000

$

100,000

  Discounts on notes payable

$

239,208

$

15,665

  Note payable issued satisfy note payable-related party

$

80,000

$

-

  Stock issued for cashless exercise of warrants

$

33,440

$

-

  Stock issued for additional consideration of convertible notes payable

$

15,810

$

-

  Write-off of notes payable to a relate party due to passing of statute of limitation

$

129,466

$

-


See the accompanying notes to the consolidated financial statements.



F-5




NUTRA PHARMA CORP.

Consolidated Statements of Changes in Stockholders' Deficit

For the years ended December 31, 2015 and 2014


 

 

 

 

Additional

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Shareholder's

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Deficit

Balance -December 31, 2013

 

25,107,825

$

25,108

$

37,742,263

$

(41,986,820)

$

(4,219,449)

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in exchange for services to consultants

 

694,375

 

694

 

195,854

 

 

 

196,548

Issuance of common stock in exchange for services to directors
and employees

 

1,352,300

 

1,352

 

323,200

 

 

 

324,552

Common stock issued in private placement

 

300,000

 

300

 

59,700

 

 

 

60,000

Common stock issued in exchange for related party debt

 

1,250,000

 

1,250

 

98,750

 

 

 

100,000

Common stock issued for modification of debt

 

62,500

 

63

 

42,262

 

 

 

42,325

Common stock issued for conversion of debt

 

3,389,452

 

3,390

 

940,514

 

 

 

943,904

Common stock issued for settlement of AP

 

4,559,329

 

4,559

 

1,470,120

 

 

 

1,474,679

Common stock issued to note holder

 

50,000

 

50

 

15,615

 

 

 

15,665

Net loss

 

 

 

 

 

 

 

(2,532,985)

 

(2,532,985)

Balance -December 31, 2014

 

36,765,781

$

36,766

$

40,888,278

$

(44,519,805)

$

(3,594,761)

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in exchange for services to consultants

 

4,960,000

 

4,960

 

587,745

 

 

 

592,705

Issuance of common stock in exchange for services to directors
and employees

 

10,900,000

 

10,900

 

2,005,600

 

 

 

2,016,500

Common stock issued in private placement

 

13,085,000

 

13,085

 

773,215

 

 

 

786,300

Common stock issued in exchange for related party debt

 

125,000

 

125

 

9,875

 

 

 

10,000

Common stock issued for modification of debt

 

75,000

 

75

 

16,675

 

 

 

16,750

Common stock issued for conversion of debt

 

6,284,830

 

6,284

 

864,355

 

 

 

870,639

Common stock issued for settlement of AP and Debt

 

6,750,000

 

6,750

 

1,063,450

 

 

 

1,070,200

Debt discount

 

825,171

 

826

 

48,426

 

 

 

49,252

Net loss

 

 

 

 

 

 

 

(5,391,981)

 

(5,391,981)

Balance -December 31, 2015

 

79,770,782

$

79,771

$

46,257,619

$

(49,911,786)

$

(3,574,396)



See the accompanying notes to the consolidated financial statements.



F-6




NUTRA PHARMA CORP.

Notes to Consolidated Financial Statements

December 31, 2015 and 2014


1.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization


Nutra Pharma Corp. (“Nutra Pharma”), is a holding company that owns intellectual property and operates in the biotechnology industry. Nutra Pharma incorporated under the laws of the state of California on February 1, 2000, under the original name of Exotic-Bird.com.


Through its wholly-owned subsidiary, ReceptoPharm, Inc. (“ReceptoPharm”), Nutra Pharma conducts drug discovery research and development activities. In October 2009, Nutra Pharma launched its first consumer product called Cobroxin®, an over-the-counter pain reliever designed to treat moderate to severe chronic pain. In May 2010, Nutra Pharma launched its second consumer product called Nyloxin®, an over-the-counter pain reliever that is a stronger version of Cobroxin® and is designed to treat severe chronic pain. In December 2014, we launched Pet Pain-Away, an over-the-counter pain reliever designed to treat pain in cats and dogs.


Basis of Presentation and Consolidation


The accompanying consolidated financial statements include the results of Nutra Pharma and its wholly-owned subsidiaries Designer Diagnostics Inc. and ReceptoPharm (collectively “the Company”, “us”, “we” or “our”). We operate as one reportable segment. All intercompany transactions and balances have been eliminated in consolidation.


Liquidity and Going Concern


Our Consolidated Financial Statements are presented on a going concern basis, which contemplate the realization of assets and satisfaction of liabilities in the normal course of business. We have experienced recurring, significant losses from operations, and have an accumulated deficit of $49,911,786 at December 31, 2015. In addition, we had respective working capital and stockholders’ deficits at December 31, 2015 of $3,404,497 and $3,574,396, respectively.  


There is substantial doubt regarding our ability to continue as a going concern which is contingent upon our ability to secure additional financing, increase ownership equity and attain profitable operations. In addition, our ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered in established markets and the competitive environment in which we operate.


As of December 31, 2015, we do not have sufficient cash to sustain our operations for the next year and will require additional financing in order to execute our operating plan and continue as a going concern. Since our sales are not currently adequate to fund our operations, we continue to rely principally on debt and equity funding; however proceeds from such funding have not been sufficient to execute our business plan. Our plan is to attempt to secure adequate funding until sales of our pain products are adequate to fund our operations. We cannot predict whether additional financing will be available, and/or whether any such funding will be in the form of equity, debt, or another form. In the event that these financing sources do not materialize, or if we are unsuccessful in increasing our revenues and profits, we will be unable to implement our current plans for expansion, repay our obligations as they become due and continue as a going concern.


The accompanying Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.


Use of Estimates


The accompanying Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense. Significant estimates include our ability to continue as going concern, the recoverability of inventories and long-lived assets, and the valuation of stock-based compensation and certain debt and warrant liabilities. Actual results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which would be recorded in the period in which they become known.



F-7




Revenue Recognition


In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Provision for sales returns is estimated based on our historical return experience. Revenue is presented net of returns and allowances for returns.


The Company collects 100% of the cash proceeds from the sale of its product by its distributor, remits a portion of the cash proceeds received back to the distributor and records the sale on a net basis. In the years ended December 31, 2015 and 2014, the Company collected $862,661 and $1,558,124 in gross receipts and recorded $291,302 and $594,505 as net sales.


Accounting for Shipping and Handling Costs


The Company records shipping and handling costs incurred in cost of sales.


Cash and Cash Equivalents


We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.


Accounts Receivable and Allowance for Doubtful Accounts


The Company grants credit without collateral to its customers based on the Company’s evaluation of a particular customer’s credit worthiness. In addition, allowances for doubtful accounts are maintained for potential credit losses based on the age of the accounts receivable and the results of the Company’s periodic credit evaluations of its customers’ financial condition. Accounts receivable are written off after collection efforts have been deemed to be unsuccessful. Accounts written off as uncollectible are deducted from the allowance for doubtful accounts, while subsequent recoveries are netted against the provision for doubtful accounts expense. The Company generally does not charge interest on accounts receivable.


Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts.


Inventories


Inventories, which are stated at the lower of average cost or market, and consist of packaging materials, finished products, and raw venom that is utilized to make the API (active pharmaceutical ingredient). The raw unprocessed venom has an indefinite life for use. The Company regularly reviews inventory quantities on hand.  If necessary it records a provision for excess and obsolete inventory based primarily on its estimates of component obsolescence, product demand and production requirements. Write-downs are charged to cost of goods sold.  We performed evaluations of our inventory during the years ended December 31, 2015 and 2014 and determined no allowances need to be recorded.


Financial Instruments and Concentration of Credit Risk


Our financial instruments include cash, accounts receivable, accounts payable, accrued expenses, loans payable, due to officers and derivative financial instruments. Other than certain warrant and convertible instruments (derivative financial instruments) and liabilities to related parties (for which it was impracticable to estimate fair value due to uncertainty as to when they will be satisfied and a lack of similar type transactions in the marketplace), we believe the carrying values of our financial instruments approximate their fair values because they are short term in nature or payable on demand. Our derivative financial instruments are carried at a measured fair value.


Balances in various cash accounts may at times exceed federally insured limits. We have not experienced any losses in such accounts. We do not hold or issue financial instruments for trading purposes. In addition, for the years ended December 31, 2015 and 2014, no customers accounted for more than 10% of the Company’s total revenues.


Derivative Financial Instruments


The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Management evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. For embedded derivatives, the Company uses a Dilution-Adjusted



F-8




Black-Scholes method to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.


Convertible Debt


The Company bifurcates the embedded derivative element in convertible debt which contain conversion features which are not considered to be conventional convertible debt.  The convertible debt is recorded at the bifurcated amount after reducing the proceeds for the liability related to the embedded call provision which is accounted for separately in the accompanying balance sheets.  After recording the initial amount of the debt, the discount related to the bifurcated embedded derivative is amortized as additional interest expense over the term of the debt with the resulting debt discount being accreted over the term of the note.  


Property and Equipment and Long-Lived Assets


Property and equipment is recorded at cost. Expenditures for major improvements and additions are added to property and equipment, while replacements, maintenance and repairs which do not extend the useful lives are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the assets of 3 – 7 years.


Property and equipment consists of the following at December 31, 2015 and 2014:


 

 

2015

 

2014

Computer equipment

$

24,208

$

24,208

Furniture and fixtures

 

34,757

 

34,757

Lab equipment

 

42,129

 

42,129

Telephone equipment

 

12,421

 

12,421

Office equipment – other

 

16,856

 

16,138

Leasehold improvements

 

73,168

 

73,168

Total

 

203,539

 

202,821

Less: Accumulated depreciation

 

(184,553)

 

(173,331)

Property and equipment, net

$

18,986

$

29,490


We review our long-lived assets for recoverability if events or changes in circumstances indicate the assets may be impaired. At December 31, 2015, we believe the carrying values of our long-lived assets are recoverable. Depreciation expense for the year ended December 31, 2015 and 2014 was $11,222 and $16,594, respectively.


Advertising


All advertising costs are expensed as incurred.  Advertising costs were approximately $2,138 and $6,156 for the year ended December 31, 2015 and 2014, respectively.


Income Taxes


We compute income taxes in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740, Income Taxes (“ASC Topic 740”). Under ASC Topic 740, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Also, the effect on deferred taxes of a change in tax rates is recognized in income in the period that included the enactment date. Temporary differences between financial and tax reporting arise primarily from the use of different methods to record bad debts and /or sales returns, and inventory reserves.


On an annual basis, we evaluate tax positions that have been taken or are expected to be taken in our tax returns to determine if they are more than likely to be sustained if the taxing authority examines the respective position.  As of December 31, 2015, we do not believe we have a need to record any liabilities for  uncertain tax positions or provisions for interest or penalties related to such  positions.


Since inception, we have been subject to tax by both federal and state taxing authorities. Until the respective statutes of limitations expire (which may be as much as 20 years while we have unused net operation losses), we are subject to income tax audits in the jurisdictions in which we operate. The Company’s 2012 to 2015 tax returns are subject to examination by Internal Revenue Services and State Taxing Agency’s.


On July 18, 2015, the Company received a notice of penalty charge of $35,296 from IRS for failure to file Forms W-2 for tax period ended at December 31, 2011. During February 2016, the Company signed a payment agreement to pay the penalty.


F-9



Stock-Based Compensation


We account for stock-based compensation in accordance with FASB ASC Topic 718, Stock Compensation (ASC Topic 718). ASC Topic 718, which requires that the cost resulting from all share-based transactions be recorded in the financial statements over the respective service periods. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.


Net Loss Per Share


Net loss per share is calculated in accordance with ASC Topic 260, Earnings per Share. Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which we incur losses, common stock equivalents, if any, are not considered, as their effect would be anti-dilutive or have no effect on earnings per share. Any common shares issued as of a result of the exercise of stock options and warrants would come from newly issued common shares from our remaining authorized shares. As of December 31, 2015and 2014, the following items were not included in dilutive loss as the effect is anti-dilutive:


 

 

December 31, 2015

 

December 31, 2014

Options and warrants

 

21,700,000

 

1,606,667

Convertible notes payable

 

15,871,102

 

1,420,434

Total

 

37,571,102

 

3,027,101


Reclassifications


Certain amounts in the 2014 Consolidated Financial Statements have been reclassified to conform to the current period presentation.  


Stock Split


On April 20, 2015, the Company declared a 1 for 40 reverse common stock split to stockholders. The Stock Split was effectuated on May 18, 2015 based upon filing the appropriate documentation with FINRA. Per share and weighted average amounts have been retroactively restated in the accompanying financial statements and related notes to reflect this stock split (See Note 7).


Recent Accounting Pronouncements


In April 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”, is to simplify presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The ASU does not affect the recognition and measurement guidance for debt issuance costs. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. We have adopted the provisions of this ASU for the year ended December 31, 2015.


In May 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. This ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.


In June 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-10, “Technical Corrections and Improvements” covers a wide range of Topics in the Codification.  The amendments represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, some of the amendments will make the Codification easier to understand and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. Transition guidance varies based on the amendments in this ASU. The amendments in this ASU that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this ASU. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.


F-10



In August 2015, FASB issued Accounting Standards Update (“ASU”) No.2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” defers the effective date ASU No. 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU No. 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU No. 2014-09. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.


In September 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not yet been made available for issuance. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.


All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.


2.     FAIR VALUE MEASUREMENTS


Certain assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2015are measured in accordance with FASB ASC Topic 820-10-05, Fair Value Measurements. FASB ASC Topic 820-10-05 defines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurements for financial assets and liabilities as well as for non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis in the financial statements.


The statement requires fair value measurement be classified and disclosed in one of the following three categories:


Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;

Level 2:

Quoted prices in markets that are not active or inputs which are observable either directly or indirectly for substantially the full term of the asset or liability; and

Level 3:

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).


The following table summarizes our financial instruments measured at fair value as of December 31, 2015 and 2014:


 

 

Fair Value Measurements at December 31, 2015

Liabilities:

 

Total

 

Level 1

 

Level 2

 

Level 3

Warrant liability

$

142,556

$

-

$

-

$

142,556

Convertible notes at fair value

$

1,021,501

$

-

$

-

$

1,021,501




F-11





 

 

Fair Value Measurements at December 31, 2014

Liabilities:

 

Total

 

Level 1

 

Level 2

 

Level 3

Warrant liability

$

186,549

$

-

$

-

$

186,549

Convertible notes at fair value

$

330,277

$

-

$

-

$

330,277


The following table shows the changes in fair value measurements using significant unobservable inputs (Level 3) during the years ended December 31, 2015 and 2014:


Description

 

2015

 

2014

Beginning balance

$

186,549

$

323,172

Purchases, issuances, and settlements

 

(782,239)

 

18,551

Day one loss on value of hybrid instrument

 

-

 

-

Total gain included in earnings (1)

 

738,246

 

(155,174)

Ending balance

$

142,556

$

186,549


(1)   The gain or loss related to the revaluation of our warrant liability is included in “Change in fair value of derivatives” in the accompanying consolidated statement of operations.


The Company values its warrants using a Dilution-Adjusted Black-Scholes Model.  Assumptions used include (1) 0.49% to 1.31% risk-free rate, (2) warrant life is the remaining contractual life of the warrants, (3) expected volatility of 187% (4) zero expected dividends (5) exercise price set forth in the agreements (6) common stock price of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.


The following table summarizes the significant terms of each of the debentures for which the entire hybrid instrument is recorded at fair value as of December 31, 2015 and 2014:


 

 

 

 

 

 

 

 

Conversion Price - Lower of Fixed

Price or Percentage of VWAP

for Look-back Period

 

 

Debenture

Issuance Year

 

Face

Amount

 

Interest Rate

 

Default

Interest

Rate

 

Anti-Dilution

Adjusted

Price

 

%

 

Look-back

Period

2015

 

$729,871

 

4%-20%

 

n/a

 

$0.03-$0.20

 

50%-85%

 

10 to 20 Days

2014

 

215,386

 

8%-20%

 

n/a

 

$0.0028-$0.0050

 

50%-85%

 

10 to 30 Days


The following table shows the changes in fair value measurements using significant unobservable inputs (Level 3) during the years ended December 31, 2015 and 2014 for the Convertible Notes:


 

 

Years Ended December 31,

 

 

2015

 

2014

Description

 

 

 

 

Beginning balance

$

330,277

$

767,057

Purchases, issuances, and settlements

 

1,012,145

 

162,311

Day one loss on value of hybrid instrument

 

779,035

 

423,340

(Gain) loss from change in fair value

 

(229,316)

 

(78,527)

Conversion to common stock

 

(870,640)

 

(943,904)

Ending balance

$

1,021,501

$

330,277


3.     INVENTORIES


Inventories are valued at the lower of cost or market on an average cost basis. At December 31, 2015 and 2014, inventories were as follows:


 

 

December 31,

2015

 

December 31,

2014

Raw Materials

$

29,216

$

16,805

Finished Goods

 

24,818

 

30,140

Total Inventories

$

54,034

$

46,945




F-12




The Company regularly reviews inventory quantities on hand.  If necessary, the Company records a provision for excess and obsolete inventory based primarily on its estimates of component obsolescence, product demand and production requirements. Write-downs and write-offs are charged to cost of goods sold.  We performed evaluations of our inventory at December 31, 2015 and 2014, the Company did not experience any write downs or write offs.


4.     SETTLEMENT OF ACCOUNTS AND NOTE PAYABLE


During October 2015, the Company issued 2,200,000 shares of the company’s restricted stock and 2,200,000 warrants (See Note 7) to settle the outstanding commissions’ payable in aggregate of $77,000 with TCN. The shares were valued at $0.1035 per share and the warrants were valued at $0.0475 per share. The Company recorded a loss of $255,215 as a selling expense during the year ended December 31, 2015.


During July 2015, the Company issued 4,400,000 shares of the company’s restricted stock and 4,400,000 warrants (See Note 7) to settle the outstanding commissions’ payable in aggregate of $59,000 with TCN. The shares were valued at $0.185 per share and the warrants were valued at $0.1009 per share. The Company recorded a loss of $1,198,773 as a selling expense during the year ended December 31, 2015.


During June 2015, the Company issued a total of 150,000 shares of the company’s restricted stock to settle the outstanding legal fees in aggregate of $15,000 with a vendor. The shares were recorded at a fair value of $28,500 or $0.19 per share (See Note 7).


During June, August and October 2014, the Company issued a total of 4,500,000 shares of the company’s restricted stock to settle the outstanding commissions’ payable in aggregate of $300,000 with TCN. The shares were valued at a range from $0.224 to $0.396 per share. The Company recorded a loss of $1,164,000 as a selling expense during the year ended December 31, 2014(See Note 7).


At December 31, 2015,certain accruals and notes payable for former ReceptoPharm employees, officer and consultants for a total of $1,085,468 that have passed the statute of limitation were written off, included in the amount was the accrued salary of $815,747, officer’s loan and accrued interest for $129,466, salary and payroll tax payable of $140,255. Since the Petitioners can only reinforce the settlement amount due to passing of statute of limitation, the Company has accrued the settlement for $315,000 and recorded the gain on settlement of $770,968 in other income (See Note 5 and 10).


5.     DUE TO OFFICERS


At December 31, 2015 and 2014, the balance due to officers consisted of the following:


 

 

December 31,

2015

 

December 31,

2014

An unsecured demand loan from our President and CEO, Rik Deitsch. The loan bears interest at 4%. The loan balance at December 31, 2015and 2014, respectively, includes accrued interest payable of $279,020 and $369,983.

$

146,770

$

411,411

A loan from Paul Reid, the former President of ReceptoPharm bearing interest at a rate of 5% per annum, due on demand and secured by certain intellectual property of ReceptoPharm  having a zero cost at December 31, 2015and 2014. The accrued interest at December 31, 2015and 2014 was $0 and $49,638, respectively. As of December 31, 2015, the loan and accrued interest were written off due to passing the statute of limitation (See Note 4 and 10)

 

-

 

129,466

Ending balances

$

146,770

$

540,877


During the year ended December 31, 2015, we borrowed $70,821 and repaid $351,583 to Mr. Deitsch. Included in the repayment is $80,000 that was assigned to a non-related party in the form of a Convertible Redeemable Note on December 7, 2015. The note carries interest at 4% and is due on December 7, 2016, unless previously converted into shares of restricted common stock. The convertible note’s holder has the right to convert the note, until is no longer outstanding into shares of Common Stock at eighty-five percent (85%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the five trading days preceding the conversion date including the day upon which the notice of conversion is received by the Company (See Note 6).

In addition, Mr. Deitsch accepted a total of 125,000 shares of the Company’s restricted common stock as a repayment to discharge $10,000 of his outstanding loan in January 2015(See Note 7).


During the year ended December 31, 2014, we borrowed $86,464 and repaid $161,969 to Mr. Deitsch. In addition, Mr. Deitsch accepted a total of 1,250,000 shares of the Company’s restricted common stock as a repayment to discharge $100,000 of his outstanding loan on April 10, 2014(See Note 7).




F-13




6.     OTHER DEBT


Other debt (Both short-term and long term) consists of the following at December 31, 2015 and 2014:


 

 

December 31,

2015

 

December 31,

2014

Note payable – Related Party (1)

$

35,000

$

120,000

Notes payable – Non Related Parties (Net of discount of $24,602 and $2,611, respectively) (2)

 

518,659

 

540,644

Convertible notes payable, at fair value (Net of discount of $21,921 and $0, respectively) (3)

 

999,580

 

330,277

Ending balances

$

1,553,239

$

990,921


(1)

During 2010 we borrowed $200,000 from one of our directors. Under the terms of the loan agreement, this loan was expected to be repaid in nine months to a year from the date of the loan along with interest calculated at 10% for the first month plus 12% after 30 days from funding. We are in default regarding this loan. The loan is under personal guarantee by our President and CEO, Rik Deitsch. We repaid $40, 000 and $85,000, respectively during 2014 and 2015. At December 31, 2015 and 2014, we owed this director principal balance of $35,000 and $120,000, respectively.  At December 31, 2015 and 2014, we owed this director accrued interest of $187,576 and $157,128, respectively.  


(2)

At December 31, 2015 and 2014, the balance of $518,659 and $540,644, respectively, consisted of the following loans:


·

In August 2014, the Company issued a promissory note to the Michael McDonald Trust in the amount of $75,000 bearing monthly interest at a rate of 2%. The note is due in six months from the execution and funding of the note. In connection with the issuance of this promissory note, the Company issued 50,000 shares of the Company's common stocks (See Note 7). The Company has recorded a debt discount in the amount of $15,665 to reflect the value of the common stocks as a reduction to the carrying amount of the convertible debt and a corresponding increase to common stocks and additional paid-in capital. The total discount of $15,665 was amortized over the term of the debt.  Amortization for the years ended December 31, 2015 and 2014 was $2,611and $13,054, respectively.  An additional 25,000 shares were issued in February 2015 with a fair value at $6,000 (See Note 7) due to the default.   During the year ended December 31, 2015, the total amount of $84,666 including the accrued interest of $9,666 was assigned and sold to Coventry Enterprises, LLC (“Coventry”) in the form of a Convertible Redeemable Note. Coventry made the conversions of total 1,324,341 shares of the company’s restricted stock satisfying the notes in full (See Note 6(3)).

·

On August 2, 2011 under a settlement agreement with Liquid Packaging Resources, Inc. (“LPR”), the Company agreed to pay LPR a total of $350,000 in monthly installments of $50,000 beginning August 15, 2011 and ending on February 15, 2012. This settlement amount was recorded as general and administrative expenses on the date of the settlement. We did not make the December 2011 or January 2012 payments and on January 26, 2012, we signed the first amendment to the settlement agreement where under we agreed to pay $175,000 which was the balance outstanding at December 31, 2011(this includes a $25,000 penalty for non-payment). The Company repaid $25,000 during the six months ended March 31, 2012. The Company did not make all of the payments under such amendment and as a result pursuant to the original settlement agreement, LPR had the right to sell 142,858 shares of the Company’s free trading stock held in escrow by their attorney and receive cash settlements for a total amount of $450,000 (the initial $350,000 plus total default penalties of $100,000).  The $100,000 default was expensed during 2012.  LPR sold the note to Southridge Partners, LLP (“Southridge”) for consideration of $281,772 in October 2012. The debt has reverted back to the Company.

·

As of December 31, 2015, the Company owed University Centre West Ltd. approximately $55,410, which was assigned and sold to Southridge and subsequently reverted back to the Company.

·

On November 5, 2014, the Company received a loan for a total of $150,000 from a non-related party. The loan was repaid through scheduled payments through November 6, 2015 along with interest on average 15% annum. The Company has recorded loan costs in the amount of $14,350 for the loan origination fees paid at inception date. The total loan cost of $14,350 was amortized over the term of the loan.  Amortization for the years ended December 31, 2015 and 2014 was $12,150 and $2,200, respectively.  On November 6, 2015, the loan was repaid in full. The interest expense for the years ended December 31, 2015 and 2014 is $16,157 and $5,862, respectively

·

On November 5, 2015, the Company received a loan for a total of $150,000 from a non-related party. The loan is repaid through scheduled payments through November 2, 2016 along with interest on average 15% annum. The Company has recorded loan costs in the amount of $12,375 for the loan origination fees paid at inception date. The total loan cost of $12,375 was amortized over the term of the loan.  Amortization for the year ended December 31, 2015 was $2,060.  As of December 31, 2015, repayment of $19,030 was made. The interest expense for the year ended December 31, 2015 is $7,261. As of December 31, 2015, the principal balance of the loan net of discount is $120,655.



F-14





·

During January, 2015, the Company entered a Payment Rights Purchase and Sale Agreement with EBF Partners LLC (“EBF”). EBF purchased $204,000 of the merchant sales for $150,000. In exchange for the purchased amount, the Company agreed to enter into a credit card processing agreement with preapproval by EBF with credit card processor. The Company authorized credit card processor to pay to EBF the cash attributable to 23% of each credit card receivable due to the Company, until EBF has received the purchase amount of $204,000. In the event of default, 100% instead of 23% of each credit card receivable will be paid. The loan is under personal guarantee by our President and CEO, Rik Deitsch and Director, Garry Pottruck.  The Company has recorded debt discount of $54,000, and loan issuance cost of $10,130 for the loan origination fees paid at inception date. The total debt discount and loan issuance cost of $64,130 was amortized over the term of the loan.  Amortization for the debt discount and loan issuance cost for the year ended December 31, 2015 was $54,000 and $10,130, respectively.  On November 6, 2015, the loan was repaid in full.

·

During November, 2015, the Company entered a Revenue Based Factoring Agreement with Qualified Merchant Group, Inc. (“QMG”). QMG purchased $67,500 of the Company’s future receipts for $50,000. In exchange for the purchased amount, the Company authorized QMG to ACH debit $459 daily from the Company’s bank account until QMG has received the purchase amount of $67,500. The loan is under personal guarantee by our President and CEO, Rik Deitsch.  The Company has recorded debt discount of $17,500 at inception date. The debt discount was amortized over the term of the loan.  Amortization for the debt discount for the year ended December 31, 2015 was $3,211.  At December 31, 2015, the principal balance of the loan net of discount is $40,822.

·

In August 2015, the Company issued a promissory note to a non-related party in the amount of $10,000 bearing monthly interest at a rate of 2%. The note is due in six months from the execution and funding of the note. In the event of the Company's failure to pay the Note in a timely fashion, the Noteholder will receive 100,000 shares restricted, common stock on the date that is 15 business days after the maturity date. The interest expense for the year ended December 31, 2015 is $871. During March 2016, the Company issued a total of 1,000,000 shares of the company’s restricted stock to settle the outstanding debt of $10,000 with accrued interest of $1,262 with the Note holder. The shares were recorded at a fair value of $12,600 or $0.02 per share (See Note 11).

·

In December 2015, the Company issued a promissory note to a non-related party in the amount of $10,000 bearing monthly interest at a rate of 2%. The note is due in six months from the execution and funding of the note. In the event of the Company's failure to pay the Note in a timely fashion, the Noteholder will receive 100,000 shares restricted, common stock on the date that is 15 business days after the maturity date. The interest expense for the year ended December 31, 2015 is $90.


(3)

At December 31, 2015 and 2014, the balance of $999,580 and $330,277 consisted of the following convertible loans:


·

In September 2011, the Company borrowed $250,000 from a non-related party.  The principal of this loan were to be repaid with a balloon payment on or before October 1, 2012. On October 19, 2012 the parties amended the notes to extend the due date to May 1, 2013 and include a conversion feature that would allow the holders to convert some or all of their outstanding notes into restricted Company stock at a 15% discount to the average closing market price of the Company's stock traded over the previous 10 days. Interest on these loans is payable monthly beginning in November 2011 with interest calculated at 20%. At December 31, 2015 and 2014, the accrued interest payable was $0 and $4,163, respectively.


During year ended December 31, 2014, the Company issued a total of 33,226,382 shares of the company’s restricted stock satisfying principal of the notes in the amounts of $92,000.  The fair value of the shares issued was $177,093 on the dates of conversion.


During year ended 2014, $33,000 of the debt was assigned to non-related parties in the form of a Convertible Redeemable Note bearing interest of 8% annum with a conversion price for each share of Common Stock equal to 55% of the average of the daily volume weighted average prices of the Common Stock for the 3 trading days with the lowest volume weighted average prices during the 15 to 20 trading days immediately preceding the Conversion Date. Following the assignments, the conversions for a total of 9,600,000 shares of the company’s restricted stock were made at the fair value of $65,982 (See Note 7). With the above conversions, at December 31, 2014, one of the Notes was satisfied in full and the remaining balance of the other Note was $100,000 with a fair value of $125,980 at December 31, 2014 and matured on February 3, 2015.  On August 3, 2014 and April 30, 2014, the Company issued 1,000,000 and 500,000 restricted shares, respectively, to each note holder in connection with the amendment of maturity date at a fair value of $9,100 and $1,950, respectively (See note 7).


During June 2015, the conversion for a total of 196,850 shares of the company’s restricted stock was made in satisfying the note in the amount of $25,000 with a fair value of $43,716 (See Note 7). With the conversions during 2013, 2014 and 2015, the remaining balance of the Note was $75,000 with a fair value of $95,998 at December 31, 2015and matured on February 3, 2016.  On February 1, 2015 and August 1, 2015, the Company issued a total of 50,000 restricted shares with a fair value of $10,750 to the note holder in connection with the amendment of maturity date to February 3, 2016 (See Note 7). On February 10, 2016, the balance of $75,000 of was assigned and sold to a non-related party in the form of a Convertible Redeemable Note. The note carries interest at 8% and is due on February 10, 2017, unless previously converted into shares of restricted common stock. The convertible note’s holder has the right to convert the note, until is no longer outstanding  into shares of Common Stock at fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the fifteen trading days preceding  the conversion date (See Note 11).



F-15





·

On July 10, 2013, the Company issued a Convertible Debentures in the amount of $30,000 to Christopher Castaldo in connection with the agreement for investor relation services. The note carries interest at 8% and is due on January 10, 2014. The note’s holder has the right to convert the note and accrued interest into shares of Common Stock at a price of $0.005. The Company continued to accrue the interest at 8% after the note was in default. On February 26, 2014, the conversion for a total of 6,000,000 shares of the company’s restricted stock was made in satisfying the note in full with a fair value of $51,060 (See Note 7).

·

On October 10, 2013, the Company issued a Convertible Debentures in the amount of $30,000 to Christopher Castaldo in connection with the agreement for investor relation services. The note carries interest at 8% and is due on April 10, 2014. The note’s holder has the right to convert the note into shares of Common Stock at a price of $0.005. The Company continued to accrue the interest at 8% after the note was in default. On April 15, 2014, the conversion for a total of 6,000,000 shares of the company’s restricted stock was made in satisfying the note in full with a fair value of $28,107 (See Note 7).

·

On June 2, 2014, the Company issued a Convertible Debenture in the amount of $10,000 to Christopher Castaldo in connection with an agreement for investor relation services (See Note 7). The note carries interest at 8% and is due on December 2, 2014. The note holder has the right to convert the note, until it is no longer outstanding into shares of Common Stock at a price of $.0035. On December 2, 2014, the conversion for a total of 2,857,143 shares of the company’s restricted stock was made in satisfying the note in full with a fair value of $14,286 (See Note 7).

·

On July 8, 2014, the Company issued a Convertible Debenture in the amount of $10,000 to Christopher Castaldo in connection with an agreement for investor relation services (See Note 6). The note carries interest at 8% and is due on January 8, 2015. The note holder has the right to convert the note, until it is no longer outstanding into shares of Common Stock at a price of $.0035. In connection with the issuance of this convertible note payable, the Company encountered a day-one derivative loss of $16,361. At December 31, 2014, this convertible note payable, at fair value, was recorded at $16,303. On January 8, 2015, the conversion for a total of 2,857,143 shares of the company’s restricted stock was made in satisfying the note in full with a fair value of $17,728 (See Note 7).

·

On September 3, 2013, the Company issued a Convertible Debenture in the amount of $100,000 to Coventry Enterprises, LLC (“Coventry”). The note carries interest at 10% and is due on September 3, 2014, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding  into shares of Common Stock at a price lesser of $.018, or (ii) fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the twenty trading days preceding  the conversion date. On March 11, 2014 and June 12, 2014, Coventry made a conversion of a total of 23,376,623 shares and 6,710,121 shares of the company’s restricted stock satisfying $90,000 and $10,000 of the notes in full with a fair value of $187,119 and $65,402, respectively (See note 7).

·

In connection with the issuances of the Note, the Company also granted five-year warrants to purchase an aggregate of 20,000,000 shares of the Company’s common stock at an exercise price of $0.025 per share. The Company classified embedded conversion features in these warrants as a derivative liability. The warrants were valued at their fair value of $87,518 using the Black-Scholes method at December 31, 2014.

·

On September 12, 2013, the Company issued a Convertible Debenture in the amount of $70,000 to Coventry Enterprises, LLC (“Coventry”). The note carries interest at 10% and is due on September 12, 2014, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding  into shares of Common Stock at a price lesser of $.02, or (ii) fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the twenty trading days preceding  the conversion date. On March 12, 2014 and June 12, 2014, Coventry made a conversion of a total of 15,584,415 and 5,789,473 shares of the company’s restricted stock satisfying $60,000 and $10,000 of the notes with a fair value of $123,641 and $60,296, respectively (See note 7).


In connection with the issuances of the Note, the Company also granted five-year warrants to purchase an aggregate of 15,000,000 shares of the Company’s common stock at an exercise price of $0.025 per share. The Company classified embedded conversion features in these warrants as a derivative liability. The warrants were valued at their fair value of $65,836 using the Black-Scholes method at December 31, 2014.


·

On April 9, 2014, the Company issued a Convertible Debenture in the amount of $20,000 to Coventry Enterprises, LLC (“Coventry”). The note carries interest at 10% and is due on April 9, 2015, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding into shares of Common Stock at a price lesser of $.80, or (ii) fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the twenty trading days preceding the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $16,172. At December 31, 2014, the convertible note payable, at fair value, was recorded at $40,627. During June, 2015, the conversion for a total of 250,000 shares of the company’s restricted stock was made in satisfying the note in full with a fair value of $44,277 (See Note 7).



F-16





·

During June 2014, $92,310 of Michael McDonald’s debt was assigned and sold to Coventry in the form of a Convertible Redeemable Note. The note carries interest at 8% and is due on June 18, 2015, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding  into shares of Common Stock at fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the fifteen trading days preceding  the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $371,772. On June 18, 2014 and July 2, 2014, Coventry made a conversion of 219,535 and 107,337 shares of the company’s restricted stock satisfying $18,462 each (total $36,924) of the note with a fair value of $92,816 and $29,909, respectively. At December 31, 2014, the remaining balance of $55,386, at fair value, was recorded at $110,159 (See Note 5(2) and Note 6). On January 26, 2015, Coventry made a conversion of 461,548 shares of the company’s restricted stock satisfying the remaining of $55,386 of the note with a fair value of $146,912 (See Note 7).During the year ended December 31, 2015, $84,666 of Michael McDonald’s debt was assigned and sold to Coventry in the form of a Convertible Redeemable Note. The note carries interest at 8% and is due in one year from the debt purchase date, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding  into shares of Common Stock at fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the fifteen trading days preceding  the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $83,589. During the year ended December 31, 2015, Coventry made the conversions of a total 1,324,341 shares of the company’s restricted stock satisfying the notes in full with a fair value of $201,894.

·

On October 7, 2013, the Company signed a secured convertible Promissory Note in the amount of $35,000 in favor of Southridge Partners II, LLC. The note was due on demand and carries interest at 10% annum. Southridge Partners II, LLC was entitled to convert the principal into shares of common stock  at the lesser of $0.015 or a 50% discount from the lowest closing bid price in the 30 trading days prior to the day that the conversion is requested; and interest accrued  was entitled to convert into shares of common stock at $0.001. In the evaluation of these financing arrangements, the Company concluded that these conversion features did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable. Southridge converted the note in full for a total of 13,349,057 shares of the company’s restricted stock on April 7, 2014. Pursuant to the “reset provision” on the note agreement, an additional 2,373,166 shares of common stocks were issued due to stock price depreciation on the clearing date of April 23, 2014. These shares were valued at fair value of $10,679 and recorded as loss on settlement of debt (See note 7).

·

On March 19, 2014, the Company issued two Convertible Debentures in the amount of up to $500,000 each (total $1,000,000) to two non-related parties. During the year ended December 31, 2015, the Company recorded the first tranche of $15,000 each (total $30,000) of the funds was received during the first quarter of 2014.  The notes carry interest at 8% and are due on the date that is two years from the execution and funding of the note.  The note holders have the right to convert the notes into shares of Common Stock at a price of $0.20. In connection with the issuance of these convertible notes payable, the Company encountered a day-one derivative loss of $18,104. At December 31, 2015 and 2014, these convertible notes payable, at fair value, was recorded at $8,824 and $36,450.

·

On February 25, 2015, the Company issued a Convertible Debenture in the amount of $68,250 to LG Capital Funding, LLC (“LG”). The note carries interest at 9% and is due on February 25, 2016, unless previously converted into shares of restricted common stock. LG has the right to convert the note, until is no longer outstanding  into shares of Common Stock at a price of  sixty-one percent (61%) of the average of the two lowest closing bid prices of the Company’s Common Stock for the twenty trading days preceding  the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $49,541.

·

On August 17, 2015, the principal balance with accrued interest of $70,875 was assigned and sold to Coventry in the form of a Convertible Redeemable Note. At August 17, 2015, the convertible note payable, at fair value, was recorded at $114,759. The Company has recorded loan costs in the amount of $3,250 for the loan origination fees paid at inception date. The total loan cost of $3,250 was fully amortized as of August 17, 2015.   The note carries interest at 8% and is due on August 17, 2016, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding  into shares of Common Stock at fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the fifteen trading days preceding  the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $55,279. On August 26, 2015, Coventry made a conversion of 749,625 shares of the company’s restricted stock satisfying $50,000 of the note with a fair value of $128,478. On October 23, 2015, Coventry made a conversion of 451,846 shares of the company’s restricted stock satisfying the remaining of $20,875 of the note in full with a fair value of $44,363 (See Note 7).



F-17





·

On August 17, 2015, the Company encountered a penalty of $27,300 in connection with prepayment of the LG note. The Company had Coventry make the payment to LG on behalf the Company and issued a Convertible Debentures in the amount of $27,300 to Coventry. The note carries interest at 8% and is due on August 17, 2016, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding  into shares of Common Stock at fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the fifteen trading days preceding  the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $21,293. At December 31, 2015, the convertible notes payable, at fair value, was recorded at $54,452.

·

On February 24, 2015, the Company issued a Convertible Debentures in the amount of up to $250,000 to a non-related party. During the year ended December 31, 2015, the Company received the fund for first three tranche of a total of $100,000.  The note carries one time interest at 12% and is due on the date that is two years from the execution and funding of the note.  The note holders have the right to convert the notes into shares of Common Stock at a price of lessor of (a) 0.40 or (b) sixty percent (60%) of the average of the two lowest closing bid prices of the Company’s Common Stock for the twenty trading days preceding the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $113,952. During August through December 2015, the Note holder made conversions for a total of 1,456,440 satisfying $60,870 of the note with a fair value of $131,125. At December 31, 2015, the convertible note payable, at fair value, was recorded at $106,947 net of debt discount of $2,917. The Company has recorded loan costs in the amount of $8,000 for the loan origination fees paid at inception date. The total loan cost of $8,000 was amortized over the term of the loan.  Amortization for the year ended December 31, 2015 was $5,083.  During January and February 2016, Vista made five conversions for a total of 3,550,000 shares of the company’s restricted stock satisfying $48,444 of the note (See Note 11).

·

During April 2015, the Company issued two Convertible Debentures in the amount of $275,000 each (aggregating $550,000) to two non-related parties. The notes carry interest at 8% and are due on the date that is nine months from the execution and funding of the note.  If paid fully in cash by the maturity date, the amount of repayment is $137,500 for each Note plus accrued interest of 8%. The notes holders have the right to convert the notes into shares of Common Stock at a fixed price of $0.10. In the event of default, $275,000 each (aggregating $550,000) plus interest may be paid in the form of conversion into common stock at the lower of: (i) the 0.10 or (ii) 0.45 multiplied by the lowest bid price of the Common Stock during the ten consecutive trading day period immediately preceding the trading day that the Company receives a notice of conversion. In connection with the issuance of these convertible notes payable, the Company encountered a day-one derivative loss of $274,958.


On December 11, 2015, the principal balance of $137,500 with accrued interest of $7,142 was assigned and sold to Coventry in the form of a Convertible Redeemable Note. The Company encountered a penalty of $28,929 in connection with prepayment of the note. The Company had Coventry make the payment to the note holder on behalf the Company and issued a Convertible Debentures in the amount of $28,929 to Coventry. With these assignments, one of the Notes of $275,000 was paid in full. At December 31, 2015, the remaining balance of convertible notes payable, at fair value, was recorded at $271,805 net of discount of $3,194. During January and March, 2016, the Note holder made a conversion of total of 8,348,252 shares of stocks satisfying $58,753 of notes payable balance (See Note 11).


During April 2015, the Company issued a total of 2,000,000 two year warrants to the notes holders to purchase common stock at an exercise price of $0.35 per share The Company classified embedded conversion features in these warrants as a derivative liability. During December 2015, 1,000,000 warrants were exercised via cashless exercise into 400,000 shares with a fair value of $33,440. The warrants were valued at their fair value of $189,959 and $22,264 respectively using the Black-Scholes method at the commitment and re-measurement dates of April 9, 2015 and December 31, 2015, respectively (See Note 7).


Also, the Company issued a total of 125,000 shares of common stocks in connection with issuance of these convertible notes payable (See Note 7).


The Company has recorded debt discount a total of $232,500 for the warrants issued and origination fees at inception date. The total debt discount was amortized over the term of the loan.  Amortization for the debt discount and loan issuance cost for the year ended December 31, 2015 was $229,305.



F-18





At December 31, 2015, the convertible note payable at fair value was recorded at $271,805, net of debt discount of $3,195.


·

Following the assignment, the convertible note payable of $144,642, at fair value, was recorded at $368,468 on December 11, 2015. The note carries interest at 8% and is due on December 10, 2016, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding  into shares of Common Stock at fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the fifteen trading days preceding  the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $223,826. On December 15, 2015, Coventry made a conversion of 1,322,751 shares of the company’s restricted stock satisfying $50,000 of the note with a fair value of $112,447 (See Note 7). At December 31, 2015, the convertible notes payable, at fair value, was recorded at $190,447. During January through March, 2016, Coventry made conversions of a total of 5,494,451 shares of the company’s restricted stock satisfying the note in full (See Note 11).

·

Following the assignment of prepayment penalty, the convertible note payable of $28,929, at fair value, was recorded at $73,695 on December 11, 2015. The note carries interest at 8% and is due on December 10, 2016, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding  into shares of Common Stock at fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the fifteen trading days preceding  the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $44,766. At December 31, 2015, the convertible notes payable, at fair value, was recorded at $58,214.

·

During December 2015, our President and CEO, Mr. Deitsch, assigned $80,000 of his outstanding loan to a non-related party in the form of a Convertible Redeemable Note. The note carries interest at 4% and is due on December 7, 2016, unless previously converted into shares of restricted common stock. The note holder has the right to convert the note, until is no longer outstanding into shares of Common Stock at eighty-five percent (85%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the five trading days preceding the conversion date including the day upon which the notice of conversion is received by the Company. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $28,791. At December 31, 2015, the convertible notes payable, at fair value, was recorded at $103,369.

·

On December 28, 2015, the Company issued a Convertible Debenture in the amount of $65,000 to a non-related party. The note carries interest at 10% and is due on December 23, 2016, unless previously converted into shares of restricted common stock. The note holder has the right to convert the note, until is no longer outstanding  into shares of Common Stock at a price of  sixty percent (60%) of the lowest closing bid prices of the Company’s Common Stock for the twenty trading days preceding the conversion date. In connection with the issuance of the convertible note payable, the Company encountered a day-one derivative loss of $54,300. The Company also issued 300,000 shares of common stocks as additional consideration. The Company has recorded debt discount of $15,810 for the fair value of stocks issued on the inception date (See Note 7). At December 31, 2015, the convertible notes payable, at fair value, was recorded at $109,524 net of debt discount of $15,810.


In the evaluation of these financing arrangements, the Company concluded that these conversion features did not meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, it requires bifurcation and liability classification, at fair value. The Company also concluded that the Default Put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the Default Put is indexed to certain events that are not associated with the convertible note payable.


The Company elected to account for these hybrid contracts under the guidance of ASC 815-15-25-4.  The fair value has been defined as the common stock equivalent value, enhanced by the fair value of the default put plus the present value of the coupon.


The holder of this convertible note has substantial rights and protections regarding dilution if certain events, including a default were to occur. There are a number of events that could trigger a default, including but not limited to failure to pay principal or interest, failure to issue shares under the conversion feature, breach of covenants, breach of representations and warranties, appointment of a receiver or trustee, judgments, bankruptcy, delisting of common stock, failure to comply with the exchange act, liquidation, cessation of operations, failure to maintain assets, material financial statement restatement, reverse split of borrowers stock, etc. In the event of these events the lender may be entitled to receive significant amounts of additional stock above the amounts for conversion.


Furthermore, there are additional events that could cause the lender to be due additional shares of common stock above and beyond the shares due from a conversion. Some of these events include, but are not limited to a merger or consolidation of the Company, dividend distribution or spin off, dilutive issuances of the Company’s stock, etc. If the lender receives additional shares of the Company’s commons stock due to any of the foregoing events or for other reasons, then this may have an extremely dilutive effect on the shareholders of the Company. Such dilution would likely result in a significant drop in the per share price of the Company’s common stock. The potential dilutive nature of this note presents a very high degree of risk to the Company and its shareholders.



F-19




7.     STOCKHOLDERS' DEFICIT


Private Placements of Common Stock


During September and October, 2015, the Company sold 1,637,334 shares of restricted common stock to investors at a price per share of $0.06 and received proceeds of $98,240. The Company issued 1,637,334 warrants to purchase common stock at an exercise price of $0.20 per share. The warrants expire on September 30, 2016 (See Note 8).


During August, 2015, the Company sold 30,000 shares of restricted common stock to an investor at a price per share of $0.10 and received proceeds of $3,000. The Company issued 30,000 warrants to purchase common stock at an exercise price of $0.20 per share. The warrants expire on June 30, 2016 (See Note 8).


During May through December, 2015, the Company sold 11,417,666 shares of restricted common stock to investors at a price per share of $0.06 and received proceeds of $685,060. The Company issued 11,417,666 warrants to purchase common stock at an exercise price of $0.20 per share. The warrants expire on June 30, 2016 (See Note 8).


In January 2014, the Company sold 300,000 shares of restricted common stock to an investor at a price per share of $0.20 and received proceeds of $60,000. The Company issued 300,000 warrants to purchase common stock at an exercise price of $1.20 per share. The warrants expire on December 31, 2015(See Note 8).


Shares Issued to Employees and Directors


During July, 2015, the Board of Directors approved a resolution for the issuance of a total of 10,900,000 shares of the Company’s restricted common stock to directors and employees of the Company. The issuance was valued at $2,016,500 ($0.185 per share), which was the fair value of the Company’s common stock on the date of issuance.


During December 2014, the Board of Directors approved a resolution for the issuance of a total of 1,352,300 shares of the Company’s restricted common stock to directors and employees of the Company. The issuance was valued at $324,552 ($0.24 per share), which was the fair value of the Company’s common stock on the date of issuance.


Common Stock Issued for Services


During October 2015, the Company signed an agreement with a consultant for consulting services for three months. In connection with the agreement, 110,000 shares of company’s restricted common stocks were issued with a fair value of $8,305. The issuance was valued at $0.0755 per share.


During October 2015, the Company signed an agreement with a consultant for consulting services for a year. In connection with the agreement, 2,500,000 shares of company’s restricted common stocks were granted. 1,000,000 shares of Common Stock of the Company were issued on the date of execution of the agreement. 500,000 shares of Common Stock of the Company are to be issued quarterly, beginning on the first day of the third month following the effective date. Cash payment of $3,000 is expected to be paid on a monthly basis. The 2,500,000 shares granted are valued at the end of each quarter until the consultants complete their performance in October 2016. The 2,500,000 shares granted were valued at $0.055 per share which is the stock price at December 31, 2015. The Company recorded an equity compensation charge of $28,906 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $26,594 is related to non-vested equity-based compensation.


During September 2015, the Company signed an agreement with a consultant for investor relation services for three months. In connection with the agreement, 200,000 shares of company’s restricted common stocks were issued. The share was valued at $0.10 per share. The Company recorded an equity compensation charge of $19,800 during the year ended December 31, 2015.


During September 2015, the Company signed an agreement with a consultant for investor relation services for twelve months. In connection with the agreement, 250,000 shares of company’s restricted common stocks were issued. The share was valued at $0.12 per share. The Company recorded an equity compensation charge of $7,705 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $22,295 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


During September 2015, the Company signed an agreement with a consultant for investor relation services for twelve months. In connection with the agreement, 300,000 shares of company’s restricted common stocks were issued. The share was valued at $0.12 per share. The Company recorded an equity compensation charge of $9,246 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $26,754 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.



F-20




During August 2015, the Company signed an agreement with a consultant for investor relation services for six months. In connection with the agreement, 750,000 shares of company’s restricted common stocks were issued. The share was valued at $0.15 per share. The Company recorded an equity compensation charge of $92,935 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $19,565 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


During August 2015, the Company signed an agreement with two consultants for investor relation services for six months. In connection with the agreement, 500,000 shares of company’s restricted common stocks were issued. The share was valued at $0.15 per share. The Company recorded an equity compensation charge of $61,957 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $13,043 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


During May 2015, the Company signed an agreement with a consultant for investor relation services for one month. In connection with the agreement, 200,000 shares of company’s restricted common stocks were issued with a fair value of $26,000.   The share was valued at $0.13 per share.


During March 2015, the Company issued 1,250,000 shares of the Company’s restricted common stock to a consultant for services for a year. The share was valued at $0.104 per share. The Company recorded an equity compensation charge of $101,773 during the year ended December 31, 2015. The remaining unrecognized compensation cost of $28,227 related to non-vested equity-based compensation to be recognized by the Company over the remaining vesting period.


During February 2015, the Company signed an agreement with a consultant for investor relation services for one month. In connection with the agreement, 50,000 shares of company’s restricted common stocks were issued with a fair value of $14,000.  The share was valued at $0.28 per share.


During January 2015, the Company signed an agreement with a consultant for investor relation services for one month. In connection with the agreement, 100,000 shares of company’s restricted common stocks were issued with a fair value of $24,400.   The share was valued at $0.244 per share.


During January 2015, the Company issued 250,000 shares of the Company’s restricted common stock to a consultant for services for six months. The share was valued at $0.244 per share. The Company recorded an equity compensation charge of $61,000 during the year ended December 31, 2015.


During December 2014, the Company issued 94,375 shares of the Company’s restricted common stock to sales representatives for services rendered with a fair value of $26,048. The share was valued at $0.276 per share.


During December 2014, the Company issued 50,000 shares of the Company’s restricted common stock to a consultant for services rendered with a fair value of $12,000. The share was valued at $0.24 per share.


During November 2014, the Company issued 50,000 shares of the Company’s restricted common stock to a consultant for services for one year. The share was valued at $0.32 per share. The Company recorded an equity compensation charge of $1,929 during the year ended December 31, 2014 and $14,071 for the year ended December 31, 2015.


During November 2014, the Company issued 125,000 shares of the Company’s restricted common stock to a consultant for services for one year. The share was valued at $0.288 per share. The Company recorded an equity compensation charge of $5,918 during the year ended December 31, 2014 and $30,082 for the year ended December 31, 2015.


During July 2014, the Company signed an agreement with a consultant for investor relation services for seven weeks. In connection with the agreement, 125,000 shares of company’s restricted common stocks were issued with a fair value of $45,500. A $10,000 convertible note convertible at $0.14 per share was also issued (See Note 6).


During May 2014, the Company signed an agreement with a consultant for investor relation services for one month. In connection with the agreement, 125,000 shares of company’s restricted common stocks were issued with a fair value of $18,500. A $10,000 convertible note convertible at $0.14 per share was also issued (See Note 6)


During June 2014, the Company issued 125,000 shares of the Company’s restricted common stock to a consultant for services for one year. The share was valued at $0.34 per share. The Company recorded an equity compensation charge of $22,938 during the year ended December 31, 2014 and $19,561 for the year ended December 31, 2015.




F-21




During August, 2013, the Company issued a total of 150,000 shares of the Company’s restricted common stock to two consultants for investor relation services for six months. The shares were valued at $0.692 per share. The Company recorded an equity compensation charge of $70,902 during the four months ended December 31, 2013, and the remaining compensation cost of $32,899 was recognized by the Company during the year ended December 31, 2014.


During August, 2013, the Company issued 50,000 shares of the Company’s restricted common stock to a consultant for investor relation services for one year. The shares were valued at $0.48 per share. The Company recorded an equity compensation charge of $8,351 during the four months ended December 31, 2013 and the remaining compensation cost of $15,649 was recognized by the Company during the year ended December 31, 2014.


During August, 2013, the Company issued 50,000 shares of the Company’s restricted common stock to a consultant for consulting services for six months. The shares were valued at $0.224 per share. The Company recorded an equity compensation charge of $8,446 during the four and one half months ended December 31, 2013, and the remaining compensation cost of $2,754 was recognized by the Company during the year ended December 31, 2014.


During February, 2013, the Company issued 200,000 shares of the Company’s restricted common stock to a consultant for investor relation services for a year. The shares were valued at $0.32 per share. The Company recorded an equity compensation charge of $61,019 during the year ended December 31, 2013. The remaining compensation cost of $2,981 was recognized by the Company during the year ended December 31, 2014.


Common Stock Issued for Debt Modification


During February and August, 2015, the Company amended the maturity dates for notes of $100,000 from a non-related party to August 3, 2015 and February 3, 2016, respectively. The Company issued 25,000 restricted shares each (total 50,000 shares) to the note holder per the amendment. The shares were valued at a fair value of $7,000 and $3,750, respectively (See Note 6).


During February 2015, the Company issued a total of 25,000 restricted shares to the Michael McDonald Trust due to the default on repayment of the promissory note of $75,000. The shares were valued at a fair value of $6,000 (See Note 6).


On August 1, 2014, the Company amended the maturity dates of notes $100,000 from a non-related party to February 3, 2015. The Company issued a total of 25,000 restricted shares to the note holder per the amendment. The shares were valued at a fair value of $9,100 (See note 6).


On April 30, 2014, the Company amended the maturity dates of notes $75,000 from a non-related party to November 3, 2014. The Company issued a total of 12,500 restricted shares to the note holder per the amendment. The shares were valued at a fair value of $1,950 (See note 6).


On January 17, 2014, the Company issued a total of 25,000 restricted shares to the Michael McDonald Trust due to the default on repayment of the promissory note of $75,000. The shares were valued at a fair value of $9,900(See Note 6).


Common Stock Issued with Debts


In December 2015, in connection with the issuance of a convertible note to a non-related party in the amount of $65,000 which is due in one year from the funding of the note. The Company also issued a total of 300,000 shares of common stock with a fair value of $15,810 as part of the agreement (See Note 6).


During December 2015, 1,000,000 warrants were exercised via cashless exercise into 400,000 shares with a fair value of $33,440 (See Note 6 and 8).


In April 2015, in connection with the issuance of two notes to two non-related Parties in the amount of $550,000 which is due in nine months from the funding of the note. The Company also issued a total of 125,000 shares of common stocks as part of the agreement (See Note 6).


In August 2014, in connection with the issuance of this promissory note to Michael McDonald Trust in the amount of $75,000 which is due in six months from the funding of the note, the Company issued 50,000 shares of the Company's common stocks. The Company has recorded a debt discount in the amount of $15,665 to reflect the value of the common stocks as a reduction to the carrying amount of the convertible debt and a corresponding increase to common stocks and additional paid-in capital. The total discount of $15,665 was amortized over the term of the debt.  Amortization for the year ended December 31, 2014 was $13,054 (See Note 6).




F-22





Common Stock Held in Escrow


On July 27, 2011 the Company issued 5,714,286 shares of free trading common stock in certificate form which is held in escrow as security under an agreement reached with Liquid Packaging Resources, Inc.  (“LPR”) on August 2, 2011(See Note 4 and 6).


Common Stock Issued for Settlement of Accounts Payable & Debt


Following the assignment of debt of $144,642 on December 15, 2015, Coventry made a conversion of 1,322,751 shares of the company’s restricted stock satisfying $50,000 of the note with a fair value of $112,447 (See Note 6).


Following the assignment of LG’s debt of $70,875 in August 2015, Coventry made a conversion of a total of 749,625 shares of the company’s restricted stock satisfying $50,000 of the note with a fair value of $128,478. On October 23, 2015, Coventry made another conversion of 451,846 shares of the company’s restricted stock satisfying the remaining of $20,875 of the note in full with a fair value of $44,363 (See Note 6).


During October 2015, the Company issued 2,200,000 shares of the company’s restricted stock and 2,200,000 warrants (See Note 4) to settle the outstanding commissions’ payable in aggregate of $77,000 with TCN. The shares were valued at $0.1035 per share and the warrants were valued at $0.0475 per share. The Company recorded a loss of $255,215 as a selling expense during the year ended December 31, 2015.


During August through December 2015, one Note holder made conversions for a total of 1,456,440 satisfying $60,870 of the note with a fair value of $131,125(See Note 6).


Date

 

Number of

shares converted

 

Fair Value of

Debt Converted

8/28/2015

 

300,000

 

36,000

9/29/2015

 

300,000

 

22,037

11/2/2015

 

300,000

 

25,239

12/3/2015

 

275,000

 

22,645

12/8/2015

 

281,440

 

25,203


During July 2015, the Company issued a total of 4,400,000 shares of the company’s restricted stock and 4,400,000 warrants (See Note 4) to settle the outstanding commissions’ payable in aggregate of $59,000 with TCN. The shares were valued at $0.185 per share and the warrants were valued at $0.1009 per share. The Company recorded a loss of $1,198,773 as a selling expense during the year ended December 31, 2015.


During June 2015, the Company issued a total of 150,000 shares of the company’s restricted stock to settle the outstanding legal fees in aggregate of $15,000 with a vendor. The shares were recorded at a fair value of $28,500 or $0.19 per share.


Following the assignment of Michael McDonald’s debt of $84,666 in the year ended December 31, 2015, Coventry made the following conversions of a total of 1,324,341 shares of the company’s restricted stock satisfying the notes in full with a fair value of $201,894 (See Note 6).


Date

 

Number of

shares converted

 

Fair Value of

Debt Converted

4/20/2015

 

489,964

 

$60,034

6/03/2015

 

453,000

 

$68,392

6/22/2015

 

381,377

 

$73,468


During June 2015, one of the convertible Notes holders made the conversion of 196,850 shares of the company’s restricted stock satisfying the notes in the amount of $25,000 with a fair value of $43,716 (See Note 6).

During June, 2015, Coventry made the conversion for a total of 250,000 shares of the company’s restricted stock in satisfying the note of $20,000 in full with a fair value of $44,277 (See Note 6).


During January 2015, Mr. Deitsch accepted a total of 125,000 shares of the Company’s restricted common stock as a repayment to discharge $10,000 of his outstanding loan to the Company (See Note 5). The shares were valued at the note payable amount due to the fact that it was a related party transaction.


During January 2015, Castaldo converted for a total of 71,429 shares of the company’s restricted stock, with a fair value of $17,428 (See Note 6).



F-23




Following the assignment of Michael McDonald’s debt of $92,310 in June 2014, Coventry made the following conversions of a total of 788,419 shares of the company’s restricted stock satisfying $92,310 of the note with a fair value of $269,637 (See Note 6).


Date

 

Number of

shares converted

 

Fair Value of

Debt Converted

6/18/2014

 

219,535

 

$92,816

7/2/2014

 

107,337

 

$29,909

1/25/2015

 

461,548

 

$146,912


Following the agreements with Castaldo for $10,000 in June 2014, Castaldo made the conversion for a total of 2,857,143 shares of the company’s restricted stock satisfying the notes in full with a fair value of $14,286 during December 2014 (See Note 6).


Following the agreements with Castaldo for $30,000 each (total $60,000) in July 2013 and October 2013, Castaldo made the conversion for a total of 12,000,000 shares of the company’s restricted stock satisfying the notes in full with a fair value of $79,167 during February and April 2014 (See Note 6).

Following the agreement with Southridge Partners II, LLC for $35,000 in October 2013, Southridge converted the note in full for a total of 13,349,057 shares of the Company’s restricted stock on April 7, 2014.Pursuant to the “reset provision” on the note agreement, an additional 2,373,166 shares of common stocks were issued due to stock price depreciation on the clearing date of April 23, 2014. These shares were valued at a fair value of $10,679 and recorded as loss on settlement of debt (See Note 6).


During June, August and October 2014, the Company issued a total of 4,500,000 shares of the company’s restricted stock to settle the outstanding commissions’ payable in aggregate of $300,000 with TCN. The shares were valued at a range from $0.224 to $0.396 per share. The Company recorded a loss of $1,164,000 as a selling expense during the year ended December 31, 2014(See Note 4).


During May and June, 2014, the two convertible Notes holders made the following conversions of a total of 830,659 shares of the company’s restricted stock satisfying the notes in the amount of $92,000 with a fair value of $177,093 on the dates of conversions (See Note 6).


Date

 

Number of

shares converted

 

Fair Value of

Debt Converted

5/30/2014

 

588,235

 

$79,632

6/16/2014

 

113,636

 

$45,820

6/14/2014

 

128,788

 

$51,641


During February and June, 2014, $23,000 and $10,000 of the convertible notes were assigned to third parties with a conversion price at $0.20 and $0.08 per share, respectively. The conversions for a total of 240,000 shares of the company’s restricted stock were made as followings in satisfying the notes of $33,000 at the fair value of $65,982 (See Note 6).


Date

 

Number of

shares converted

 

Fair Value of

Debt Converted

2/10/2014

 

115,000

 

$30,726

6/14/2014

 

125,000

 

$35,256


Following the agreements with Coventry Enterprises, LLC (see Note 6) for $100,000 and $70,000 in September 2013, Coventry made the following conversions for a total of 1,286,516 shares of the company’s restricted stock during the year ended December 31, 2014 satisfying the Notes in full (See note 6):


Date

 

Number of

shares converted

 

Fair Value of

Debt Converted

3/11/2014

 

584,416

 

$187,119

3/12/2014

 

389,610

 

$123,641

6/12/2014

 

312,490

 

$103,142


On April 10, 2014, Mr. Deitsch accepted a total of 1,250,000 shares of the Company’s restricted common stock as a repayment to discharge $100,000 of his outstanding loan to the Company (See note 5). The shares were valued at the note payable amount due to the fact that it was a related party transaction.




F-24




Stock Split


On April 20, 2015, the Company declared a 1 for 40 reverse common stock split to stockholders. The Stock Split was effectuated on May 18, 2015 based upon filing the appropriate documentation with FINRA. Per share and weighted average amounts have been retroactively restated in the accompanying financial statements and related notes to reflect this stock split.


8.     STOCK OPTIONS AND WARRANTS


Common Stock Warrants


During July 2015, the Company issued a total of 4,400,000 shares of the company’s restricted stock and 4,400,000 warrants to settle the outstanding commissions’ payable in aggregate of $59,000 with TCN. The shares were valued at $0.185 per share and the warrants were valued at $0.1009 per share. The warrants expire on June 30, 2016 (See Note 7).


During April 2015, the Company issued a total of 2,000,000 warrants to purchase common stock at an exercise price of $0.35 per share in connection with issuance of two convertible notes payable. The warrants expire on April 14, 2017 (See Note 7).


During April, 2014, the Company issued a total of 100,000 warrants to purchase common stock at an exercise price of $1.00 per share in connection with issuance of a convertible note payable to Coventry. The warrants expire on April 9, 2019 (See Note 7).


From time to time, we issue warrants to purchase our common stock. These warrants have been issued for cash in conjunction with the private placement of shares of our common stock.


During December 2015, 1,000,000 warrants were exercised via cashless exercise into 400,000 shares with a fair value of $33,440 (See Note 7).


During September and October, 2015, the Company issued 1,637,334 warrants to purchase common stock at an exercise price of $0.20 per share. The warrants expire on September 30, 2016 (See Note 7).


During May through December, 2015, the Company issued 11,447,666 warrants to purchase common stock at an exercise price of $0.20 per share. The warrants expire on June 30, 2016 (See Note 7).


During January 2014, the Company issued a total of 300,000 warrants to purchase common stock at an exercise price of $1.20 per share in connection with the private placement offerings. The warrants expired on December 31, 2015.


During December 2013, the Company issued a total of 250,000 warrants to purchase common stock at an exercise price of $1.20 per share in connection with the private placement offerings. The warrants expired on December 31, 2015.


During October and November 2013, the Company issued a total of 25,000 warrants to purchase common stock at an exercise price of $4.00 per share in connection with the private placement offerings. The warrants expired on December 31, 2014.


On September 16, 2013, the Company issued 625,000 warrants to purchase stock at an exercise price of $1.20 in connection with settlement of an outstanding account payable. The warrants expired on December 31, 2014.


During June, 2013, 625,000 warrants to purchase stock at an exercise price of $4.00 per share were issued to CEO, Mr. Deitsch in exchange of notes payable. The warrants expired on December 31, 2014 (See Note 5).


250,000 warrants to purchase stock at an exercise price of $4.00 per share were issued to CEO, Mr. Dietsch in December 2012. The warrants expired on December 31, 2014.


In the fourth quarter 2012, the Company issued a total of 441,250 warrants to purchase common stock at an exercise price of $4.00 per share in connection with the private placement offerings. The warrants expired on December 31, 2014.


In the third quarter 2012, The Company issued a total of 675,000 warrants to purchase common stock at an exercise price of $4.00 per share in connection with a private placement offering. The warrants expired on December 31, 2014.


During November 2011, the Company issued a total of 41,667 warrants to purchase common stock at an exercise price of $6 per share in connection with the private placement offerings. The warrants expired on November 8, 2015.



F-25




During January 2011, the Company issued a total of 25,000 warrants to purchase common stock at an exercise price of $4.00 per share in connection with the private placement offerings. The warrants expired on December 31, 2014.


A summary of warrants outstanding in conjunction with private placements of common stock were as follows during the years ended December 31, 2015 and 2014:


 

 

Number

Of shares

 

Weighted average exercise price

Balance December 31, 2013

 

3,872,917

$

1.94

Exercised

 

-

 

-

Issued

 

400,000

$

1.2

Forfeited

 

(2,666,250)

 

-

Balance December 31, 2014

 

1,606,667

$

1.92

Exercised

 

(1,000,000)

 

-

Issued

 

21,685,000

$

1.11

Forfeited

 

(591,667)

 

-

Balance December 31, 2015

 

21,700,000

$

0.95


The following table summarizes information about fixed-price warrants outstanding as of December 31, 2015 and 2014:


 

 

Exercise Price

 

Weighted

Average

Number

Outstanding

 

Weighted Average Contractual Life

 

Weighted Average Exercise Price

2015

$

0.20-6.0

 

21,700,000

 

0.70 years

$

0.95

2014

$

0.40-1.20

 

1,606,667

 

2.76 years

$

1.92


As of December 31, 2015, the aggregate intrinsic value of all stock options and warrants outstanding and expected to vest was $0. The intrinsic value of each option share is the difference between the fair value of our common stock and the exercise price of such option share to the extent it is “in-the-money”. Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money options had they exercised their options on the last trading day of the year and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.055, closing stock price of our common stock on December 31, 2015. There were no in-the-money warrants at December 31, 2015.


9.     INCOME TAXES


The Company’s tax expense differs from the “expected” tax expense for the years ended December 31, 2015 and 2014, (computed by applying the Federal Corporate tax rate of 34% to loss before taxes and 5.5% for Florida State Corporate Taxes, the blended rate used was 37.63%), are approximately as follows:


 

 

December 31,

 

 

2015

 

2014

Computed “expected” tax expense (benefit) - Federal

$

(1,777,507)

$

(813,848)

Computed “expected” tax expense (benefit) - State

 

(304,273)

 

(139,314)

Permeate differences

 

1,874,050

 

797,895

Change in valuation allowance

 

207,730

 

155,267

 

$

-

$

-


 

 

2015

 

2014

Current portion of net deferred income tax assets:

 

 

 

 

Accrued salary

$

207,730

$

155,267

Valuation allowance

 

(207,730)

 

(155,267)

Current net deferred income tax asset

$

-

$

-

 

 

 

 

 

Non- current portion of net deferred income tax asset

 

 

 

 

Net operating loss carryforwards

$

12,143,139

$

11,257,975

Valuation allowance

 

(12,143,139)

 

(11,257,975)

Non-current net deferred income tax asset

$

-

$

-




F-26




Due to the uncertainty of the utilization and recoverability of the loss carry-forwards and other deferred tax assets, we have provided a valuation allowance to fully reserve such assets.


As of December 31, 2015, the Company has net operating loss carryforwards of approximately $32,270,000 available to offset future taxable income in various years through December 31, 2034.  The significant difference between such net operating loss carryforwards and our accumulated deficit of approximately $17,782,000 results primarily from stock based compensation and debt settlements which are considered to be permanent differences.


The valuation allowances increased by approximately $207,000 and $155,000 for the years ended December 31, 2015 and 2014, respectively. The Company’s 2012 to 2015 tax returns are subject to examination by Internal Revenue Services and State Taxing Agency’s.  


10.     COMMITMENTS AND CONTINGENCIES


Operating Leases


In February 2013, Nutra Pharma entered into an operating lease for monthly payments of approximately $3,500 for three years and expired in January 2016. In February 2016, Nutra Pharma entered into a new operating lease for monthly payments of approximately $3,200 for three years and expires in February 2019.  ReceptoPharm leases a lab and renewed its operating lease agreement for five years in July of 2012. The lease requires monthly payments of approximately $6,400 from August 1, 2012 through August 1, 2017. The lease was renewed in February 2016 for another five years beginning August 1, 2017.


Future minimum payments under these lease agreements, including the extension period, are approximately as follows:


Years ended December 31,

 

Total

2016

 

115,688

2017

 

121,433

2018

 

126,494

2019

 

88,513

Thereafter

 

233,861

 

$

685,989


Rent expense in 2015 and 2014 approximated $126,339 and $119,215, respectively.  


The Company sublets approximately 3779 square feet of its space to Nationwide Laboratory Services, Inc. for one year started from April 2015. The rent for the first three months is $1,500 for the first three months, and then the rent will be increased by $100 per month until the sum of $2,200 per month is attained. During the year ended December 31, 2015, the Company recorded a rental income of $27,564 which included the rent and utilities.


Consulting Agreements


During July 2015, the Company signed an agreement with a consulting company for consulting services for five years. In connection with the agreement, 500,000 shares of company’s restricted common stocks and a one year note of $50,000 with 8% interest were granted. The share was valued at $0.18 per share. The stocks and note payable have not been issued as of December 31, 2015. The Company has accrued the $142, 500 in accrued expense as of December 31, 2015.


During July 2015, the Company signed an agreement with a consultant for investor relation services for two months. In connection with the agreement, 400,000 shares of company’s restricted common stocks were granted with a fair value of $84,000.   The share was valued at $0.21 per share. During August 2015, the Company signed an extension agreement with the consultant for a month. In connection with the agreement, 200,000 shares of company’s restricted common stocks were issued with a fair value of $32,000. The share was valued at $0.16 per share.  The stocks have not been issued as of December 31, 2015.  The Company has accrued the $116,000 in accrued expense and recorded as an equity compensation charge during the year ended December 31, 2015.


Litigation


f/k/a Receptogen, Inc.


On August 18, 2006, ReceptoPharm was named as a defendant in Patricia Meding, et. al. v. ReceptoPharm, Inc. f/k/a Receptogen, Inc., Index No.: 18247/06 (New York Supreme Court, Queens County). The original proceeding claimed that ReceptoPharm owed the Plaintiffs, including Patricia Meding, a former ReceptoPharm officer and shareholder and several corporations that she claims to own, the sum of $118,928.15 plus interest and counsel fees on a series promissory notes that were allegedly executed in 2001 and 2002. On



F-27




August 23, 2007, the Queens County New York Supreme Court issued a decision denying Plaintiffs motion for summary judgment in lieu of a complaint, concluding that there were issues of fact concerning the enforceability of the promissory notes. On May 23, 2008, the Plaintiffs filed an amended complaint in which they reasserted their original claims and asserted new claims seeking damages of no less than $768,506 on their claims that in or about June 2004 ReceptoPharm breached its fiduciary duty to the Plaintiffs as shareholders of ReceptoPharm by wrongfully canceling certain of their purported ReceptoPharm share certificates. In late 2010, Plaintiffs further amended their complaint alleging that ReceptoPharm violated Plaintiffs contractual and statutory rights by cancelling an additional 30,370 share certificates and failing to permit the Plaintiffs to exercise dissenting shareholder rights with respect to those share certificates. The damages associated with the Plaintiffs' claims could rise as the result of increases in our share price as the Receptopharm shares may be convertible into our common shares. The potential exposure may exceed $10,000,000 if the Plaintiffs are successful with all of their claims.


ReceptoPharm believes the suit is without merit and has filed an answer denying the material allegations of the amended complaint and asserted a series of counterclaims against the Plaintiffs alleging claims for declaratory judgment, fraud, breach of fiduciary duty, conversion and unjust enrichment as a result of the promissory notes. Plaintiffs have moved for partial summary judgment on their claims regarding the additional 30,370 shares, but not on their claims regarding the alleged promissory notes or the 43,750 alleged shares. In August of 2011, the Plaintiff's motion was partially granted. In September 2012, ReceptoPharm's attorneys filed a Motion to be removed as counsel. On October 10, 2014 their motion was granted.


On June 1, 2015, the parties executed a settlement agreement whereby ReceptoPharm would pay the Plaintiffs a total of $360,000 over 35 months. The first payment of $20,000 was made on July 1, 2015. A second payment of $20,000 was made on August 17, 2015. The settlement requires 32 subsequent monthly $10,000 payments to be made on the 15th of every month. Payments were made in September through December, 2015. In the event of default on any of the payments due under the settlement agreement, the settlement amount would increase by an additional $200,000. As of December 31, 2015, the Company has accrued the legal settlement amount at present value of $243,164 and an additional contingency of $200,000. The settlement agreement is personally guaranteed by Rik Deitsch, our CEO.


Liquid Packaging Resources, Inc. v. Nutra Pharma Corp. and Erik “Rik” Deitsch 


On April 21, 2011, Nutra Pharma Corp. and its CEO, Erik Deitsch, were named as defendants in Liquid Packaging Resources, Inc. v. Nutra Pharma Corp. and Erik “Rik” Deitsch, Superior Court of Fulton County, Georgia, Civil Action No. 2011-CV-199562. Liquid Packaging Resources, Inc. (“LPR”) claimed that Nutra Pharma Corp. and Mr. Deitsch, directly or through other companies, placed orders with LPR that required LPR to purchase components from third parties. LPR sought reimbursement for those third party expenses in the amount of not less than $359,826.85 plus interest. LPR also sought punitive damages in the amount of not less than $500,000 and attorney's fees.


Mr. Deitsch and Nutra Pharma Corp. then removed the action to the United States District Court, Northern District of Georgia, Civil Action No. 11-CV-01663-ODE. After removal, LPR amended the Complaint to assert that Nutra Pharma Corp. and Mr. Deitsch were the alter egos of the alleged other companies through whom the subject orders were placed and therefore should be considered one and the same. Mr. Deitsch and Nutra Pharma Corp.  moved to dismiss the Complaint on several grounds including statute of frauds, failure to state a claim, and jurisdiction (only for Mr. Deitsch). Mr. Deitsch and Nutra Pharma Corp. believe the suit is without merit.


After June 30, 2011, at LPR's request, the parties mediated the dispute before LPR responded to the Motion To Dismiss. At the mediation, the parties worked out an agreement whereby Nutra Pharma Corp. would purchase from LPR the components LPR purchased from third parties at an amount slightly less than the principal amount of the suit and on terms acceptable to us. The agreed price was $350,000 payable over 7 months in equal $50,000 amounts. This agreement was reached by us because it provided tangible value in exchange for the purchase price rather than incurring the expense of litigation, which would likely be substantial and not recouped. While Nutra Pharma Corp.  had counterclaims we could assert, we believe this was a practical resolution. The settlement allowed us to take possession of the components prior to full payment and, in exchange, provided security to LPR in the form of our stock valued at $400,000 at the time of issuance. The stock can only be sold in event of a default of the payment schedule. The litigation was dismissed in August of 2011. We made the August, September and November payments (totaling $150,000) in a timely fashion. We were late for the payment due October 15, 2011 and requested an accommodation from LPR, eventually paying an extra $5,000 towards that payment. At December 31, 2011, Nutra Pharma Corp. had made total payments of $205,000 with an additional $150,000 owed. In order to allow us to skip the December payment, LPR agreed to another accommodation whereby we would pay both the December and January payment with an additional $10,000 on or before January 16, 2012. We were unable to make this payment and on January 26, 2012 signed an amended payment schedule adding an additional $15,000 for a total of $175,000 owed. Our CEO, Rik Deitsch, added additional collateral stock in a separate company that he held personally. $25,000 was paid in January, with subsequent payments of $30,000 due monthly on the 15th of March through the 15th of July, 2012. We failed to make the March payment and was subsequently called in default of the Agreement. Under the original agreement, if we are in default of the agreement, LPR has the right to sell shares of our free trading stock held in escrow by their attorney and receive cash settlements for a total amount of $450,000 representing the new total cash amount due to LPR by the Company.




F-28




On June 11, 2012, LPR sold their debt to Southridge Partners, LLP in an agreement to be paid out over time. In August, 2013, LPR cancelled their agreement with Southridge Partners, LLP.  As of December 31, 2015, LPR continues to hold the collateral stock. We are currently negotiating a settlement with LPR. Upon the settlement of the outstanding debt, LPR will return the collateral shares to the Company.


Involuntary Petition of Bankruptcy


On August 31, 2012, certain former ReceptoPharm employees and a former ReceptoPharm consultant filed a Petition for Involuntary Bankruptcy against us in the United States Bankruptcy Court, Southern District of Florida. The Petitioners originally claimed they were owed $990,927 from Nutra Pharma in the form of accrued wages and promissory notes, but amended their claim to $816,662 in a subsequent filing. In response to the Petition, we filed a motion to dismiss the action which, if successful, would avoid the case being converted into an actual bankruptcy action. On September 30, 2013, the Company entered into a Settlement Agreement with the Petitioners, which is effective upon the court dismissal of the action.  In full and final satisfaction of all claims, the Company settled the Agreement with the Petitioners for a total sum of $350,000.  $35,000 was made during the year ended December 31, 2013 and a second lump sum payment was due within 8 months from February 12, 2014, the date the court dismissed the action.  The Parties executed mutual releases exclusive of releases under the Settlement Agreement. On October 21, 2014 we received a Notice of Default from the Petitioners' counsel. We have responded to the notice and will be seeking remedies to the alleged default. As of December 31, 2015, the Petitioner's claims and accruals for a total of $1,085,468 that have passed the statute of limitation were written off, included in the amount was the accrued salary of $815,747, officer’s loan and accrued interest for $129,466, salary and payroll tax payable of $140,255. Since the Petitioners can only reinforce the settlement amount due to passing of statute of limitation, the Company has accrued the settlement for $315,000 and recorded the gain on settlement of $770,968 in other income (See Note 4 and 5).


11.     SUBSEQUENT EVENTS


Notes payable


In January 2016, the Company issued a promissory note to a non-related party in the amount of $100,000 bearing monthly interest at a rate of 2%. The note is due in six months from the execution and funding of the note. In connection with the issuance of this promissory note, the Company issued 68,000 shares of the Company's common stocks.


In January 2016, the Company issued a promissory note to a non-related party in the amount of $50,000 bearing monthly interest at a rate of 2%. The note is due in six months from the execution and funding of the note. In connection with the issuance of this promissory note, the Company issued 350,000 shares of the Company's common stocks.


In February 2016, the Company issued a promissory note to a non-related party in the amount of $50,000 bearing interest at 10% annually. The note is due in one year from the execution and funding of the note.


Convertible Notes Payable


On February 10, 2016, the balance of $75,000 of a convertible note payable to a non-related party was assigned and sold in the form of a Convertible Redeemable Note. The note carries interest at 8% and is due on February 10, 2017, unless previously converted into shares of restricted common stock. The convertible note’s holder has the right to convert the note, until is no longer outstanding  into shares of Common Stock at fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the fifteen trading days preceding  the conversion date (See Note 6). During March 2016, the Note holder made a conversion of 6,696,428 shares of the company’s restricted stock satisfying the note in full.


On February 19, 2016, the Company received the fund of a total of $50,000 pursuant to the agreement signed on February 24, 2015 in which the Company issued a Convertible Debentures in the amount of up to $250,000 to a non-related party. The note carries one time interest at 12% and is due on the date that is two years from the execution and funding of the note.  The note holders have the right to convert the notes into shares of Common Stock at a price of lessor of (a) 0.40 or (b) sixty percent (60%) of the average of the two lowest closing bid prices of the Company’s Common Stock for the twenty trading days preceding the conversion date.


On March 3, 2016, the Company issued a Convertible Debenture in the amount of $100,000 to Coventry Enterprises, LLC (“Coventry”). The note carries interest at 8% and is due on March 3, 2017, unless previously converted into shares of restricted common stock. Coventry has the right to convert the note, until is no longer outstanding into shares of Common Stock at a price fifty-five percent (55%) of the average of the three lowest VWAP prices of the Company’s Common Stock for the twenty trading days preceding the conversion date. In connection with the issuances of the Note, the Company also granted five-year warrants purchasing an aggregate of 2,500,000 shares of the Company’s common stock at an exercise price of $0.03 per share.




F-29




On March 3, 2016, the Company issued an additional Convertible Debenture in the amount of $100,000 to Coventry Enterprises, LLC (“Coventry”). The note carries interest at 8% and is due on March 3, 2017. The Note was paid for by the issuance of an offsetting $100,000 secured note (Back End Note) issued to the Company by Coventry provided that prior to conversion of the Note, Coventry must have paid off the Note in cash. Coventry promises to pay the Company $100,000 no later than the earlier of (i) September 3, 2016. Or (ii) such time as has a resale registration statement covering the shares issuable upon conversion of the $100,000 back end note dated March 3, 2016 declared effective. The back end note was secured by assets with a fair market value of not less than $100,000.


Common Stock Issued for Debt Conversions


During January and February 2016, Vista made five conversions for a total of 3,550,000 shares of the company’s restricted stock satisfying $48,444 of the note (See Note 6).


During January through March, 2016, the Note holder made a conversion of total of 8,348,252 shares of stocks satisfying $58,753 of notes payable of $275,000 originated in April 2015(See Note 6).


During January through March, 2016, Coventry made conversions of a total of 5,494,451 shares of the company’s restricted stock satisfying the note in full (See Note 6).


Settlement of Notes payable


During March 2016, the Company issued a total of 1,000,000 shares of the company’s restricted stock to settle the outstanding debt of $10,000 with accrued interest of $1,262 with the Note holder. The shares were recorded at a fair value of $12,600 or $0.02 per share (See Note 6).


Bridge Financing


The Company entered into a loan agreement with Greentree Financial Group, Inc. (“Greentree”) in connection with a bridge financing transaction, consisting of certain unsecured convertible promissory notes in principal amount up to $250,000, the first tranche of which is in principal amount of $50,000  matures in one year from the funding of the Note. The conversion price is lower of $0.10 per share or 60% of the average of the three lowest lowest volume weighted average prices for the ten consecutive trading days immediately prior to but not including the conversion date. The Company also issued three-year warrants to purchase 2,000,000 shares of the Company’s common stock.


Consulting agreements


During April 2016, the Company signed an agreement with a consulting company for consulting services for six months. In connection with the agreement, 700,000 shares of company’s restricted common stocks and a Convertible Promissory Note of $40,000 with annual interest rate of 12% and conversion price of $0.10 per share or 60% of the average of the three lowest volume weighted average prices for the ten consecutive trading days immediately prior to but not including the conversion date, whichever is lower, were issued on the date of execution of the agreement.


During April 2016, the Company signed an agreement with a consulting company for consulting services for a fee of $80,000. In connection with the agreement, the Company issued two convertible promissory notes in principal amount of $20,000 and $60,000, respectively, with annual interest rate of 12% and conversion price of $0,10 per share or 60% of the average of the three lowest volume weighted average prices for the ten consecutive trading days immediately prior to but not including the conversion date, whichever is lower.  The three-year warrants to purchase 2,000,000 shares of the Company’s common stock with an exercise price of $0.05 per share were also issued.


Private Placement


During March 2016, the Company sold 916,667 shares of restricted common stock to investors at a price per share of $0.06 and received proceeds of $55,000. The Company issued 916,667 warrants to purchase common stock at an exercise price of $0.10 per share.




F-30