UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For
the quarterly period ended
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _________ to ________
Commission
file numbers
(Name of registrant as specified in its charter)
(State or Other Jurisdiction of Organization) |
(IRS Employer Identification Number) |
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Ticker symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
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 ☐
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, a smaller reporting company, or an emerging growth company.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). Yes ☐
As of November 21, 2022, there were shares of common stock and 12,000,000 shares of Series B preferred stock issued and outstanding.
TABLE OF CONTENTS
| 2 |
Nutra Pharma Corp (“Nutra Pharma”) and its wholly owned subsidiaries, ReceptoPharm, Inc. (“ReceptoPharm”) and Designer Diagnostics Inc. are referred to herein as “we”, “our” or “us” (ReceptoPharm is also individually referred to herein).
Forward Looking Statements
This Quarterly Report on Form 10–Q for the period ending September 30, 2022, contains forward–looking statements that involve risks and uncertainties, 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.” We are subject to risks detailed in Item 1(a). All statements other than statements of historical fact are statements that could be deemed forward–looking statements, including: (a) any projections of revenue, gross margin, expenses, earnings or losses from operations, synergies or other financial items; and (b) any statements of the plans, strategies and objectives of management for future operations; and (c) 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.
| 3 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NUTRA PHARMA CORP.
Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory, current portion | ||||||||
| Other receivable | ||||||||
| Convertible notes receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Inventory, less current portion | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Security deposit | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Accrued payroll due to officers | ||||||||
| Deferred revenue to a related party | ||||||||
| Accrued interest to related parties | ||||||||
| Due to officer | ||||||||
| Derivative liabilities | ||||||||
| Other debt, net of discount, current portion | ||||||||
| SBA notes payable, current portion | ||||||||
| Operating lease obligations, current portion | ||||||||
| Total current liabilities | ||||||||
| Convertible note, less current portion | ||||||||
| SBA notes payable, less current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, $ par value, shares authorized and Series B Preferred shares issued and outstanding at September 30, 2022 and December 31, 2021 | ||||||||
| Common stock, $ par value, shares authorized: and shares issued and outstanding at September 30, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| F-1 |
NUTRA PHARMA CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Net sales to a related party | ||||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative - including stock based compensation of $ and $ for the three months ended September 30, 2022 and 2021, and $ and $ for the nine months ended September 30, 2022 and 2021, respectively | ||||||||||||||||
| Bad debt expense (recovery) - related party | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expenses) | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense to related parties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of convertible notes and derivatives | ( | ) | ||||||||||||||
| Stock based loan modification cost | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss on settlement of debt and accrued expense, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other income (expenses) | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Net income (loss) per share - basic and diluted | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average number of shares outstanding during the period - basic | ||||||||||||||||
| Weighted average number of shares outstanding during the period - diluted | ||||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| F-2 |
NUTRA PHARMA CORP.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit
For the Three Months Ended September 30, 2022 and 2021
(Unaudited)
| Preferred Stock | Additional | Total | ||||||||||||||||||||||||||||||||||
| Series A | Series B | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance -June 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for debt modification and penalty | - | |||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||
| Balance -September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Preferred Stock | Additional | Total | ||||||||||||||||||||||||||||||||||
| Series A | Series B | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance -June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Issuance of common stock in exchange for services to consultants | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of debt | - | - | ||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||
| Balance -September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| F-3 |
NUTRA PHARMA CORP.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit
For the Nine Months Ended September 30, 2022 and 2021
(Unaudited)
| Preferred Stock | Additional | Total | ||||||||||||||||||||||||||||||||||
| Series A | Series B | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance -December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for debt modification and penalty | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of debt | - | - | ||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||
| Balance -September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Preferred Stock | Additional | Total | ||||||||||||||||||||||||||||||||||
| Series A | Series B | Common Stock | Paid-in | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance -December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Issuance of common stock in exchange for services to consultants | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for debt modification and penalty | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of debt | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of debt | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance -September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| F-4 |
NUTRA PHARMA CORP.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Bad debt expense - related party | ||||||||
| Accrued interest expense for amount due to officer | ||||||||
| Loss on settlement of debt and accrued expense | ||||||||
| Depreciation | ||||||||
| Stock-based compensation | ||||||||
| Stock-based loan modification cost | ||||||||
| Amortization of convertible notes receivable discount | ( | ) | ( | ) | ||||
| Change in fair value of convertible notes and derivatives | ( | ) | ||||||
| Amortization of loan discount | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | ( | ) | ||||||
| Increase in other receivable | ( | ) | ( | ) | ||||
| Increase in inventory | ( | ) | ( | ) | ||||
| Increase in prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Decrease in accounts payable | ||||||||
| Increase in accrued expenses | ||||||||
| Increase in accrued payroll due to officers | ||||||||
| Increase in deferred revenue to a related party | ||||||||
| Decrease in accrued interest to related parties | ( | ) | ( | ) | ||||
| Decrease in operating lease obligations | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Convertible notes receivable advances | ( | ) | ( | ) | ||||
| Convertible notes receivable repayments | ||||||||
| Acquisition of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities: | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Loans from officer | ||||||||
| Repayment of officer loans | ( | ) | ( | ) | ||||
| Proceeds from convertible notes | ||||||||
| Repayment of convertible notes | ( | ) | ( | ) | ||||
| Advances from an unrelated third party | ||||||||
| Repayments of other notes payable | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase(decrease) in cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non Cash Financing and Investing: | ||||||||
| Common stock issued in settlement of notes | $ | $ | ||||||
| Common stock issued for conversion of debt | $ | $ | ||||||
| Warrants issued with Debt--Debt discount | $ | $ | ||||||
| Increase of right-of-use asset due to lease renewal | $ | $ | ||||||
| Increase of operating lease liabilities due to lease renewal | $ | $ | ||||||
| Reclassification of rental receivable to convertible notes receivable | $ | $ | ||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| F-5 |
NUTRA PHARMA CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2022
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 was 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, Nutra Pharma launched Pet Pain-Away, an over-the-counter pain reliever designed to treat pain in cats and dogs. In October 2019, Nutra Pharma launched Equine Pain-Away™, an over-the-counter topical pain reliever designed to treat pain and inflammation in horses. In March 2021, Nutra Pharma launched Luxury Feet™, an over-the-counter pain reliever designed specifically to treat foot pain and inflammation especially for women that wear high heels and stilettos. In May of 2022, we began producing products for Avini Health Corporation (“Avini Health”). Avini Health distributes wellness and nutritional products through their network of independent distributors in the United States, Canada and the US Virgin Islands. The products that we provide for Avini Health include private label versions of our Nyloxin products and are sold as: Avini Plus Relief oral spray, Avini Plus Relief topical gel and Avini Plus Relief roll-on. We also provide the following products: a dietary fiber blend sold as Avini Plus Fiber, a micronized and activated colloidal suspension of zeolite that is sold as Cell Defender, a mushroom and zeolite blend sold in capsules as ZMUNITY, and a caffeine adaptogenic 2oz energy shot sold as Avini Plus Energy.
Basis of Presentation and Consolidation
The Unaudited Condensed Consolidated Financial Statements and notes are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not contain certain information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Interim results are not necessarily indicative of results for a full year. Therefore, the interim Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto contained in the Company’s Annual Report on Form 10-K from which the accompanying condensed consolidated balance sheet dated December 31, 2021 was derived.
The accompanying Unaudited Condensed 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. Designer Diagnostics Inc. has been inactive since June 2011. All intercompany transactions and balances have been eliminated in consolidation.
Liquidity and Going Concern
Our
Unaudited Condensed 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 $
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.
We do not have sufficient cash to sustain our operations for a period of twelve months from the issuance date of this report 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 Unaudited Condensed 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.
| F-6 |
Impact of COVID-19 on our Operations
The
ramifications of the outbreak of the novel strain of COVID-19, reported to have started in December 2019 and spread globally, are filled
with uncertainty and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption.
Beginning in June 2020, the Company experienced a delay in retail rollout as a downstream implication of the slowing economy. During
May 2020, we received approval from the Small Business Administration (“SBA”) to fund our request for a PPP loan for $
The Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; and the distribution of testing and a vaccine.
Use of Estimates
The accompanying Unaudited Condensed 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, the recoverability of amounts due from officer, the valuation of stock-based compensation and certain debt and derivative liabilities, recognition of loss contingencies and deferred tax valuation allowances. 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.
Revenue from Contracts with Customers
The Company accounts for revenue from contracts with customers in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC Topic 606, revenue recognition has a five-step process: a) Determine whether a contract exists; b) Identify the performance obligations; c) Determine the transaction price; d) Allocate the transaction price; and e) Recognize revenue when (or as) performance obligations are satisfied.
Our revenues are primarily derived from customer orders for the purchase of our products. We recognize revenues as performance obligations are fulfilled upon shipment of products. We record revenues net of promotions and discounts.
| F-7 |
Accounting for Shipping and Handling Costs
We account for shipping and handling as fulfillment activities and record amounts billed to customers as revenue and the related shipping and handling costs as cost of sales.
Accounts Receivable and Allowance for Doubtful Accounts
We grant credit without collateral to our customers based on our evaluation of a particular customer’s credit worthiness. Accounts receivable are due 30 days after the issuance of the invoice. In addition, allowances for doubtful accounts are maintained for potential credit losses based on the age of the accounts receivable and the results of periodic credit evaluations of our 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. We generally do not charge interest on accounts receivable. We use third party payment processors and are required to maintain reserve balances, which are included in 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 net realizable value, 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. We classify
inventory as short-term or long-term inventory based on timing of when it is expected to be consumed. The Company regularly reviews inventory
quantities on hand. If necessary, it records a net realizable value adjustment for excess and obsolete inventory based primarily on its
estimates of product demand and production requirements. Write-downs are charged to cost of goods sold. We performed an evaluation of
our inventory and related accounts at September 30, 2022 and December 31, 2021, and increased the reserve on supplier advances for future
venom purchases included in prepaid expenses and other current assets by $
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 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 three months ended September 30, 2022, one customer accounted
for
| F-8 |
Operating Lease Right-of-Use Asset and Liability
The Company accounts for leases in accordance with Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), as amended (“ASC Topic 842”). This standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and classify as either operating or finance leases.
In accordance with ASC Topic 842, at the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether we obtain the right to substantially all the economic benefit from the use of the asset, and whether we have the right to direct the use of the asset. Leases with a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less under practical expedient in paragraph ASC 842-20-25-2.
Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate.
Derivative Financial Instruments
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 other 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. 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.
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
Convertible Debt
For convertible debt that was issued before the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity that did not contain an embedded derivative that required bifurcation, the conversion feature was evaluated to determine if the rate of conversion was below market value and should be categorized as a beneficial conversion feature (“BCF”). A BCF related to debt was recorded by the Company as a debt discount and with the offset recorded to equity. The related convertible debt was recorded net of the discount for the BCF. The discount was amortized as additional interest expense over the term of the debt with the resulting debt discount being accreted over the term of the note.
| F-9 |
The Fair Value Measurement Option
We have elected the fair value measurement option for convertible debt with embedded derivatives that require bifurcation, and record the entire hybrid financing instrument at fair value under the guidance of ASC Topic 815, Derivatives and Hedging (“ASC Topic 815”). The Company reports interest expense, including accrued interest, related to this convertible debt under the fair value option, within the change in fair value of convertible notes and derivatives in the accompanying consolidated statement of operations.
Derivative Accounting for Convertible Debt and Options and Warrants
The Company evaluated the terms and conditions of the convertible debt under the guidance of ASC Topic 815, Derivatives and Hedging. The conversion terms of some of the convertible notes are variable based on certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the debt is indeterminate. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted, and all additional convertible debt and options and warrants are included in the value of the derivative liabilities. Pursuant to ASC 815-15, Embedded Derivatives, the fair values of the convertible debt, options and warrants and shares to be issued were recorded as derivative liabilities on the issuance date and revalued at each reporting period.
Property and Equipment
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
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.
Income Taxes
The Company recorded income tax expense for the three and nine months ended September 30, 2022 and 2021 because the estimated annual effective tax rate was zero. As of September 30, 2022, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.
Related Party Transactions
All transactions with related parties are in the normal course of operations and are measured at the exchange amount (See Note 13).
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.
| F-10 |
Net income (loss) per share is calculated in accordance with FASB ASC Topic 260, Earnings per Share. Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is calculated by dividing net income (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 conversion options and warrants would come from newly issued common shares from our remaining authorized shares.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Basic and diluted numerator: | ||||||||||||||||
| Net income (loss) - basic | $ | $ | $ | $ | ( | ) | ||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Change in fair value of convertible notes | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest on convertible debt | ||||||||||||||||
| Net income (loss) - diluted | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||
| Basic and diluted denominator: | ||||||||||||||||
| Weighted-average common shares outstanding - basic | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Convertible debt | ||||||||||||||||
| Options and warrants | ||||||||||||||||
| Weighted-average common shares outstanding - diluted (1) | ||||||||||||||||
| Net income (loss) per share - basic and diluted | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||
| (1) |
| September 30, 2022 | September 30, 2021 | |||||||
| Options and warrants | ||||||||
| Convertible notes payable at fair value | ||||||||
| Convertible notes payable | ||||||||
| Total | ||||||||
The following table summarizes the weighted average securities that were excluded from the diluted per share calculation because (1) for the nine months ended September 30, 2022, the exercise prices of the options and warrants were greater than the average market price of the common shares and (2) for the nine months ended September 30, 2021, the effect of including these potential shares was antidilutive due to a net loss:
| September 30, 2022 | September 30, 2021 | |||||||
| Options and warrants | ||||||||
| Convertible notes payable at fair value | ||||||||
| Convertible notes payable | ||||||||
| Total | ||||||||
| F-11 |
Recent Adopted Accounting Pronouncements
As of January 1, 2022, the Company adopted ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies and clarifies certain calculation and presentation matters related to convertible and equity and debt instruments. Specifically, ASU-2020-06 removes requirements to separately account for conversion features as a derivative under ASC Topic 815 and removing the requirement to account for beneficial conversion features on such instruments. Accounting Standards Update 2020-06 also provides clearer guidance surrounding disclosure of such instruments and provides specific guidance for how such instruments are to be incorporated in the calculation of Diluted EPS. The adoption did not have a material effect on the accompanying consolidated financial statements.
As of January 1, 2022, the Company adopted ASU No. 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modification or Exchanges of Freestanding Equity-Classified Written Call Options (“ASU 2021-04”), which will clarify and reduce diversity in practice. Specifically, the new standard includes a recognition model comprising four categories of transactions and corresponding accounting treatment for each category. The category that would apply to a modification or an exchange of an equity-classified warrant would depend on the substance of the modification transaction (e.g. a financing transaction to raise equity versus one to raise debt). This recognition model is premised on the idea that the accounting for the transaction should not differ from what it would have been had the issuer of the warrants paid cash instead of modifying the warrants. The adoption did not have a material effect on the accompanying consolidated financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016- 13”), which significantly changes how entities will account for credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the existing incurred loss model with an expected credit loss model that requires entities to estimate an expected lifetime credit loss on most financial assets and certain other instruments. Under ASU 2016-13 credit impairment is recognized as an allowance for credit losses, rather than as a direct write-down of the amortized cost basis of a financial asset. The impairment allowance is a valuation account deducted from the amortized cost basis of financial assets to present the net amount expected to be collected on the financial asset. Once the new pronouncement is adopted by the Company, the allowance for credit losses must be adjusted for management’s current estimate at each reporting date. The new guidance provides no threshold for recognition of impairment allowance. Therefore, entities must also measure expected credit losses on assets that have a low risk of loss. For instance, trade receivables that are either current or not yet due may not require an allowance reserve under currently generally accepted accounting principles, but under the new standard, the Company will have to estimate an allowance for expected credit losses on trade receivables under ASU 2016-13. ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022 for smaller reporting companies. Early adoption is permitted. The Company will evaluate the impact of ASU 2016-13 on the Company’s consolidated financial statements in a future period closer to the date of adoption.
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 at September 30, 2022 and December 31, 2021 are 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). |
| F-12 |
The following table summarizes our financial instruments measured at fair value at September 30, 2022 and December 31, 2021:
| Fair Value Measurements at September 30, 2022 | |||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Warrant liability | $ | $ | $ | $ | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | |||||||||||||
| Convertible notes at fair value | $ | $ | $ | $ | |||||||||||||
| Fair Value Measurements at December 31, 2021 | |||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Warrant liability | $ | $ | $ | $ | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | |||||||||||||
| Convertible notes at fair value | $ | $ | $ | $ | |||||||||||||
The following table shows the changes in fair value measurements for the warrant liability using significant unobservable inputs (Level 3) during the nine months ended September 30, 2022 and the year ended December 31, 2021:
| Description | September 30, 2022 | December 31, 2021 | ||||||
| Beginning balance | $ | $ | ||||||
| Purchases, issuances, and settlements | ||||||||
| Total gain included in earnings (1) | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
| (1) |
We
valued our warrants using a Dilution-Adjusted Black-Scholes Model. Assumptions used include (1)
We valued derivative liabilities using the number of potential convertible shares for warrants in equity and convertible notes with fixed conversion price that are recorded at amortized cost times the closing stock price of our restricted common stock at September 30, 2022. These derivative liabilities are recorded due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit and the equity environment is tainted, and therefore all convertible debt and options and warrants should be accounted for as liabilities.
The following table summarizes assumptions and the significant terms of the convertible notes for which the entire hybrid instrument is recorded at fair value at September 30, 2022 and December 31, 2021:
Conversion Price - Lower of Fixed Price or Percentage of VWAP for Look-back Period | ||||||||||||||||||
| Debenture | Face Amount | Interest Rate | Default Interest Rate | Discount Rate | Anti-Dilution Adjusted Price | % of stock price for look-back period | Look-back Period | |||||||||||
| September 30, 2022 | $ | N/A | $ | |||||||||||||||
| December 31, 2021 | $ | N/A | $ | |||||||||||||||
Using the stated assumptions summarized in the table above, we calculated the inception date and reporting period fair values of each note issued. The following table shows the changes in fair value measurements for the convertible notes at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2022 and the year ended December 31, 2021:
| Description | September 30, 2022 | December 31, 2021 | ||||||
| Beginning balance | $ | $ | ||||||
| Purchases and issuances | ||||||||
| Day one loss on value of hybrid instrument (1) | ||||||||
| Loss (gain) from change in fair value (1) | ( | ) | ||||||
| Repayments in cash | ( | ) | ( | ) | ||||
| Conversion to common stock | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
| (1) |
| F-13 |
3. INVENTORIES
Inventories are valued at the lower of cost or net realizable value on an average cost basis. At September 30, 2022 and December 31, 2021, inventories were as follows:
September 30, 2022 | December 31, 2021 | |||||||
| Raw Materials | $ | $ | ||||||
| Finished Goods | ||||||||
| Total Inventories | ||||||||
| Less: Long-term inventory | ( | ) | ( | ) | ||||
| Current portion | $ | $ | ||||||
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2022 and December 31, 2021:
September 30, 2022 | December 31, 2021 | |||||||
| Computer equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Lab equipment | ||||||||
| Telephone equipment | ||||||||
| Office equipment – other | ||||||||
| Leasehold improvements | ||||||||
| Total | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
We
review our long-lived assets for recoverability if events or changes in circumstances indicate the assets may be impaired. At September
30, 2022, we believe the carrying values of our long-lived assets are recoverable. Depreciation expense for the nine-months ended September
30, 2022 and 2021 was $
5. DUE TO/FROM OFFICER
At
September 30, 2022, the net balance due to Rik Deitsch, and the companies majority owned and controlled by him (collectively
referred to as “Due to Officer”) in the aggregate is $
At
December 31, 2021, the net balance due to Rik Deitsch, and the companies majority owned and controlled by him is $
6. DEBTS
Debts consist of the following at September 30, 2022 and December 31, 2021:
September 30, 2022 | December 31, 2021 | |||||||
| Notes payable – Unrelated third parties (Net of discount of $ | $ | $ | ||||||
| Convertible notes payable – Unrelated third parties (Net of discount of $ | ||||||||
| Convertible notes payable, at fair value (4) | ||||||||
| Other advances from an unrelated third party (5) | ||||||||
| SBA notes payable(6) | ||||||||
| Ending balances | ||||||||
| Less: Long-term portion-Convertible Notes payable-Unrelated third parties | ( | ) | ( | ) | ||||
| Less: Long-term portion- SBA notes payable | ( | ) | ( | ) | ||||
| Current portion | $ | $ | ||||||
| F-14 |
| (1) | During 2010 we borrowed
$ |
| (2) | At September 30, 2022 and
December 31, 2021, the balance of $ |
| ● | In August 2016, we issued
two Promissory Notes for a total of $ | |
| ● | On August 2, 2011 under
a settlement agreement with Liquid Packaging Resources, Inc. (“LPR”), we agreed to pay LPR a total of $ | |
| ● | At December 31, 2012, we
owed University Centre West Ltd. approximately $ | |
| ● | In April 2016, we issued
a promissory note to an unrelated third party in the amount of $ | |
| ● | In May 2016, the Company
issued a promissory note to an unrelated third party in the amount of $ | |
| ● | In June 2016, the Company
issued a promissory note to an unrelated third party in the amount of $ |
| F-15 |
| ● | A promissory note originally
issued to an unrelated third party in August 2016 was restated in September 2019 in the amount of $ | |
| ● | On September 26, 2016,
we issued a promissory note to an unrelated third party in the amount of $ | |
| ● | In October 2016, we issued
a promissory note to an unrelated third party in the amount of $ | |
| ● | In June 2017, we issued
a promissory note to an unrelated third party in the amount of $ | |
| ● | During July 2017, we received
a loan for a total of $ | |
| ● | In July 2017, we issued
a promissory note to an unrelated third party in the amount of $ |
| F-16 |
| ● | In November 2017, we issued
a promissory note to an unrelated third party in the amount of $ | |
| ● | In November 2017, we issued
a promissory note to an unrelated third party in the amount of $ | |
| ● | During January 2022, the
Company received a loan for $ |
| ● | During June 2022, the Company
entered a Purchase and Sale of Future Receipts Agreement with a non-related party. This third party purchased $ |
| F-17 |
| (3) | At September 30, 2022 and
December 31, 2021, the balance of $ and $ net of discount of $ |
| ● | In October 2017, we issued
a promissory note to an unrelated third party in the amount of $ | |
| ● | During January through
December 2018, we issued convertible notes payable to the 20 unrelated third parties for a total of $ | |
| During February 2019, we
issued convertible notes payable of $ | ||
| During May 2019, we restated
two convertible notes payable with additional original issue discount of $ | ||
| During February, November
and December 2019, we issued three convertible promissory notes to the unrelated third party for $ |
| F-18 |
During
2019, repayments of $ were made in cash to three of the Notes. Six of the Notes for a total of $
At
December 31, 2019, the principal balance of the notes, net of discount of $
During
the year ended December 31, 2020, we issued convertible notes payable of $
At
December 31, 2020, the principal balance of the notes, net of discount of $
During
the first quarter of 2021, we issued convertible promissory notes to the unrelated third parties for a total of $
During
December 2021, in connection with the issuance of three of the above mentioned convertible notes of $
| F-19 |
During
March 2021, the remaining balance of promissory note of $
During
March 2021, in connection with the settlement of the $
During
August 2021, the promissory note of $
During the first quarter of 2022, we issued convertible promissory notes to the unrelated third parties for a total of $ with original issuance discount of $. The Noteholders have the right to convert the note into shares of Common Stock at a conversion price ranging from $ to $ per share. The notes are due one year from the execution and funding of the notes.
During the second quarter of 2022, we issued convertible promissory notes to the unrelated third parties for a total of $ with original issuance discount of $. The Noteholders have the right to convert the note into shares of Common Stock at a conversion price ranging from $ to $ per share. The notes are due one year from the execution and funding of the notes.
During the third quarter of 2022, we issued convertible promissory notes to the unrelated third parties for a total of $with original issuance discount of $. The Noteholders have the right to convert the note into shares of Common Stock at a conversion price ranging from $ to $ per share. The notes are due one year from the execution and funding of the notes.
During
January and May 2022, in connection with the issuance of one of the above mentioned convertible notes of $
During
June 2022, we repaid a convertible notes payable originated in May 2021 in cash for $
During
August 2022, we made repayment of $
| F-20 |
At
the date of this report, $
The
total discount amortization on all notes for the three and nine months ended September 30, 2021 was $
| (4) | At September 30, 2022 and
December 31, 2021, the balance of $ |
| ● | The remaining balance of
$ | |
| ● | During May 2017, we issued
a Convertible Debenture in the amount of $ | |
| ● | During February through
August 2018, we issued seven convertible promissory notes to an unrelated third party due one year from the execution dates. During
October 2020, the Note holder sold the remaining debt principal value as of October 22, 2020 of $ | |
| ● | During July 2018, we issued
a convertible debenture in the amount of $ | |
| ● | During August 2018, we
issued a convertible debenture in the amount of $ | |
| ● | During January 2019, the
principal balance of $ |
| F-21 |
| ● | During
February 2019, we issued a convertible promissory note to an unrelated third party in the amount up to $ | |
| ● | During
June 2019, we issued a convertible promissory note to an unrelated third party for $ |
| (5) | At September 30, 2022 and December 31, 2021, the balance of $ consisted of the advances received from a third party during the periods from May 2019 through May 2020 in connection with a Joint Venture proposal. The deposits were considered as payments towards the purchase of equity in the joint venture. The joint venture is currently on hold pending the outcome of the lawsuit with the Securities and Exchange Commission (see Note 12). |
| (6) |
During
April and June 2020, the Company executed the standard loan documents required for securing a loan from the SBA under its Economic
Injury Disaster Loan assistance program (the “EIDL Loan”) considering the impact of the COVID-19 pandemic on the Company’s
business. Pursuant to the Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL
Loan was $ |
| Years | Amount | |||
| 2022(2 months remaining) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Less: Long-term portion - SBA notes payable | ( | ) | ||
| Current portion | $ | |||
| F-22 |
7. STOCKHOLDERS’ DEFICIT
Authorized Shares
On November 18, 2021, we obtained written consents from stockholders holding a majority of our outstanding voting stock to approve an amendment of the Company’s articles of incorporation, as amended, to increase the number of authorized shares of common stock from to .
Series A Preferred Stock
Effective October 30, 2017, pursuant to authority of its Board of Directors, the Company filed a Certificate of Determination to authorize the issuance of shares of stock designated “preferred shares”, issuable from time to time in one or more series and authorize the Board of Directors to fix the number of shares constituting any such series, and to determine or alter the dividend rights, dividend rate, conversion rights, voting rights, right and terms of redemption (including sinking fund provisions), the redemption price or prices and the liquidation preference of any wholly unissued series of such preferred shares, and the number of shares constituting any such series.
Effective October 30, 2017 the Board of Directors authorized the issuance of shares of Series A Preferred Stock (“Series A Preferred”). Terms of the Series A Preferred include the following:
| 1. | The Series A Preferred voted with the Company’s common stock as a single class on all matters or consents for the Company’s common stockholders. Each share of Series A Preferred is entitled to one thousand votes per share. | |
| 2. | The Series A Preferred was not entitled to dividends unless the Company paid cash dividends or dividends in other property to holders of outstanding shares of common stock, in which event, each outstanding share of the Series A Preferred was entitled to receive dividends of cash or property in an amount or value equal to one thousand multiplied by the amount paid in respect of one share of common stock. Any dividend payable to the Series A Preferred would have the same record and payment date and terms as the dividend payable on the common stock. | |
| 3. | The Series A Preferred did not have any redemption rights. |
Effective November 15, 2021, the Board of Directors authorized an exchange of shares of Series A Preferred Stock held by Mr. Deitsch for an equal number of Series B Preferred Stock.
Upon return of 100% of Series A Preferred Stock to the Company, the entire class of Series A Preferred Stock was cancelled and the associated Certificate of Determination was filed with the Secretary of State of California.
Series B Preferred Stock
Effective March 2021, pursuant to authority of its Board of Directors, the Company filed a Certificate of Determination for its Series B Preferred Stock. The Series B Preferred Stock has a par value of $ per shares and consists of shares.
| F-23 |
Terms of the Series B Preferred include the following:
| 1. | The Series B Preferred votes with the Company’s common stock as a single class on all matters or consents for the Company’s common stockholders. Each share of Series B Preferred is entitled to one thousand votes per share. | |
| 2. | The
Series B Preferred will not be entitled to dividends unless the Company pays cash dividends or dividends in other property to holders
of outstanding shares of common stock, in which event, each outstanding share of the Series B Preferred will be entitled to receive
dividends of cash or property in an amount or value equal to one thousand multiplied by the amount paid in respect of one share of
common stock. Any dividend payable to the Series B Preferred will have the same record and payment date and terms as the dividend
payable on the common stock. The liquidation value of Series B Preferred is $ | |
| 3. | Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of all shares of Series B Preferred then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders an amount in cash equal to $ in cash per share before any distribution is made on any shares of the Company’s common stock. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the application of all amounts available for payments with respect to Series B Preferred would not result in payment in full of Series B Preferred, the holders shall share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference to which each is entitled. | |
| 4. | The Series B Preferred does not have any redemption rights. |
During
November 2021, the Board of Directors approved resolutions for the issuance of a total of shares of Series B Preferred stock
to Mr. Deitsch to discharge $
Effective November 15, 2021, the Board of Directors authorized an exchange of shares of Series A Preferred Stock held by Mr. Deitsch for an equal number of Series B Preferred Stock.
Common Stock Issued for Conversion of Convertible Debt
During
February 2022, the Noteholder received shares of our restricted common stock in satisfaction the $
Common Stock Issued for Settlement of Debt
During
February 2022, in connection with the settlement of $
During
May 2022, in connection with the settlement of a total of $
Common Stock Issued for Debt Modification and Penalty
During
August 2022, we issued restricted shares to a Note holder due to the default on repayments of the promissory note of $
During
August 2022, we issued restricted shares to a Note holder due to the default on repayments of the convertible note of $
Common Stock Issued for Consulting Service
During
July 2021, the Company signed an agreement with a consultant for services for twelve months. The shares issued upon execution
were valued at $
| F-24 |
Common Stock Warrants
During
August 2020, convertible promissory notes of $
| Month of Issuance | Number of Warrants | Month of Expiration | ||||||
| August, 2020 | ||||||||
| October, 2020 | ||||||||
During
November and December, 2020, the Company granted the
warrants at an exercise price of $
During
December 2021, in connection with the issuance of three of the convertible notes of $
During
January and May 2022, in connection with the issuance of the convertible note of $
| F-25 |
A summary of warrants outstanding in conjunction with private placements of common stock were as follows during the year ended December 31, 2021 and the nine months ended September 30, 2022:
| Number Of shares | Weighted average exercise price | |||||||
| Balance December 31, 2020 | $ | |||||||
| Exercised | ||||||||
| Issued | ||||||||
| Expired | ( | ) | ||||||
| Balance December 31, 2021 | $ | |||||||
| Exercised | ||||||||
| Issued | ||||||||
| Expired | ( | ) | ||||||
| Balance September 30, 2022 | $ | |||||||
The following table summarizes information about fixed-price warrants outstanding as of September 30, 2022 and December 31, 2021:
| Exercise Price | Weighted Average Number Outstanding | Weighted Average Contractual Life | Weighted Average Exercise Price | |||||||||||||
| September 30, 2022 | $ | years | $ | |||||||||||||
| December 31, 2021 | $ | years | $ | |||||||||||||
At
September 30, 2022, the aggregate intrinsic value of all warrants outstanding and expected to vest was $
9. ACCRUED EXPENSES
Accrued expenses consisted of the following:
September 30, 2022 | December 31, 2021 | |||||||
| Accrued consulting fees | $ | $ | ||||||
| Accrued payroll taxes | ||||||||
| Accrued interest | ||||||||
| Accrued others | ||||||||
| Total | $ | $ | ||||||
10. PREPAID EXPENSES
Prepaid expenses and other current assets consist of the following:
September 30, 2022 | December 31, 2021 | |||||||
| Supplier advances for future purchases | $ | $ | ||||||
| Reserve for supplier advances | ( | ) | ( | ) | ||||
| Net supplier advances | ||||||||
| Prepaid professional fees | ||||||||
| Deferred stock compensation | ||||||||
| Total | $ | $ | ||||||
We
performed an evaluation of our inventory and related accounts at September 30, 2022 and December 31, 2021, and increased the reserve
on supplier advances for future venom purchases by $
| F-26 |
11. CONVERTIBLE NOTES RECEIVABLE
During March through November 2021, we purchased five convertible notes from an unrelated third party (the “Third Party”) for a total of $ with original issuance discount of $. The notes are convertible into common shares for $ per common share and mature in from the funding of the notes. The original issuance discount is amortized over the lives of notes.
During
March through September 2022, we purchased five convertible notes from the Third Party for a total of $
Repayments
of $
Amortization
for all the convertible notes receivable was $
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Lease cost | ||||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| Balance sheet information | ||||||||
| Operating ROU Assets | $ | $ | ||||||
| Operating lease obligations, current portion | ||||||||
| Operating lease obligations, non-current portion | ||||||||
| Total operating lease obligations | $ | $ | ||||||
| Weighted average remaining lease term (in years) – operating leases | ||||||||
| Weighted average discount rate-operating leases | % | % | ||||||
| Supplemental cash flow information related to leases were as follows: | ||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | ||||||
Future minimum payments under these lease agreements are as follows:
| December 31, | Total | |||
| 2022 (Remaining three months) | $ | |||
| Total future lease payments | $ | |||
| Less imputed interest | ||||
| Total | $ | |||
Consulting Agreements
During
July 2015, we signed an agreement with a company to provide for consulting services for
| F-27 |
During
October 2015, the Company signed an agreement with a consultant for consulting services for a year. In connection with the agreement,
shares of the Company’s restricted common stock were granted and the Company was to make monthly cash payments of $
Litigation
CSA 8411, LLC v. Nutra Pharma Corp., Case No. CACE 18-023150
On
October 12, 2018, CSA 8411, LLC filed a lawsuit against the Company in the 17th Judicial Circuit Court in and for Broward County, Florida
(Case No. CACE 18-023150) to recover $
Defendant also filed affirmative claims against the Plaintiff, its owner Dan Oran and several related entities. The case has not been set for trial as of this date.
Securities and Exchange Commission v. Nutra Pharma Corporation, Erik Deitsch, and Sean Peter McManus
On September 28, 2018, the United States Securities and Exchange Commission (the “SEC”) filed a lawsuit in the United States District Court for the Eastern District of New York (Case No. 2:18-cv-05459) against the Company, Mr. Deitsch, and Mr. McManus. The lawsuit alleges that, from July 2013 through June 2018, the Company and the other defendants’ defrauded investors by making materially false and misleading statements about the Company and violated anti-fraud and other securities laws.
On May 29, 2019 (following each of the defendants filing motions to dismiss), the SEC filed a First Amended Complaint which generally alleged the same conduct as its original Complaint, but accounted for certain guidance provided by the United States Supreme Court in a case that had been recently decided. Each of the defendants then moved to dismiss the SEC’s First Amended Complaint. On March 31, 2020, the Court entered an Order granting in part and denying in part the various motions to dismiss. Following that Order, the SEC filed a Second Amended Complaint (the operative pleading) and the defendants have filed their answers which generally deny liability. At this time, discovery is closed and the SEC has indicated an intent to file a summary judgment motion regarding certain non-fraud claims asserted in its Second Amended Complaint. The defendants have opposed the SEC’s request to file such motion(s). The Court conducted a hearing on February 23, 2021 and set an initial briefing schedule for the SEC’s Motion for Partial Summary Judgment wherein the Plaintiffs’ Motion for Partial Summary Judgment was due on April 5, 2021, the Defendants’ Consolidated (i.e., collectively, Nutra Pharma Corporation, Erik “Rik” Deitsch, and Sean McManus) Response Brief to the SEC’s Motion was due May 3, 2021, and the Plaintiffs’ Reply Brief was due on May 19, 2021. On March 23, 2021, the Plaintiff filed a Motion for Extension of Time to file the Motion for Partial Summary Judgment. On April 9, 2021, the Plaintiff filed a Motion for Partial Summary Judgment, Defendants’ filed a Memorandum of Law in Opposition to Plaintiff’s Motion on May 7, 2021, and Plaintiff filed its Reply brief on May 21, 2021. On August 31, 2022, the Court entered an Order Granting in Part and Denying in Part the SEC’s Motion for Partial Summary Judgment. Specifically, the Court granted the SEC’s Motion for Partial Summary Judgment on Claim 7 (Section 5 of the Securities Act) against the Company and Mr. Deitsch, Claim 8 (Section 13(d) of the Exchange Act and Rule 13d-2(a) thereunder) against Mr. Deitsch, Claim 9 (Section 16(a) of the Exchange Act and Rule 16a-3 thereunder) against Mr. Deitsch, and Claim 10 (Section 13(a) of the Exchange Act and Rule 13a-11 thereunder) against the Company, but denied the SEC’s Motion for Partial Summary Judgment on Claim 14 (alleged aiding and abetting Nutra Pharma’s violation of Section 13(a) of the Exchange Act, and Rule 13a-11 thereunder) against Mr. Deitsch. The remedies pertaining to the claims addressed in the SEC’s Partial Summary Judgment will be determined by the Court at a later date. On September 16, 2022, Mr. Deitsch filed a Motion to Supplement his Initial Disclosures pursuant to Rule 26(a)(1) of the Federal Rules of Civil Procedure and to re-open discovery for the limited purpose of obtaining discovery from certain Nutra Pharma shareholders identified by Mr. Deitsch in his supplement to the initial disclosures. The Magistrate Judge assigned to the case granted Deitsch’s Motion on that same day and discovery has been re-opened on a limited basis. When the discovery in the case is complete, the case will proceed to trial on the remaining claims in the SEC’s Second Amended Complaint that were not addressed in the SEC’s Partial Summary Judgment. The Company disputes the allegations in this lawsuit and continues to vigorously defend against the SEC’s claims. Mr. Deitsch and Mr. McManus have similarly defended the lawsuit since its filing and each contest liability. The Company does not believe that it engaged in any fraudulent activity or made any material misrepresentations concerning the Company and/or its products.
13. RELATED PARTY TRANSACTIONS
The Company acts as a product formulator and contract manufacturer for Avini Health. The Company’s chief executive officer is an owner of Avini Health and is its chief scientific officer.
Commencing in May 2022, the Company sublets a portion of its space to Avini
Health under a one-year sublease for a monthly rent of $
As of September 30, 2022 and December 31, 2021, we had the following related party balances:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Deferred revenue to a related party | $ | $ | ||||||
| Accrued interest to a related party | ||||||||
For the three and nine months ended September 30, 2022 and 2021, we had the following related party transactions
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net sales to a related party | $ | $ | $ | $ | ||||||||||||
| Bad debt expense (recovery) - related party | ( | ) | ( | ) | ||||||||||||
| Rental income from a related party | ||||||||||||||||
| Interest expense to a related party | ||||||||||||||||
14. SUBSEQUENT EVENTS
During October 2022, we issued convertible promissory notes to the unrelated third parties for a total of $ with original issuance discount of $. The Noteholders have the right to convert the note into shares of Common Stock at a conversion price of $ per share. The notes are due one year from the execution and funding of the notes.
On
October 27, 2022, the promissory note of $
| F-28 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Our business during the nine months ended September 30, 2022 has focused upon marketing our homeopathic drugs for the treatment of pain:
| ● | Nyloxin® (Stage 2 Pain) | |
| ● | Nyloxin® Extra Strength (Stage 3 Pain) | |
| ● | Pet Pain–Away | |
| ● | Equine Pain–Away | |
| ● | Luxury Feet |
During the nine months ended September 30, 2022 and thereafter, the following has occurred:
On March 17, 2022, we provided updates on increasing our manufacturing capabilities for the production of our own products as well as third party companies with OTC drugs as well as dietary supplements. These capabilities include: a liquid fill line, a tube filling line, an extrusion line as well as a capsule filling line.
On March 23, 2022, we announced our first agreement to act as a product formulator and contract manufacturer for an outside company, Avini Health. The first sales for the Avini Health product line began in mid-March with the launch of their initial product offerings that include: Nyloxin, a zeolite liquid product, a nano-silver product and a mushroom blend capsule.
Nyloxin®/Nyloxin® Extra Strength
We offer Nyloxin®/Nyloxin® Extra Strength as our over–the–counter (OTC) pain reliever that has been clinically proven to treat moderate to severe (Stage 2) chronic pain.
Nyloxin® and Nyloxin® Extra Strength are 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.
Nyloxin® and Nyloxin® Extra Strength offer several benefits as a pain reliever. With increasing concern about consumers using opioid and acetaminophen–based pain relievers, the Nyloxin® products provide an alternative that does not rely on opiates or non–steroidal anti–inflammatory drugs, otherwise known as NSAIDs, for their pain relieving effects. Nyloxin® also has a well–defined safety profile. Since the early 1930s, the active pharmaceutical ingredient (API) of Nyloxin®, 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 Nyloxin® are rare, but may include headache, nausea, vomiting, sore throat, allergic rhinitis and coughing.
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The primary difference between Nyloxin® and Nyloxin® Extra Strength is the dilution level of the venom. The approximate dilution levels for Nyloxin® and Nyloxin® Extra Strength are as follows:
Nyloxin®
| ● | Topical Gel: 30 mcg/mL | |
| ● | Oral Spray: 70 mcg/mL |
Nyloxin® Extra Strength
| ● | Topical Gel: 60 mcg/mL | |
| ● | Oral Spray: 140 mcg/mL |
In December 2011, we began marketing Nyloxin® and Nyloxin® Extra Strength at www.nyloxin.com and on www.Amazon.com/nyloxin. 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.
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. In February of 2018, Nyloxin was added to the Federal Supply Schedule but was subsequently removed the following week without an adequate explanation. We have continued to work with our consultants to understand why our products were improperly removed the Federal Supply Schedule and when we may be able to get re-listed on the Federal Supply Schedule for eventual sales to governmental agencies or to the US Military.
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International Sales
We are pursuing international drug registrations in Canada, Mexico, India, Australia, New Zealand, 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 actively seeking new distribution partners in India.
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. Due to lack of funding, we have waited to complete the approval process to begin distributing Nyloxin® and expect to re-engage in the process in 2022.
On February 1, 2018 we announced a Distribution Agreement with the Australian company, Pharmachal PTY LTD to market and distribute Nyloxin® in Australia and New Zealand. Pharmachal has begun the registration process with the TGA (Therapeutic Goods Administration). At this time, we do not know if our products will qualify for TGA registration and cannot provide a timeline for the eventual distribution in Australia.
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.
In May of 2016, we signed a license agreement to begin the process of creating an infomercial (Direct Response) campaign for Pet Pain–Away™. In November of 2016, we announced the license agreement with DEG Productions for the marketing and distribution of Pet Pain–Away globally. DEG has the ability to earn the exclusive distribution rights for the product by reaching certain sales milestones. DEG has created their own website (www.getpetpainaway.com) and began airing commercials in December of 2016.
In February of 2020, we took back the marketing of Pet Pain-Away and are currently selling the product on Amazon.com and through www.petpainaway.com.
Luxury Feet
In June of 2017 we announced the creation of Luxury Feet; an over–the–counter pain reliever and anti–inflammatory product that is designed for women who experience pain or discomfort due to high heels and stilettos. In March of 2021 we announced plans for the marketing and distribution of Luxury Feet and on April 15, 2021 we announced that the product was available for purchase on Amazon.
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Equine Pain-Away (Formerly 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. We had 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. Equine Nyloxin was rebranded as Equine Pain-Away and officially rolled into the market in October of 2019. Equine Pain-Away is being marketed through several retailers and online at www.EquinePainAway.com and on Amazon.
Avini Health products
In May of 2022, we began producing products for Avini Health Corporation. Avini Health distributes wellness and nutritional products through their network of independent distributors in the United States, Canada and the US Virgin Islands. The products that we provide for Avini Health include private label versions of our Nyloxin products and are sold as: Avini Plus Relief oral spray, Avini Plus Relief topical gel and Avini Plus Relief roll-on. We also provide the following products: a dietary fiber blend sold as Avini Plus Fiber, a micronized and activated colloidal suspension of zeolite that is sold as Cell Defender, a mushroom and zeolite blend sold in capsules as ZMUNITY, and a caffeine adaptogenic 2oz energy shot sold as Avini Plus Energy.
Drug Discovery and Pipeline
Nutra Pharma is developing proprietary therapeutic protein products for the biologics market. The Company has two leading drug candidates: RPI–MN and RPI–78M.
RPI–MN
RPI–MN inhibits the entry of several viruses that are known to cause severe neurological damage in such diseases as encephalitis and Human Immunodeficiency Virus (HIV). It is being developed first for the treatment of HIV.
RPI–78M
RPI–78M is being developed for the treatment of Multiple Sclerosis (MS) and Adrenomyeloneuropathy (AMN). Other neurological and autoimmune disorders that may be served by RPI–78M include Myasthenia Gravis (MG), Rheumatoid Arthritis (RA) and Amyotrophic Lateral Sclerosis (ALS).
RPI–78M and RPI–MN contain anticholinergic peptides that recognize the same receptors as nicotine (acetylcholine receptors) but have the opposite effect. In a specific chemical process unique to Nutra Pharma, the drugs are created through a process of chemical modification.
In September, 2015 RPI–78M was granted Orphan Status by the FDA for the treatment of pediatric Multiple Sclerosis. This allows for much shorter timelines to drug approval, waiver of FDA fees (around $2.5M), rolling review and fast–track approval. Orphan status also allows for potential grant money and other funding opportunities through the clinical process.
RPI–MN and RPI–78M possess several desirable properties as drugs:
● 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 serious adverse side effects following years of investigations in humans and animals.
● They are extremely stable and resistant to heat, which gives the drugs a long shelf life. The drugs’ stability has been determined to be over 4 years at room temperature. This is extremely unusual for a biologic drug.
● RPI–78M may be administered orally –– a first for a biologic MS drug. This will present MS patients with additional quality of life benefits by eliminating the requirement for routine injections.
● They are easy to administer.
We are currently working with consultants to develop trial protocols for a Phase I/II trial for the use of RPI–78M in the treatment of Pediatric Multiple Sclerosis. Our goal is to initiate these trials in 2022.
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Critical Accounting Policies and Estimates
Our condensed consolidated unaudited financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our critical accounting policies and estimates are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K filed with the SEC on April 15, 2022. There were no material changes to our accounting policies during the nine months ended September 30, 2022.
We regularly evaluate the accounting policies and estimates that we use to prepare our condensed consolidated financial statements. In general, management’s estimates are based on historical experience, information from third party professionals, and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management under different and/or future circumstances.
Results of Operations – Comparison of Three Months Periods Ended September 30, 2022 and 2021
Sales for the three–month period ended September 30, 2022 were $109,204, including sales to a related party for $84,580, compared to $19,266 for the three-month period ended September 30, 2021. The increase in net sales is primarily attributable to the increase in sales of Nyloxin, Zeolite liquid product, Nano-silver product and Mushroom blend capsule.
Cost of sales for the three–month period ended September 30, 2022 is $41,051 compared to $9,644 for the three–month period September 30, 2021. Our cost of sales includes the direct costs associated with manufacturing, shipping and handling costs. Our gross profit margin for the three–month period ended September 30, 2022 is $68,153 or 62,41% compared to $9,622 or 49.94% for the three–month period ended September 30, 2021. The increase in our profit margin is primarily due to decrease in manufacturing cost.
Selling, general and administrative expenses decreased $230,459 or 41.38% from $556,932 for the quarter ended September 30, 2021 to $326,473 for the quarter ended September 30, 2022, generally due to the overall decrease in professional fees. In addition, we had a bad debt recovery from the receivables from companies owned by the Company’s CEO for $21,799 and $35,000 for the three months ended September 30, 2022 and 2021, respectively.
Other income of $4,210 and $4,750 for the three months ended September 30, 2022 and 2021, respectively, is related to the amortization of debt discount from the convertible notes receivables obtained during 2021 and the first three quarters of 2022.
Interest expense, including related party interest expense, increased $63,710 or 46.85%, from $135,986 for the quarter ended September 30, 2021 to $199,696 for the quarter ended September 30, 2022. This increase was primarily due to increase in amortization of loan discounts in the quarter ended September 30, 2022 compared to the quarter ended September 30, 2021.
We carry certain of our debentures and common stock warrants at fair value. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted, and all additional convertible debt, options and warrants are included in the value of the derivative liabilities. For the three months ended September 30, 2022 and 2021, the liability related to these hybrid instruments fluctuated, resulting in a gain of $1,019,736 and $16,133,270, respectively.
Loss on settlement of debts decreased $56,339 or 100%, from a loss of $56,339 for the three months ended September 30, 2021 to a loss of $0 for the three months ended September 30, 2022. This decrease was primarily due to decrease in losses on settlement of debt through issuance of shares of common stock. Stock issued for loan modification increased $10,500 or 100% from $0 for the nine months ended September 30, 2021 to $10,500 for the nine months ended September 30, 2022.
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As a result of the foregoing, our net income decreased by $14,856,156 or 96.26%, from an income of $15,433,385 for the quarter ended September 30, 2021 to $577,229 for the quarter ended September 30, 2022.
Results of Operations – Comparison of Nine Months Periods Ended September 30, 2022 and September 30, 2021
Sales for the nine–month period ended September 30, 2022 were $221,780, including sales to a related party for $154,966, compared to $71,748 for the nine-month period ended September 30, 2021. The increase in net sales is primarily attributable to the increase in sales of Nyloxin, Zeolite liquid product, Nano-silver product and Mushroom blend capsule.
Cost of sales for the nine–month period ended September 30, 2022 is $116,254 compared to $24,284 for the nine–month period September 30, 2021. Our cost of sales includes the direct costs associated with manufacturing, shipping and handling costs. Our gross profit margin for the nine–month period ended September 30, 2022 is $105,526 or 47.58% compared to $47,464 or 66.15% for the nine–month period ended September 30, 2020. The decrease in our profit margin is primarily due to increase in the manufacturing cost.
Selling, general and administrative expenses decreased $510,132 or 33.97% from $1,501,689 for the nine months ended September 30, 2021 to $991,557 for the nine months ended September 30, 2022, generally due to the overall decrease in professional fees. In addition, we incurred bad debt expense of $0 and $38,000 from the receivables from companies owned by the Company’s CEO for the nine months ended September 30, 2022 and 2021.
Other income of $16,215 and $6,465 for the nine months ended September 30, 2022 and 2021, respectively, is related to the amortization of debt discount from the convertible notes receivables obtained during 2021 and the first three quarters of 2022.
Interest expense, including related party interest expense, increased $232,142 or 64.36%, from $360,673 for the nine months ended September 30, 2021 to $592,815 for the nine months ended September 30, 2022. This increase was primarily due to increase in amortization of loan discounts in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
We carry certain of our debentures and common stock warrants at fair value. Due to the fact that the number of shares of common stock issuable could exceed the Company’s authorized share limit, the equity environment is tainted, and all additional convertible debt, options and warrants are included in the value of the derivative liabilities. For the nine months ended September 30, 2022 and 2021, the liability related to these hybrid instruments fluctuated, resulting in a gain of $6,569,581 and a loss of $12,824,783, respectively.
Loss on settlement of debts decreased $334,277 or 68.80%, from a loss of $485,836 for the nine months ended September 30, 2021 to a loss of $151,559 for the nine months ended September 30, 2022. This decrease was primarily due to decrease in losses on settlement of debt through issuance of shares of common stock. Stock issued for loan modification decreased $97,000 or 90.23% from $107,500 for the nine months ended September 30, 2021 to $10,500 for the nine months ended September 30, 2022.
As a result of the foregoing, our net income increased by $20,209,443 or 132.39%, from a loss of $15,264,552 for the nine months ended September 30, 2021 to an income of $4,944,891 for the nine months ended September 30, 2022.
Liquidity and Capital Resources
We have incurred significant losses from operations and working capital and stockholders’ deficits raise substantial doubt about our ability to continue as a going concern. Further, as stated in Note 1 to our condensed consolidated unaudited financial statements for the period ended September 30, 2022, we have an accumulated deficit of $76,784,098 at September 30, 2022. In addition, we have a significant amount of indebtedness in default, a working capital deficit of $15,686,016 and a stockholders’ deficit of $15,609,507 at September 30, 2022.
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 the date of the filing of this report, we do not believe that our source of cash is adequate for the next 12 months of operation and there is substantial doubt about our ability to continue as a going concern.
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Current operations are primarily being funded through a combination of product sales and convertible notes. During the nine months ended September 30, 2022, we raised $710,000 through the issuance of convertible notes and $251,340 through the issuance of a promissory notes.
We expect to utilize the proceeds from these funds and additional capital to manufacture Nyloxin® and Pet Pain–Away and reduce our debt level. We estimate that we will require approximately $200,000 quarterly to fund our existing operations and ReceptoPharm’s operations for the next twelve months from the date of filing. These costs include: (i) compensation for three (3) 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. In addition, due to the fact that the number of shares of common stock issuable under warrants and convertible notes could exceed the Company’s authorized share limit, we may need to utilize funds to expand the number of authorized shares.
Our ability to meet our future operating expenses is highly dependent on the amount of such future revenues. To the extent that future revenues from the sales of 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.
The accompanying Unaudited Condensed 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.
Impact of COVID-19 on our Operations
The ramifications of the outbreak of the novel strain of COVID-19 are filled with uncertainty and changing quickly. Our operations have continued during the COVID-19 pandemic and we have not had significant disruption. Beginning in June 2020, the Company experienced a delay in retail rollout as a downstream implication of the slowing economy. During May 2020, we received approval from SBA to fund our request for a PPP loan for $64,895. The entire loan was forgiven in November 2021. During April and June 2020, we obtained the loan in the amount of $150,000 from SBA under its Economic Injury Disaster Loan assistance program. We used the proceeds primarily for rent, payroll, utilities, accounting and legal expenses.
The Company is operating in a rapidly changing environment so the extent to which COVID-19 impacts its business, operations and financial results from this point forward will depend on numerous evolving factors that the Company cannot accurately predict. Those factors include the following: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; and the distribution of testing and a vaccine.
Uncertainties and Trends
Our operations and possible revenues are dependent now and in the future upon the following factors:
● whether Nyloxin®, Nyloxin® Extra Strength and Pet Pain–Away will be accepted by retail establishments where they are sold;
● because Nyloxin® is a novel approach to the over–the–counter pain market, whether it will be accepted by consumers over conventional over–the–counter pain products;
● whether Nyloxin® Military Strength will be successfully launched and be accepted in the marketplace;
● whether our international drug applications will be approved and in how many countries;
● whether we will be successful in marketing Nyloxin®, Nyloxin® Extra Strength and Pet Pain–Away in our target markets and create nationwide and international visibility for our products;
● whether our drug delivery system, i.e. oral spray and gel, will be accepted by consumers who may prefer a pain pill delivery system;
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● whether competitors’ pain products will be found to be more attractive to consumers;
● whether we successfully develop and commercialize products from our research and development activities;
● whether we compete effectively in the intensely competitive biotechnology area;
● whether we successfully execute our planned partnering and out–licensing products or technologies;
● whether the current economic downturn and related credit and financial market crisis will adversely affect our ability to obtain financing, conduct our operations and realize opportunities to successfully bring our technologies to market;
● whether we are subject to litigation and related costs in connection with use of products;
● whether we will successfully contract with domestic distributor(s)/advertiser(s) for our products and whether that will cause interruptions in our operations;
● whether we comply with FDA and other extensive legal/regulatory requirements affecting the healthcare industry.
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 other than those disclosed in this report 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of September 30, 2022, 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 September 30, 2022, as defined in Rule 13a–15 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 Section 9A of our annual report on Form 10–K, our disclosure controls and procedures were not effective, at a reasonable assurance level, as of September 30, 2022. In light of this, we performed additional post–closing procedures and analyses in order to prepare the Condensed Consolidated Unaudited Financial Statements included in this report. As a result of these procedures, we believe our Condensed Consolidated Unaudited 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.
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Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer, who also acted as our Principal Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
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 quarter ended September 30, 2022 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
CSA 8411, LLC v. Nutra Pharma Corp., Case No. CACE 18-023150
On October 12, 2018, CSA 8411, LLC filed a lawsuit against the Company in the 17th Judicial Circuit Court in and for Broward County, Florida (Case No. CACE 18-023150) to recover $100,000 allegedly owed under an amended promissory note dated April 12, 2017. On November 1, 2018, the Company filed its Answer and Affirmative Defenses to the Complaint. The Company believes that this lawsuit is without merit. Moreover, the Company believes that it has a number of valid defenses to this claim. Among other things, the owner of CSA 8411, LLC violated the terms of a Binding Memorandum of Understanding by failing to invest in the Company and fraudulently inducing the Company to enter into the subject amended promissory note. Opposing counsel reached out to schedule mediation, and mediation was set for June 21, 2019 in Plantation, FL however the mediation was unsuccessful. At September 30, 2022, we owed principal balance of $91,156 and accrued interest of $60,037 (See Note 6) if the defenses and our new claims are deemed be of no merit.
The Company also filed affirmative claims against the Plaintiff, its owner Dan Oran and several related entities. The case has not been set for trial as of this date.
Securities and Exchange Commission v. Nutra Pharma Corporation, Erik Deitsch, and Sean Peter McManus
On September 28, 2018, the United States Securities and Exchange Commission (the “SEC”) filed a lawsuit in the United States District Court for the Eastern District of New York (Case No. 2:18-cv-05459) against the Company, Mr. Deitsch, and Mr. McManus. The lawsuit alleges that, from July 2013 through June 2018, the Company and the other defendants defrauded investors by making materially false and misleading statements about t and violated anti-fraud and other securities laws.
The violations alleged against the Company by the SEC include: (a) raising over $920,000 in at least two private placement offerings for which the Company failed to file required registration statements with the SEC; (b) issuing a series of materially false or misleading press releases; (c) making false statements in at least one Form 10-Q; and (d) failing to make required public filings with the SEC to disclose the Company’s issuance of millions of shares of stock. The lawsuit makes additional allegations against Mr. McManus and Mr. Deitsch, including that Mr. McManus acted as a broker without SEC registration and defrauded at least one investor by making false statements about the Company, that Mr. Deitsch engaged in manipulative trades of the Company’s stock by offering to pay more for shares he was purchasing than the amount the seller was willing to take, and that Mr. Deitsch failed to make required public filings with the SEC. The lawsuit seeks both injunctive and monetary relief.
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On May 29, 2019 (following each of the defendants filing motions to dismiss), the SEC filed a First Amended Complaint which generally alleged the same conduct as its original Complaint, but accounted for certain guidance provided by the United States Supreme Court in a case that had been recently decided. Each of the defendants then moved to dismiss the SEC’s First Amended Complaint. On March 31, 2020, the Court entered an Order granting in part and denying in part the various motions to dismiss. Following that Order, the SEC filed a Second Amended Complaint (the operative pleading) and the defendants have filed their answers which generally deny liability. At this time, discovery is closed and the SEC has indicated an intent to file a summary judgment motion regarding certain non-fraud claims asserted in its Second Amended Complaint. The defendants have opposed the SEC’s request to file such motion(s). The Court conducted a hearing on February 23, 2021 and set an initial briefing schedule for the SEC’s Motion for Partial Summary Judgment wherein the Plaintiffs’ Motion for Partial Summary Judgment was due on April 5, 2021, the Defendants’ Consolidated (i.e., collectively, Nutra Pharma Corporation, Erik “Rik” Deitsch, and Sean McManus) Response Brief to the SEC’s Motion was due May 3, 2021, and the Plaintiffs’ Reply Brief was due on May 19, 2021. On March 23, 2021, the Plaintiff filed a Motion for Extension of Time to file the Motion for Partial Summary Judgment. On April 9, 2021, the Plaintiff filed a Motion for Partial Summary Judgment, Defendants’ filed a Memorandum of Law in Opposition to Plaintiff’s Motion on May 7, 2021, and Plaintiff filed its Reply brief on May 21, 2021. On August 31, 2022, the Court entered an Order Granting in Part and Denying in Part the SEC’s Motion for Partial Summary Judgment. Specifically, the Court granted the SEC’s Motion for Partial Summary Judgment on Claim 7 (Section 5 of the Securities Act) against the Company and Mr. Deitsch, Claim 8 (Section 13(d) of the Exchange Act and Rule 13d-2(a) thereunder) against Mr. Deitsch, Claim 9 (Section 16(a) of the Exchange Act and Rule 16a-3 thereunder) against Mr. Deitsch, and Claim 10 (Section 13(a) of the Exchange Act and Rule 13a-11 thereunder) against the Company, but denied the SEC’s Motion for Partial Summary Judgment on Claim 14 (alleged aiding and abetting Nutra Pharma’s violation of Section 13(a) of the Exchange Act, and Rule 13a-11 thereunder) against Mr. Deitsch. The remedies pertaining to the claims addressed in the SEC’s Partial Summary Judgment will be determined by the Court at a later date. On September 16, 2022, Mr. Deitsch filed a Motion to Supplement his Initial Disclosures pursuant to Rule 26(a)(1) of the Federal Rules of Civil Procedure and to re-open discovery for the limited purpose of obtaining discovery from certain Nutra Pharma shareholders identified by Mr. Deitsch in his supplement to the initial disclosures. The Magistrate Judge assigned to the case granted Deitsch’s Motion on that same day and discovery has been re-opened on a limited basis. When the discovery in the case is complete, the case will proceed to trial on the remaining claims in the SEC’s Second Amended Complaint that were not addressed in the SEC’s Partial Summary Judgment. Nutra Pharma disputes the allegations in this lawsuit and continues to vigorously defend against the SEC’s claims. Mr. Deitsch and Mr. McManus have similarly defended the lawsuit since its filing and each contest liability. The Company does not believe that it engaged in any fraudulent activity or made any material misrepresentations concerning the Company and/or its products.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During August 2022, we issued 10,000,000 restricted shares to a Note holder due to the default on repayments of the promissory note of $183,619 amended in February 2022.
During August 2022, we issued 500,000 restricted shares to a Note holder due to the default on repayments of the convertible note of $17,250 originated in July 2021.
Item 3. Defaults Upon Senior Securities
Debt owed to a Director
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 Mr. Deitsch. We repaid principal balance in full as of December 31, 2016. During the nine months ended September 30, 2022, we repaid $15,000 of accrued interest in cash. At September 30, 2022 and December 31, 2021, we owed this director accrued interest of $145,508 and $147,768, respectively.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
| Exhibit No. | Title | |
| 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. | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NUTRA PHARMA CORP. | |
| Registrant | |
| Dated: November 21, 2022 | /s/ Rik J. Deitsch |
| Rik J. Deitsch | |
| Chief Executive Officer/Chief Financial Officer |
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