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NPHC > SEC Filings for NPHC > Form 10-K on 16-Apr-2013All Recent SEC Filings

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Form 10-K for NUTRA PHARMA CORP


16-Apr-2013

Annual Report


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

Critical Accounting Policies and Estimates

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

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

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

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

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

Inventory Obsolescence: Inventories are valued at the lower of average cost or market value. We periodically perform an evaluation of inventory for excess, impairments and obsolete items. At December 31, 2012, our inventory consisted entirely of raw materials that are utilized in the manufacturing of finished goods. These raw materials generally have expiration dates in excess of 10 years.

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

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

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

Accomplishments During 2012

In March of 2012, we engaged LWR Partners, a select team experienced in branding, advertising and media deployment. LWR connects brands to customers through a suite of digital products that includes SMS Mobile, Email, Social Media, Online Video, Web Advertising and Point of Decision media. LWR Partners have created and guided traditional brands like The Die Hard Battery, Taster's Choice Coffee, Jimmy Dean Sausage and currently works with The "Seeds of Freedom" Foundation, Commerce Science Corporation and many new top quality Brands. LWR Partners is headquartered in Boca Raton, Florida. LWR will be working with us to create a unified brand strategy for Nyloxin™ and work to build on-line sales of the product.

In October of 2012, we purchased an advertisement for Nyloxin™ in Musculoskeletal Health - a special section of the Washington Post. The advertisement ran alongside an article featuring Jeff Gottfurcht, the first Rheumatoid Arthritis sufferer to conquer Everest. Mr. Gottfurcht began using Nyloxin™ while training for his Everest expedition and found it so effective in relieving the pain from his Rheumatoid Arthritis that he was able to stop using other medications with potentially serious side effects. He began his Everest climb in late March, 2011 and despite adverse weather conditions, reached the summit on May 14, 2011 using Nyloxin™ every day to manage his RA symptoms.

In October of 2012, we purchased an advertisement for Nyloxin™ in the USA Today Sports, World Series 2012 Collector's Edition Magazine.

In September of 2012 we began distributing Nyloxin™ through TCN International, a Network Marketing Company. TCN distributes products and software applications to approximately 400,000 independent agents in more than 30 countries, including more than 40,000 agents in the United States.

On December 19, 2012 we introduced Nyloxin™ Military Strength, a stronger version of Nyloxin™, to be marketed to the US Military and the US Veteran's Administration. We also announced that we had begun the process of registration with the United States government for sales into the military.

Results of Operations

Status of Operations

Due to our poor cash position, lack of significant sales and inability to obtain financing, we have been unable to fully fund our operations since October, 2011. This has included salaries for Nutra Pharma and ReceptoPharm employees. Paul Reid, PhD resigned as ReceptoPharm's Chief Executive Officer in November 2011. Since that time our Director, Harold Rumph, has filled the role in handling ReceptoPharm's day-to-day operations, which presently are limited to accepting venom samples for validation, maintaining records for quality control, quality assurance and administrative duties consisting of paying ReceptoPharms bills. As noted in previous filings, we have been unable to proceed with ReceptoPharm's studies since June, 2010; therefore, until we receive adequate financing or increased sales revenue, we have placed our drug development activities on hold and will focus all of our efforts on promoting our products that are already available in the marketplace.

We estimate that we will require approximately $600,000 to fund our existing operations and the operations of our subsidiaries ReceptoPharm and Designer Diagnostics over the next twelve months. 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.

We began generating revenues from the sale of Cobroxin® in the fourth quarter of 2009 and from the sale of Nyloxin™ and Nyloxin™ Extra Strength in January of 2011. Sales have been limited and inconsistent. 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 sale of Cobroxin® and Nyloxin™ are insufficient to cover our operating expenses we may need to raise additional equity capital, which could result in substantial dilution to existing shareholders. There can be no assurance that we will be able to raise sufficient equity capital to fund our working capital requirements on terms acceptable to us, or at all. We may also seek additional loans from our officers and directors; however, there can be no assurance that we will be successful in securing such additional loans.

Comparison of Years Ended December 31, 2012 and 2011

Sales for the year ended December 31, 2012 were $203,290 compared to $159,599 for the comparable period in 2011. All of the sales in 2012 were related to product sales. Of the total sales in 2011, $145,644 was related to product sales. The remaining sales of $13,955 for 2011 were generated from clinical research services to independent third parties provided by ReceptoPharm, our wholly owned subsidiary.

Cost of sales for the year ended December 31, 2012 was $147,647. Cost of sales includes the direct costs associated with manufacturing. This cost also includes the write offs of venom of $117,800. Cost of sales for the year ended December 31, 2011 was $879,587. This cost also includes the write offs of obsolete components held in inventory in the amount of $426,399, a write-down of finished goods inventory of $139,743 and a write-down of venom of $103,320.

General and administrative expenses decreased $386,099 or 12.7% from $3,039,795 for the year ended December 31, 2011 to $2,653,696 for the year ended December 31, 2012. Our general and administrative expenses include stock based compensation, which increased $945,294 or 110.7% from $854,167 for the year ended December 31, 2011 to $1,799,461 for the year ended December 31, 2012. The increase in stock based compensation was offset by overall decrease in payroll, marketing and promotional expenses, consulting and legal fees.

Research and development expenses incurred by ReceptoPharm decreased $87,819 or 96.7% from $90,865 for the year ended December 31, 2011 to $3,046 for the year ended December 31, 2012. Our research expenses are related to ongoing research activities pertaining to ReceptoPharm's leading drug compound, RPI-78. Also included in research and development expenses are certain costs related to the commercialization of our Cobroxin®products as well as development expenses related to the breeding of cobra snakes for the production of cobra venom.

Interest expense decreased $270,566 or 63.8% from $424,038 for the year ended December 31, 2011 to $153,472 for the comparable period in 2012. This decrease was primarily attributable to a onetime expense of $300,000 incurred in 2011 for the fair value of shares issued in excess of the debt they were exchanged for.

We carry certain of our debentures and common stock warrants at fair value. For the year ended December 31, 2012 and 2011, the liability related to these hybrid instruments fluctuated, resulting in a loss of $400,488 and $22,577, respectively.

We had a one-time loss on the settlement and modification of debt $550,327 offset by other income of $93,035 during 2012.

We incurred a net loss of $3,612,351 for the year ended December 31, 2012 compared to a net loss of $4,397,198 for the comparable period in 2011. The decrease in net loss of $784,847 or 17.9% is primarily attributable to an overall decrease of general and administrative expenses, research and development costs and interest expense.

Liquidity and Capital Resources

During December 31, 2012 and 2011, respectively, we have negative cash from operations of approximately $0.7 million and $1.9 million. Our lack of cash, significant losses and working capital and stockholders' deficits raise substantial doubt about our ability to continue as a going concern. For the years ended December 31, 2012 and December 31, 2011, we have experienced significant losses totaling $3,612,351and $4,397,198, respectively and had an accumulated deficit of $37,643,856 for the period from our inception to December 31, 2012. In addition, we had working capital and stockholders' deficits at December 31, 2012 of $3,632,479 and $3,576,343, respectively.

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

As of December 31, 2012, we had $7,559 in cash and as of April 15, 2013, we had approximately $1,162 in cash and we owed approximately $486,250 in vendor payables. We currently do not have sufficient cash to sustain our operations for the next month and will require additional financing or an increase in sales in order to execute our operating plan and continue as a going concern. Our plan is to attempt to secure adequate funding to bridge the commercialization of our Cobroxin® and Nyloxin™ products. We cannot predict whether additional financing will be in the form of equity, debt, or another form and we may be unable to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that these financing sources do not materialize, or that we are unsuccessful in increasing our revenues and profits, we may be unable to implement our current plans for expansion, repay our obligations as they become due or continue as a going concern, any of which circumstances would have a material adverse effect on our business prospects, financial condition and results of operations.

Historically, we have relied upon loans from our Chief Executive Officer Rik J Deitsch, to fund costs associated with our operations. These loans are unsecured, accrue interest at a rate of 4.0% per annum and are due on demand. During the year ended December 31, 2012, we borrowed a total of $164,779 from Mr. Deitsch and repaid a total of $149,478 to him including the $100,000 repayment through exchange of the 10 million shares of Company's stocks. In addition Mr. Deitsch sold $175,000 of the Company's debt in a private transaction.

In addition, during the year ended December 31, 2012, we raised an additional $613,500 of which $454,500 was received through the sale of restricted stock and $159,000 through the issuance of short-term notes bearing interest at 8% to 12%.

Uncertainties and Trends

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

· An obligation under a guarantee contract.

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

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

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

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

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