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NPHC > SEC Filings for NPHC > Form 10-Q on 19-Aug-2013All Recent SEC Filings

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Form 10-Q for NUTRA PHARMA CORP


19-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

During the second quarter of 2013, our business has focused upon marketing our fully developed three homeopathic drugs for the treatment of pain:

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

· Nyloxin™ (Stage 2 Pain) and Nyloxin™ Extra Strength (Stage 3 Pain).

We will continue this focus during the remainder of 2013.

During our second quarter of 2013 and thereafter, the following has occurred:

On June 24, 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, cats and horses.

On June 18, we announced that New Vitality, a marketing and distribution company, had begun a test radio campaign to gauge the market acceptance of Nyloxin™. The 60-second ads ran for several weeks on radio stations throughout the United States. As a result of positive testing, New Vitality will be adding Nyloxin to their e-commerce website as they continue to advertize the product.

On June 10, we announced a Licensing Agreement for the marketing and distribution of our original product, Cobroxin® with Cobra Pharmaceuticals. The terms of the licensing agreement state that Cobra Pharmaceuticals will be responsible for marketing, distribution, inventory control and customer service of Cobroxin®. They will maintain exclusive rights in perpetuity provided that they maintain minimum quarterly sales that increase over time.

Cobroxin®

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

In November 2009, XenaCare began selling Cobroxin® to brick-and-mortar retailers, including distribution to CVS in March 2010 and Walgreens in May 2010. On April 1, 2011, we notified our Cobroxin® Distributor, XenaCare that they were in breach of our agreement. As a result of this, the distribution agreement was terminated effective April 10, 2011. XenaCare had a large stock of the product that they had ordered from us and we have allowed them to continue to market their existing inventory of Cobroxin®. In October, 2011 we discontinued their website at www.Cobroxin.com. All current traffic to that website is now redirected to www.Nyloxin.com. On June 10, 2013, we announced a new licensing agreement for the distribution of Cobroxin® with Cobra Pharmaceuticals, LLC. The new distributors expect to begin a direct response campaign by the fourth quarter of 2013 with the return to retail in 2014.

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

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

· safe and effective;

· all natural;

· long-acting;

· easy to use;

· non-narcotic;

· non-addictive; and

· analgesic and anti-inflammatory.

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

Nyloxin™/Nyloxin™ Extra Strength

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

Cobroxin®

· Topical Gel: 20 mcg/mL

· Oral Spray: 35 mcg/mL

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

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.

In April of 2013, we created a portal website for Nyloxin™ Distribution to a buyer's club, Freedom 10. The Freedom 10 group is able to buy our products at a discount based on the volume of products sold.

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.

During June of 2013, we announced that New Vitality, a marketing and distribution company, had begun a test radio campaign to gauge the market acceptance of Nyloxin™. The 60-second ads ran for several weeks on radio stations throughout the United States. As a result of positive testing, New Vitality will be adding Nyloxin™ to their e-commerce website as they continue to advertize the product.

We are pursuing international drug registrations in India, Canada, Mexico, 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. Additionally, we plan to complete two human clinical studies aimed at comparing the ability of Nyloxin™ Extra Strength to replace prescription pain relievers. We originally believed that these studies would begin during the second quarter of 2010; however, these studies have been delayed because of lack of funding. 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, cats and horses. We are seeking distributors for the product now as we begin manufacturing for eventual sales in the fourth quarter of 2013.

Critical Accounting Policies and Estimates

Our condensed consolidated 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.

We regularly evaluate the accounting policies and estimates that we use to prepare our 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.

We believe that our critical accounting policies and estimates include our ability to continue as a going concern, revenue recognition, accounts receivable and allowance for doubtful accounts, inventory obsolescence, accounting for long-lived assets and accounting for stock based compensation.

Ability to Continue as a Going Concern: 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. At June 30, 2013, there is substantial doubt about the Company's ability to continue as a going concern.

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.

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.

Results of Operations - Comparison of Three Months Periods Ended June 30, 2013 and June 30, 2012

Net sales for the three-month period ended June 30, 2013 are $22,080 compared to $16,301 for the three months period ended June 30, 2012. The increase in net sales is primarily attributable to the increase in Nyloxin sales.

Cost of sales for the three-month period ended June 30, 2013 is $16,352 compared to $3,356 for the three-month period ended June 30, 2012. Our cost of sales includes the direct costs associated with Nyloxin™ manufacturing. Our gross profit margin for the three-month period ended June 30, 2013 is $5,728 or 25.9% compared to $12,945 or 79.4% for the three-month period ended June 30, 2012. The decrease in our profit margin is due primarily to the increase in the shipping cost and fulfillment services.

Selling, general and administrative expenses ("SG&A") increased $168,185 or 85.8% from $195,982 for the quarter ended June 30, 2012 to $364,167 for the quarter ended June 30, 2013, generally due to the increase in consulting, legal and professional fees. Our SG&A expenses include office expenses such as rent and utilities, product liability insurance and outside legal and accounting services. Also included in SG&A expenses is stock based compensation expense, which increased $89,141 or 100% from $0 for the three months period ending June 30, 2012 to $89,141 for the three months period ending June 30, 2013.

Interest expense increased $3,199 or 8.5%, from $37,747 for the quarter ended June 30, 2012 to $40,946 for the comparable 2013 period. This increase was due to an overall increase in short term indebtedness in the quarter ended June 30, 2013 compared to the quarter ended June 30, 2012.

We carry certain of our debentures and common stock warrants at fair value. For the three months ended June 30, 2013 and 2012, the liability related to these hybrid instruments fluctuated, resulting in a loss of $212,869 and a gain of $86,519, respectively.

As a result of the foregoing, our net loss increased by $474,884 or 353.7%, from $134,265 for the quarter ended June 30, 2012 to $609,149 for the comparable 2013 period.

Comparison of Six Months Ended June 30, 2013 and June 30, 2012

Net sales for the six months ended June 30, 2013 are $59,861 compared to $31,235 for the six months ended June 30, 2012. The increase in sales is primarily attributable to an overall increase in sales of Nyloxin™.

Cost of sales for the six months ended June 30, 2013 is $23,606 compared to $6,366 for the six months ended June 30, 2012. Our cost of sales includes the direct costs associated with Cobroxin® and Nyloxin™ manufacturing. Our gross profit margin for the six months ended June 30, 2013 is $36,255 or 60.6% compared to $24,869 or 79.6% for the six months ended June 30, 2012. The decrease in our profit margin is due primarily to increase in the shipping cost and fulfillment services.

Selling, general and administrative expenses ("SG&A") decreased $107,265 or 12.9% from $833,807 for the six months ended June 30, 2012 to $726,542 for the six months ended June 30, 2013, generally due to a decrease in advertising, consulting, legal and professional fees. Our SG&A expenses include office expenses such as rent and utilities, product liability insurance and outside legal and accounting services. Also included in SG&A expenses is stock based compensation expense, which decreased $128,553 or 31.1% from $413,021 for the six months ended June 30, 2012 to $284,468 for the six months ended June 30, 2013.

Interest expense increased $4,968 or 6.61%, from $75,191 for the six months ended June 30, 2012 to $80,159 for the comparable 2013 period. This increase was due to an overall increase in short term indebtedness for the six months ended June 30, 2013 compared to the comparable period in 2012.

We carry certain of our debentures and common stock warrants at fair value. For the six months ended June 30, 2013 and 2012, the liability related to these hybrid instruments fluctuated, resulting in a loss of $250,068 and $25,461, respectively.

Our net loss decreased by $40,232 or 3.6%, from $1,122,680 for the six months ended June 30, 2012 to $1,082,448 for the comparable 2013 period.

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 financial statements for the period ended June 30, 2013, we have an accumulated deficit of $38,726,304 and working capital and stockholders' deficits of $3,768,198 and $3,710,802, 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 June 30, 2013, 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.

Historically, we have relied upon loans from our Chief Executive Officer, Rik Deitsch, to fund our operations. These loans are unsecured, accrue interest at a rate of 4.0% per annum and are due on demand. During the six month period ended June 30, 2013, we borrowed an additional $103,664 from Mr. Deitsch and repaid him $2,100. Mr. Deitsch accepted a total of 25,000,000 shares of the Company's restricted common stock as a repayment to discharge $100,000 of his outstanding loan the Company in June 2013. As of June 30, 2013, we owe Mr. Deitsch $620,378. Included in this amount is $337,501 of accrued interest.

Subsequent to June 30, 2013 and through August 14, 2013, the Company received additional advances from its President, Rik Deitsch in the amount of $9,613 and repaid $5,600. The amount owed to Mr. Deitsch at August 15, 2013 was $627,503, which includes $340,613 of accrued interest.

As of August 15, 2013, we raised $75,000 through issuance of convertible notes.

We expect to utilize the proceeds from these funds and additional capital to manufacture Cobroxin® and Nyloxin™, and reduce our debt level. We estimate that we will require approximately $200,000 to fund our existing operations and ReceptoPharm's operations through December 31st. 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™ during the first quarter of 2011. 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 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.

Uncertainties and Trends

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

¨ whether Cobroxin®, Nyloxin™, and Nyloxin™ Extra Strength will be accepted by retail establishments where they are sold;

¨ because Cobroxin® 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 our international drug applications will be approved and in how many countries;

¨ whether we will be successful in marketing Cobroxin®, Nyloxin™ and Nyloxin™ Extra Strength 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;

¨ 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 the potential effect of certain legal contingencies) 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.

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