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NPHC > SEC Filings for NPHC > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for NUTRA PHARMA CORP

Form 10-K for NUTRA PHARMA CORP


31-Mar-2014

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, 2013 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 2013

On January 31, 2013 we relocated to our new corporate headquarters in the Lakeside Professional Village in Coral Springs, Florida. Our offices are comprised of a reception area, conference room, 3 offices, 2 restrooms, a break area and 2 cubicle workstations. These facilities are saving us more than $70,000 in annual costs and are more than adequate for our purposes.

On March 28, 2013 we announced that we had received notification that our patent for our pain drug and our trademarks for Nyloxin® had been published in India's Official Journal. The patent, "Use of Cobratoxin as an Analgesic," was published in the Official Journal No.: 09/2013 of the Indian Patent Office (IPO) on March 1, 2013. The Trademarks for Nyloxin™ are registered in India under Class 5, which represents a Pharmaceutical or a dietetic substances adapted for medical use. This allows for patent and brand protection, leading to eventual sales through Indian distributors.

In April 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.

On June 10, 2013, 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.

On June 18, 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.

On June 24, 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.

On August 19, 2013, we provided an update on our efforts to register Nyloxin® with US Governmental agencies. In December 2012, we had announced that we were introducing a stronger version of Nyloxin® to be called Nyloxin® Military Strength. we are registering the Nyloxin® Military Strength as well as Nyloxin® and Nyloxin® Extra Strength with US government agencies that will allow for the eventual sales and distribution of these products into the active military, US military base stores and foreign embassies.

On August 22, 2013, we announced that we had begun the process of registering our homeopathic treatment for chronic pain, Nyloxin®, in the country of South Africa. We stated a goal to begin marketing in South Africa by mid-2014.

On August 29, 2013, we announced that New Vitality, a marketing and distribution company, had placed and received their first order of the Company's all-natural, non-addictive pain reliever, Nyloxin®. The order was pursuant to New Vitality's successful test radio campaign to gauge the market acceptance of the product.

On October 08, 2013, we provided updates on the sales and marketing activities of TCN, a distributor of Nutra Pharma's over-the-counter (OTC) pain reliever, Nyloxin®. We announced the launch of TCNs global marketing and distribution campaign for Nyloxin®. In September 2012, we had announced the beginning of distribution efforts by the TCN group of direct distributors. Since that time, TCN has worked diligently to introduce Nyloxin® to approximately 40,000 distributors in the United States and almost 400,000 distributors globally. In August 2013, TCN re-launched their company as the "True Cash Network" and have subsequently expanded their internet presence. They have been working to overhaul their product offerings and have allowed their distributors personal websites under their www.MyNyloxin.com portal. Additionally, TCN has scheduled marketing efforts in the US that will include internet, radio and television.

On Oct 30, 2013, we announced that we were in the process of launching the newest addition to our line of homeopathic treatments for chronic pain, Equine Nyloxin®, a topical therapy for horses that is packaged as a two piece kit:
Nyloxin® Topical Gel comprises Step 1 and a solution of DMSO (dimethylsulfoxide) comprises Step 2.

On November 11, 2013, we announced that New Vitality, a marketing and distribution company, had begun filming a commercial for Nyloxin®. Photos from the shoot were published to Nutra Pharma's Facebook page. The 2-minute infomercial is expected to run sometime in early 2014.

On December 2, 2013, we announced that MyNyloxin, a new Network Marketing company, will have the exclusive rights to market and distribute Nyloxin® in the Network Marketing channel. We continue to market the products through our retail and Direct Response distributors.

On December 6, 2013, we announced the launch of the MyNyloxin.com website. The website allows for product sales and information as well as allowing distributors to sign up and view the Network Marketing opportunity.

On January 7, 2014, we announced the initial shipment of products and payments of commissions to MyNyloxin Distributors. The Network Marketing opportunity is being aggressively pursued and is expected to grow throughout 2014.

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, including paying 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. Future revenues from the sale of Cobroxin® and Nyloxin® are insufficient to cover our operating expenses and 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, 2013 and 2012

Sales for the year ended December 31, 2013 were $122,198 compared to $203,290 for the comparable period in 2012. All of the sales in 2013 and 2012 were related to product sales. The decrease in sales is primarily attributable to an overall decrease in sales of Nyloxin®.

Cost of sales for the year ended December 31, 2013 and 2012 was $41,165 and $147,647. Cost of sales includes the direct costs associated with manufacturing, shipping and handling costs, and write offs of Venom during 2012. Our gross profit margin for the year ended December 31, 2013 was $81,033 or 66.3% compared to $55,643 or 27.4% for the year ended December 31, 2012. The increase in our profit margin is due primarily to the write offs of venom of $117,800 at December 31, 2012.

Selling, general and administrative expenses ("SG&A") decreased $214,271 or 8.1% from $2,656,742 for the year ended December 31, 2012 to $2,442,471 for the year ended December 31, 2013. Our SG&A expenses include office expenses such as rent and utilities, product liability insurance and outside legal and accounting services, and also include stock based compensation, which decreased $407,482 or 22.6% from $1,799,461 for the year ended December 31, 2012 to $1,391,979 for the year ended December 31, 2013. The decrease of $407,482 in stock based compensation was offset by overall increase of $193,211 in payroll, marketing and promotional expenses, consulting and legal fees.

Interest expense increased $3,904 or 2.5%, from $153,472 for the year ended December 31, 2012 to $157,376 for the comparable 2013 period. This increase was due to an overall increase in short term indebtedness for the year ended December 31, 2013 compared to the year ended December 31, 2012.

We carry certain of our debentures and common stock warrants at fair value. For the year ended December 31, 2013 and 2012, the liability related to these hybrid instruments fluctuated, resulting in a loss of $1,135,677 and $400,488, respectively.

Loss on settlement of debt and accounts payable increased $231,181 or 50.6%, from $457,292 for the year ended December 31, 2012 to $688,473 for the comparable 2013 period. This increase was due to an overall increase in settlement of debts and accounts payable through issuance of stocks for the year ended December 31, 2013 compared the year ended December 31, 2012.

Our net loss increased by $730,613 or 20.2%, from $3,612,351 for the year ended December 31, 2012 to $4,342,964 for the year ended December 31, 2013.

Liquidity and Capital Resources

During December 31, 2013 and 2012, respectively, we have negative cash from operations of approximately $0.6 million and $0.7 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, 2013 and December 31, 2012, we have experienced significant losses totaling $4,342,964 and $3,612,351, respectively and had an accumulated deficit of $41,986,820 for the period from our inception to December 31, 2013. In addition, we had working capital and stockholders' deficits at December 31, 2013 of $4,259,938 and $4,219,449, 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, 2013, we had $4,640 in cash and as of March 31, 2014, we had approximately $5,179 in cash and we owed approximately $558,740 in vendor payables. We currently do not have sufficient cash to sustain our operations for the next 12 months and will require additional financing or an increase in sales in order to execute our operating plan and continue as a going concern. Our plan is to continue to increase sales of our products and attempt to secure adequate funding to bridge the commercialization of our Cobroxin® 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, 2013, we borrowed a total of $151,718 from Mr. Deitsch and repaid a total of $216,100 to him including the $162,500 repayment through exchange of the 50 million shares of Company's stocks.

As of December 31, 2013, we raised $285,000 and $75,000 through the issuance of convertible notes and promissory note, respectively. We also raised $140,000 through sales of common stocks.

Uncertainties and Trends

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

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

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

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

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

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

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

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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