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, the recoverability of inventory and long-lived assets, the fair
value of stock-based compensation, the fair value of debt, the fair value of
derivative liabilities, recognition of loss contingencies and deferred tax
valuation allowances 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.
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.
Revenue Recognition: 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.
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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. For
certain product sales to a distributor, we record revenue including a portion of
the cash proceeds that is remitted back to the distributor.
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.
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, 2021, our inventory consisted
entirely of raw materials and finished goods that are utilized in the
manufacturing of finished goods. These raw materials generally have expiration
dates in excess of 10 years. Commencing on October 1, 2019, we classify
inventory as short-term or long-term inventory based on timing of when it is
expected to be consumed.
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: Management evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features
that qualify as embedded derivatives. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument is initially
recorded at its fair value and is then re-valued at each reporting date, with
changes in the fair value reported as charges or credits to income. For
option-based simple derivative financial instruments, the Company uses the
Black-Scholes option-pricing model to value the derivative instruments at
inception and subsequent valuation dates. 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 does not contain an embedded
derivative that requires bifurcation, the conversion feature is evaluated to
determine if the rate of conversion is below market value and should be
categorized as a beneficial conversion feature ("BCF"). A BCF related to debt is
recorded by the Company as a debt discount and with the offset recorded to
equity. The related convertible debt is recorded net of the discount for the
BCF. The discount is amortized as additional interest expense over the term of
the debt with the resulting debt discount being accreted over the term of the
note.
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.
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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 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.
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 2021 & Subsequent Accomplishments
On February 12, 2021, we announced that we are focusing on our intellectual
property portfolio and have engaged new IP attorneys at Christopher & Weisberg
P.A.
On February 23, 2021, we provided updates on our work in improving our existing
facilities for manufacturing and validation of our drug products. This included
the renewal of our lease for our current lab space and bringing all of
manufacturing in-house.
On March 11, 2021, we announced that we had engaged AccuReg, Inc. as outside
Regulatory and Quality Assurance consultants as part of our work in improving
our existing facilities for manufacturing and validation of our drug products.
On March 16, 2021, we announced our plans for the marketing and distribution 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.
On April 15, 2021, we announced that our newest product, Luxury Feet, was
available for purchase on Amazon.com.
On May 24, 2021, we announced today plans for expanding the marketing of our
over-the-counter pain relievers and anti-inflammatory products by working with
influencers on several social media platforms. These will include celebrities as
well as professional and Olympic athletes that have benefitted from our
products.
On May 27, 2021, we provided updates on increasing our manufacturing
capabilities for the production of our line of over-the-counter pain relievers
and anti-inflammatory drugs. As part of this process, we have completed the
design and purchase for a new liquid filling line that includes automatic
filling, capping, coding, labeling and heat shrinking for most of our products.
The new equipment will allow production of up to 40 bottles per minute, which
greatly increases our manufacturing capacity. The equipment is expected to be
validated, certified and in production by early September of 2021.
On June 2, 2021, we announced that we had signed an agreement with professional
snowboarder Jake Vedder as a celebrity endorser of Nyloxin for Chronic Pain
relief. Mr. Vedder will provide marketing content, videos and testimonials on
the use of our product and as a social media influencer.
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On June 4, 2021, we announced our plans for increasing sales of our
over-the-counter pain relievers through private label agreements that will
rebrand Nyloxin. The first private label distributor contract has been executed
with sales expected to start within the next 4-6 weeks. Their marketing plan
includes direct sales, targeted landing pages and aggressive marketing through
social media.
On June 8, 2021, we announced that Diverse Health Services of Metro-Detroit has
added the Nyloxin line of products to their offerings. Nyloxin is already being
sold in-house at their facilities and will be added shortly to their online
marketplace. Their marketing plan includes direct sales to patients and other
medical facilities, sales through their websites and social media utilizing
their online platforms as well as videos featuring Dr. Randall Tent.
On July 15, 2021, we announced that we had engaged the Washington DC-based
government affairs consulting firm, Vitello Consulting. The firm will work with
elected officials as well as governmental agencies to increase the awareness of
Nutra Pharma's products and technologies with the goal of improving sales,
garnering grants and potentially speeding drug applications.
On July 23, 2021, we announced that we filed a new provisional patent to protect
our intellectual property surrounding our development of nerve agent counter
measures.
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.
Results of Operations
Status of Operations
In November 2014, we announced the recertification of our laboratory facility as
the first step in re-engaging our drug development activities. In September,
2015 we received Orphan designation from the FDA for our lead drug candidate,
RPI-78M for the treatment of Pediatric Multiple Sclerosis. This will allow us to
shorten the timeline on clinical studies and may allow an eventual Fast Track
through the approval process. We are currently working with our consultants to
prepare a pre-IND meeting with the FDA in order to gain approval of a protocol
for a Phase I/II clinical study in Pediatric MS. Our goal is to begin the study
by the end of 2021.
We estimate that we will require approximately $600,000 to fund our existing
operations and the operations of our subsidiary ReceptoPharm over the next
twelve months. These costs include: (i) compensation for four (4) full-time
employees; (ii) compensation for various consultants who we deem critical to our
business; (iii) general office expenses including rent and utilities; (iv)
product liability insurance; and (v) outside legal and accounting services.
These costs reflected in (i) - (v) do not include research and development costs
or other costs associated with clinical studies.
We began generating revenues from the sale of Cobroxin® in the fourth quarter of
2009 and from the sale of Nyloxin® and Nyloxin® Extra Strength in January of
2011. We began sales of Pet Pain-Away in December 2014. While sales have
decreased year over year, they have been limited and inconsistent. Our ability
to meet our future operating expenses is highly dependent on the amount of such
future revenues. If future revenues from the sale of 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.
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Comparison of Years Ended December 31, 2021 and 2020
Sales for the year ended December 31, 2021 were $97,735 compared to $51,897 for
the comparable period in 2020. All of the sales in 2021 and 2020 were related to
product sales. The increase in sales is primarily attributable to an overall
increase in sales of Pet Pain-Away.
Cost of sales for the years ended December 31, 2021 and 2020 was $41,268 and
$15,678. Cost of sales includes the direct costs associated with manufacturing,
shipping and handling costs. Our gross profit margin for the year ended December
31, 2021 was $56,467 or 57.78% compared to $36,219 or 69.79% for the year ended
December 31, 2020. The increase in our profit margin is primarily due to
decrease in the manufacturing cost. In addition, we had an impairment of prepaid
inventory of $48,000 and $21,303 for the years ended December 31, 2021 and 2020,
respectively, due to slow-moving inventory.
Selling, general and administrative expenses ("SG&A") increased $827,219 or
75.11% from $1,101,363 for the year ended December 31, 2020 to $1,928,582 for
the year ended December 31, 2021. The increase is due to increases in
professional fees and stock based compensation. In addition, we had a bad debt
recovery from the receivables from companies owned by the Company's CEO for
$161,500 during the year ended December 31, 2020. We incurred bad debt expense
of $68,330 from the receivables from companies owned by the Company's CEO for
the year ended December 31, 2021.
Other income for the year ended December 31, 2021 is of $78,254. $65,274 of it
is due to the PPP loan and accrued interest forgiven by SBA, and $12,980 of it
is related to the amortization of debt discount from the convertible notes
receivables obtained during 2021. Other income of $5,000 for the year ended
December 31, 2020 was due to the EIDL advance forgiven by SBA during June 2020.
Interest expense, including related party interest expense, increased $159,505
or 47.45%, from $336,174 for the year ended December 31, 2020 to $495,679 for
the year ended December 31, 2021. This increase was primarily due to increase of
amortization of loan discount in the year ended December 31, 2021 compared to
the year ended December 31, 2020.
We carry certain of our debentures and common stock warrants at fair value. For
the years ended December 31, 2021 and 2020, the liability related to these
hybrid instruments fluctuated, resulting in a loss of $10,096,315 and
$1,012,556, respectively. Interest expense on these debentures is included in
the fair value loss in the statements of operations.
Loss on settlement of debts, accounts payable, and accrued expenses increased
$2,073,129 or 130.61%, from the gain of $1,587,293 for the year ended December
31, 2020 to the loss of $485,836 for the year ended December 31, 2021. This
increase in loss was primarily due to the increase in loss on settlement of
debts through issuance of stocks.
Stock issued for loan modification increased $19,700 or 22.44% from $87,800 for
the year ended December 31, 2020 to $107,500 for the year ended December 31,
2021.
Our net loss increased by $12,326,337 or 1,602.52%, from $769,184 for the year
ended December 31, 2020 to $13,095,521 for the year ended December 31, 2021.
Liquidity and Capital Resources
During December 31, 2021 and 2020, respectively, we had negative cash from
operations of approximately $1.74 million and $0.88 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, 2021 and 2020, we have experienced net loss of
$13,095,521 and $769,184, respectively, and had an accumulated deficit of
$81,728,989 for the period from our inception to December 31, 2021. In addition,
we had working capital and stockholders' deficits at December 31, 2021 of
$20,606,665 and $20,877,650, 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.
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As of December 31, 2021, we had $90,910 in cash and owed approximately $2.73
million in vendor payables and accrued expenses. 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 Nyloxin® and Pet Pain-Away products. We cannot
predict whether additional financing will be in the form of equity, debt, or
another form and we may be unable to obtain the necessary additional capital on
a timely basis, on acceptable terms, or at all. In the event that these
financing sources do not materialize, or that we are unsuccessful in increasing
our revenues and profits, we may be unable to implement our current plans for
expansion, repay our obligations as they become due or continue as a going
concern, any of which circumstances would have a material adverse effect on our
business prospects, financial condition and results of operations.
Historically, we have relied upon loans from our Chief Executive Officer Rik J
Deitsch, to fund costs associated with our operations. These loans are
unsecured, accrue interest at a rate of 4.0% per annum and are due on demand. At
December 31, 2021, the balance due to our President and CEO, Rik Deitsch, and
the Companies owned by him is $199,726, which is an unsecured demand loan that
bears interest at 4%. During the year ended December 31, 2021, we repaid
$182,741 to and collected $105,780 from Mr. Deitsch and the Companies owned by
him. Additionally, accrued interest on the demand loan was $7,520 and is
included in the due to officer account. For the year ended December 31, 2021, we
recorded a bad debt expense of $68,330.
During the year ended December 31, 2021, we raised net cash proceeds of
$2,288,560 through the issuance of convertible notes. Current operations are
being funded through a combination of product sales, loans from our CEO and
convertible notes.
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. We also closed our Coral Springs office in effort to save money. During
May 2020, we received approval from SBA to fund our request for a PPP loan for
$64,895. We used the proceeds primarily for payroll costs. The entire loan was
forgiven in November 2021 and recorded as other income on the Statement of
Operations. 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 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.
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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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