NPHC Nutra Pharma Corp (CE)

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2019

1.     BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Nutra Pharma Corp. (“Nutra Pharma”), is a holding company that owns intellectual property and operates in the biotechnology industry. Nutra Pharma was incorporated under the laws of the state of California on February 1, 2000, under the original name of Exotic-Bird.com.

Through its wholly-owned subsidiary, ReceptoPharm, Inc. (“ReceptoPharm”), Nutra Pharma conducts drug discovery research and development activities. In October 2009, Nutra Pharma launched its first consumer product called Cobroxin^®, an over-the-counter pain reliever designed to treat moderate to severe chronic pain. In May 2010, Nutra Pharma launched its second consumer product called Nyloxin^®, an over-the-counter pain reliever that is a stronger version of Cobroxin^® and is designed to treat severe chronic pain. In December 2014, we launched Pet Pain-Away, an over-the-counter pain reliever designed to treat pain in cats and dogs.

Basis of Presentation and Consolidation

The Unaudited Condensed Consolidated Financial Statements and notes are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not contain certain information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature. Interim results are not necessarily indicative of results for a full year. Therefore, the interim Unaudited Condensed Consolidated Financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in the Company’s Annual Report on Form 10-K.

The accompanying Unaudited Condensed Consolidated Financial Statements include the results of Nutra Pharma and its wholly-owned subsidiaries Designer Diagnostics Inc. and ReceptoPharm (collectively “the Company”, “us”, “we” or “our”). We operate as one reportable segment. All intercompany transactions and balances have been eliminated in consolidation.

Reclassification of Prior Year Presentation

Reclassification occurred to certain prior year amounts in order to conform to the current year classifications. The reclassifications have no effect on the reported net loss.

Restatement of Prior Period Presentation

Certain prior period amounts have been restated. Restatements have been made for the three months ended March 31, 2018 to correct the change in the fair value of convertible notes and to record a gain on settlement of debt and accounts payable. As a result of these changes, the following occurred:

Liquidity and Going Concern

Our Unaudited Condensed Consolidated Financial Statements are presented on a going concern basis, which contemplate the realization of assets and satisfaction of liabilities in the normal course of business. We have experienced recurring, significant losses from operations, and have an accumulated deficit of $61,673,285 at March 31, 2019. In addition, we have a significant amount of indebtedness in default, a working capital deficit of $6,348,242 and a stockholders’ deficit of $6,296,489 at March 31, 2019.

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

We do not have sufficient cash to sustain our operations for a period of twelve months from the issuance date of this report and will require additional financing in order to execute our operating plan and continue as a going concern. Since our sales are not currently adequate to fund our operations, we continue to rely principally on debt and equity funding; however, proceeds from such funding have not been sufficient to execute our business plan. Our plan is to attempt to secure adequate funding until sales of our pain products are adequate to fund our operations. We cannot predict whether additional financing will be available, and/or whether any such funding will be in the form of equity, debt, or another form. In the event that these financing sources do not materialize, or if we are unsuccessful in increasing our revenues and profits, we will be unable to implement our current plans for expansion, repay our obligations as they become due and continue as a going concern.

The accompanying Unaudited Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

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 (See Note 12). During April and June 2020, we obtained a loan in the amount of $154,900 from the SBA under its Economic Injury Disaster Loan assistance program. We intended to use the proceeds primarily for working capital purpose (See Note 12).

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 development of widespread testing or a vaccine.

Use of Estimates

The accompanying Unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense. Significant estimates include our ability to continue as going concern, the recoverability of inventories and long-lived assets, the recoverability of amounts due from officer, the valuation of stock-based compensation and certain debt and warrant liabilities, recognition of loss contingencies and deferred tax valuation allowances. Actual results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which would be recorded in the period in which they become known.

Revenue from Contracts with Customers

On January 1, 2018, we adopted Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”)

Topic 606, "Revenue from Contracts with Customers" ("ASC Topic 606") using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The cumulative impact of adopting ASC Topic 606 resulted in no changes to retained earnings at January 1, 2018. The impact to revenue for the three months ended March 31, 2018 was an increase of $1,500 as a result of applying ASC Topic 606 to certain revenues generated through online distributors which are now presented gross as we have control over providing the products related to such revenues. This new revenue recognition standard (new guidance) 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. The Company has evaluated the impact of ASC Topic 606 and determined that there is no change to the Company's accounting policies, except for the recording of certain product sales to a distributor, in which a portion of the cash proceeds received is remitted back to the distributor. Under ASC 606, the Company determined that these sales should be recorded on a gross basis.

Our revenues are primarily derived from customer orders for the purchase of our products. We recognize revenues as performance obligations are fulfilled upon delivery 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.

Accounting for Shipping and Handling Costs

We account for shipping and handling as fulfillment activities and record shipping and handling costs incurred within revenue.

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 receivables.

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. Management believes that the receivables are fully collectable. Therefore, no allowance for doubtful account is deemed to be required at March 31, 2019 and December 31, 2018.

Inventories

Inventories, which are stated at the lower of average cost or net realizable value, consist of packaging materials, finished products, and raw venom that is utilized to make the API (active pharmaceutical ingredient). The raw unprocessed venom has an indefinite life for use. The Company regularly reviews inventory quantities on hand. If necessary, it records a net realizable value adjustment for excess and obsolete inventory based primarily on its estimates of product demand and production requirements. Write-downs are charged to cost of goods sold. We performed an evaluation of our inventory and related accounts at March 31, 2019 and December 31, 2018, and increased the reserve on supplier advances for future venom purchases included in the prepaid expenses and other current assets by $0 and $47,757, respectively. At March 31, 2019 and December 31, 2018, the total valuation allowance for prepaid venom is $200,911.

Financial Instruments and Concentration of Credit Risk

Our financial instruments include cash, accounts receivable, accounts payable, accrued expenses, loans payable, due to officers and derivative financial instruments. Other than certain warrant and convertible instruments (derivative financial instruments) and liabilities to related parties (for which it was impracticable to estimate fair value due to uncertainty as to when they will be satisfied and a lack of similar type transactions in the marketplace), we believe the carrying values of our financial instruments approximate their fair values because they are short term in nature or payable on demand. Our derivative financial instruments are carried at a measured fair value.

Balances in various cash accounts may at times exceed federally insured limits. We have not experienced any losses in such accounts. We do not hold or issue financial instruments for trading purposes. In addition, for the three months ended March 31, 2019, there were two customers that accounted for 61% and 17% of the total revenues, respectively. For the three months ended March 31, 2018, there was one customer that accounted for 45% of the total revenues. As of March 31, 2019 and December 31, 2018, 54% and 84% of the accounts receivable balance are reserves due from two payment processors.

Operating Lease Right-of-Use Asset and Liability

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “ Leases” (Topic 842), as amended (“ASC Topic 842”). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months and classify as either operating or finance leases. We adopted this standard effective January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date. Adoption of the ASC Topic 842 had a significant effect on our balance sheet resulting in increased non-current assets and increased current and non-current liabilities. There was no impact to retained earnings upon adoption of the new standard. We did not have any finance leases (formerly referred to as capital leases prior to the adoption of ASC Topic 842), therefore there was no change in accounting treatment required. For comparability purposes, the Company will continue to comply with the previous disclosure requirements in accordance with the existing lease guidance and prior periods are not restated.

The Company elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and, (3) not to reassess the treatment of initial direct costs for existing leases.

In accordance with ASC Topic 842, at the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease including whether the contract involves the use of a distinct identified asset, whether we obtain the right to substantially all the economic benefit from the use of the asset, and whether we have the right to direct the use of the asset. Leases with a term greater than one year are recognized on the balance sheet as ROU assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less under practical expedient in paragraph ASC 842-20-25-2.

Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rate within our operating leases are generally not determinable and, therefore, the Company uses the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate for each lease using our estimated borrowing rate.

For periods prior to the adoption of ASC Topic 842, the Company recorded rent expense based on the term of the related lease. The expense recognition for operating leases under ASC Topic 842 is substantially consistent with prior guidance. As a result, there are no significant differences in our results of operations presented.

The impact of the adoption of ASC Topic 842 on the balance sheet was:

Derivative Financial Instruments

Management evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to 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. 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.

Property and Equipment and Long-Lived Assets

Property and equipment is recorded at cost. Expenditures for major improvements and additions are added to property and equipment, while replacements, maintenance and repairs which do not extend the useful lives are expensed. Depreciation is computed using the straight-line method over the estimated useful lives of the assets of 3 – 7 years.

Income Taxes

The Company recorded no income tax expense for the three months ended March 31, 2019 and 2018 because the estimated annual effective tax rate was zero. As of March 31, 2019, the Company continues to provide a valuation allowance against its net deferred tax assets since the Company believes it is more likely than not that its deferred tax assets will not be realized.

Stock-Based Compensation

We account for stock-based compensation in accordance with FASB ASC Topic 718, Stock Compensation (“ASC Topic 718”). ASC Topic 718, which requires that the cost resulting from all share-based transactions be recorded in the financial statements over the respective service periods. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement in accounting for share-based payment transactions with employees. The statement also establishes fair value as the measurement objective for transactions in which an entity acquires goods or services from non-employees in share-based payment transactions.

Net Loss Per Share

Net loss per share is calculated in accordance with FASB ASC Topic 260, Earnings per Share. Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which we incur losses, common stock equivalents, if any, are not considered, as their effect would be anti-dilutive or have no effect on earnings per share. Any common shares issued as of a result of the exercise of stock options and warrants would come from newly issued common shares from our remaining authorized shares. As of March 31, 2019 and 2018, the following items were not included in dilutive loss as the effect is anti-dilutive:

Recent Accounting Pronouncements

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is effective for the Company as of January 1, 2019. The Company noted that all share based payments were settled as of the date of the adoption, so there was no impact on the Company's financial statements.

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.

2.     FAIR VALUE MEASUREMENTS

Certain assets and liabilities that are measured at fair value on a recurring basis at March 31, 2019 are measured in accordance with FASB ASC Topic 820-10-05, Fair Value Measurements. FASB ASC Topic 820-10-05 defines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurements for financial assets and liabilities as well as for non-financial assets and liabilities that are recognized or disclosed at fair value on a recurring basis in the financial statements.

The statement requires fair value measurement be classified and disclosed in one of the following three categories:

The following table summarizes our financial instruments measured at fair value at March 31, 2019 and December 31, 2018:

The following table shows the changes in fair value measurements for the warrant liability using significant unobservable inputs (Level 3) during the three months ended March 31, 2019 and the year ended December 31, 2018:

(1)   The gain related to the revaluation of our warrant liability is included in “Change in fair value of convertible notes and derivatives” in the accompanying consolidated statement of operations.

We valued our warrants using a Dilution-Adjusted Black-Scholes Model. Assumptions used include (1) 2.27% to 2.81% risk-free rate, (2) warrant life is the remaining contractual life of the warrants, (3) expected volatility of 256%-290% (4) zero expected dividends (5) exercise price set forth in the agreements (6) common stock price of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.

The following table summarizes assumptions and the significant terms of the convertible notes for which the entire hybrid instrument is recorded at fair value at March 31, 2019 and December 31, 2018:

Using the stated assumptions summarized in table above, we calculated the inception date and reporting period fair values of each note issued. The following table shows the changes in fair value measurements for the convertible notes at fair value using significant unobservable inputs (Level 3) during the three months ended March 31, 2019 and the year ended December 31, 2018:

(1)   The losses related to the valuation of the convertible notes are included in “Change in fair value of convertible notes and derivatives” in the accompanying consolidated statement of operations.

We review our long-lived assets for recoverability if events or changes in circumstances indicate the assets may be impaired. At March 31, 2019, we believe the carrying values of our long-lived assets are recoverable. Depreciation expense for the three months ended March 31, 2019 and 2018 was $1,105 and $1,928, respectively.

5.     DUE TO/FROM OFFICER

At March 31, 2019, the balance due to our President and CEO, Rik Deitsch, is $182,464, which is an unsecured demand loan that bears interest at 4%. During the three months ended March 31, 2019, we repaid $9,950 to and collected $4,100 from Mr. Deitsch and the Companies owned by him. Additionally, accrued interest on the demand loan was $1,817 and is included in the due to officer account.

At December 31, 2018, the balance due to our President and CEO, Rik Deitsch, is $186,497, which was an unsecured demand loan that bore interest at 4%. During the three months ended March 31, 2018, we repaid $73,350 to and collected $31,100 from Mr. Deitsch and the Companies owned by him. Additionally, accrued interest on the demand loan was $7,674 and is included in the due to officer account. The Company has fully reserved receivables from companies owned by the Company's CEO. The reserve was $505,470 as of March 31, 2019 and December 31, 2018.

In December 2017, we issued a promissory note to a related party in the amount of $12,000 with original issuance discount of $2,000. The note was amended in December 2018 with original issuance discount of $2,400 and was due in twelve months from the execution and funding of the note. At March 31, 2019 and December 31, 2018, the principal balance of the loan is $12,600 and $12,000, net of debt discount of $1,800 and $2,000, respectively. The Note was settled in June 2020.

During the three months ended March 31, 2019, we issued convertible notes payable of $70,000 with original issuance discount of $5,000. The notes were due in six months from the execution and funding of each note. The notes are convertible into shares of Company’s common stock at a conversion price of $0.0005 per share. In addition, upon the issuance of convertible notes, the Company granted the total of 110,000,000 warrants at an exercise price of $0.001 per share. The warrants were valued at $8,147 using the Black-Scholes method and recorded as a debt discount that was amortized over the life of the notes. The Notes were further restated in December 2019, and August and October 2020. They are in default and in negotiation of settlement.

Amortization for the three months ended March 31, 2019 and 2018 was $24,902 and $48,904. At March 31, 2019 and December 31, 2018, the principal balance of the notes, net of discount of $16,667 and $28,421 is $731,583 and $589,829.

The new note of $49,819 carries interest at 8% and was due on February 13, 2019, unless previously converted into shares of restricted common stock. We have accrued interest at default interest rate of 24% after the note’s maturity date. The Noteholder has the right to convert the note into shares of our restricted common stock at sixty percent of the lowest trading price of our restricted common stock for the twenty-five prior trading days including the conversion date. During September 2018, the Noteholder made conversions of 52,244,433 shares of our restricted common stock with a fair value of $37,011 in satisfaction of principal balance of $15,000 and accrued interest in full (See Note 7). At March 31, 2019 and December 31, 2018, the convertible note payable with principal balance of $34,819, at fair value, was recorded at $64,751 and $62,508.

All of the above convertible notes with principal balance of a total of $511,319 were settled in October 2020 (See Note 12).

7.     STOCKHOLDERS' DEFICIT

Common Stock Issued for Accrued Expense

During January 2019, in connection with the settlement of a default penalty of debt of $110,000 originated in December 2016, we issued a total of 81,000,000 shares of our restricted common stock with a fair value of $32,400 to the Note holder (See Note 6). We had an accrual of $32,400 to account for the cost of the shares at December 31, 2018.

Common Stock Issued for Services

During June 2018, the Company signed an agreement with a consultant for investor relation services for twelve months. In connection with the agreement, 100,000,000 shares of the Company’s restricted common stock were issued. The shares were valued at $0.0012 per share. The Company recorded an equity compensation charge of $30,000 during the three months ended March 31, 2019 and $70,000 during the year ended December 31, 2018. The remaining unrecognized compensation cost of $20,000 for the period from April through May 2019 will be recognized by the Company over the remaining service period.

8.     STOCK WARRANTS

Common Stock Warrants

During March, 2013, the Company issued a total of 65,000 warrants to purchase common stock at an exercise price of $0.01 per share in connection with issuance of a convertible note payable to Coventry. The warrants expired on March 22, 2018.

On September 3, 2013 and September 12, 2013, the Company issued 500,000 and 375,000 warrants, respectively, to purchase common stock at an exercise price of $0.025 and $0.01 per share in connection with issuances of convertible notes payable to Coventry. The warrants expired on September 3, 2018 and September, 12, 2018, respectively.

On March 31, 2017, in connection with the issuance of an $80,000 Note, we granted three-year warrants to purchase an aggregate of 6,000,000 shares of our common stock at an exercise price of $0.005 per share. The warrants were valued at their fair value of $608 and $977 using the Black-Scholes method on March 31, 2019 and December 31, 2018. The warrants expire on March 30, 2020.

On March 3, 2016, in connection with the issuance of a convertible note, we granted five-year warrants to purchase an aggregate of 2,500,000 shares of our common stock at an exercise price of $0.03 per share. The warrants were valued at their fair value of $350 and $491 using the Black-Scholes method at March 31, 2019 and December 31, 2018. The warrants expire on March 3, 2021.

On April 4, 2016, in connection with the issuance of convertible notes, we granted three-year warrants to purchase an aggregate of 4,000,000 shares of our common stock at an exercise price of $0.05 per share. The warrants were valued at their fair value of $0 using the Black-Scholes method at March 31, 2019 and December 31, 2018. The warrants expire on April 4, 2019.

During April 2014, the Company issued a total of 100,000 warrants to purchase common stock at an exercise price of $0.025 per share in connection with issuance of a convertible note payable to Coventry. The warrants were valued at their fair value of $0 using the Black-Scholes method at March 31, 2019 and December 31, 2018. The warrants expire on April 9, 2019.

During February 2019, the Company granted the total of 110,000,000 warrants to purchase common stock at an exercise price of $0.001 per share in connection with issuance of three convertible notes. The warrants were valued at $8,147 using the Black-Scholes method and recorded as a debt discount that was amortized over the life of the notes. The warrants expire in August 2019.

A summary of warrants outstanding in conjunction with private placements of common stock were as follows during the three months ended March 31, 2019 and the year ended December 31, 2018:

The following table summarizes information about fixed-price warrants outstanding as of March 31, 2019 and December 31, 2018:

At March 31, 2019, the aggregate intrinsic value of all warrants outstanding and expected to vest was $0. The intrinsic value of warrant share is the difference between the fair value of our restricted common stock and the exercise price of such warrant share to the extent it is “in-the-money”. Aggregate intrinsic value represents the value that would have been received by the holders of in-the-money warrants had they exercised their warrants on the last trading day of the year and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $0.0002, closing stock price of our restricted common stock on March 29, 2019. There were no in-the-money warrants at March 31, 2019.

We performed an evaluation of our inventory and related accounts at March 31, 2019 and December 31, 2018, and increased the reserve on supplier advances for future venom purchases by $0 and $47,757, respectively. At March 31, 2019 and December 31, 2018, the total valuation allowance for prepaid venom is $200,911.

11.     COMMITMENTS AND CONTINGENCIES

Operating Leases

In February 2016, we entered into our current three-year operating lease for monthly payments of approximately $3,200 which expired in February 2019. The lease is currently month-to-month, thus classified as short-term and not reported on the balance sheet under Topic ASC 842.

ReceptoPharm leases a lab and renewed its operating lease agreement for five years beginning August 1, 2017 for monthly payments of approximately $6,900 with a 5% increase each year.

Future minimum payments under these lease agreements are as follows:

Consulting Agreements

During July 2015, we signed an agreement with a company to provide for consulting services for five years. In connection with the agreement, 500,000 shares of our restricted common stock and a one year 8% note of $50,000 were granted. The shares were valued at $0.18 per share. As the services provided were in dispute, the shares and note payable have not been issued as of March 31, 2019. We have accrued the $142,500 in accrued expense as of March 31, 2019 and December 31, 2018.

During October 2015, the Company signed an agreement with a consultant for consulting services for a year. In connection with the agreement, 2,500,000 shares of the Company’s restricted common stock were granted and the Company was to make monthly cash payments of $3,000. As of December 31, 2016, the Company recorded an equity compensation charge of $31,750, however, only 1,000,000 of the shares have been issued. As of March 31, 2019 and December 31, 2018, $19,150 has been recorded in accrued expense to account for the 1,500,000 shares of common stock that have not been issued.

Litigation

Patricia Meding, et. al. v. ReceptoPharm, Inc. f/k/a Receptogen, Inc.

On June 1, 2015, ReceptoPharm entered into a settlement agreement with Patricia Meding, a former officer and shareholder of ReceptoPharm.  The settlement relates to a lawsuit filed by Ms. Meding against ReceptoPharm (Patricia Meding, et. al. v. ReceptoPharm, Inc. f/k/a Receptogen, Inc., Index No.: 18247/06, New York Supreme Court, Queens County) in which she claimed to own certain shares of ReceptoPharm stock and claimed to be owed amounts on a series of promissory notes allegedly executed in 2001 and 2002.

The settlement agreement executed on June 1, 2015 provides that ReceptoPharm will pay Ms. Meding a total of $360,000 over 35 months. The first payment of $20,000 was made on July 1, 2015. A second payment of $20,000 was made on August 17, 2015 with 32 subsequent monthly $10,000 payments due on the 15th of every month thereafter. To date, ReceptoPharm has made all monthly payments due under the agreement.  In the event of default on any of the payments due under the settlement agreement, the settlement amount would increase by an additional $200,000.  As of December 31, 2018, all payments were made and the settlement is concluded. We have recorded $200,000 in gain on settlement of debt on the consolidated statements of operations upon payments in full in April 2018.

Paul Reid et al. v. Nutra Pharma Corp. et al.

On August 26, 2016, certain of former ReceptoPharm employees and a former ReceptoPharm consultant filed a lawsuit in the 17th Judicial Circuit in and for Broward County, Florida (Case No. CACE16–015834) against Nutra Pharma and Receptopharm to recover $315,000 allegedly owing to them under a settlement agreement reached in an involuntary bankruptcy action that was brought by the same individuals in 2012 and for payment of unpaid wages/breach of written debt confirms. 

Nutra Pharma and Receptopharm believe that the lawsuit is without merit, especially in light of gross misconduct by these former employees that was discovered after execution of the aforementioned settlement agreement. On October 9, 2020, the Court entered an Order denying the plaintiffs’ motion for summary judgment with respect to Count I of the Complaint (for alleged breach of the aforementioned settlement agreement), and the parties continue to engage in discovery regarding their respective claims and defenses. The case is currently set for trial during the period from May 10, 2021 to May 28, 2021, but it is unclear at this time with the ongoing COVID-19 pandemic (and the resultant cessation of jury trials in Broward County) whether the trial will proceed at that time.

Get Credit Healthy, Inc. v. Nutra Pharma Corp. and Rik Deitsch, Case No. CACE 18-017055

On August 1, 2018, Get Credit Healthy, Inc. filed a lawsuit against Nutra Pharma Corp. and Rik Deitsch (collectively the “Defendants”) in the 17th Judicial Circuit Court in and for Broward County, Florida (Case No. CACE 18-017055) to recover $100,000 allegedly owed under an amended promissory note dated April 12, 2017. Counsel for Get Credit Healthy, Inc. requested an early mediation conference in an attempt to resolve our dispute. We agreed to this request, and mediation took place on February 15, 2019.  At December 31, 2018, we owed principal balance of $101,818 and accrued interest of $21,023. At mediation, Get Credit Healthy, Inc. claimed that the individual that breached the binding memorandum of understanding with Nutra Pharma Corp. was never an owner of Get Credit Healthy, Inc., but rather, a close friend that encouraged Get Credit Healthy, Inc. to make the subject loan to Nutra Pharma Corp.  Ultimately, the parties were able to reach a Confidential Settlement Agreement to resolve the dispute, and an Agreed Order was entered dismissing the lawsuit. The lawsuit was settled on February 15, 2019 for $104,000 with scheduled payments. The repayments were made in full as of November 2020 (See Note 6).

CSA 8411, LLC v. Nutra Pharma Corp., Case No. CACE 18-023150

On October 12, 2018, CSA 8411, LLC filed a lawsuit against the Company in the 17th Judicial Circuit Court in and for Broward County, Florida (Case No. CACE 18-023150) to recover $100,000 allegedly owed under an amended promissory note dated April 12, 2017. On November 1, 2018, the Company filed its Answer and Affirmative Defenses to the Complaint. The Company believes that this lawsuit is without merit. Moreover, the Company believes that it has a number of valid defenses to this claim. Among other things, the owner of CSA 8411, LLC violated the terms of a Binding Memorandum of Understanding by failing to invest in the Company and fraudulently inducing the Company to enter into the subject amended promissory note (contrary to the Get Credit Healthy lawsuit discussed above, we are certain that this individual is the majority owner of CSA 8411, LLC).  Opposing counsel reached out to schedule mediation, and mediation was set for June 21, 2019 in Plantation, FL however the mediation was unsuccessful.  At March 31, 2019, we owed principal balance of $91,156 and accrued interest of $21,706 (See Note 6) if the defenses and our new claims are deemed to be of no merit.

The Company also filed affirmative claims against the Plaintiff, its owner Dan Oran and several relate entities. The case has not been set for trial as of this date.

Securities and Exchange Commission v. Nutra Pharma Corporation, Erik Deitsch, and Sean Peter McManus

On September 28, 2018, the United States Securities and Exchange Commission (the “SEC”) filed a lawsuit in the United States District Court for the Eastern District of New York (Case No. 2:18-cv-05459) against the Company, Mr. Deitsch, and Mr. McManus. The lawsuit alleges that, from July 2013 through June 2018, the Company and the other defendants defrauded investors by making materially false and misleading statements about the Company and violated anti-fraud and other securities laws.

The violations alleged against the Company by the SEC include: (a) raising over $920,000 in at least two private placement offerings for which the Company failed to file required registration statements with the SEC; (b) issuing a series of materially false or misleading press releases; (c) making false statements in at least one Form 10-Q; and (d) failing to make required public filings with the SEC to disclose the Company’s issuance of millions of shares of stock. The lawsuit makes additional allegations against Mr. McManus and Mr. Deitsch, including that Mr. McManus acted as a broker without SEC registration and defrauded at least one investor by making false statements about the Company, that Mr. Deitsch engaged in manipulative trades of the Company’s stock by offering to pay more for shares he was purchasing than the amount the seller was willing to take, and that Mr. Deitsch failed to make required public filings with the SEC. The lawsuit seeks both injunctive and monetary relief.

On May 29, 2019 (following each of the defendants filing motions to dismiss), the SEC filed a First Amended Complaint which generally alleged the same conduct as its original Complaint, but accounted for certain guidance provided by the United States Supreme Court in a case that had been recently decided. Each of the defendants then moved to dismiss the SEC’s First Amended Complaint. On March 31, 2020, the Court entered an Order granting in part and denying in part the various motions to dismiss. Following that Order, the SEC filed a Second Amended Complaint (the operative pleading) and the defendants have filed their answers which generally deny liability. At this time, discovery is closed and the SEC has indicated an intent to file a summary judgment motion regarding certain non-fraud claims asserted in its Second Amended Complaint. The defendants have opposed the SEC’s request to file such motion(s). The Court conducted a hearing on February 23, 2021 and set an initial briefing schedule for the SEC’s Motion for Partial Summary Judgment wherein the Plaintiffs’ Motion for Partial Summary Judgment was due on April 5, 2021, the Defendants’ Consolidated (i.e., collectively, Nutra Pharma Corporation, Erik “Rik” Deitsch, and Sean McManus) Response Brief to the SEC’s Motion is due May 3, 2021, and the Plaintiffs’ Reply Brief is due on May 19, 2021.  On March 23, 2021, the Plaintiff filed a Motion for Extension of Time to file the Motion for Partial Summary Judgment. On March 24, 2021, the Court entered an order granting the Motion for Extension of Time and modified the briefing schedule as follows: Plaintiffs’ Motion is due on or before April 9, 2021, the Defendants’ Response is due on or before May 7, 2021, and the Plaintiffs’ Reply is due on or before May 21, 2021. The Company disputes the allegations in this lawsuit and continues to vigorously defend against the SEC’s claims. Mr. Deitsch and Mr. McManus have similarly defended the lawsuit since its filing and each contest liability. The Company does not believe that it engaged in any fraudulent activity or made any material misrepresentations concerning the Company and/or its products.

12.     SUBSEQUENT EVENTS

Convertible Notes Payable

During February 2019, we issued convertible promissory notes to unrelated third parties for a total of $55,000 with original issuance discount of $5,000. The notes were due six months from the execution and funding of the notes. During December 2019, $22,000 of the Note was amended to extend the maturity date to June 2020. During August 2020, $38,500 of the Notes was amended with additional original issuance discount of $7,550 due February 2021. During October 2020, $16,500 of the Notes was amended with additional original issuance discount of $1,650 due April 2021.The Noteholders have the right to convert the note into shares of Common Stock at a conversion price of $0.0005. In connection with the issuance of amended convertible notes, the Company granted the following warrants at an exercise price of $0.001 per share. The warrants were valued using the Black-Scholes method and recorded as a debt discount that was amortized over the life of the notes. No warrants have been exercised.

During February 2019, we issued a convertible promissory note to an unrelated third party in the amount up to $1,000,000 paid upon tranches. The note is due two years from the execution and funding of the note per tranche. The Noteholder has the right to convert the note into shares of Common Stock at a conversion price of the lower of $0.0005 or 50% discount to the average trading price of the three lowest closing stock prices for the twenty days prior to the notice of conversion. A portion of the Note in the amount of $389,572 has been funded during 2019 through October 2020. In connection with issuance of the convertible note, the Noteholder agreed to eliminate two outstanding Notes of $27,000 and the accrued interest of $11,412 that were held by the Noteholder’s defunct entities. During May 2019 through February 2020, the Note holder received a total of 1,250,000,000 shares of our restricted common stock in satisfaction the $275,000 of the Note with a fair value of $700,000. As of December 31, 2019, $114,572 remains outstanding and is due between March 2021 through September 2022.

During June 2019, we issued a convertible promissory note to an unrelated third party for $240,000 with original issuance discount of $40,000. The note was due one year from the execution and funding of the notes. In connection with the issuance of this note, we issued 16,000,000 shares of our restricted common stock. The common stock was valued at $4,688 and recorded as a debt discount that was amortized over the life of the note. The Noteholder has the right to convert the note into shares of Common Stock at a conversion price of the lower of $0.0005 or 50% discount to the average trading price of the three lowest closing stock prices for the twenty days prior to the notice of conversion. The Note is in default and negotiation of settlement.

During November 2019, we issued a convertible promissory note to an unrelated third party for $137,500 with original issuance discount of $12,500. The note was due six months from the execution and funding of the notes. The Noteholder had the right to convert the note into shares of Common Stock at a fixed conversion price of $0.000275. The Note is in default and negotiation of settlement.

During December 2019, we issued a convertible promissory note to an unrelated third party for $22,000 with original issuance discount of $2,000. The note was due six months from the execution and funding of the notes. The Noteholder had the right to convert the note into shares of Common Stock at a fixed conversion price of $0.0002. The difference between the conversion price and the fair value of the Company’s common stock on the date of issuance of the convertible notes resulted in a beneficial conversion feature (BCF) in the amount of $20,000. The BCF was recorded as a debt discount that was amortized over the life of the notes. The Note is in default and negotiation of settlement.

During January and March 2020, we issued convertible promissory notes to an unrelated third party for a total of $68,750 with original issuance discount of $6,250. The Noteholder has the right to convert the note into shares of Common Stock at a fixed conversion price of $0.0005. The difference between the conversion price and the fair value of the Company’s common stock on the date of issuance of the convertible notes resulted in a BCF in the amount of $5,500. The BCF was recorded as a debt discount that was amortized over the life of the notes. The Notes were due in January and March 2021. The Notes are in default and negotiation of settlement.

During February and March 2020, we issued convertible promissory notes to an unrelated third party for a total of $22,000 with original issuance discount of $2,000. The notes were due six months from the execution and funding of the notes. The Noteholder had the right to convert the note into shares of Common Stock at a fixed conversion price of $0.0003. The difference between the conversion price and the fair value of the Company’s common stock on the date of issuance of the convertible notes resulted in a BCF in the amount of $20,000. The BCF was recorded as a debt discount that was amortized over the life of the notes. The Notes are in default and negotiation of settlement.

During March 2020, we issued a convertible promissory note to an unrelated third party for $5,500 with original issuance discount of $500. The note was due six months from the execution and funding of the notes. The Noteholder had the right to convert the note into shares of Common Stock at a fixed conversion price of $0.0002. The difference between the conversion price and the fair value of the Company’s common stock on the date of issuance of the convertible notes resulted in a BCF in the amount of $5,000. The BCF was recorded as a debt discount that was amortized over the life of the notes. The Note is in default and negotiation of settlement.

During March 2020, we issued a convertible promissory note to an unrelated third party for $5,500 with original issuance discount of $500. The note was due six months from the execution and funding of the notes. The Noteholder had the right to convert the note into shares of Common Stock at a fixed conversion price of $0.0005. The difference between the conversion price and the fair value of the Company’s common stock on the date of issuance of the convertible notes resulted in a BCF in the amount of $3,300. The BCF was recorded as a debt discount that was amortized over the life of the notes. The Note is in default and negotiation of settlement.

During August 2020, we issued a convertible promissory note to an unrelated third party for a $22,000 with original issuance discount of $2,000. The Noteholder has the right to convert the note into shares of Common Stock at a fixed conversion price of $0.0005. The difference between the conversion price and the fair value of the Company’s common stock on the date of issuance of the convertible notes resulted in a BCF in the amount of $13,200. The BCF was recorded as a debt discount that was amortized over the life of the notes. The note is due August 2021.

During July 2020, we issued a convertible promissory note to an unrelated third party for $20,900 with original issuance discount of $1,900. The Noteholder has the right to convert the note into shares of Common Stock at a fixed conversion price of $0.00052. The difference between the conversion price and the fair value of the Company’s common stock on the date of issuance of the convertible notes resulted in a BCF in the amount of $15,273. The BCF was recorded as a debt discount that was amortized over the life of the notes. The note was due January 2021. The Note is in default and negotiation of settlement.

During August 2020, we issued convertible promissory notes to an unrelated third party for $5,500 with original issuance discount of $500. The Noteholder has the right to convert the note into shares of Common Stock at a fixed conversion price of $0.0005. The difference between the conversion price and the fair value of the Company’s common stock on the date of issuance of the convertible notes resulted in a BCF in the amount of $1,100. The BCF was recorded as a debt discount that was amortized over the life of the notes. The note was due February 2021. The Note is in default and negotiation of settlement.

PPP Loan

During May 2020, we entered into a long-term loan agreement with the U. S. Small Business Administration for a Payroll Protection Program (PPP) loan, for $64,895 with an annual interest rate of one percent (1%), with a term of twenty-four (24) months, whereby a portion of the loan proceeds have been used for certain labor costs, office rent costs and utilities, which may be subject to a loan forgiveness, pursuant to the terms of the SBA/PPP program.

Economic Injury Disaster Loan

During April and June 2020, the Company executed the standard loan documents required for securing a loan from the SBA under its Economic Injury Disaster Loan assistance program (the “EIDL Loan”) considering the impact of the COVID-19 pandemic on the Company’s business. Pursuant to the Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan was $154,900, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due twelve months from the date of the SBA Loan Agreement in the amount of $731. The balance of principal and interest is payable over a 360 month period from the date of the SBA Loan Agreement. In connection therewith, the Company received a $5,000 advance, which does not have to be repaid. The SBA requires that the Company collateralize the loan to the maximum extent up to the loan amount. If business fixed assets do not “fully secure” the loan the lender may include trading assets (using 10% of current book value for the calculation), and must take available equity in the personal real estate (residential and investment) of the principals as collateral.

Common Stock Issued for Services

During April 2019, we signed an agreement with a consultant to provide investor relation services for twelve months. In connection with the agreement, 120,000,000 shares of our restricted common stock were issued. The shares were valued at $24,000.

During June 2019, we signed an agreement with a consultant to provide investor relation services for twelve months. In connection with the agreement, 15,000,000 shares of our restricted common stock were issued. The shares were valued at $6,000.

Amendment of Convertible Promissory Notes

During May 2019, the Notes of $48,000 with original issuance discount of $8,000 amended in October 2018 were restated. The $8,000 original issuance discount from the Note restated in October was repaid May 2019. The restated principal balance of $40,000 plus the original issuance discount of $8,000 were due August 2019. In connection with this restated note, we issued 3,000,000 shares of our common stock. The common stock was valued at $900 and recorded as a debt discount that was amortized over the life of the restated note. The Note is in default and negotiation of settlement.

During May 2019, the Notes of $24,000 with original issuance discount of $4,000 amended in November 2018 were restated. The restated principal balance of $24,000 plus the original issuance discount of $2,400 were due August 2019. In connection with this restated note, we issued 3,000,000 shares of our common stock. The common stock was valued at $900 and recorded as a debt discount that was amortized over the life of the restated note. The Note is in default and negotiation of settlement.

Restatement of Promissory Notes

During September 2019, the Notes of $282,983 plus accrued interest amended in December 2018 were restated. The restated principal balance of $333,543 were due September 2020. In connection with this restated note, we issued 20,000,000 shares of our common stock. The common stock was valued at $5,090 and recorded as a debt discount that was amortized over the life of the note. The Note is in default and negotiation of settlement.

During September 2019, the Note of $36,000 with original issuance discount of $6,000 amended in September 2018 was restated. The $6,000 original issuance discount from the Note amended in September 2018 has been repaid in full as of September 2019. The restated principal balance was $36,000 with the original issuance discount of $6,000 and was due September 2020. The $6,000 original issuance discount from the Note amended in September 2019 has been repaid in full as of September 2020. The Note was further restated in September 2020. The restated principal balance was $36,000 with the original issuance discount of $6,000 and is due March 2021. The Note is in default and negotiation of settlement.

During January 2020, the Note of $60,000 with original issuance discount of $10,000 amended in November 2018 and the Note of $88,225 plus accrued interest at a rate of 2.5% monthly to an unrelated third party were combined and restated. The restated principal balance was $148,225 that carries interest at a rate of 2.0% monthly due July 2020. During July 2020, the restated Note of $148,225 plus accrued interest of $18,701 was further restated. The new principal balance was $166,926 that carries interest at a rate of 2.0% monthly and was due January 2021. The Note is in negotiation of restatement.

Settlement of Convertible Promissory Notes

During August 2019, the Note of $12,000 with original issuance discount of $2,000 originated in December 2019 was settled for $12,000 with scheduled payments through December 1, 2019. In connection with this settlement, we issued 1,500,000 shares of common stocks with a fair value of $450. Repayment of $3,500 was made as of December 2020. The remaining balance of $8,500 is in default and in negotiation of settlement.

During December 2019, two Notes for a total of $9,900 with original issuance discount of $900 originated in February 2018 were settled with 40,000,000 shares of common stocks. The shares were valued at fair value of $24,000.

During December 2019, three Notes for a total of $49,684 with original issuance discount of $2,700 originated in May 2017, January and September 2018, respectively, were settled with 260,000,000 shares of common stocks. The shares were valued at fair value of $130,000.

During December 2019, two Notes for a total of $46,500 originated in October and November 2018 and the accounts payable of $39,000 for consulting fees were settled with 500,000,000 shares of common stocks. The shares were valued at fair value of $300,000, and have not been issued.

During February through August 2018, we issued seven convertible promissory notes to an unrelated third party due one year from the execution dates. The principal balance of these Notes on March 31, 2019 was $511,319. During September 2020, a Note holder received a total of 107,133,333 shares of our restricted common stock in satisfaction of the principal balance of $22,000 and accrued interest of $10,140. During October 2020, the Note holder received a total of 107,817,770 shares of our restricted common stock in satisfaction of the principal balance of $22,000 and accrued interest of $10,345. During October 2020, the Note holder sold the remaining debt of $467,000 and accrued interest of $166,168 for $250,000 to a non-related party.

Settlement and Restatement of Promissory Notes

During March 2020, $50,000 of the Note of $120,000 with original issuance discount of 20,000 originated in November 2017 was settled for 125,000,000 shares. An additional 36,000,000 shares were issued to satisfy the default provision of the original note and 10,000,000 shares were issued along with the restatement. The total fair value of issued stock was $119,700. The remaining balance of $70,000 was restated with additional issuance discount of $14,000. The $84,000 due in September 2020 is in default and negotiation of further settlement.

Settlement of a Related-Party Note

During June 2020, the Note of $14,400 with original issuance discount of $2,400 to a related party amended in December 2018 was settled with cash payment of $14,400 and 5,000,000 shares of common stocks. The shares were valued at fair value of $3,000.

Advances

During the periods from May 2019 through May 2020, the Company received a total of $175,000 in deposits from a third party in connection with a Joint Venture proposal. The deposits were considered as payments towards the purchase of equity in the joint venture. The joint venture is currently on hold pending the outcome of the lawsuit with the SEC.

Common Stock Issued for Default Payments

During May 2019, we issued a total of 3,000,000 restricted shares to two Note holders due to the default on repayments of the convertible note of $48,000 originated in October 2018 and $24,000 originated in November 2018. The shares were valued at fair value of $900.

During August 2019, we issued a total of 2,000,000 additional restricted shares to the two Note holders due to default on repayments. These shares were valued at fair value of $700.

During June 2019, we issued a total of 500,000 restricted shares to a Note holder due to the default on repayments of the convertible note of $12,000 originated in December 2018. The shares were valued at fair value of $150.

During July 2019, we issued a total of 5,000,000 restricted shares to a Note holder due to the default on repayments of the promissory note of $282,983 plus accrued interest amended in December 2018. The shares were valued at fair value of $1,500.

During September 2019, we issued a total of 10,000,000 restricted shares to a Note holder due to the default on repayments of the original issuance discount of $10,000 for the convertible promissory notes of $60,000 amended in November 2018. The shares were valued at fair value of $4,000.

During January 2020, we issued a total of 75,000,000 restricted shares to a Note holder due to the default on repayments of the convertible promissory note of a total of $148,225 amended in August and November 2018. The shares were valued at fair value of $45,000.

During July 2020, we issued a total of 1,000,000 restricted shares to a Note holder due to the default on repayments of the promissory note of $22,000 originated in December 2019. The shares were valued at fair value of $700.

During September 2020, we issued a total of 10,000,000 restricted shares to a Note holder due to the default on repayments of the promissory note of $333,543 plus accrued interest amended in September 2019. The shares were valued at fair value of $6,000.

During October 2020, we issued a total of 1,500,000 restricted shares to a Note holder due to the default on repayments of the promissory note of $84,000 amended in March 2020. The shares were valued at fair value of $900.