The Company generates revenue from services and product sales. Revenue is recognized in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the services delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related revenue are recorded. The Company defers any revenue for which the services have not been performed or is subject to refund until such time that the Company and the customer jointly determine that the services have been performed or no refund will be required.
The Company licenses patented technology to customers under licensing agreements that allow those customers to utilize the technology in services they provide to their customers. The timing and amount of revenue recognized from license agreements depends upon a variety of factors, including the specific terms of each agreement. Such agreements are reviewed for multiple elements. Multiple elements can include amounts related to initial non-refundable license fees for the use of the Company’s patented technology and additional royalties on covered services. Revenue is only recognized after all of the following criteria are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred; (3) fees are fixed or determinable; and (4) collectability of fees is reasonably assured. Under these license agreements, the Company generally receives an initial non-refundable license fee and in some cases, additional running royalties. Revenue from royalties is recognized when earned and when amounts can be reasonably estimated.
The Company generally recognizes initial license fees over the term of the agreement or estimated performance period, since the license fees typically do not have standalone value relative to the other deliverables to be provided in an arrangement, as the arrangement would be accounted for as a single unit of accounting.
Deferred Revenue
The Company from time to time collects initial license fees when license agreements are signed and become effective. License fees collected from Licensees but not yet recognized as income are recorded as deferred revenue and amortized as income earned over the economic life of the related contract.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2014 and December 31, 2013. The respective carrying value of certain financial instruments approximated their fair values. These financial instruments include cash, stock based compensation and notes payable. The fair value of the Company’s convertible securities is based on management estimates and reasonably approximates their book value.
See Footnote 9 and 10 for derivative liabilities and Footnote 12 and 13 for stock based compensation and other equity instruments.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
Segment Information
Accounting Standards Codification subtopic Segment Reporting 280-10 (“ASC 280-10”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company has one reportable business segment which is operated in the United States.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the asset’s estimated useful life, which is five years for furniture and all other equipment. Expenditures for maintenance and repairs are expensed as incurred.
Long-Lived Assets
The Company follows FASB ASC 360-10-15-3, “Impairment or Disposal of Long-lived Assets,” which established a “primary asset” approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
Net Income (loss) Per Share
The Company accounts for net income (loss) per share in accordance with Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”), which requires presentation of basic and diluted earnings per share (“EPS”) on the face of the statement of operations for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS.
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period. It excludes the dilutive effects of any potentially issuable common shares.
Diluted net loss share is calculated by including any potentially dilutive share issuances in the denominator. As of June 30, 2014 and 2013, potentially dilutive shares issuances were comprised of convertible notes payable, warrants and vested stock options.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred. The Company charged to operations $29,977 and $168,947 as advertising costs for the three and six months ended June 30, 2014, respectively; and $10,350 for the three and six months ended June 30, 2013.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
Derivative Instrument Liability
The Company accounts for derivative instruments in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At June 30, 2014 and December 31, 2013, the Company did not have any derivative instruments that were designated as hedges.
Stock Based Compensation
Share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. The Company measures the fair value of the share-based compensation issued to non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions) or the fair value of the award (for non-stock transactions), which were considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
As of June 30, 2014, 3,000,000 employee stock options were outstanding with 3,000,000 shares vested and exercisable and 400,000 non-employee stock options were outstanding with 312,000 shares vested and exercisable, respectively. As of December 31, 2013, 9,000,000 and 2,750,000 employee and non-employee stock options were outstanding, respectively, with 3,000,000 and 2,650,000 shares vested and exercisable, respectively.
Income Taxes
Income tax provisions or benefits for interim periods are computed based on the Company’s estimated annual effective tax rate. Based on the Company's historical losses and its expectation of continuation of losses for the foreseeable future, the Company has determined that it is not more likely than not that deferred tax assets will be realized and, accordingly, has provided a full valuation allowance. As the Company anticipates or anticipated that its net deferred tax assets at December 31, 2014 and 2013 would be fully offset by a valuation allowance, there is no federal or state income tax benefit for the three and six months ended June 30, 2014 and 2013 related to losses incurred during such periods.
Reclassification
Certain reclassifications have been made to prior periods’ data to conform with the current year’s presentation. These reclassifications had no effect on reported income or losses.
Recent Accounting Pronouncements
The FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.
The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company has not yet determined the effect of the adoption of this standard and it is expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The Company has not yet determined the effect of the adoption of this standard and it is expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows
NOTE 3 – GOING CONCERN MATTERS
The Company’s condensed consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred significant recurring losses which have resulted in an accumulated deficit of $6,173,716 and working capital deficiency of $972,077 at June 30, 2014 and loss from operations of $736,603 for the six months ended June 30, 2014 which raises substantial doubt about the Company’s ability to continue as a going concern.
Continuation as a going concern is dependent upon obtaining additional capital and upon the Company’s attaining profitable operations. The Company will require a substantial amount of additional funds to build a sales and marketing organization, and to fund additional losses which the Company expects to incur over the next few years. The Company recognizes that, if it is unable to raise additional capital, it may find it necessary to substantially reduce or cease operations. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
NOTE 4 – PROPERTY AND EQUIPMENT
The Company’s property and equipment at June 30, 2014 and December 31, 2013:
| |
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
Office equipment
|
|
$
|
15,137
|
|
|
$
|
14,649
|
|
|
Computer equipment
|
|
|
2,574
|
|
|
|
2,574
|
|
|
Leasehold improvements
|
|
|
20,014
|
|
|
|
20,014
|
|
| |
|
|
37,725
|
|
|
|
37,237
|
|
|
Less accumulated depreciation
|
|
|
(30,164
|
)
|
|
|
(28,392
|
)
|
| |
|
$
|
7,561
|
|
|
$
|
8,845
|
|
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
Depreciation expense charged to operations amounted to $859 and $1,771, respectively, for the three and six months ended June 30, 2014, respectively, and $836 and $1,491, respectively, for the three and six months ended June 30, 2013.
NOTE 5 – LICENSING RIGHTS
On October 28, 2010, prior to the recapitalization of the Company, the Company acquired an exclusive product license, which included the right to use the Naltrexone Implant and any procedures related to the licensed product. The Company paid a onetime license fee of 7.5% of the total common shares outstanding on the date of the agreement, or 5,672,250 common shares at the market value of $0.70 per share as of the date of the agreement. Total value of the license is recorded as $3,970,575. Additionally, the Company will pay $600 for each prescription request of the licensed product. The agreement will remain in force for so long as the Company continues to use the Licensed Product.
During the year ended December 31, 2013, the Company determined that its licensing rights had a definite life based on various economic factors. The Company estimated a useful life of 30 years. Amortization of the three and six months ended June 30, 2014 was $33,088 and $66,176, respectively.
NOTE 6 – DEFERRED REVENUE
In 2013 and 2014, the company has granted license and sub-license agreements (“Agreements”) for various regions or States in the United States allowing the licensee to market, distribute and sell solely in the defined license territory, as defined, the products provided by the Company. The agreements are granted for a defined period or perpetual and are effective as long as annual milestones are achieved.
Terms for payments for licensee agreements vary from full cash payment to defined terms. In cases where license or sub-license fees are uncollected or deferred; the Company nets those uncollected fees with the deferred revenue for balance sheet presentation.
The Company amortizes license fees over the shorter of the economic life of the related contract life or contract terms for each licensee. The remaining unamortized aggregate balance of deferred revenue as of June 30, 2014 and December 31, 2013 was $2,287,255 and $934,593, respectively.
NOTE 7 – ADVANCE FROM LENDERS
During the year ended December 31, 2012, the Company received an aggregate of $885,000 of net proceeds in connection with the expected issuance of convertible debt. As of December 31, 2013, $95,599 of the notes have yet to be executed and finalized or refunded. During the six months ended June 30, 2014, the Company paid an aggregate of $134,968 in full settlement of the outstanding balance and accrued interest.
NOTE 8 – SETTLEMENT PAYABLE
On June 13, 2013, Fresh Start Private Florida, LLC (“FSPF”) filed a complaint against the Company alleging breach of a License Agreement whereby FSPF was to receive, implant, use, sell and otherwise commercialize the Naltrexone implant product and the Fresh Start Alcohol Rehabilitation Program throughout the state of Florida. The complaint alleged that the Company made certain misrepresentations and failed to provide certain operational documentation pursuant to the License Agreement. (Fresh Start Private Florida, LLC v. Fresh Start Private Management, Inc., Case No. 13-CA 1850, Circuit Court of the Twentieth Judicial Circuit in and for Collier County, Florida).
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
On June 3, 2014, the Company entered into a settlement agreement to pay the plaintiff in increments through October 31, 2015 in exchange for dismissal of all pending litigation and termination of all prior and current agreements.
NOTE 9 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES
Convertible debenture issued on April 5, 2013, related party
On April 5, 2013, the Company issued a convertible debenture for an aggregate of $425,000 comprised of $400,000 previous advances (see note 7 above) and $25,000 additional proceeds. The financing closed on April 5, 2013.
The Note bears interest at the rate of 15% per annum. Interest is payable quarterly on April 15, July 15, October 15 and January 15 for the prior quarter and principal must be repaid on April 5, 2016. The Note is convertible into common stock, at holder’s option, at a $0.50 per share with certain conversion adjustments in the event the Company issues additional shares of its common stock or securities convertible into the Company’s common stock at a price per share less than the conversion price in effect or without consideration, then the conversion price upon each issuance shall be adjusted to the price equal to the consideration per share paid for such additional shares of the Company’s common stock.
In connection with the issuance of the convertible debenture, the Company issued an aggregate of 1,275,000 shares of its common stock and detachable warrants granting the holder the right to acquire an aggregate of 1,275,000 shares of the Company’s common stock at an initial exercise price of $1.00 per share for five years. The warrant contains exercise price adjustments in the event the Company issues additional shares of its common stock or securities convertible into the Company’s common stock at a price per share less than the exercise price in effect or without consideration, then the exercise price upon each issuance shall be adjusted to the price equal to the consideration per share paid for such additional shares of the Company’s common stock.
The Company has identified the embedded derivatives related to the above described debenture and warrants. This embedded derivative included variable conversion or exercise features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the debenture and to fair value as of each subsequent reporting date.
The Company allocated proceeds based on the relative fair values of the debt, common stock and warrants, measured at an aggregate of $148,134, to the warrant and debt conversion provision liabilities (debt and warrants) and equity (common stock) to discount to convertible debenture. The fair values of the embedded derivatives were determined using the Binominal Option Pricing Model with the following assumptions: contractual terms of 3 to 5 years, an average risk free interest rate of 0.33% to 0.68%, a dividend yield of 0%, and volatility of 256.18%.
The charge of the amortization of debt discounts and costs for the three and six months ended June 30, 2014 was $12,299 and $24,464, respectively; and $11,624 for the three and six months ended June 30, 2013, which was accounted for as interest expense. At June 30, 2014, the unamortized debt discount was $87,177.
Convertible debentures effective March 31, 2013
In November 2013, effective March 31, 2013, the Company issued four convertible debentures for an aggregate of $385,000 comprised of previous advances. The financing closed in November 2013.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
The Notes bear interest at the rate of 15% per annum. Interest is payable quarterly on April 15, July 15, October 15 and January 15 for the prior quarter and principal must be repaid on March 31, 2016. The Notes are convertible into common stock, at holder’s option, at a $0.50 per share with certain conversion adjustments in the event the Company issues additional shares of its common stock or securities convertible into the Company’s common stock at a price per share less than the conversion price in effect or without consideration, then the conversion price upon each issuance shall be adjusted to the price equal to the consideration per share paid for such additional shares of the Company’s common stock.
In connection with the issuance of the convertible debentures, the Company issued or is obligated to issue an aggregate of 1,155,000 shares of its common stock and detachable warrants granting the holder the right to acquire an aggregate of 1,155,000 shares of the Company’s common stock at an initial exercise price of $1.00 per share for five years. The warrant contains exercise price adjustments in the event the Company issues additional shares of its common stock or securities convertible into the Company’s common stock at a price per share less than the exercise price in effect or without consideration, then the exercise price upon each issuance shall be adjusted to the price equal to the consideration per share paid for such additional shares of the Company’s common stock.
The Company has identified the embedded derivatives related to the above described debentures and warrants. This embedded derivative included variable conversion or exercise features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the debenture and to fair value as of each subsequent reporting date.
The Company allocated proceeds based on the relative fair values of the debt, common stock and warrants, measured at an aggregate of $129,532, to the warrant and debt conversion provision liabilities (debt and warrants) and equity (common stock) to discount to convertible debenture. The fair values of the embedded derivatives were determined using the Binominal Option Pricing Model with the following assumptions: contractual terms of 3 to 5 years, an average risk free interest rate of 0.36% to 0.77%, a dividend yield of 0%, and volatility of 227.18%.
During the six months ended June 30, 2014, the Company paid $35,000 outstanding convertible notes. In addition, the remaining notes in aggregate of $350,000 and accrued interest were exchanged for licensing rights for the State of Ohio (See Note 6 above). At the date(s) of payoff or exchange, the Company determined fair value of the embedded derivatives of $324,239, using the Binominal Option Pricing Model with the following assumptions: contractual terms of 2 to 3 years, an average risk free interest rate of 0.39% to 0.48%, a dividend yield of 0%, and volatility of 205.71% to 232.90%, was reclassified to additional paid in capital.
The charge of the amortization and write off (upon payoff or conversion) of debt discounts and costs for the three and six months ended June 30, 2014 was $78,540 and $97,031, which was accounted for as interest expense.
Mark to market adjustment at June 30, 2014
At June 30, 2014, the Company marked to market the fair value of the derivatives of the convertible notes discussed above and determined a fair value of $400,753. The Company recorded a gain from change in fair value of derivative liability of $394,154 and $133,961for the three and six months ended June 30, 2014, respectively. The fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 205.83%, (3) weighted average risk-free interest rate of 0.47%, (4) expected life of 1.77 years, and (5) estimated fair value of the Company’s common stock of $0.10 per share.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
NOTE 10 – WARRANT LIABILITY
The Company issued warrants in conjunction with the issuance of convertible debentures. These warrants contain certain reset provisions. Therefore, in accordance with ASC 815-40, the Company reclassified the fair value of the warrant from equity to a liability at the date of issuance. Subsequent to the initial issuance date, the Company is required to adjust to fair value the warrant as an adjustment to current period operations.
The Company recorded a gain on change in fair value of warrant liability of $197,839 and $55,190 for the three and six months ended June 30, 2014, respectively.
At June 30, 2014, the fair value of the 2,430,000 warrants containing certain reset provisions were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 205.83%, (3) weighted average risk-free interest rate of 0.88%, (4) expected life of 3.77 years, and (5) estimated fair value of the Company’s common stock of $0.10 per share.
At June 30, 2014, the warrant liability valued at $232,541, the Company believes an event under the contract that would create an obligation to settle in cash or other current assets is remote and has classified the obligation as a long term liability.
NOTE 11 – NOTES PAYABLE-RELATED PARTY
As of June 30, 2014 and December 31, 2013, the Company received advances from Jorge Andrade, director, Scott Carley, and Neil Muller, President as loans from related parties. The loans are payable on demand and without interest.
On January 22, 2013, the Company issued a unsecured promissory note payable for $200,000 due January 1, 2018, with a stated interest rate of 12% per annum beginning three months from issuance; payable monthly. Principal payments are due starting February 1, 2015 at $6,650 per month. The lender has an option to convert the note to licensing rights for the State of Oregon. The Company currently is in default of the required interest payments initially due starting April 22, 2013. During the six months ended June 30, 2014, the Company has paid $36,390 principal and accrued interest towards the promissory note.
In connection with the issuance of the above described promissory note, the Company is obligated to issue 750,000 of its common stock.
The Company recorded a debt discount of $11,250 based on the fair value of the Company’s common stock at the issuance date of the promissory note. The discount is amortized ratably over the term on the notes. The note holder subsequently became an officer of the Company. The balance outstanding as of June 30, 2014 is $163,610 with unamortized debt discount of $6,531.
NOTE 12 – STOCKHOLDERS’ EQUITY
Preferred stock
The Company is authorized to issue 80,000 shares of preferred stock with no par value. As of June 30, 2014 and December 31, 2013, the Company had 80,000 shares and -0- shares of preferred stock issued and outstanding.
On June 19, 2014, the Company’s Board of Directors designated 80,000 shares of preferred stock, no par value. Each share of preferred stock shall entitle the holder to one thousand (1,000) votes and is convertible into one share of common stock and shall have the same rights and privileges and rank equally, share ratably and be identical in all respects as to all matters with the Company’s common stock.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
On June 25, 2014, the Company issued an aggregate of 80,000 shares of preferred stock to officers and directors for services rendered.
Common stock
The Company is authorized to issue 200,000,000 shares of common stock with par value $.001 per share. As of June 30, 2014 and December 31, 2013, the Company had 141,964,501 shares and 127,343,501 shares of common stock issued and outstanding.
In February 2014, the Company issued 2,500,000 shares of its common stock in connection with the exercise of non-employee stock options exercised at $0.015 per share. The aggregate exercise price of $37,500 was paid to the Company by utilizing amounts due to the employees by the Company.
In March 2014, the Company issued 4,805,000 shares of its common stock in settlement of a past services and other obligations previously accrued at December 31, 2013.
In March 2014, the Company issued 250,000 shares of its common stock for advertising valued at $45,000 based on the underlying market value of the common stock at the date of issuance.
In March 2014, the Company issued 100,000 shares of its common stock for related party interest valued at $18,000 based on the underlying market value of the common stock at the date of issuance.
In March 2014, the Company issued 716,000 shares of its common stock to a licensee valued at $89,500 based on the underlying market value of the common stock at the date of issuance.
In March 2014, the Company issued 100,000 shares of its common stock for services rendered valued at $12,000 based on the underlying market value of the common stock at the date of issuance.
In June 2014, the Company issued 150,000 shares of its common stock for advisory services valued at $27,750 based on the underlying market value of the common stock at the date of issuance.
In June 2014, the Company issued 6,000,000 shares of its common stock in connection with the exercise of non-employee stock options exercised at $0.015 per share. The aggregate exercise price of $90,000 was paid to the Company by utilizing amounts due to the employees by the Company.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
NOTE 13 – STOCK OPTIONS AND WARRANTS
Employee Options
The following table summarizes the changes in employee options outstanding and the related prices for the shares of the Company’s common stock issued to employees of the Company under the 2013 Stock Option Plan:
| |
Options Outstanding
|
|
|
Options Exercisable
|
|
| |
Exercise
Prices
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
| $ |
0.015 |
|
|
3,000,000
|
|
|
|
4.23
|
|
|
$
|
0.015
|
|
|
|
3,000,000
|
|
|
$
|
0.015
|
|
The intrinsic value of the vested employee stock options as of June 30, 2014 was $255,300 based on the Company’s stock price of $0.1001 per share at June 30, 2014.
Transactions involving stock options issued to employees are summarized as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per Share
|
|
|
Outstanding at December 31, 2013
|
|
|
9,000,000
|
|
|
$
|
0.015
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(6,000,000
|
)
|
|
|
(0.015
|
)
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at June 30, 2014
|
|
|
3,000,000
|
|
|
$
|
0.015
|
|
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
The following table summarizes the changes in non-employee options outstanding and the related prices for the shares of the Company’s common stock issued to non-employees of the Company under the 2013 Stock Option Plan:
| Options Outstanding |
|
|
Options Exercisable
|
|
| Exercise Prices |
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
| $ |
0.10 |
|
|
250,000
|
|
|
|
4.32
|
|
|
$
|
0.10
|
|
|
|
210,000
|
|
|
$
|
0.10
|
|
| |
0.20 |
|
|
150,000
|
|
|
|
4.70
|
|
|
|
0.20
|
|
|
|
102,000
|
|
|
|
0.020
|
|
| |
|
|
|
400,000
|
|
|
|
4.46
|
|
|
|
0.1375
|
|
|
|
312,000
|
|
|
|
|
|
Transactions involving stock options issued to non-employees are summarized as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per Share
|
|
|
Outstanding at December 31, 2013
|
|
|
2,750,000
|
|
|
$
|
0.015
|
|
|
Granted
|
|
|
150,000
|
|
|
|
0.020
|
|
|
Exercised
|
|
|
(2,500,000
|
)
|
|
|
0.015
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at June 30, 2014
|
|
|
400,000
|
|
|
$
|
0.015
|
|
On March 10, 2014, the Company ratified, confirmed and approved the granting of 2014 stock options in aggregate of 150,000 to the Company’s advisory board representing five individuals under the Company’s 2012 Stock Option Plan. The issued options are exercisable 52% immediately and remainder at 10,000 per month (12 months) at $0.20 per share for five years.
The intrinsic value of the vested non- employee stock options as of June 30, 2014 was $21 based on the Company’s stock price of $0.1001 per share at June 30, 2014.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company’s common stock:
| Warrants Outstanding |
|
|
Warrants Exercisable
|
|
| Exercise Prices |
|
Number
Outstanding
|
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
| $ |
0.25 |
|
|
200,000
|
|
|
|
0.74
|
|
|
$
|
0.25
|
|
|
|
200,000
|
|
|
|
0.99
|
|
| |
1.00 |
|
|
2,430,000
|
|
|
|
3.76
|
|
|
|
1.00
|
|
|
|
2,430,000
|
|
|
|
4.01
|
|
| |
$0.94 |
|
|
2,630,000
|
|
|
|
3.53
|
|
|
$
|
0.94
|
|
|
|
2,630,000
|
|
|
|
3.78
|
|
Transactions involving warrants are summarized as follows:
|
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
Per Share
|
|
|
Outstanding at December 31, 2013
|
|
|
2,430,000
|
|
|
$
|
1.00
|
|
|
Issued
|
|
|
200,000
|
|
|
|
0.25
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at June 30, 2014
|
|
|
2,630,000
|
|
|
$
|
0.94
|
|
In March 2014, the Company issued 200,000 warrants to purchase the Company’s common stock at an exercise price of $0.25 per share for one year to a Company’s licensee vesting immediately. The fair value of the warrant of $24,557 was determined using the Black Scholes Option Pricing Model with the following assumptions: dividend yield $-0-, volatility of 191.73% and risk free rate of 0.13% and is amortized over the term of the related licensee agreement.
NOTE 14 – RELATED PARTY TRANSACTIONS
The Company has an arrangement with Terranautical Global Investments (“TGI”). TGI is a company controlled by Jorge Andrade that provides consulting services to the Company. There is no formal agreement between the parties and the amount of remuneration is $6,250 per month. During the three and six months ended June 30, 2014, the Company incurred $25,000 and $37,500 as consulting fees, respectively. During the three and six months ended June 30, 2013, the Company incurred $50,000 and $96,667 as consulting fees, respectively. As of June 30, 2014 and December 31, 2013, there was an unpaid balance of $174,100 and $162,850, respectively.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
The Company has an arrangement with Premier Aftercare Recovery Service, (“PARS”). PARS is a Company controlled by Neil Muller that provides consulting services to the Company. There is no formal agreement between the parties and the amount of remuneration is $6,250 per month. During the three and six months ended June 30, 2014 the Company incurred $25,000 and $37,500, respectively, as consulting fees and expense reimbursements. During the three and six months ended June 30, 2013, the Company incurred $50,000 and $96,667 as consulting fees and expense reimbursements., respectively. As of June 30, 2014 and December 31, 2013, there was an unpaid balance of $-0- and $142,459, respectively.
The Company has an arrangement with Felix Financial Enterprises (“FFE”). FFE is a Company controlled by Lourdes Felix that provides consulting services to the Company. There is no formal agreement between the parties and the amount of remuneration is $6,250 per month. During the three and six months ended June 30, 2014, the Company incurred $25,000 and $37,500 as consulting fees, respectively. During the three and six months ended June 30, 2013, $50,000 and $62,500 consulting fees were incurred, respectively. As of June 30, 2014 and December 31, 2013, there was an unpaid balance of $69,140 and $105,390, respectively.
West Coast Health Consulting, Inc. is a company controlled by Jorge Andrade that previously provided consulting services to the Company. During the three and six months ended June 30, 2014 , the Company incurred $-0- and $-0- as consulting fees, respectively. As of June 30, 2014 and December 31, 2013, there was an unpaid balance of $-0- and $-0-, respectively.
The Company has an arrangement with Brady Granier. There is no formal agreement between the parties and the amount of remuneration is $6,250 per month. For the three and six months ended June 30, 2014, $18,750 and $37,500 in consulting fees were incurred, respectively. As of June 30, 2014 and December 31, 2013, there was an unpaid balance of $34,890 and $72,640, respectively.
The Company has an arrangement with Kent Emry. There is no formal agreement between the parties and the amount of remuneration is $6,250 per month. For the three and six months ended June 30, 2014, $18,750 and $37,500 in consulting fees were incurred, respectively. As of June 30, 2014 and December 31, 2013, there was an unpaid balance of $-0- and $26,189, respectively.
The above related parties are compensated as independent contractors and are subject to the Internal Revenue Service regulations and applicable state law guidelines regarding independent contractor classification. These regulations and guidelines are subject to judicial and agency interpretation, and it could be determined that the independent contractor classification is inapplicable.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Employment agreements
Lourdes Felix, Chief Financial Officer and Brady Granier, Chief Operating Officer of the Company, entered into Executive Service Agreements with the Company on February 28, 2013 and October 16, 2013, respectively (the “Executive Agreements”).
The Executive Agreements provided, among other things, (i) the remuneration to be received in exchange for services provided to the Company; (ii) a general description of the services to be provided to the Company; and (iii) other obligations, terms, and conditions relating to the professional relationship between Felix and Granier, as applicable, and the Company.
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
On June 30, 2014, each of Felix and Granier entered into an amendment to the Executive Agreements (the “Amendments”), which provide that each of Felix and Granier shall receive three percent (3%) of the Company’s gross margin of sales of then-current healthcare products, devices and/or modifications thereto thereafter for a period of fifteen years following the Termination Date, as defined in the Executive Agreements. The Amendments were approved by the unanimous consent of the disinterested directors of the Company in accordance with the requirements of the Nevada Revised Statutes.
Potential Acquisitions
The Board of Directors of the Company authorized the execution of a letter of understanding dated December 30, 2013 (the “Letter of Understanding”) with Trinity Rx Solutions LLC (“Trinity Rx”) and Sal Amodeo, the sole member of Trinity Rx (“Amodeo”).
The Company is involved in establishing alcohol rehabilitation and treatment centers and has created certain alcohol therapeutic and rehabilitation programs (the “Counseling Programs”) consisting of a Naltrexone implant that is placed under the skin in the lower abdomen coupled with life counseling sessions. The Naltrexone implant formula is owned by Trinity Rx. The Company entered into an exclusive license dated September 7, 2010 (the ‘”License Agreement”) with Trinity Rx. In accordance with the terms and provisions of the License Agreement, Trinity Rx provides to the Company the Naltrexone Implant that has been designed for alcoholism.
As of June 30, 2014, the above described acquisition has not closed. The total aggregate payments of the $57,404 and $25,000 in refundable deposits is reflected in the Company’s balance sheet as short term deposits as of June 30, 2014 and December 31, 2013, respectively.
NOTE 16 –FAIR VALUE MEASUREMENTS
ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of June 30, 2014:
BIOCORRX, INC.
(formerly Fresh Start Private Management, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2014
(unaudited)
| |
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Warrant liability
|
|
$ |
|
|
|
$ |
|
|
|
$ |
232,541 |
|
|
|
232,541 |
|
|
Derivative liability
|
|
|
- |
|
|
|
- |
|
|
|
400,753 |
|
|
|
400,753 |
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
633,294 |
|
|
$ |
633,294 |
|
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the six months ended June 30, 2014.
|
Balance, December 31, 2013
|
|
$ |
1,306,834 |
|
|
Fair value of embedded derivative in connection with convertible notes at inception
|
|
|
|
|
|
Transfers out due to conversions of convertible notes
|
|
|
(368,510 |
) |
|
Mark-to-market at June 30, 2014
|
|
|
(304,950 |
) |
|
Balance, June 30, 2014
|
|
$ |
633,294 |
|
NOTE 17 – SUBSEQUENT EVENTS
On April 5, 2013, the Company issued a Convertible Debenture (the “Original Note”) to various holders in the principal sum of $425,000, convertible into common stock of the Company. On July 7, 2014, the Company executed various Amended and Restated Promissory Notes (the “Amended Notes") to the holders of the Note, in the aggregate principal amount of $545,217.81 (“Amended Principal”), which is equal to the principal sum of the Original Note, plus the interest accrued thereon as of the date of the Amended Notes. Pursuant to the Amended Notes, the Amended Principal, plus interest thereon at a rate of twelve percent (12%) per annum payable in equal monthly installments, with the balance payable on or before July 15, 2016. The Amended Notes are not convertible into shares of common stock. In the event that the Company fails to make a timely payment or to perform any term of the Amended Notes, the holders thereof shall have the right to declare the full, unpaid balance thereof immediately payable.
On April 5, 2013, the Company issued a Series A Warrant for the Purchase of Shares of Common Stock (the “Warrant”) to various holders for the purchase of an aggregate of 1,275,000 shares of common stock of the Company at the purchase price of $1.00 per share. On July 7, 2014, the Company executed an Amendment and Restatement of Warrant for the Purchase of Shares of Common Stock (the “Amended Warrant”), which provided that the number of common shares that the holder has the right to purchase equals 1,275,000 at $0.25 per share.
On July 16, 2014, the Company entered into a sublicense agreement with Addiction Recovery Centers Inc.(“ARC”). In accordance with the agreement the Company granted ARC an exclusive sublicense within the Territory of Nevada. The agreement is for a perpetual period of time and remains effective as long as annual milestones are achieved.
ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to us could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for materials, and competition.
Business Overview
We are an addiction rehabilitation company and developer of the Start Fresh Program headquartered in Santa Ana, California. We were established in January 2010 and currently operating in Santa Ana, California. The Company’s current treatment program is called the Start Fresh Program. On January 7, 2014 we changed our name to BioCorRx Inc. to take advantage of unique branding of our Start Fresh Program and to look to acquire other addiction programs and healthcare related products and services. We operate within the Specialty Hospitals, Expert Psychiatric industry, specifically within the industry subsets of Alcoholism Rehabilitation Hospital.
The Start Fresh Program is an alcoholism treatment program comprised of two parts: (1) an implant, administered by a licensed physician, of a proprietary compounded formulation of the drug, Naltrexone (implanted under the skin) (the “Implant”) which reduces alcohol cravings over a period of time which typically is longer than other formulations or means of injection of the drug Naltrexone; and (2) uniquely and specifically structured, intensive one on one alcohol addiction life coaching program developed by BioCorRx, Inc. (the “Coaching Program”).
BioCorRx, Inc. has been granted an exclusive license to the proprietary implant by its developer. The license allows BioCorRx to license to physicians and medical groups experienced in treating alcoholism and addiction dependency the right to order the proprietary implant from the compounding pharmacies that have been licensed and trained to make the implant by its developer. It also allows BioCorRx to sub-license the implant access to territories in the U.S. and abroad.
BioCorRx is not a licensed health care provider and does not provide health care services to patients. BioCorRx does not operate substance abuse clinics and does not employ substance abuse counselors or coaches at this time. BioCorRx makes the Start Fresh Program available to health care providers to utilize when the health care provider determines it is medically appropriate and indicated for his or her patients. Any physician or licensed alcohol addiction treatment provider is solely responsible for treatment options prescribed or recommended to his or her patients. At all times, such providers retain complete and exclusive authority, responsibility, supervision and control over their medical practice, their patients, the treatment that their patients receive and any decision to prescribe the implant to any of the provider’s patients. BioCorRx does not condition its license to health care providers accessing the implant on their making available the Coaching Program to the providers’ patients – although BioCorRx certainly encourages that providers do so.
BioCorRx has issued several license agreements to several unrelated third parties involving the establishment of alcoholism rehabilitation and treatment centers and creating certain alcoholism rehabilitation programs. The Company has substantially expanded its operations in 2013 through the licensing and distribution opportunities of its Start Fresh Program. The four new locations now offering the Start Fresh Program are Arizona, Northern California, Nebraska and Connecticut. The company’s current focus will continue on expansion to more territories across the United States, branding of the Start Fresh Program and acquisition of healthcare related products and services. The Company is committed to continuing to provide excellent rehabilitation services to clients nationwide as it expands its network of licensed clinics.
Results of Operations
The following table summarizes changes in selected operating indicators of the Company, illustrating the relationship of various income and expense items to net sales for the respective periods presented (components may not add or subtract to totals due to rounding):
Three Months ended June 30, 2014 Compared with Three Months ended June 30, 2013
Three months ended June 30,
| |
|
2014
|
|
|
2013
|
|
|
Net Sales
|
|
$
|
238,008
|
|
|
$
|
499,951
|
|
|
Cost of Sales
|
|
|
47,262
|
|
|
|
70,260
|
|
|
Gross Profit
|
|
|
190,746
|
|
|
|
429,691
|
|
|
Total Operating Expenses
|
|
|
(638,551
|
)
|
|
|
(348,751
|
)
|
|
Gain on settlement of debt
|
|
|
|
|
|
|
800
|
|
|
Net Interest Expense
|
|
|
(128,845
|
)
|
|
|
(81,398
|
)
|
|
Gain (loss) on change in derivative liability
|
|
|
916,232
|
|
|
|
(155,278
|
)
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Net Income (loss)
|
|
$
|
339,582
|
|
|
$
|
(154,936
|
)
|
Sales
Sales for the three months ended June 30, 2014 were $238,008 compared with $499,951 for the three months ended June 30, 2013, reflecting a decrease of 53%.
The decrease in sales revenue is directly related to the Company’s focus on licensing and distribution efforts which will have the potential to create a stronger revenue stream going forward.
Cost of Sales
Cost of sales for the three months ended June 30, 2014 were $47,262 compared with $70,260 for the three months ended June 30, 2013, reflecting a decrease of 33%. Cost of sales have dropped dramatically because of the new variation of the licensing and distribution revenue model.
Gross Profit
Gross profit percentage for the three months ended June 30, 2014 was 80.2% compared to 85.9% for the three months ended June 30, 2013.
Total Operating Expenses
Total operating expenses for the three months ended June 30, 2014 and 2013 were $638,551 and $348,751 reflecting an increase of 83%. The primary increase is due to a settlement agreement reached regarding prior pending litigation thereby incurring a $275,000 expense for the three months ended June 30, 2014. Additionally, comparing the three months ended June 30, 2013 to June 30, 2014, consulting and investor relations fees decreased from $191,169 to $126,091, accounting and legal fees decreased from $104,486 to $68,882, advertising increased from $10,350 to $29,977, and rent decreased from $8,619 to $4,321. In addition, we incurred $52,907 as stock based compensation in 2014 compared to $29,916 in 2013.
Gain (loss) on change in Fair Value of Derivative Liability
As of June 30, 2014, we had outstanding a convertible notes and warrants with variable conversion provisions that had the possibility of exceeding our common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provision of this note. As such, we are required to determine the fair value of this derivative and mark to market each reporting period. For the three months ended June 30, 2014, we incurred a $916,232 gain on change in fair value of our derivative liabilities compared to $155,278 loss the same period, last year.
Interest Expenses
Interest expense for the three months ended June 30, 2014 and 2013 were $128,845 and $81,398, respectively, reflecting reduced costs incurred from our 2013 borrowings.
Income taxes
Income taxes for the three months ended June 30, 2014 and 2013 were $-0-.
Net Income (Loss)
For the three months ended June 30, 2014, the Company experienced income of $339,582 compared with a net loss of $154,936 for the three months ended June 30, 2013.
Six Months ended June 30, 2014 Compared with Six Months ended June 30, 2013
Six months ended June 30,
| |
|
2014
|
|
|
2013
|
|
|
Net Sales
|
|
$
|
368,837
|
|
|
$
|
887,160
|
|
|
Cost of Sales
|
|
|
74,962
|
|
|
|
149,366
|
|
|
Gross Profit
|
|
|
293,875
|
|
|
|
737,794
|
|
|
Total Operating Expenses
|
|
|
(1,133,406
|
)
|
|
|
(601,530
|
)
|
|
Gain on settlement of debt
|
|
|
|
|
|
|
17,800
|
|
|
Net Interest Expense
|
|
|
(202,022
|
)
|
|
|
(170,435
|
)
|
|
Gain (loss) on change in derivative liability
|
|
|
304,950
|
|
|
|
(193,209
|
)
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Net Loss
|
|
$
|
(736,603
|
)
|
|
$
|
(209,580
|
)
|
Sales
Sales for the six months ended June 30, 2014 were $368,837 compared with $887,160 for the six months ended June 30, 2013, reflecting a decrease of 58%.
The decrease in sales revenue is directly related to the Company’s focus on licensing and distribution efforts which will have the potential to create a stronger revenue stream going forward.
Cost of Sales
Cost of sales for the six months ended June 30, 2014 were $74,962 compared with $149,366 for the six months ended June 30, 2013, reflecting a decrease of 50%. Cost of sales have dropped dramatically because of the new variation of the licensing and distribution revenue model.
Gross Profit
Gross profit percentage for the six months ended June 30, 2014 was 79.7% compared to 83.2% for the six months ended June 30, 2013.
Total Operating Expenses
Total operating expenses for the six months ended June 30, 2014 and 2013 were $1,133,406 and $601,530 reflecting an increase of 88%. The primary increase is due to a settlement agreement reached regarding prior pending litigation thereby incurring a $275,000 expense for the six months ended June 30, 2014. Additionally, comparing the six months ended June 30, 2013 to June 30, 2014, consulting and investor relations fees decreased from $323,120 to $298,029, accounting and legal fees increased from $130,971 to $155,727, advertising increased from $10,350 to $168,947, and rent decreased from $21,553 to $8,642. In addition, we incurred $138,194 as stock based compensation in 2014 compared to $104,503 in 2013.
Gain (loss) on change in Fair Value of Derivative Liability
As of June 30, 2014, we had outstanding a convertible notes and warrants with variable conversion provisions that had the possibility of exceeding our common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provision of this note. As such, we are required to determine the fair value of this derivative and mark to market each reporting period. For the six months ended June 30, 2014, we incurred a $304,950 gain on change in fair value of our derivative liabilities compared to $193,209 loss the same period, last year.
Interest Expenses
Interest expense for the six months ended June 30, 2014 and 2013 were $202,022 and $170,435, respectively, reflecting reduced costs incurred from our 2013 borrowings.
Income Taxes
Income taxes for the six months ended June 30, 2014 and 2013 were $-0-.
Net Income (Loss)
For the six months ended June 30, 2014, the Company experienced a net loss of $736,603 compared with a net loss of $209,580 for the six months ended June 30, 2013.
Liquidity and Capital Resources
As of June 30, 2014, we had cash of approximately $320,942. The following table provides a summary of our net cash flows from operating, investing, and financing activities.
Six months ended June 30,
| |
|
2014
|
|
|
2013
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
387,351
|
|
|
$
|
(111,683
|
)
|
|
Net cash used in investing activities
|
|
|
(32,890
|
)
|
|
|
(9,721
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
(142,085
|
)
|
|
|
170,107
|
|
|
Net increase in cash
|
|
|
212,376
|
|
|
|
48,703
|
|
|
Cash, beginning of period
|
|
|
108,566
|
|
|
|
6,002
|
|
|
Cash, end of period
|
|
$
|
320,942
|
|
|
$
|
54,705
|
|
Currently we have no material commitments for capital expenditures as of June 30, 2014. We historically sought and continue to seek financing from private sources to move our business plan forward. In order to satisfy the financial commitments, we had relied upon private party financing that has inherent risks in terms of availability and adequacy of funding.
For the next twelve months, we anticipate that we will need to supplement our revenues with additional capital investment or debt to ensure that we will have adequate cash to provide the minimum operating cash requirements to continue as a going concern. In 2014, the company entered into five separate licensing and distribution agreements whereby the Company received up-front licensing fees which allowed for sufficient cash flow to maintain operations. We believe that providing licensing and distribution opportunities will create a steady revenue stream by which sufficient cash flows can be maintained while the Company continues its growth and expansion.
We may require additional capital investments or borrowed funds to meet cash flow projections and carry forward our business objectives. There can be no guarantee or assurance that we can raise adequate capital from outside sources. If we are unable to raise funds when required or on acceptable terms, we have to significantly scale back, or discontinue, our operations.
Net Cash Flow From Operating Activities
Net Cash provided by operating activities increased by $499,034 for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to the Company’s ability to increase its cash flow from unearned revenue that is directly attributable to licensing and distribution agreements.
Net Cash Flow From Investing Activities
Net cash used in investing activities increased by $23,169 for the six months ended June 30, 2014 compared to of six months ended June 30, 2013 primarily due to investments in acquisition deposits.
Net Cash Flow From Financing Activities
Net cash provided by financing activities decreased by $312,192 for the six months ended June 30, 2014 compared to six months ended June 30, 2013 due to the decrease in borrowings and payoff of existing obligations.
Going Concern
The Company’s financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern. This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of June 30, 2014 and December 31, 2013, the Company has a working capital deficit of $972,077 and $861,901, and an accumulated deficit of $6,173,716 and $5,437,113. The Company’s revenues have decreased from 2013 to 2014. We will be dependent upon the raising of additional capital through placement of our common stock in order to implement its business plan or by using outside financing. There can be no assurance that the Company will be successful in these situations in order to continue as a going concern. The Company is funding its operations by additional borrowings and some shareholder advances.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.
Critical Accounting Policies
Use of Estimates and Assumptions
Preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Revenue Recognition
The Company generates revenue from services. Revenue is recognized in accordance with Accounting Standards Codification subtopic 605-10, Revenue Recognition (“ASC 605-10”) which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the services delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related revenue are recorded. The Company defers any revenue for which the services has not been performed or is subject to refund until such time that the Company and the customer jointly determine that the services has been performed or no refund will be required.
The Company licenses patented technology to customers under licensing agreements that allow those customers to utilize the technology in services they provide to their customers. The timing and amount of revenue recognized from license agreements depends upon a variety of factors, including the specific terms of each agreement. Such agreements are reviewed for multiple elements. Multiple elements can include amounts related to initial non-refundable license fees for the use of the Company’s patented technology and additional royalties on covered services. Revenue is only recognized after all of the following criteria are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred; (3) fees are fixed or determinable; and (4) collectability of fees is reasonably assured. Under these license agreements, the Company generally receives an initial non-refundable license fee and in some cases, additional running royalties. Revenue from royalties is recognized when earned and when amounts can be reasonably estimated.
Deferred Revenue
The Company from time to time collects initial license fees when license agreements are signed and become effective. License fees collected from Licensees but not yet recognized as income are recorded as deferred revenue and amortized as income earned over the economic life of the related contract.
Derivative Financial Instruments
Accounting Standards Codification subtopic 815-40, Derivatives and Hedging, Contracts in Entity’s own Equity (“ASC 815-40”) became effective for the Company on October 1, 2009. The Company’s convertible debt has variable conversion rates to the exercise price, which prohibit the Company from determining the number of shares needed to settle the conversion of the debt.
Stock-Based Compensation
FASB ASC 718 “Compensation – Stock Compensation” prescribes accounting and reporting standards for all stock-based payments award to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, may be classified as either equity or liabilities. The Company determines if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the option to settle by issuing equity instruments lacks commercial substance or (b) the present obligation is implied because of an entity’s past practices or stated policies. If a present obligation exists, the transaction should be recognized as a liability; otherwise, the transaction should be recognized as equity The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50 “Equity – Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
Recent Accounting Pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required under Regulation S-K for “smaller reporting companies.”
ITEM 4 – CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses described below, as of June 30, 2014, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:
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(a)
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We did not have sufficient personnel in our accounting and financial reporting functions. As a result we were not able to achieve adequate segregation of duties and were not able to provide for adequate reviewing of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis.
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Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weaknesses: A lack of sufficient personnel in our accounting and financial reporting functions to achieve adequate segregation of duties.
Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our accounting staff consists of a Chief Financial Officer, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will eliminate or greatly decrease any control and procedure issues we may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
(b) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended June 30, 2014 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
We are currently not a party to any material legal proceedings or claims not previously disclosed on Form 8-K.
Item 1A. Risk Factors
Not required under Regulation S-K for “smaller reporting companies.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
On February 29, 2012 one member of the Board of Directors, Jorge Andrade Jr., filed for bankruptcy protection in the United States Bankruptcy Court for the Central District of California under Chapter 7 of the United State Bankruptcy Code, as amended, case no. 8:12-bk-12653-TA (“Chapter 7 Bankruptcy”). Under the Chapter 7 Bankruptcy, Dr. Andrade was seeking discharge of most of his debts. On June 18, 2012, the U.S. Bankruptcy court issued a Discharge of Debtor Order declaring that Dr. Andrade was granted a discharge under Section 727 of Title 11 of the U.S. Bankruptcy Code.
Item 6. Exhibits
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31.01
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Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.02
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Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.01
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Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101 INS
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XBRL Instance Document*
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101 SCH
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XBRL Schema Document*
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101 CAL
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XBRL Calculation Linkbase Document*
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101 LAB
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XBRL Labels Linkbase Document*
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101 PRE
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XBRL Presentation Linkbase Document*
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101 DEF
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XBRL Definition Linkbase Document*
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*
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The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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