See the accompanying notes to the unaudited condensed consolidated financial statements
See the accompanying notes to the unaudited condensed consolidated financial statements
See the accompanying notes to the unaudited condensed consolidated financial statements
See the accompanying notes to the unaudited condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
NOTE 1 – BUSINESS
BioCorRx Inc., through its wholly owned subsidiary Fresh Start Private, Inc., distributes and licenses the BioCorRx Recovery Program for alcoholism and opioid addiction treatment that empowers patients to succeed in their overall recovery. We offer a unique treatment philosophy that combines medical intervention and a counseling/coaching program that is administered by specialized life coaches/counselors.
On January 7, 2014, the Company changed its name from Fresh Start Private Management, Inc. to BioCorRx Inc. In addition, effective February 20, 2014, the Company's quotation symbol on the Over-the-Counter Bulletin Board was changed from CEYY to BICX.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The following (a) condensed consolidated balance sheet as of December 31, 2015, which has been derived from audited financial statements, and (b) the unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for the year ending December 31, 2016. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2015 included in the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on April 14, 2016.
Basis of Presentation:
On July 28, 2016, the Company formed BioCorRx Pharmaceuticals, Inc., a wholly owned subsidiary and Nevada Corporation, for the purpose of developing certain business lines. As of September 30, 2016, there were no significant assets or liabilities in BioCorRx Pharmaceuticals, Inc., or operations since its formation.
The condensed consolidated financial statements include the accounts of BioCorRx Inc. and its wholly owned subsidiaries, Fresh Start Private, Inc. and BioCorRx Pharmaceuticals, Inc. (hereafter referred to as the "Company" or "BioCorRx"). All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
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 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.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The Company licenses proprietary products and protocols to customers under licensing agreements that allow those customers to utilize the products and protocols 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 products and protocols 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 products 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 receives an initial non-refundable license fee and in some cases, additional running royalties. Generally, the Company defers recognition of non-refundable upfront fees if it has continuing performance obligations without which the right, product or service conveyed in conjunction with the non-refundable fee has no utility to the licensee that is separate and independent of its performance under the other elements of the arrangement. License fees collected from Licensees but not yet recognized as income are recorded as deferred revenue and amortized as income earned over the expected economic life of the related contract.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 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 expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include assumptions used in the fair value of stock-based compensation, derivative and warrant liabilities, the fair value of other equity and debt instruments and allowance for doubtful accounts.
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with credit quality institutions. At times, such amounts may be in excess of the FDIC insurance limit. At September 30, 2016 and 2015, deposits in excess of FDIC limits were $80,625 and $-0-, respectively.
Accounts Receivable
Accounts receivable are recorded at original invoice amount less an allowance for uncollectible accounts that management believes will be adequate to absorb estimated losses on existing balances. Management estimates the allowance based on collectability of accounts receivable and prior bad debt experience. Accounts receivable balances are written off upon management's determination that such accounts are uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Management believes that credit risks on accounts receivable will not be material to the financial position of the Company or results of operations. The allowance for doubtful accounts was $53,250 and $44,500 as of September 30, 2016 and December 31, 2015, respectively.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2016 and December 31, 2015. 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 11 for derivative liabilities and Footnote 12 and 13 for stock based compensation and other equity instruments.
Restricted Cash
The Company is required to maintain in its bank accounts at all times no less than 10% of the outstanding principle of its convertible debt issued June 10, 2016. The amount held may be reduced upon noteholder approval. The Cash held must be unrestricted and not subject to any liens. As of September 30, 2016, the Company's restricted cash balance of $250,000 was classified as other assets in the accompanying balance sheet.
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 September 30, 2016 and 2015, potentially dilutive shares issuances were comprised of convertible notes, warrants and stock options.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The following potentially dilutive securities have been excluded from the computations of weighted average shares outstanding as of September 30, 2016 and 2015, as they would be anti-dilutive:
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Shares underlying options outstanding
|
|
|
47,850,000
|
|
|
|
13,850,000
|
|
Shares underlying warrants outstanding
|
|
|
2,630,000
|
|
|
|
2,630,000
|
|
Shares underlying convertible notes outstanding
|
|
|
131,250,000
|
|
|
|
1,833,333
|
|
|
|
|
181,730,000
|
|
|
|
18,313,333
|
|
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred. The Company charged to operations $60,034 and $198,778 as advertising costs for the three and nine months ended September 30, 2016 and $1,825 and $54,202 for the three and nine months ended September 30, 2015, respectively.
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 September 30, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges.
At September 30, 2016 and December 31, 2015, the Company had outstanding convertible notes and warrants that contained embedded derivatives. These embedded derivatives include certain conversion features and reset provisions. (See Note 9 and Note 11).
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 September 30, 2016, there were 47,850,000 stock options outstanding, of which 18,975,000 were vested and exercisable, respectively. As of September 30, 2015, there were 13,850,000 stock options outstanding with all vested and exercisable, respectively.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
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, 2015 and 2014 would be fully offset by a valuation allowance, there is no federal or state income tax benefit for the three and six months ended September 30, 2016 and 2015 related to losses incurred during such periods.
Recent Accounting Pronouncements
There are 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 financial position, results of operations or cash flows.
NOTE 3 – GOING CONCERN AND MANAGEMENT'S LIQUIDITY PLANS
As of September 30, 2016, the Company had cash of $80,625 and working capital deficit of $1,584,783. During the nine months ended September 30, 2016, the Company used net cash in operating activities of $1,618,596. The Company has not yet generated any significant revenues, and has incurred net losses since inception. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
During the nine months ended September 30, 2016, the Company raised $2,264,448 in cash proceeds the issuance of convertible notes and notes payable. The Company believes that its current cash on hand will be sufficient to fund its projected operating requirements through December 2016.
The Company's primary source of operating funds since inception has been from proceeds from private placements of convertible and other debt. The Company intends to raise additional capital through private placements of debt and equity securities, but there can be no assurance that these funds will be available on terms acceptable to the Company, or will be sufficient to enable the Company to fully complete its development activities or sustain operations. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, reduce overhead, or scale back its current business plan until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
Accordingly, the accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
NOTE 4 – PROPERTY AND EQUIPMENT
The Company's property and equipment at September 30, 2016 and December 31, 2015:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Office equipment
|
|
$
|
34,234
|
|
|
$
|
15,137
|
|
Computer equipment
|
|
|
2,574
|
|
|
|
2,574
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
20,014
|
|
|
|
|
36,808
|
|
|
|
37,725
|
|
Less accumulated depreciation
|
|
|
(13,116
|
)
|
|
|
(33,825
|
)
|
|
|
$
|
23,692
|
|
|
$
|
3,900
|
|
Depreciation expense charged to operations amounted to $1,433 and $2,801, respectively, for the three and nine months ended September 30, 2016; and $608 and $1,720, respectively, for the three and nine months ended September 30, 2015.
NOTE 5 – INTELLECTUAL PROPERTY/ LICENSING RIGHTS
On June 30, 2015, the Company acquired the complete rights, title and interest in the Naltrexone Implant Formulation used specifically in the BioCorRx Recovery Program for an aggregate purchase price of $1,132,000 comprised of an obligation to pay $1,000,000 over 14 months starting October 1, 2015 and 3,000,000 of the Company's common stock at the market value of $0.044 per share as of the date of the agreement. The Company estimated a useful life of 10 years.
On March 31, 2016, the parties agreed to terminate the above described acquisition and to cancel any and all obligations assumed under the agreement. In connection with the cancellation, the Company recorded a loss on termination of licensing agreement of $132,804.
On January 26, 2016, the Company entered into an asset purchase agreement to acquire intellectual and contractual rights for all of North America with the option for Central and South America for Naltrexone Implants formulas created by the Seller for 24 months upon receipt of the intellectual property for a fee of $55,648. The Company, within the first 12 months has the right to purchase perpetual rights for above territories for a one-time fee, financed over 5 years. The rights are amortized over the 24 month contract life. For the three and nine months ended September 30, 2016, amortization was $18,905.
On July 28, 2016, the Company and Therakine, Ltd., an Irish private company limited by shares ("Therakine"), entered into a Development, Commercialization and License Agreement (the "Agreement"). Therakine has know-how and patents related to sustained release drug delivery technology (the "Technology"). Pursuant to the Agreement, Therakine granted the Company an exclusive license to utilize the Technology in developing injectable naltrexone products to treat patients suffering addiction to opioids, methamphetamines, cocaine, or alcohol. The Company is permitted to sell on a worldwide basis the products that utilize the Technology. The Agreement expires when the Company's last valid claim to Therakine's patents expires. Upon expiration of the Agreement, the licenses granted will become irrevocable and fully paid up.
The Company agreed to pay, in return for the license to the Technology, up to $2,750,000 in milestone payments and royalties ranging from 5% to 12% of net sales of products that use the Technology. The Company is also required to pay a percentage of any sublicense income it receives related to products that use the Technology. In the event Therakine enters into a license agreement with a third party for products unrelated to injectable naltrexone that use the Technology, Therakine will pay the Company a percentage of its income from these products. As of September 30, 2016, the Company has paid the initial $125,000.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
NOTE 6 – DEFERRED REVENUE
In 2014 and 2015, the Company granted license and sub-license 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 September 30, 2016 and December 31, 2015 was $1,155,362 and $1,480,286, respectively.
NOTE 7 – SETTLEMENT PAYABLE
On March 9, 2016, Jorge Andrade (former Company's Chief Executive Officer) and Terranautical Global Investments, Inc. filed with the Eighth Judicial District Court in Clark County, Nevada a lawsuit claiming unpaid compensation, bonuses and previous loans in aggregate of $316,000 plus accrued interest and damages.
On March 21, 2016, the Plaintiff and the Company entered into a settlement agreement whereby the Company agreed to settle for a cash payment of $250,000 due December 16, 2016. At March 21, 2016, the Company reclassified $195,845 accounts payable and $54,155 notes payable, related party to settlement payable in the accompanying balance sheet.
NOTE 8 – NOTES PAYABLE
On July 7, 2014, the Company issued unsecured promissory notes in aggregate of $545,218 in settlement of previously issued convertible debentures dated April 3, 2013 and related accrued interest. The promissory notes include monthly payments of principal and interest, at 12% per annum, of $10,658 beginning August 15, 2014 through July 15, 2016 with the remaining unpaid balance due on or before July 15, 2016. The balance as of September 30 31, 2016 and December 31, 2015 was $172,748 and $518,660, respectively. The notes are currently in default.
On March 15, 2016, the Company issued a secured promissory note for $360,000 due 90 days from the date of issuance. Proceeds received were $300,000, net of Original Issuance Discount ("OID") of $60,000. The promissory note is secured by all accounts, all proceeds and all accessions for rents, profits and products. On June 10, 2016, in connection with the issuance of a secured convertible note, the outstanding balance was settled in full. During the nine months ended September 30, 2016, the Company amortized $60,000 of the OID to interest expense.
NOTE 9 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES
Iconic Holdings, LLC
On February 1, 2016
,
the Company issued to Iconic Holdings, LLC a $88,000 Convertible Promissory Note. The proceeds from the Iconic note provides was up to an aggregate of $79,200 in net proceeds after taking into consideration an Original Issue Discount ("OID") of $8,800. The maturity date is one year from the date of issuance.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The Company, at its sole discretion, has an option to repay the Iconic note within 90 days of the effective date at a rate of 110% of unpaid principal or 135% from 91-180 days of effective date. After 180 days, the note may not be prepaid without the consent of the holder.
The Note is convertible after 180 days into shares of the Company's common stock at a conversion price equal to 60% discount to the lowest closing price of the common stock for the 10 trading days immediately prior the conversion date.
The Company has identified the embedded derivatives related to the above described note. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent reporting date.
At inception, the Company determined the aggregate fair value of $96,170 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 150.09%, (3) weighted average risk-free interest rate of 0.47%, (4) expected life of 1.00 year, and (5) estimated fair value of the Company's common stock of $0.0121 per share.
The determined fair value of the debt derivatives of $96,170 was charged as a debt discount up to the net proceeds of the note with the remainder of $21,722 charged to current period operations as non-cash interest expense.
On June 2, 2016, the Iconic Holdings, LLC note was paid in full.
BICX Holding Company LLC
On June 10, 2016, the Company issued to BICX Holding Company, LLC a $2,500,000 senior secured convertible promissory note due June 10, 2019 and bearing interest at 8% per annum due annually beginning June 10, 2018.
Under the terms of the note, the note holder may, at any time, convert the unpaid principal of the note, or any portion thereof, into shares of the Company's common stock at an initial conversion price equal to 25% of the Company's total authorized common stock, determined at $0.019 per share at the date of issuance. In addition, the note contains certain anti-dilution provisions, as defined.
The Company is required to maintain a cash balance of 10% of the outstanding principal amount at all times, unrestricted and lien free.
The note holder has the right, until December 10, 2016, to purchase another convertible note from the Company in a principal amount of up to $2,500,000 for a total aggregate purchase price of $5,000,000. Based on the percentage of the maximum purchase price the note holder invests, they will receive another convertible note for a pro rata percentage the Company's total authorized common stock (up to another 26% of the Company's total authorized common stock, for a total of 51%, if the note holder invests the maximum purchase price). If the note holder does not exercise the right to pay the maximum purchase price, the note holder will pay the Company a break-up fee equal to 5% of the remaining balance of the maximum purchase price.
The note is secured by all of assets of the Company and is ranked senior to all of the Company's debt currently outstanding or hereafter, unless prohibited by law.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The Company has identified the embedded derivatives related to the above described note. These embedded derivatives included certain conversion and reset features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent reporting date.
At inception, the Company determined the aggregate fair value of $2,225,907 of embedded derivatives. The fair value of the embedded derivatives was determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 164.06%, (3) weighted average risk-free interest rate of 0.73%, (4) expected life of 3.00 years, and (5) estimated fair value of the Company's common stock of $0.0201 per share.
The determined fair value of the debt derivatives of $2,225,907 was charged as a debt discount.
During the nine months ended September 30, 2016, the Company paid off an aggregate of $211,500 of the previously issued convertible notes. At the date of payoff, the Company marked to market the fair value of the debt derivatives and determined a fair value of $262,271 and transferred to equity. 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 147.99% to 164.09%, (3) weighted average risk-free interest rate of 0.48% to 0.99%, (4) expected life of 0.67 to 1.70 years, and (5) estimated fair value of the Company's common stock of $0.017 to $0.027 per share.
At September 30, 2016, the Company marked to market the fair value of the debt derivatives and determined a fair value of $4,561,258. The Company recorded a loss from change in fair value of debt derivatives of $1,861,840 and $3,330,920 for the three and nine months ended September 30, 2016. 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 170.16%, (3) weighted average risk-free interest rate of 0.88%, (4) expected life of 2.69 years, and (5) estimated fair value of the Company's common stock of $0.039 per share.
The charge of the amortization of debt discounts and costs for the three and nine months ended September 30, 2016 was $187,017, and $412,510; and $69,905 and $83,185 for the three and nine months ended September 30, 2015, respectively, which was accounted for as interest expense.
NOTE 10 – NOTES PAYABLE-RELATED PARTY
As of September 30, 2016 and December 31, 2015, the Company received advances from Kent Emry current President of the Company, Scott Carley, and Neil Muller, former President of the Company as loans from related parties. The loans are payable on demand and without interest. In addition, the Company has issued unsecured, non-interest bearing demand notes to related parties. The balance outstanding as of September 30, 2016 and December 31, 2015 were $47,980 and $109,135, respectively. (See Note 7-Settlement Payable)
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 year ended December 31, 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 issued 950,000 (as amended) of its common stock on March 31, 2014.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
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 September 30, 2016 and December 31, 2015 was $163,610, with unamortized debt discount of $1,402 and $3,110, respectively.
NOTE 11 – WARRANT LIABILITY
The Company issued warrants in conjunction with the issuance of certain 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.
At September 30, 2016, the fair value of the 1,155,000 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 171.16%, (3) weighted average risk-free interest rate of 0.77%, (4) expected life of 1.51 years, and (5) estimated fair value of the Company's common stock of $0.039 per share.
The Company recorded a loss from change in fair value of warrant liability of debt derivatives of $15,391 and $13,352 for the three and nine months ended September 30, 2016, respectively.
At September 30, 2016, the warrant liability valued at $36,097, 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 12 – STOCKHOLDERS' DEFICIT
Effective July 5, 2016, the Company amended its articles of incorporation to increase the authorized shares of capital stock of the Company from two hundred million (200,000,000) shares of common stock, and eighty thousand (80,000) shares of preferred stock, both $.001 par value respectively, to five hundred twenty five million (525,000,000) shares common stock ($0.001 par value), and six hundred thousand (600,000) shares of preferred stock (no par value), respectively.
Preferred stock
The Company is authorized to issue 600,000 shares of preferred stock with no par value. As of September 30, 2016 and December 31, 2015, the Company had 80,000 shares of preferred stock issued and outstanding.
Common stock
The Company is authorized to issue 525,000,000 shares of common stock with par value $.001 per share. As of September 30, 2016 and December 31, 2015, the Company had 169,094,501 shares and 164,144,501 shares of common stock issued and outstanding.
In February 2016, the Company issued an aggregate of 1,250,000 shares of its common stock for services rendered valued at $25,000 based on the underlying market value of the common stock at the date of issuance.
In July 2016, the Company issued an aggregate of 3,700,000 shares of its common stock for services rendered valued at $101,090 based on the underlying market value of the common stock at the date of issuance.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
NOTE 13 – STOCK OPTIONS AND WARRANTS
Options
Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from using the Company's historical stock prices. The Company accounts for the expected life of options based on the contractual life of options for non-employees. For employees, the Company accounts for the expected life of options in accordance with the "simplified" method, which is used for "plain-vanilla" options, as defined in the accounting standards codification.
The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options.
In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company's forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the number of vested options as a percentage of total options outstanding. If the Company's actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
The Company estimated forfeitures related to option grants at a weighted average annual rate of 0% per year, as the Company does not yet have adequate historical data, for options granted during the nine months ended September 30, 2016 and 2015.
The following assumptions were used in determining the fair value of employee and vesting non-employee options during the nine months ended September 30, 2016:
|
|
September 30,
2016
|
|
Risk-free interest rate
|
|
|
1.13
|
%
|
Dividend yield
|
|
|
0
|
%
|
Stock price volatility
|
|
|
163.82
|
%
|
Expected life
|
|
5.75 years
|
|
Weighted average grant date fair value
|
|
$
|
0.019
|
|
On June 17, 2016, the Company awarded options to purchase an aggregate of 33,000,000 shares of common stock to key officers of the Company. These options vest monthly over 24 months and have a term of 10 years. The options have an exercise price of $0.0201 per share. The options had an aggregate grant date fair value of $628,283.
On June 17, 2016, the Company extended the term of previously granted options in aggregate of 13,500,000 initially expiring from November 2019 to July 2020 by five years to November 2024 to July 2025. The change in fair value of $53,858 was determined using the Black Scholes option model and charged to current to operations during the nine months ended September 30, 2016.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The following assumptions were used in determining the change in fair value of extended options during the nine months ended September 30, 2016:
|
|
September 30,
2016
|
|
Risk-free interest rate
|
|
0.083 % to 1.62
|
%
|
Dividend yield
|
|
|
0
|
%
|
Stock price volatility
|
|
|
163.82
|
%
|
Expected life
|
|
3.42 to 9.10 years
|
|
The following table summarizes the stock option activity for the nine months ended September 30, 2016:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2016
|
|
|
14,850,000
|
|
|
$
|
0.09
|
|
|
|
4.4
|
|
|
$
|
-
|
|
Grants
|
|
|
33,000,000
|
|
|
|
0.2
|
|
|
|
10.0
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2016
|
|
|
47,850,000
|
|
|
$
|
0.04
|
|
|
|
9.4
|
|
|
$
|
623,700
|
|
Exercisable at September 30, 2016
|
|
|
18,975,000
|
|
|
$
|
0.08
|
|
|
|
8.1
|
|
|
$
|
77,963
|
|
The aggregate intrinsic value in the preceding tables represents the total pretax intrinsic value, based on options with an exercise price less than the Company's stock price of $0.039 as of September 30, 2016, which would have been received by the option holders had those option holders exercised their options as of that date.
The following table presents information related to stock options at September 30, 2016:
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Options
|
|
|
In Years
|
|
|
Options
|
|
$
|
0.01-0.025
|
|
|
33,000,000
|
|
|
|
9.75
|
|
|
|
4,125,000
|
|
|
0.0251-0.05
|
|
|
3,500,000
|
|
|
|
8.85
|
|
|
|
3,500,000
|
|
|
0.051 and up
|
|
|
11,350,000
|
|
|
|
7.55
|
|
|
|
11,350,000
|
|
|
|
|
|
47,850,000
|
|
|
|
9.15
|
|
|
|
18,975,000
|
|
The stock-based compensation expense related to option grants was $78,535 and $104,713 during the three and nine months ended September 30, 2016, and $142,193 and $143,448 during the three and nine months ended September 30, 2015.
As of September 30, 2016, stock-based compensation related to options of $523,568 remains unamortized and is expected to be amortized over the weighted average remaining period of 1.67 years.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
Warrants:
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
|
|
|
|
1,475,000
|
|
|
|
2.15
|
|
|
$
|
0.25
|
|
|
|
1,475,000
|
|
|
|
2.44
|
|
|
1.00
|
|
|
|
1,155,000
|
|
|
|
1.76
|
|
|
|
1.00
|
|
|
|
1,155,000
|
|
|
|
2.01
|
|
$
|
0.58
|
|
|
|
2,630,000
|
|
|
|
2.00
|
|
|
$
|
0.58
|
|
|
|
2,630,000
|
|
|
|
2.25
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
2,630,000
|
|
|
$
|
0.58
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2016
|
|
|
2,630,000
|
|
|
$
|
0.58
|
|
NOTE 14 – RELATED PARTY TRANSACTIONS
The Company has an arrangement with Premier Aftercare Recovery Service, ("PARS"). PARS is a Company controlled by Neil Muller, a shareholder of the Company and prior officer of the Company, that provides consulting services to the Company. There is no formal agreement between the parties and the amount of remuneration is $14,583 per month. During the three and nine months ended September 30, 2016, the Company incurred $-0-, and during three and nine months ended September 30, 2015, the Company incurred $29,167 and $100,000, respectively, as consulting fees and expense reimbursements. As of September 30, 2016 and December 31, 2015, there was an unpaid balance of $64,638 and $154,638, respectively.
The Company has an arrangement with Felix Financial Enterprises ("FFE"). FFE is a Company controlled by Lourdes Felix, an officer of the Company, that provides consulting services to the Company. Until June 17, 2016, there was no formal agreement between the parties and the amount of remuneration is $14,583 per month. During the three and nine months ended September 30, 2016, the Company incurred $40,000 and $126,756, respectively, and during the three and nine months ended September 30, 2015, the Company incurred $43,750 and $114,583, respectively, as consulting fees. As of September 30, 2016 and December 31, 2015, there was an unpaid balance of $91,465 and $191,013, respectively.
On June 17, 2016, the Company entered into an executive service contract with Felix Financial Enterprises LLC to provide consulting services. The agreement is an at will agreement and provides for a base salary of $160,000 per year, 11,200,000 stock options, extended previously issued options and auto allowance.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The Company has an arrangement with Brady Granier, an officer of the Company. Until June 17, 2016 there was no formal agreement between the parties and the amount of remuneration is $14,583 per month. For the three and nine months ended September 30, 2016, the Company incurred $43,750 and $131,250 , respectively and during the three and nine months ended September 30, 2015, the Company incurred $43,750 and $114,583, respectively, as consulting fees. As of September 30, 2016 and December 31, 2015, there was an unpaid balance of $64,481 and $137,045, respectively.
On June 17, 2016, the Company entered into an executive service contract with Brady Granier as the Company's President and Chief Executive Officer. The agreement is an at will agreement and provides for a base salary of $175,000 per year, 10,600,000 stock options, extended previously issued options and auto allowance.
The Company has an arrangement with Kent Emry, an officer of the Company. There is no formal agreement between the parties and the amount of remuneration is $6,250 per month. For the three and nine months ended September 30, 2016 the Company incurred $-0- and $33,558, respectively , and during the three and nine months ended September 30, 2015, the Company incurred $6,250, as consulting fees. As of September 30, 2016 and December 31, 2015, there was an unpaid balance of $80,433 and $53,125, respectively.
On June 17, 2016, the Company entered into an executive service contract with Tom Welch as the Company's Vice President of Operations. The agreement is an at will agreement and provides for a base salary of $140,000 per year, 11,200,000 stock options, extended previously issued options and auto allowance.
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 – CONCENTRATIONS
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit.
The Company's revenues earned from sale of products and services for the three months ended September 30, 2016 included 13%, 34%, 24% and 26% (aggregate of 97%) from four customers of the Company's total revenues.
The Company's revenues earned from sale of products and services for the nine months ended September 30, 2016 included 14% and 17% (aggregate of 31%) from two customers of the Company's total revenues.
The Company's revenues earned from sale of products and services for the three months ended September 30, 2015 included 21%, 10%, 29%, 10%, 10% and 10% (aggregate of 90%) from six customers of the Company's total revenues.
The Company's revenues earned from sale of products and services for the nine months ended September 30, 2015 included 14%, 24%, 10% and 16% (aggregate of 64%) from four customers of the Company's total revenues.
Three customers accounted for 27%, 11% and 18% (aggregate of 56%) of the Company's total accounts receivable at September 30, 2016 and two customers accounted for 49% and 20% of the Company's total accounts receivable at December 31, 2015.
The Company relies on Trinity Rx as its sole supplier of its Naltrexone implant.
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
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 September 30, 2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,561,258
|
|
|
$
|
4,561,258
|
|
Warrant liability
|
|
|
|
|
|
|
|
|
|
|
36,097
|
|
|
|
36,097
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,597,355
|
|
|
$
|
4,597,355
|
|
Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of December 31, 2015:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
170,531
|
|
|
$
|
170,531
|
|
Warrant liability
|
|
|
|
|
|
|
|
|
|
|
22,746
|
|
|
|
22,746
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
193,277
|
|
|
$
|
193,277
|
|
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
The table below sets forth a summary of changes in the fair value of the Company's Level 3 financial liabilities from December 31, 2015 through September 30, 2016:
|
|
Debt Derivative Liability
|
|
|
Warrant
Liability
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
170,531
|
|
|
|
22,746
|
|
Transfers in (out):
|
|
|
|
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
2,322,077
|
|
|
|
-
|
|
Fair value of debt derivative at note extinguishment transferred to equity
|
|
|
(262,271
|
)
|
|
|
-
|
|
Mark-to-market at September 30, 2016:
|
|
|
|
|
|
|
|
|
Embedded derivative
|
|
|
2,330,921
|
|
|
|
13,351
|
|
Balance, September 30, 2016
|
|
$
|
4,561,258
|
|
|
$
|
36,097
|
|
NOTE 17 – COMMITMENTS AND CONTINGENCIES
Operating leases
On March 9, 2016, the Company entered into a lease amendment and expansion agreement, whereby the Company agreed to lease office space in Anaheim, California, commencing July 1, 2016 and expiring on June 30, 2019.
As of September 30, 2016, future minimum lease payments for office space are as follows:
Three months ended December 31, 2016
|
|
$
|
12,636
|
|
Year ended December 31, 2017
|
|
|
51,330
|
|
Year ended December 31, 2018
|
|
|
52,903
|
|
Year ended December 31, 2019
|
|
|
26,844
|
|
|
|
$
|
143,713
|
|
BIOCORRX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(unaudited)
Rent expense charged to operations, which differs from rent paid due to rent credits and to increasing amounts of base rent, is calculated by allocating total rental payments on a straight-line basis over the term of the lease.
Royalty agreement
On July 28, 2016, the Company and Therakine, Ltd. entered into a Development, Commercialization and License Agreement. Pursuant to the Agreement, Therakine granted the Company an exclusive license to treat patients suffering addiction to opioids, methamphetamines, cocaine, or alcohol. The Company is permitted to sell on a worldwide basis the products that utilize the Technology. The Agreement expires when the Company's last valid claim to Therakine's patents expires. Upon expiration of the Agreement, the licenses granted will become irrevocable and fully paid up.
The Company agreed to pay, in return for the license to the Technology, up to $2,750,000 in milestone payments and royalties ranging from 5% to 12% of net sales of products that use the Technology. The Company is also required to pay a percentage of any sublicense income it receives related to products that use the Technology. In the event Therakine enters into a license agreement with a third party for products unrelated to injectable naltrexone that use the Technology, Therakine will pay the Company a percentage of its income from these products. As of September 30, 2016, the Company has paid the initial $125,000. (See Note 5)
NOTE 18 – SUBSEQUENT EVENTS
Financing and stock issuance
On October 21, 2016, The Company issued two 8% convertible promissory notes in the aggregate principal amount of $220,000. In addition to the note transactions, by October 20, 2016, the Company issued 400,000 shares of the Company’s restricted common stock to each investor for a total of 800,000 shares as inducement shares. The inducement shares will be increased by 150,000 shares for each investor if the closing price of the Company’s common stock falls below $0.025 prior to the Company paying back the notes or the complete conversion of the notes into shares of the Company’s common stock.
The notes mature on April 21, 2017. The maturity date is extendable at the option of each Investor as long as no event of default has occurred. Under the terms of the notes, each Investors may, on or after the maturity date, convert the unpaid principal of their Note into shares of the Company's common stock. The conversion price is 60% of the lowest trade that occurs during the twenty-five (25) trading days immediately preceding the conversion date.