Livento Group, Inc. - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2016

For the transition period from ________ to ________

Commission File Number 333-192997

NuGene International, Inc.

(Exact name of registrant as specified in its charter)

Securities registered under Section 12(b) of the Act:

Securities registered under Section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and, (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein and, will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the common stock held by non-affiliates as of April 10, 2017 was $5,898,823 based on the closing price of the registrant's common stock reported by the OTCQB market on April 10, 2017. The determination of affiliate status is not necessarily a conclusive determination for other purposes. The outstanding number of shares of common stock as of April 10, 2017 was: 42,260,211

Documents incorporated by reference: None

TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties.

All statements, other than statements of historical facts, included or incorporated by reference in this Annual Report on Form 10-K regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

Our forward-looking statements in this Annual Report on Form 10-K are subject to a number of known and unknown risks and uncertainties that could cause actual results, performance, or achievements to differ materially from those described or implied in the forward-looking statements, including:

The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives requires the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. We can give no assurance that any of the assumptions relating to the forward-looking statements included in this Annual Report on Form 10-K are accurate, and we assume no obligation to update any such forward-looking statements, except as may be required under applicable securities laws.

We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included or incorporated by reference important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make.

You should read this Annual Report on Form 10-K, and the documents that have been filed as exhibits to the Annual Report on Form 10-K or any document incorporated by reference herein completely and with the understanding that our actual future results may be materially different from what we expect. It is routine for internal projections and expectations to change as the year, or each quarter in the year, progresses, and, therefore, it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this prospectus and may change prior to the end of each quarter or the year.

PART I

ORGANIZATIONAL HISTORY

We were incorporated in the State of Nevada on October 30, 2013 under the name “Bling Marketing, Inc.”  Until December 29, 2014, we were a wholesaler of jewelry, principally earrings, rings, and pendants (“BMI Business”).  We recognized a minimal amount of sales from operations prior to the three months ended September 30, 2014. 

On December 26, 2014, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with NuGene Inc., a California corporation (“NuGene”), and on December 29, 2014 (the “Closing Date”) we filed a certificate of merger in the State of California whereby our subsidiary, NG Acquisition Inc. (“Acquisition Sub”) merged with NuGene. As a result, NuGene (the surviving entity) became our wholly owned subsidiary.  The transaction contemplated under the Merger Agreement was deemed to be a reverse merger. Under reverse merger accounting, our Company (the legal acquirer) is considered to have been acquired by NuGene. The assets, liabilities, and operations of NuGene have been brought forward at their book value and no goodwill has been recognized. 

NUGENE HISTORY AND BUSINESS

NuGene was incorporated in California in December 2006 and formed and funded by our founders, Ali Kharazmi and Mohammed Kharazmi, M.D. The initial focus of NuGene was to develop and market customized skin care products. As part of that focus, NuGene sought to leverage the working relationships developed by our founders with the plastic surgery community. NuGene directed significant time and resources on developing anti-aging and scar treatment/reduction products.

In 2007, we continued to focus on age defying products utilizing peptide complexes (see further description, below) and  nano-encapsulation  for absorption into the skin (see further description, below). We introduced a limited product line under the NuGene name, and co-branded the products with an affiliated entity, Genetic Institute of Anti Aging, Inc. (“GIAA”), which is also owned by our founders. We utilized the services of a Korean based contract manufacturer to supply our products. This product line (the “GIAA Line”) was based on the use of peptides and did not utilize stem cells. We had very modest sales in 2007, with our sole customer being GIAA, a related party.

In 2008, we stopped production of the GIAA Line and sales were limited to selling remaining inventory through medical offices and through GIAA. With the GIAA Line discontinued, we spent the remainder of 2008 considering different formulations and methodologies for improved anti-aging products. In 2009 and 2010, we had limited activity and very limited sales. Our sales were mostly overseas and limited to the remaining inventory of the GIAA Line. We continued to explore how we might advance our formulations and methodologies. We expended funds on research and development, carried out mostly by scientists engaged by the Company.

In 2011, our founders decided to use adult adipose human stem cells (undifferentiated cells found throughout the body that multiply by cell division to replenish dying cells and regenerate tissues) as the foundation of the formulation for its products. During 2011, the Company developed a proprietary process to extract human adult stem cells from fat cells that the Company then used in its customized NuGene line made specifically for those client(s). Throughout 2011, we continued to provide autologous, or mature, fat-derived stem cells for use in clinical procedures, utilizing this technology. Through this process, the Company refined its ability to culture adult human stem cells to render human conditioned stem cell media at a proprietary concentration which is a primary ingredient in the NuGene line of cosmeceuticals.

In 2012, we completed our initial line of cosmeceutical products based on these adipose derived stem cells. We branded this advanced skin care line solely under the NuGene name (the “NuGene Line”). We were able to eliminate the unpleasant odor associated with stem cells by adding a fragrance with a very low incidence of allergic reaction. The packaging of this new product line bears no resemblance to the prior GIAA Line. We also manufactured the NuGene Line ourselves at a small laboratory facility that we leased from an affiliated entity owned by one of our founders. Throughout 2013, we continued to expand the product offerings of the NuGene Line. The Company focused its stem cell work in the surgical arena and orthopedic regeneration. These services were delivered to one client, which was an affiliated entity. Sales of the NuGene Line were limited as we were in an initial rollout and branding phase.

During 2014, we focused our efforts on transitioning to a cosmeceutical skincare business for mass distribution. With this transition and expanded attention to our consumer products, we sought to develop our marketing plan and distribution channels. By the end of 2014, we had wholesalers distributing products from the NuGene Line to medical offices and medical spas throughout the United States. In addition to the NuGene Line, we generated revenues from an affiliate, Advanced Surgical Partners (“ASP”) which is also owned by our former CEO and Chairman of the Board, Messrs. Ali and Mohammed Kharazmi, respectively. Revenues generated from ASP resulted from NuGene providing Plasma Rich Platelet and Stem Cell injections for orthopedic and plastic surgery procedures to ASP. We provided these products and services to ASP as we transitioned into the commercialization of our cosmeceutical product lines. We had no such product sales and provided no services to ASP subsequent to the Merger Agreement in December 2014.

The Company currently is principally engaged in marketing its NuGene Line of products. We will need to seek substantial additional funding to remain a going concern, maintain operations and to implement our business plan. Without adequate funding to support our operations for at least the next 12 months, our ability to expend funds on advertising, retain channels of distribution, retain supplier relationships, build inventory and recruit experienced sales personnel cannot be assured. Additionally, we were unsuccessful in several attempts to raise capital during 2015 and early 2016 and these failures have put our Company under significant financial strain. We continue to attempt to procure new sources of funding, whether from the issuance of debt or shares of our common stock or a combination of both. Even if we are able to obtain such additional funding, no assurance can be given that the amounts of funding we might secure will prove to be adequate or that we will be able to accomplish our goals within the timeframes projected. In addition, no assurance can be given that we will be able to obtain any additional financing on commercially reasonable terms or otherwise. If we are unable to obtain adequate funding, we may be unable to manage our existing outstanding debt, and may be required to significantly curtail or even discontinue our operations.

OVERVIEW

“Cosmeceuticals” refer to the combinations of cosmetics and pharmaceuticals that may offer medicinal or drug-like benefits. The term is more of a marketing term rather than a legal term, with the cosmetics industry having adopted the term in the late 1990’s. The U.S. Food and Drug Administration (the “FDA”) does not recognize the term. While drugs are subject to a review and approval process by the FDA, cosmetics and cosmeceuticals are not subject to the same stringent regulatory regime and scrutiny. As such, if a product has drug properties, it must be approved as a drug. However, cosmeceuticals are not subject to this review and approval process.

Cosmeceuticals offer consumers cosmetic-like treatments with active ingredients, which we believe give them pharmaceutical-like efficacy. Driven by aesthetic-consciousness, according to the May 2014 RNCOS research publication entitled, “Global Cosmeceuticals Market Outlook 2018” the global market for cosmeceutical products reached an estimated size of $35.1 billion in 2013. We believe that this market benefits from a younger generation of consumers as well as baby boomers who want to preserve their youthful looks. In our view the U.S. cosmeceutical market will continue to be favorably influenced by these groups who want beautiful and younger looking skin while aging.

Two of the fastest growing cosmeceuticals segments are the anti-aging and hair restoration markets which focus on mechanisms that influence the aging of skin and prevent/restore hair loss. Also according to the same RNCOS research, skin care garnered a material share of the cosmeceutical market in 2013 with a 60%, $21 billion worldwide market share, followed by hair care which represented a 14%, $4.75 billion market share. The global skincare cosmeceutical market is expected to reach $30.3 billion by 2018, accounting for a 62% share in the total cosmeceutical markets. In particular it is anticipated that with an aging baby boomer population and increased male grooming, skin whitening, facial care and sun-damaged products will drive the expected global demand.

The use of stem cell based media as a foundation for cosmeceutical products is designed to promote the anti-aging process. Every human being has stem cells in his or her body. These cells exist from the early stages of human development until the end of a person’s life. Throughout our lives, our body continues to produce stem cells that regenerate to produce differentiated cells that make up various aspects of the body such as skin, blood, muscles, and nerves. These are generally referred to as adult stem cells (non-embryonic). These cells are important for the purpose of medical therapies aiming to replace lost or damaged cells or tissues or to otherwise treat disorders. Our NuGene Line of products uses human adult stem cells culture media that we believe, when applied to human skin cells, may reduce the appearance of aging skin. We have not yet commenced widespread marketing efforts of the NuGene Line, however we are in the process of developing relationships with distributors to provide access to national and international channels of distribution. 

STRATEGY

In our view, anti-aging products represent (and will continue to represent) a significant portion of the facial skincare market. In key markets, we believe that the facial skincare market is positioned for significant growth with limited downside risks from the overall condition of the economy. In order to make claims that products can diminish the signs of aging, marketers are constantly looking for new combinations of specialty ingredients. The category of skincare products based on biotechnology such as human stem cell is in our view just beginning to be developed, and therefore we expect that it has significant growth potential. Our goal is to leverage our knowledge in human adult stem cell technology to develop and commercialize advanced anti-aging skincare and hair growth products for the retail and professional channels. We intend to develop, manufacture, and market cosmetic skin care and hair products to address this significant market opportunity.

We plan to continue to sell our NuGene Line of products domestically and internationally through professional channels, including dermatologists, plastic surgeons, medical offices, and day and resort spas. We also expect to directly market our product through television sales-dedicated channels. We plan to promote brand awareness through advertising, our own sales personnel, other marketing and public relations. We will also partially rely upon the name recognition of Kathy Ireland secured under the License Agreement discussed below. We propose to further expand our sales efforts through our branded website (www.nugene.com) and additional online commerce channels.

In addition to our product enhancement and marketing activities, our success will also depend on our ability to develop and protect our proprietary technology. We intend to rely on a combination of patent, trade secret and know-how, copyright and trademark laws, as well as confidentiality agreements, licensing agreements and other agreements, to establish and protect our proprietary rights. Our success will also depend upon our ability to avoid infringing upon the proprietary rights of others.

OUR PRODUCTS

All of our products listed below have been formulated, fully developed and are currently being marketed. We have formulated and are testing other products which we expect to introduce (financial resources permitting) once we complete product testing and preparation of marketing materials. None of our products are licensed from third parties.  All of products are either protected by patents for which we have applied, or derived from trade secrets and proprietary formulas.

NuGene Skincare Products

Hair care Products 

Wound Care-Wound Healing; Biopharma Products

In 2014, we initiated research and formulation for a new topical burn cream for treatment of burns that we expect may reduce infection and could improve healing time. Burns are the fourth most common type of trauma worldwide according to RNCOS research. Despite recent advances in wound management, infection continues to be a significant problem in treating burns. This has resulted in the routine use of prophylactic topical antimicrobial agents. The most common topical antimicrobial agent used is silver sulfadiazine cream. However, the side effects of delayed wound healing have remained a challenge to overcome.

Tissue healing research has demonstrated adipose-derived stem cell culture conditioned media exhibit human dermal fibroblast proliferation and enhanced secretion of type I, III collagen and fibronectin. These properties are well suited for dermal wound healing. In order to develop and bring this product to market, we intend to work with a contract manufacturer to combine the product with our stem cell media technology. The preclinical FDA work we will need to have completed consists of in vitro and in vivo efficacy studies, experimental toxicology testing, formulation study, storage condition, stability testing, and ensuring Good Manufacturing Practices are all followed in the manufacturing process. This topical product will require FDA approval and we can give no assurance that we will obtain that approval.

STRATEGIC RELATIONSHIPS AND LICENSING ARRANGEMENTS

kiWW License Agreement

In November 2014, we entered into a License Agreement with kathy ireland Worldwide^® ("kiWW^®") whereby we licensed the right to utilize the trademarks and rights to the name, likeness and visual representations of Kathy Ireland in connection with our cosmeceutical line of products containing adult human adipose stem cell derived or containing biologically active or biologically derived ingredients. The initial term of the license is for eight years and it may be renewed for up to an additional four years.

In accordance with the License Agreement, we are required to submit a Business Plan to kiWW^® within ninety days of the effective date of the License Agreement. We have submitted our Business Plan to the Licensor within the required time frame and received the necessary approvals. The License Agreement defines the Licensed Products as those NuGene products containing stem cell derived or containing biologically active or biologically derived ingredients including: NuGene Face Wash, NuGene Universal Cream, NuGene Universal Serum, NuGene Light and Bright, NuGene Eye Serum, NuGene Anti-Hair Loss Serum, NuGene Regenerative Shampoo & Conditioner, and Advanced Infusion Serums as well as the following products which have not yet been commercially launched and/or developed: NuGene FaceMask, NuGene Melasma Serum, NuGene Acne Serum, NuGene Revitalizing Night Cream, NuGene Toner, NuGene Body Lotion, NuGene Specialty Soap, NuGene Neck and Décolleté Lotion, and other age defying products that are stem cell derived or which contain biologically active or biologically derived ingredients. On March 5, 2015, we announced the launch of the NuGene kathy ireland ^® brand. The campaign includes a re-branded internet presence and new videos featuring Ms. Ireland. We have initiated the launch of a larger multi-media campaign to promote the product line.

NuGene is obligated to utilize commercially reasonable efforts to meet the following minimum totals of net sales of Licensed Products for the specified periods:

A "Contract Year" corresponds to a calendar year ending December 31 and commences with the year 2015.

The Forecasted Minimum Net Sales are not binding. Rather, they are estimates and establish a target and a benchmark for the Minimum Royalty discussed below. Should we fail to meet the Forecasted Minimum Net Sales in any given Contract Year, the License Agreement remains in full force and effect so long as we have made commercially reasonable efforts to meet the Forecasted Minimum Net Sales for the Contract Year. However, we are still obligated to pay the Minimum Royalty for that Contract Year.

For each of these Contract Years we are obligated to pay a minimum royalty as follows:

Once the minimum royalties, as noted above, are paid, we pay royalties in the amount of 5% of net sales of products under the License Agreement, and an additional royalty payment in the amount of 1% of net sales of products under the License Agreement sold to purchasers introduced to NuGene by kiWW.

Additionally, we are obligated to pay an annual Brand Participation fee to kiWW^® which provides for general advertising, goodwill and promotion of the overall kathy ireland brand. NuGene paid kiWW $350,000 effective upon execution of the License. This onetime fee includes a "Brand Participation" fee for Contract Year 1. Brand Participation fees for Contract Years 2 through 8 are $50,000 annually with an additional 1% of the total gross sales of Licensed Products of the prior year beginning in Contract Year 4.

This description of the License Agreement is a summary and does not purport to describe all material conditions, obligations and payments that are the responsibility of NuGene to the Licensor. The description provided of the License Agreement in this Annual Report is qualified in its entirety by reference to the License Agreement attached as an Exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on January 6, 2015, and that agreement is incorporated herein by this reference as if fully set forth herein Report.

The Company and kiWW have recently been in discussions to address and resolve issues and problems under the License Agreement, which includes the Company’s failure to timely tender certain payments under the License Agreement. In order to settle all disputes under the License Agreement and to confirm their commitment to each other under the License Agreement, on 03 February 2017 the Company finalized and executed a Confirmation and Continuation Agreement (the “Confirmation Agreement”) with kiWW. Pursuant to the Confirmation Agreement, the Company is obligated to provide the following consideration: (i) Pay the sum of $50,000 to settle a lawsuit in which the Company, kiWW, and other parties are named as defendants (the Company previously paid the $50,000 and the litigation has been dismissed); (ii) Issue to kiWW warrants in the form of a Common Stock Purchase Warrant to acquire 3,000,000 shares of the Company’s common stock (the warrant expires five years from the date of issuance and is exercisable for $0.01 per share, with a cash-less exercise option); (iii) Issue to kiWW 500,000 restricted shares of the Company’s common stock, which will be subject to the same lock-up agreement placed on executives of the Company pursuant to the Company’s proposed public offering under this Registration Statement; and, (iv) Upon the earlier of 30 June 2017, or the closing of the Company’s proposed public offering under this Registration Statement, the Company shall pay to kiWW $50,000. Pursuant to the Confirmation Agreement, kiWW is obligated as follows: (x) kiWW agrees that the Company has performed, paid, and otherwise satisfied all of its obligations under the License Agreement for calendar year 2016; (ii) kiWW agrees that as of the end of calendar year 2016, the Company was not in breach of the License Agreement in any respect; and, (iii) kiWW ratifies and confirms the License Agreement, and that it shall continue in full force and effect.

Advisory Board

In an effort to improve our product line and retain the latest and most forward looking state of the art services, the Company has assembled an Advisory Board consisting of Board Certified Dermatologists and Plastic Surgeons consisting of medical professionals whom the Company believes are leaders in their respective fields. We anticipate that our Advisory Board members, among other things, will provide us with strategic and business development ideas, insight into major trends in the highly competitive cosmeceutical marketplace and input regarding their specific expertise.

COMPETITION 

NuGene experiences and will experience intense competition from companies developing cosmeceuticals with stem cell derived active ingredients as well other ingredients. Our pharmaceutical division competes or will compete with companies developing stem cell based pharmaceuticals. Our cosmeceutical line of products also competes with other companies that offer a plant derived stem cell skin care line or stem-cell derived extracts. Many of these companies have substantially greater financial, technological, research and development, marketing and personnel resources.

In order to successfully compete with larger and better funded brands, the Company employs a strategy of developing products that are either proprietary or have some unique characteristics. All of our products combine in-house advancements, proprietary, and patent pending technologies and formulations. We believe that our use of well accepted, adult human stem cell derived conditioned media obtained through adipose derived stem cells gives us a competitive advantage against competitors seeking to use controversial human stem cells derived from bone marrow and other sources. Our patent pending adipose derived stem cell culture process also provides us with a low cost, high yield output for production.

Adipose derived stem cells are also called mesenchymal, or in simpler terms, “adult stem cells”. Adult stem cells are limited to categorization by their tissue of origin. Stem cells which are present in fat are called adipose stem cells. This is entirely different from embryonic stem cells, which are found in embryos and subject to significant ethical issues. The foremost mechanism by which adult stem cells participate in repair of the human body is related to the secretion of trophic factors. They provide a microenvironment with the production of a wide range of growth factors, cytokines, and chemokines, all of which are broadly defined as the stem cell secretomes or biomolecules. The secretomes are well preserved in their biological conformation and effectiveness in the fat tissue or when cultured in a tissue culture plate.

NuGene uses adipose stem cells. These stem cells are cultivated in a plastic flask fed with a liquid solution mix composed of amino acids and other nutrients. This promotes the cells to attach to the flask, thrive, divide, and grow in an incubator which mimics the human body environment. This is process is called stem cell culture. In the process of dividing and growing, these stem cells secrete a vast array of secretomes or biomolecules which are functionally and structurally similar to the ones produced in their host tissue (fat). This solution, with secreted biomolecules, is called stem cell derived condition media. Since the source of the cells is fat, which is mesenchymal/adult in nature, this media is also called as adult stem cell derived conditioned media. This conditioned media is a pure solution of secretomes and does not contain any dead or live stem cells. This conditioned media is then processed and used in NuGene’s proprietary formulations, providing a competitive advantage to NuGene.

There are many large, integrated, and established pharmaceutical, specialty chemical, personal care, and health care companies that have greater capacity than us to develop and to commercialize types of products which would be competitive to ours. The Company believes that manufacturing, regulatory, distribution and marketing expertise will be increasingly important competitive factors in favor of the Company. In this regard, the Company believes that its management and contractors it has engaged provide it with a competitive advantage.

Our marketing strategy seeks to employ a dual approach of offering both a direct to consumer line of products and a professional line of product. Our consumer brand has the competitive advantage of using the Kathy Ireland name and brand. We will also employ the most efficient media buying and direct to consumer techniques to create awareness in the most cost efficient manner possible. Our professional line of products will benefit from Key Opinion Leader studies; clinical studies; and, the engagement of sales network professionals with a proven history of success in our market segment.

While we have experienced slow growth in the sales of our products, we believe that is a direct result of our lack of available cash. The proceeds we seek to obtain through the public offering under this Registration Statement should provide us with the cash resources to effectively market our products. We believe that we will be able to effectively compete on the basis of product quality and reliability, cost of production, technical capability, product innovation, and customer service. We believe that we will further improve our competitive position by utilizing contract manufacturers to further lower our overhead and cost of production.

GOVERNMENTAL REGULATION 

U.S. Government Regulation 

The health care industry is highly regulated in the United States. The federal government, through various departments and agencies, state and local governments, and private third-party accreditation organizations regulate and monitor the health care industry, associated products, and operations. The following is a general overview of the laws and regulations pertaining to our business. 

FDA Regulation of Stem Cell Treatment and Products 

The FDA regulates the manufacture of human stem cell treatments and associated products under the authority of the Public Health Safety Act (“PHSA”) and the Federal Food, Drug, and Cosmetic Act (“FDCA”). Stem cell derived products can be regulated under FDA’s Human Cells, Tissues, and Cellular and Tissue-Based Products Regulations (“HCT/Ps”), or may also be subject to FDA’s drug, biological product, or medical device regulations.

Cosmetic and Skin Care Regulation 

Depending upon product claims and formulation, skin care products may be regulated as cosmetics, drugs, devices, or combination cosmetics and drugs. We currently only market cosmetic skin care products and are evaluating entry into the pharmaceutical market. The FDA has authority to regulate cosmetics marketed in the United States under the FDCA and the Fair Packaging and Labeling Act (“FPLA”) and implementing regulations. The Federal Trade Commission (the “FTC”) regulates the advertising of cosmetics under the FTCA. 

The FDCA prohibits the marketing of adulterated and misbranded cosmetics. Cosmetic ingredients must also comply with the FDA’s ingredient, quality, and labeling requirements and the FTC’s requirements pertaining to truthful and non-misleading advertising. Cosmetic products and ingredients, with the exception of color additives, are not required to have FDA premarket approval. Manufacturers of cosmetics are also not required to register their establishments, file data on ingredients, or report cosmetic-related injuries to the FDA. 

We are required to substantiate the safety and product claims of our cosmetic products and ingredients before marketing. The FDA or FTC may disagree with our characterization of one or more of the skin care products as a cosmetic or the product claims. This could result in a variety of enforcement actions which could require the reformulation or relabeling of our products, the submission of information in support of the product claims or the safety and effectiveness of our products, or more punitive action, all of which could have a material adverse effect on our business. If the FDA determines we have failed to comply with applicable requirements under the FDCA or FPLA, it can impose a variety of enforcement actions from public warning letters, injunctions, consent decrees, and civil penalties to seizure of our products, total or partial shutdown of our production, and criminal prosecutions. If any of these events were to occur, it could materially adversely affect us. If the FTC determines we have failed to substantiate our claims, it can pursue a variety of actions including disgorgement of profits, injunction from further violative conduct, and consent decrees.  

Some types of skin-care products are regulated as both cosmetics and drugs under the FDCA. Examples of drug-cosmetic combination products are facial moisturizers that contain sunscreen and skin protectant hand lotions. Products that are both cosmetics and drugs because of ingredients or intended use must satisfy the regulatory requirements for both cosmetics and drugs. The drug requirements include either FDA premarket approval under an NDA or an abbreviated new drug application (“ANDA”), or, more typically, implicit approval through conformance with the applicable FDA final regulation (also known as an over-the-counter drug monograph) that specifies the conditions that must be met for the drug to be generally recognized as safe and effective.  

At present, we do not anticipate that any of the products we market will be regulated as a combination cosmetic and drug or solely as a drug or device. However, the FDA may disagree with such a determination which could result in a variety of enforcement actions and significant additional expenditure to comply with regulations which the FDA may deem applicable to such products. We are in the process of researching new products that may be classified as combination cosmetics and drugs which would require FDA approval. See “Risk Factors” beginning on page 13 of this Annual Report on Form 10-K.

Domestic State and Local Government Regulation 

Some states and local governments in the United States regulate the labeling, operation, sale, and distribution of our skin care products. To the extent additional state or local laws apply, we intend to comply with them.  

Foreign Government Regulation 

In general, we will need to comply with the government regulations of each individual country in which our products are to be distributed and sold. These regulations vary in complexity and can be as stringent, and on occasion even more stringent, than FDA regulations in the United States. The level of complexity and stringency is not always precisely understood today for each country, creating greater uncertainty for the international regulatory process. Furthermore, government regulations can change with little to no notice and may result in increased regulation of our product(s), resulting in a greater regulatory burden for us. We have not yet thoroughly explored the applicable laws and regulations that we will need to comply with in foreign jurisdictions. As a result, it is possible that we may not be permitted to sell our products in foreign markets or expand our business into one or more foreign jurisdictions.

THE SCIENCE BEHIND OUR PRODUCTS

Human Stem Cells

Cells are the basic living units that make up humans, animals, plants and other organisms. Stem cells have two important characteristics that distinguish them from other types of cells. First, they can renew themselves for long periods of time. Second, they are unspecialized and under certain conditions can be induced to become cells with special functions such as metabolically active cells of the liver or transparent and protective cells of the eye. Until recently, scientists have worked with two major kinds of stem cells, embryonic stem cells and adult stem cells each category of which has different properties and characteristics.

Adipose Stem Cell-Derived Media

We use human fat tissue (adipose tissue) to derive adult human stem cells. Adipose stem cell derived growth factors have been shown to contribute to exerting diverse regenerative effects on skin cells. These growth factors help in stimulating collagen synthesis and migration of dermal fibroblasts (a major contributor in skin repair, regeneration, and revitalization). Using a proprietary technique for the isolation of these cytokines from adipose derived stem cells, NuGene has been able to incorporate these proteins into its cosmeceutical line of products.

Peptides

Peptides are molecular links of amino acids that help your skin to produce the anti-wrinkle protein known as collagen. Peptides are closely related to proteins. Peptides and proteins are present in every living cell and are responsible for many biochemical activities including acting in enzymes, hormones, antibiotics, etc. Peptides are listed in many better skin care products, and they perform important functions in the skin. As people age, they lose collagen which results in sagging and wrinkled skin. Since collagen is a protein composed of long chains of amino acids linked together by peptide bonds, peptides play an important role in replacing lost collagen. As collagen breaks down, the protein chains break up into smaller chains of peptides. The resulting peptide chains send signals to the body to produce more collagen. Since peptides are small, they can penetrate the skin’s protective barriers. Applying peptides directly to the skin through good skin care products tricks the skin into thinking that it has lost collagen recently and needs to produce more. Research has identified a number of peptides which mimic the function of the naturally produced growth factors in the human body. The advantage of using peptides over growth factors in skin care formula is their stability, but they are not complete in structural integrity as expressed by proteins in vivo.

Production of Growth Factors

NuGene has been able to produce a sufficient quantity of biologically active growth factors derived from adipose stem cells to meet its current product requirements. With patent-pending technology, the process has achieved a high yield rate and superior quality of biomolecules. Our purification technique enables NuGene to have a high concentration of growth factors and cytokines in our skincare line.

Nano-encapsulation

One of the material challenges of the skincare science is the delivery of the active ingredients to the skin. At NuGene, we met this challenge by using proprietary nano-encapsulation technology. This technology allowed us to effectively deliver adipose stem cell derived cytokines and growth factors through embedding them within a nanosome or capsule. This added step enhances the penetration of these biomolecules into the skin cells. Additionally, it prevents these growth factors/cytokines from becoming degraded by proteases present in the mixture. We believe this enhances the effectiveness of our products.   

NuGene’s Anti-Aging Mechanism

Based upon research on adipose derived stem cell cultured media, we have discovered the following potential benefits:

INTELLECTUAL PROPERTY

We have invested, and continue to invest, significantly in intellectual properties, which consist of patents, trademarks, proprietary formulas and trade secrets, and URLs. We have a program to file applications for and obtain patents in the United States and in selected foreign countries where we believe filing for such protection is appropriate. There are certain processes and applications which we wish to keep confidential; we do not seek patent protection for such items. We currently have four U.S. provisional patent applications, and four pending international applications based on the same four U.S. provisional patents. The principal claims made in these applications cover wound scar and burn treatment creams, the methods of preparing stem cells and the formulations for stem cell media containing products. There are currently no patents issued in favor of the Company.

The following summarizes our pending applications:

The device of the invention includes dressings having a cathode and an anode, each forming an electrical half-cell, and a conductive treatment gel containing HADSCC media. The treatment gel may also contain human adipose-derived stem cells. The method includes providing a treatment gel and a dressing, applying the treatment gel to the skin or to the dressing, and applying the dressing to the skin. Other embodiments include bandages combining sterile dressings with a composition including a conditioned medium. The conditioned medium may be nanoencapsulated or may be dispersed in an emollient base and applied to the sterile dressing.

EMPLOYEES

As of December 31, 2016, we had 10 employees, all of which were full time employees. None of our employees is represented by a labor union, and we consider our relationship with our employees to be good. It is possible that the Company will outsource many functions so we cannot estimate whether there will be a significant increase in the number of employees. It is likely, however, that we will need to increase the number of employees in the general and administrative and business development areas over the next two years, as well as for our research and development activities.

DESCRIPTION OF PROPERTY

Our corporate offices are currently located at 17912 Cowan, Suite A, Irvine, California, 92614. We sublease our sole corporate facilities from ASP, an affiliate of our Company, for approximately $17,109 per month (including common area maintenance), consistent with the amount that is charged to ASP by the property owner. On February 5, 2015, ASP entered into a new five-year lease for the property with the owner beginning July 1, 2015 and subsequently amended to begin June 1, 2015. The lease was subsequently amended to increase the square footage under lease beginning in January 2016. The lease includes annual increases in the monthly lease payments of approximately 3% each year.

LEGAL PROCEEDINGS

On July 10, 2015, Stemage Skin Care, LLC (the “Plaintiff”) filed a complaint in the U.S. District Court for the Central District of California entitled “Stemage Skin Care LLC, a North Carolina limited liability company vs. NuGene International, Inc. et al.” (Civil Action No.8:15-cv-01078-AG-JCG). The complaint also names as defendants NuGene, Inc., Ali Kharazmi, Saeed Kharazmi, Kathy Ireland Worldwide, Stephen Roseberry, Steve Rosenblum and Erik Sterling. The complaint contains allegations of damage asserted to be grounded on: (i) copyright infringement; (ii) interference with contract; (iii) intentional interference with prospective economic advantage; (iv) negligent interference with prospective economic advantage; and (v) conspiracy. The complaint allegedly arises out of an August 20, 2012 agreement among the Plaintiff and kathy ireland inc. (“KI”) pursuant to which KI made Kathy Ireland available to perform “Ambassador Services” as defined within that agreement. That agreement effectively terminated in October 2014 and is the subject of a separate arbitration with KI and Kathy Ireland before the American Arbitration Association. On or around August 4, 2016 the Company settled the litigation. All parties to this litigation executed a settlement agreement resolving and waiving all claims, with a full dismissal, with prejudice, of the action. Pursuant to the settlement, in December 2016 the Company paid the total sum of $50,000 to the Plaintiff.

On July 31, 2015 Star Health & Beauty, LLC (“SH&B”) filed a complaint in the U.S. District Court for the Northern District of Georgia entitled “Star Health & Beauty, LLC vs. NuGene, Inc. and NuGene International, Inc. Defendants” (Case No. 1:15-cv-02634-CAP). The complaint alleges that our use of the NuGene name and trademark infringes on SH&B’s NUGEN name. SH&B seeks cancelation of our NuGene trademark, as well as unspecified monetary damages. In February, 2017 the parties agreed upon terms to settle the matter, subject to execution of a definitive written settlement agreement to include the following terms: (i) $60,000 to be paid by the Company to SH&B, in installments of $5,000 upon execution of a Settlement Agreement, $25,000 90-days thereafter, and $30,000 60-days thereafter; (ii) issuance of 125,000 shares of the Company’s common stock to SH&B upon execution of a Settlement Agreement; (iii) each side continues to use their names as the wish; (iv) full mutual releases of known and unknown claims; (v) each bears its respective cost of litigation; and, (vi) dismissal with prejudice of the action. The written Settlement Agreement is being finalized and should be executed within the next 30 days.

In May 2016, we were informed that the California Labor Commissioner scheduled a hearing in connection with two individuals that claimed our Company did not fulfill its obligations to pay a final paycheck. The two individuals are seeking back pay and penalties totaling approximately $31,000. A trial/hearing was scheduled for March 14, 2017 to decide each matter. In February 2017 we settled both matters. In exchange for a complete release from the first claimant, we will pay the first claimant a total of $9,000 in accordance with the following schedule: $4,500 on or before March 10, 2017; four additional payments of $1,000 each on the 15^th day of April, May, June, and July 2017; and, a final payment of $500 on or before the 15^th day of August. In exchange for a complete release from the second claimant, we will pay the second claimant a total of $4,000 on or before March 10, 2017.

On May 6, 2016, we were presented with a demand for payment of compensation for a former executive employee (the “Former Executive”) pursuant to his employment contract with our Company. The amount of the compensation claimed by the Former Executive totaled $49,998. The Company’s management is evaluating the merits of this matter. We believe that no amounts are due to the Former Executive and we have not accrued a liability as of December 31, 2016.

In December, 2016, we were informed by the four holders of our promissory notes totaling $480,000 (the “Holders”) that they would not honor their obligation to provide an additional $600,000 in similar financing. The Holders allege that certain breaches of the notes by the Company relieve them of their obligation. The Company firmly believes there is no merit whatsoever to the claims of the Holders. Rather than pursue litigation against the Holders, the Company has elected to pursue other sources of financing. However, should the Holders seek any acceleration or damages of any kind under the Notes, NuGene is committed to aggressively protect its rights, including though not limited to seeking damages from the Holders.

On February 24, 2017, we were informed that the Company will need to respond to a lawsuit filed by Habib American Bank (“Habib”) in the Superior Court of California, County of Orange. The action names Advanced Surgical Partners, LLC (“ASP”) as a defendant, as well as a number of additional named parties including though not limited to NuGene, Inc.; our Chairman of the Board, Mohammad Ali Kharazmi (“Ali”); and, our Chief Financial Officer and Board Member, Mohammad Saeed Kharazmi (“Saeed”). The action is based on a purported default under a commercial loan from Habib to ASP on or around January, 2008 (the “Loan”). According to the complaint, ASP currently owes Habib approximately $2.7 million under the Loan and that ASP has defaulted on the Loan. The Loan was arranged by Ali on behalf of ASP. Ali and Saeed are owners of, and control, ASP; they are also guarantors on the Loan. Additional family members of Ali and Saeed are alleged to be additional guarantors on the Loan, as are additional business entities owned by, or affiliated with, Ali and Saeed. The Loan is secured, in part, by the pledge of real estate owned by family members of Ali and Saeed (the “Pledged Real Estate”). A Deed of Trust was recorded by Habib against the Pledged Real Estate, and there appears to be more than sufficient equity in the Pledged Real Estate to pay off the Loan. NuGene is also alleged to be an additional guarantor on the Loan. A thorough search of NuGene records and files has failed to yield any documents or indication that NuGene was in fact a guarantor on the Loan. The Company has no documentation of the Loan or its purported guaranty, and there was no business relationship between ASP and NuGene which would suggest that a guaranty would have been provided. There was no prior knowledge by the Company of the existence of the Loan or the purported guaranty. Ali has steadfastly rejected the existence of the guaranty and has affirmatively assured the Company that he never authorized NuGene to guaranty the Loan, and that he never signed any documents on behalf of NuGene regarding the Loan. At this time, the Company intends to aggressively defend its rights and reject any status as a guarantor of the Loan. We believe that the Company’s risk and liability exposure under the Loan is minimal based upon (i) good faith and evidentiary defenses; and, (ii) the fact that there is more than adequate value/equity in the Pledged Real Estate to pay off the loan.

On April 4, 2017, Habib agreed to dismiss the Company from the litigation brought by Habib. A formal Settlement Agreement and Release has been executed by and between the Company and Habib.

Other than that described above, we are not currently a party to any other material legal proceedings. We are not aware of any pending or threatened litigation against us that in our view would have a material adverse effect on our business, financial condition, liquidity, or operating results. However, legal claims are inherently uncertain, and we cannot assure you that we will not be adversely affected in the future by legal proceedings.

WEBSITE

We currently maintain our corporate website at www.nugene.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and other related information will be available, free of charge, on our website after we electronically file those documents with, or otherwise furnish them to, the SEC. Our Internet website and the information contained therein, or connected thereto, are not and are not intended to be incorporated into this Annual Report on Form 10-K or any other SEC filing.

An investment in our common stock involves a very high degree of risk.  You should carefully consider the risks described below, together with all of the other information included in this Annual Report on Form 10-K, before making an investment decision.    Our future operating results may vary substantially from anticipated results due to a number of risks and uncertainties, many of which are beyond our control. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. The following discussion highlights some of these risks and uncertainties and the possible impact of these risks on future results of operations. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the market value of our stock could decline substantially and you could lose part or all of your investment.

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since our inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.

Since the inception of NuGene, Inc. (our wholly owned subsidiary) in December 2006, we have incurred significant operating losses. Our net losses were approximately $5.2 million and $11.8 million for the fiscal years ended December 31, 2015 and 2016, respectively. As of December 31, 2016, we had a deficit accumulated since inception of $18.4 million. We have invested a significant portion of our efforts and financial resources in the development of our NuGene line of products. More recently, we have begun to also invest our efforts and financial resources in the early development of our wound care/wound healing products.

We expect to continue to incur significant operating losses for at least the next several years. To become and remain profitable we must succeed in commercializing and marketing our NuGene line of products. We may never succeed in these activities and may never generate revenues that are significant or large enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable could depress the market price of our common stock and could impair our ability to raise capital, expand our business, or continue our operations. A decline in the market price of our common stock could also cause you to lose all or a part of your investment.

Our financial statements have been prepared assuming that our Company will continue as a going concern and we will need to obtain additional funding if we are to continue operations.

The factors described elsewhere herein raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. To date we have incurred significant cash losses that have materially impaired our liquidity and working capital. We have been under severe liquidity restraints such that our prior CEO was required to personally guarantee borrowings made by our Company from our bank. This has resulted in the substantial increase in balances outstanding and owing to our suppliers that has put our relationships with them in jeopardy. We continue to attempt to procure the needed funding to maintain our operations. Should we be successful, we will need to quickly reverse the historical trend of our operations through generating significantly higher levels of revenue (at or about historical margins) and reducing our operating expenses. If we cannot generate the revenues and gross margin at levels required to achieve profitability or obtain sufficient additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations. Should that happen, an investor could suffer the loss of a significant portion or all of his investment in our Company.

We have a limited operating history and investors will have no ability to gauge market acceptance for our products or the ability of management to execute on our business plan.

We are an early-stage company with a limited operating history and limited revenues derived from our operations. Our operations to date have been primarily focused on our formation, the hiring of our management team, acquiring, licensing, and developing our technology and products, building and expanding our sales force, marketing department and investor relations and commencing the commercial launch of our products.

It is difficult to predict future performance and our ability to maintain operations is dependent upon a number of factors over which we have limited control. As a result, it is difficult to predict our quarterly financial results and they are likely to fluctuate significantly. We are a relatively new company with a limited operating history and our sales prospects are uncertain. We also have relatively limited experience selling our products. Accordingly, we cannot predict with any certainty the timing or level of sales of our products in the future. If our quarterly sales or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. In addition to the other factors discussed under these “Risk Factors,” specific factors that may cause fluctuations in our operating results include:

Because we have a limited operating history, we are subject to all of the risks and uncertainties of a new business.

We initiated the rollout of the first generation of NuGene products in 2013. We are subject to all of the risks and uncertainties normally associated with an early stage business, including potential manufacturing issues, difficulties establishing our marketing and distribution operations, lack of name recognition, lack of adequate capital, difficulties hiring and retaining qualified employees and difficulties in complying with all applicable federal, state, and local regulatory and administrative requirements. As an early stage company, we expect to incur operating losses until (if ever) we successfully release and market a line of products that will generate enough revenues and gross margin to become profitable or thereafter maintain profitability. There is no assurance that we will be able to validate and market products that will generate enough revenues for us to become profitable or thereafter maintain profitability. As a result, we cannot predict when, if ever, it might achieve profitability and cannot be certain that it will be able to sustain profitability, if achieved. Our lack of an operating history may make it difficult for you to evaluate our business prospects in connection with an investment in our securities. 

We need to raise additional capital to continue our operations, which may not be available on commercially reasonable terms, or at all, and which materially may dilute your investment.

To attain profitability, we must increase our revenues and manage our product, operating and administrative expenses, as to which each of which we can give no assurance. Because we have been to date unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we must raise additional funds to continue our operations and to manage our current short-term debt load. Further, our recent efforts to raise additional capital have been unsuccessful. We do not have any arrangements in place for additional funds and no assurance can be given that required funds will become available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. Our current cash and cash equivalents are insufficient to fund our operations through the end of our fiscal year in 2016. If we are unsuccessful in obtaining additional funds on commercially reasonable terms or at all, and thereafter in achieving profitability, we may be required to curtail significantly or cease our operations, which could result in the loss of all of your investment in our stock.  

Should we be able to obtain additional financing and thereafter be successful in growing our revenues according to our operating plans, we may not be able to manage our growth effectively, which could adversely affect our operations and financial performance. 

The ability to manage and operate our business as we execute our growth strategy will require further substantial capital and effective planning. Additionally, we have not been able to maintain adequate levels of capital to fund existing operations. Significant rapid growth on top of our current operations could greatly strain our internal resources, leading to a much lower quality of customer service, reporting problems and delays in meeting important deadlines resulting in substantial loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure, liquidity, and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower, no or negative growth, critical shortages of cash and a failure to achieve or sustain profitability.

Significant differences between actual and estimated demand for our products could adversely affect us.

If we overestimate demand for our products, we may be required to write off inventories and increase our reserves for product returns or liabilities to customers in future periods. If we underestimate demand, we may not have sufficient inventory of products to ship to our customers. Our cosmeceutical products have expiration dates that generally range from 24 to 36 months from the date of manufacture. We need to exercise judgment in estimating these reserves. The actual amounts could be materially different from our estimates, and differences will need to be accounted for in the period in which they become known. If we determine that the actual amounts exceed our reserve amounts, we will record a charge to earnings to approximate the difference. A material reduction in earnings resulting from a charge could have a material adverse effect on our net income, results of operations and financial condition.

If we raise additional funds through collaboration, licensing, or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our current products, potential products, or proprietary technologies, or grant licenses on terms that are not favorable to us.

If adequate funds are not available to us, our ability to achieve profitability or to respond to competitive pressures would be significantly limited, and we may be required to delay, significantly curtail or eliminate the sales of one or more of our current products and/or the development of one or more of our potential products.

Risks Related to the Development and Commercialization of Our Product Candidates

If our product candidates are found to cause undesirable side effects we may need to delay or abandon our development and commercialization efforts.

Any undesirable side effects that might be caused by our product candidates could interrupt, delay or halt the commercialization and marketing of the products. In addition, if we start selling any of our product candidates and we or others later identify undesirable side effects caused by the product. This could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from its sale.

The commercial success of any product candidates that we may develop will depend upon the degree of market acceptance by physicians, patients, and consumers.

Any products that we bring to the market may not gain market acceptance by physicians, patients, and consumers. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. Physicians will not recommend our product candidates until we can demonstrate the safety and efficacy of our product candidates as compared to other treatments. Even if the clinical safety and efficacy of our product candidates are established, physicians may elect not to recommend these products, and consumers may choose not to purchase our products. The degree of market acceptance of our product candidates will depend on a number of factors, including:

We face substantial competition in the development of our product candidates which may result in others developing or commercializing products before or more successfully than we do.

We are engaged in segments of the cosmeceuticals industry that are characterized by intense competition and rapidly evolving technology. Many large companies, academic institutions, and other public and private research organizations are pursuing the development of competing products. We face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become available. Many of our potential competitors have significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture, and commercialize product candidates.

Risks Related to Our Intellectual Property

If we are unable to protect our intellectual property rights, our competitors may develop and market similar or identical products that may reduce demand for our products, and we may be prevented from establishing collaborative relationships on favorable terms.

The following factors are important to our success:

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. There are currently no patents issued in favor of the Company.

Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If patents do not issue with claims encompassing our products, our competitors may develop and market similar or identical products that compete with ours. Even if such patents are issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Failure to obtain effective patent protection for our technology and products may reduce demand for our products and prevent us from establishing collaborative relationships on favorable terms.

We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as potential corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information or our competitors may learn of the information in some other way. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

The laws of many foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Accordingly, the fact that we have obtained certain patent rights in the United States does not guarantee that we will be able to obtain the same or similar rights elsewhere. Even if we are granted patents in foreign countries, we cannot guarantee that we will be able to enforce our rights effectively.

If we are unable to obtain and maintain protection for our intellectual property, the value of our technology and products may be adversely affected, which would materially affect our business.

Patents. Our commercial success will continue to depend in part on the patent rights we plan to obtain related to future products we may market. We currently have four U.S. provisional patent applications, and four pending international applications based on the same four U.S. provisional patents. The principal claims made in these applications cover wound scar and burn treatment creams, the methods of preparing stem cells and the formulations for stem cell media containing products. There are currently no patents issued in favor of the Company. Our success also depends on our and our licensors’, collaborators’, and suppliers’ ability to maintain these patent rights against third-party challenges to their validity, scope, or enforceability of these patent rights.

Our patent position (and those of our licensors, collaborators, and suppliers) is subject to the same uncertainty as other pharmaceutical and consumer product companies. Our patent applications (as well as the patents and patent applications of our licensors, collaborators and suppliers) may not protect our technologies and products because, among other things, our pending applications may not result in issued patents; we may develop additional proprietary technologies that are not patentable; patents issued to us may not provide a basis for future commercially viable products; and patents issued to us may not provide us with any competitive advantage, or may be challenged, circumvented, invalidated or rendered unenforceable by third parties. For example, the USPTO or the courts may deny, narrow, or invalidate patent claims, particularly those that concern biotechnology and pharmaceutical inventions. Inventors or third parties of whom we are unaware, may challenge the ownership of patents and applications we own, license or benefit from through supply agreements with our collaborators and suppliers. We, our licensors, collaborators, and suppliers may not be successful in securing or maintaining proprietary or patent protection for our products, and protection that is secured may be challenged and possibly lost.

Trade Secrets and Proprietary Know-how. We, our licensors, collaborators, and suppliers also rely upon trade secrets, proprietary know-how, and other technological innovation, particularly when patent protection is not appropriate or available. However trade secrets are difficult to protect, and we have limited control over the protection of trade secrets used by our licensors, collaborators, and suppliers. Although we attempt to protect our trade secrets by requiring our employees, consultants, advisors and current and prospective business partners to enter into confidentiality agreements prohibiting them from disclosing or taking our proprietary information and technology, these agreements may not provide meaningful protection for our trade secrets and proprietary know-how. If our employees or consultants breach these agreements, we may not have adequate remedies for any of these breaches. Further, third parties that are not parties to confidentiality agreements may obtain access to our trade secrets or know-how. Others may independently develop similar or equivalent trade secrets or know-how. If our confidential or proprietary information is divulged to third parties, including our competitors, our competitive position in the marketplace will be harmed and our ability to successfully penetrate our target markets could be severely compromised.

Trademarks. Our trademarks will continue to be important to our success and competitive position. We have received U.S. trademark registration for our corporate name, NuGene^®, and own or have rights to use our product and component names. We also have a license for the use of Kathy Ireland^® who acts as our brand ambassador. We also will need to pursue trademark registration for any new trademarks that we select. We may not be able to secure any of our trademark registrations with the PTO or comparable foreign authorities. If we do not adequately protect our rights in our various trademarks from infringement (and we are involved in two separate ongoing disputes with respect to trademarks), any goodwill that has been developed in those marks would be lost or impaired. We could also be forced to cease using any of our trademarks that are found to infringe upon or otherwise violate the trademark or service mark rights of another company, and, as a result, we could lose all the goodwill that has been developed in those marks and could be liable for damages caused by any infringement or violation.

We may be subject to claims that we, or our employees, have inadvertently or otherwise used or disclosed alleged trade secrets or other proprietary information of our employees’ former employers.

We employ individuals who were previously employed at other personal care product or nutritional supplement companies, including our competitors or potential competitors. To the extent that our employees are involved in research areas that are similar to those in which they were involved with their former employers, we may be subject to claims that such employees have inadvertently or otherwise used or disclosed the alleged trade secrets or other proprietary information of the former employers. Litigation may be necessary to defend against such claims.

Claims by other parties that we infringe or have misappropriated their proprietary technology may result in liability for damages, royalties, or other payments, or stop our development and commercialization efforts.

Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents that may be granted in the future. Many of our competitors may have obtained patents covering products and processes generally related to our products and processes, and they may assert these patents against us. Moreover, there can be no assurance that these competitors have not sought or will not seek additional patents that may cover aspects of our technology. As a result, there is a greater likelihood of a patent dispute than would be expected if our competitors were pursuing unrelated technologies.

While we conduct patent searches to determine whether the technologies used in our products infringe patents held by third parties, numerous patent applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in conducting patent searches, there can be no guarantee that we will not violate third-party patent rights that we have not yet identified.

There may be U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. The owners or licensees of these and other patents may file one or more infringement actions against us. In addition, a competitor may claim misappropriation of a trade secret by an employee hired from that competitor. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our business, even if the allegations of infringement or misappropriation are unwarranted. A need to defend multiple actions or claims could have a disproportionately greater impact. In addition, either in response to or in anticipation of any such infringement or misappropriation claim, we may enter into commercial agreements with the owners or licensees of these rights. The terms of these commercial agreements may include substantial payments, including substantial royalty payments on revenues received by us in connection with the commercialization of our products.

Payments under such agreements could increase our operating losses and reduce our resources available for development activities. Furthermore, a party making this type of claim could secure a judgment that requires us to pay substantial damages, which would increase our operating losses and reduce our resources available for development activities. A judgment could also include an injunction or other court order that could prevent us from making, using, selling, offering for sale, or importing our products or prevent our customers from using our products. If a court determined or if we independently concluded that any of our products or manufacturing processes violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance that we would be able to reengineer the product or processes to avoid those rights, or to obtain a license under those rights on commercially reasonable terms, if at all.

RISKS RELATED TO REGULATORY MATTERS

While we believe that that our principal cosmeceutical products and product candidates do not require FDA approval as new drugs, the FDA could disagree and we may be required to conduct clinical trials to establish efficacy and safety or cease to market these products.

Our cosmeceutical products are marketed on the basis that they are generally recognized as safe and effective for their intended use and thus do not require new drug approval. The FDA has not challenged this position. The FDA may at any time disagree with our position for a variety of reasons, including new information about the particular product or its active ingredients, how the product is promoted, if another company obtains FDA approval for a prescription drug with the same active ingredient, or based on a change of FDA regulatory policy. This could require us to seek new drug approval for these products to remain on the market or to withdraw a product until required clinical trials are performed and new drug approval is obtained.  

If the active ingredients of the products are finally determined by the FDA not to be generally recognized as safe and effective for over-the-counter, or OTC use, the FDA may seek to apply those findings to prescription products as well, leading to potential objections to the continued marketing of the products or a demand that marketing continue only on the basis of a new drug approval. Either of these outcomes could affect the way our products are marketed or our ability to market them at all. Further, the FDA could decide that growth factors derived from human adipose stem cells do not come within this policy and thus must seek new drug approval to remain on the market or must be withdrawn until approval is obtained.

Our wound healing-wound care products under development may not be approved by the FDA or foreign regulatory authorities, and any failure or delay associated with our product development and clinical trials or obtaining regulatory approval of these products would increase our product development costs and time to market. We face substantial risks of failure inherent in developing stem cell growth factor derived products that may be determined by the FDA to fall under the classification as pharmaceutical products. The pharmaceutical industry is subject to stringent regulation by many different agencies at the federal, state, and international levels. If determined to be pharmaceutical products, then the product candidates will be required to satisfy rigorous standards of safety and efficacy before the FDA approves them, and before any foreign regulatory authorities approve them for commercial use in any countries outside the U.S. where we decide to market them. Even if a regulatory filing is accepted, the FDA or foreign regulatory authorities may request additional information from us, including data from additional clinical trials, and, ultimately, may not grant marketing approval for some of our products or may grant approval only under conditions that are less commercially attractive than anticipated. To the extent that these products do not perform successfully in our planned pivotal clinical trials, we may need to develop alternative candidates. Product development is generally a long, expensive, and uncertain process. Successful development of our new wound healing-wound care product formulations, including our incisional and or burn cream will depend on many factors, including:

If we are unable to develop suitable clinical formulations of our wound healing-wound care product candidates or are significantly delayed in doing so, our ability to commercialize these products will be adversely affected. Once we have manufactured a formulation that we believe is suitable for pivotal clinical testing, we will need to complete our clinical testing, and failure can occur at any stage of testing. These clinical tests must comply with FDA and other applicable regulations. We may suffer significant setbacks in advanced clinical trials, even after showing promising results in earlier trials. The results of later clinical trials may not replicate the results of prior clinical trials. Based on results at any stage of clinical trials, we may decide to discontinue development of a product candidate. We, or the FDA, may suspend clinical trials at any time if the patients participating in the trials are exposed to unacceptable health risks or if the FDA finds deficiencies in our applications to conduct the clinical trials or in the conduct of our trials. Moreover, not all products in clinical testing will receive timely, or any, regulatory approval. Even if clinical trials are completed as planned, their results may not support our assumptions or our product claims. The clinical process may fail to demonstrate that our products are safe for humans or effective for intended uses. In addition, these failures could cause us to abandon a product entirely. If we fail to take any current or future product candidate from the development stage to market, we will have incurred significant expenses without the possibility of generating revenues, and our business will be adversely affected.

We will be subject to ongoing regulatory review of products currently under development that may be marketed in the future.

Any of our pharmaceutical products under development will be subject to extensive regulation. These regulations will impact many aspects of our operations, including the manufacture, labeling, packaging, adverse event reporting, storage, advertising, promotion, and record keeping related to the products. The FDA also may require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products. In addition, the subsequent discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension, or withdrawal of regulatory approvals, product recalls, seizure of products, injunctions against their distribution, disgorgement of money, operating restrictions, and criminal prosecution.

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal laws have been applied to restrict certain marketing practices in the pharmaceutical industry in recent years. These laws include anti-kickback statutes and false claims statutes. Violations of the federal anti-kickback statute are punishable by imprisonment, criminal fines, civil monetary penalties, and exclusion from participation in federal healthcare programs. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions under the federal anti-kickback statute, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing, arranging for or recommending prescription or purchase may be subject to scrutiny if they do not qualify for a statutory exemption or safe harbor. Federal false claims laws prohibit any person from knowingly making, or causing to be made, a false claim to the federal government, or knowingly making, or causing to be made a false statement to have a false claim paid. The majority of states also have statutes or regulations similar to the federal anti-kickback law and false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines, and imprisonment.

In addition, as part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. This practice is overseen by the FDA and other governmental authorities under regulations that include, in particular, requirements concerning record keeping and control procedures. Any failure to comply with these regulations may result in significant criminal and civil penalties as well as damage to our credibility in the marketplace. Because of the breadth of these laws and the narrowness of the safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws, which could have a material adverse effect on our business, financial condition, and results of operations.

The regulatory status of our cosmeceutical products could change, and we may be required to conduct clinical trials to establish efficacy and safety or cease to market these products.

The Federal Food, Drug, and Cosmetic Act does not recognize “cosmeceuticals” as a category of products. We use the term “cosmeceuticals” as a marketing term to describe our non-prescription, cosmetic products. The FDA does not have a premarket approval system for cosmetic products outside of new color additives, and we believe we are permitted to market our cosmeceutical products and have them manufactured without submitting safety or efficacy data to the FDA. However, the FDA may in the future determine to regulate what we term as cosmeceuticals or the ingredients included in our cosmeceuticals as drugs or biologics, rather than cosmetics. If any of our products are deemed to be drugs or biologics, rather than cosmetics, we would be required to conduct clinical trials to demonstrate the safety and efficacy of our cosmeceutical products in order to continue to market and sell them. In such event, we may not have sufficient resources to conduct any required clinical trials and we may not be able to establish sufficient efficacy or safety data to resume the sale of our cosmeceutical products. Any inquiries by the FDA or any foreign regulatory authorities into the regulatory status of our cosmeceutical products and any related interruption in the marketing and sale of our cosmeceutical products could severely damage our brands and image in the marketplace, including our relationships with physicians and their patients.

If we choose, or are required, to seek FDA approval to market and sell any of our products, we may be unable to demonstrate the necessary safety and efficacy to obtain such FDA approval.

Our current business strategy is focused on developing and commercializing product opportunities as cosmeceuticals not requiring FDA approval. In the future we, alone or with project partners, may seek FDA regulatory approval to market and sell one or more of our products assets as an FDA-approved drug. The FDA may also seek to classify one or more of our products as drug rather a cosmeceutical. If we choose, or are required, to obtain FDA approval to market and sell any of our products, the approval process is costly, time consuming, uncertain, and subject to unanticipated delays. The FDA or other regulatory agencies may not approve a product candidate on a timely basis or at all. Before we obtain FDA approval for the sale of any product, we will be required to demonstrate through preclinical studies and clinical trials that it is safe and effective for each intended use, which we may not be able to do. A failure to demonstrate safety and efficacy of a product candidate to the FDA’s satisfaction would result in our failure to obtain FDA approval. Moreover, even if the FDA were to grant regulatory approval of a product candidate, the approval may be limited to specific therapeutic areas or limited as to its distribution, which could reduce revenue potential, and we will be subject to extensive and costly post-approval requirements and oversight with respect to commercialization of the product candidate.

Delays in the completion of, or the termination of, any clinical or non-clinical trials for any product candidates for which we may seek FDA approval could adversely affect our business. 

Clinical trials are very expensive, time consuming, unpredictable and difficult to design and implement. The results of clinical trials may be unfavorable, they may continue for several years, and they may take significantly longer to complete and involve significantly more costs than expected. Delays in the commencement or completion of clinical testing could significantly affect product development costs and plans with respect to any product candidate for which we seek FDA approval. The commencement and completion of clinical trials can be delayed and experience difficulties for a number of reasons, including delays and difficulties caused by circumstances over which we may have no control. For instance, approvals of the scope, design or trial site may not be obtained from the FDA and other required bodies in a timely manner or at all, agreements with acceptable terms may not be reached in a timely manner or at all with clinical research organizations to conduct the trials, a sufficient number of subjects may not be recruited and enrolled in the trials, and third-party manufacturers of the materials for use in the trials may encounter delays and problems in the manufacturing process, including failure to produce materials in sufficient quantities or of an acceptable quality to complete the trials. If we were to experience delays in the commencement or completion of, or if we were to terminate, any clinical or non-clinical trials we pursue in the future, the commercial prospects for the applicable product candidates may be limited or eliminated, which may prevent us from recouping our investment in research and development efforts for the product candidate and would have a material adverse effect on our business, results of operations, financial condition and prospects.

Even if we successfully develop any product candidate into an FDA-approved drug, failure to comply with continuing federal and state regulations could result in the loss of approvals to market the drug.

Even if we successfully develop any product candidate into an FDA-approved drug, we will be subject to extensive continuing regulatory requirements and review, including review of adverse drug experiences and clinical results from any post-marketing tests or continued actions required as a condition of approval. The manufacturer and manufacturing facilities we would use to produce any drug preparations would be subject to periodic review and inspection by the FDA. We will be reliant on third parties to maintain their manufacturing processes in compliance with FDA and all other applicable regulatory requirements. Any changes to a product that has been approved, including the way it is manufactured or promoted, will often require FDA approval again before the product, as modified, may be marketed and sold. In addition, we and the manufacturers of the drug will be subject to ongoing FDA requirements for submission of safety and other post-market information. If we or the manufacturers of the drug failed to comply with these or any other applicable regulatory requirements, a regulatory agency may, among other things, issue warning letters, impose civil or criminal penalties, suspend or withdraw regulatory approval, impose restrictions on our operations, close the facilities of the manufacturers, seize or detain products or require a product recall.

Regulatory review of the manner in which we market and promote our products could result in classification of a product as a drug, which could adversely affect our business.

Regulatory review also covers a company’s activities in the marketing and promotion of its products. The FDA could review the manner in which we market and promote our products, including though not limited to claims and information provided on our packaging, in product descriptions and details, and on our website. If the FDA determines that such marketing and promotion classifies a product as a drug, we would be forced to obtain FDA approval for such product. We could also face significant potential penalties and restrictions for promotion of a drug for an unapproved use. Sales and marketing programs are under scrutiny for compliance with various mandated requirements, such as illegal promotions to health care professionals. Failure to comply with these requirements could expose us to negative publicity, fines and penalties that could harm our business.

If our manufacturers do not comply with U.S. and federal regulations, our supply of product could be disrupted or terminated.

Our manufacturers must comply with U.S. regulations and corresponding foreign standards, including the FDA’s current Good Manufacturing Practice regulations for drug manufacturing and processing, or “cGMPs”, applicable to the manufacturing processes related to ingredients sold to us for use in our products, and their facilities must be inspected and approved by the FDA and other regulatory agencies as part of their business. We will have limited control over the FDA compliance of our third-party manufacturers. If any of our manufacturers fail to meet or are found to be non-compliant with the cGMPs or any other FDA requirements or similar regulatory requirements outside of the U.S., obtaining the required regulatory approvals, including from the FDA, to use alternative suppliers may be a lengthy and uncertain process. A lengthy interruption in the manufacturing of one or more of our products as a result of non-compliance could adversely affect our product inventories and supply of products available for sale which could reduce our sales, margins and market share, as well as harm our overall business and financial results. Additionally, the Federal Drug and Cosmetic Act (“FDCA”) may hold labelers/specification developers (brands selling a product) criminally and civilly liable for the violations, acts, and omission of their manufacturers.

Under the FDCA, cosmetics (which we refer to as cosmeceuticals) are defined as articles applied to the human body to cleanse, beautify, or alter the appearance. The manufacturing of cosmetics is subject to the misbranding and adulteration sections of the FDCA applicable to cosmetics. Cosmetics are not subject to premarket approval by the FDA but the product and ingredients must be tested to assure safety. If the product or ingredients are not tested for safety, a specific warning is required. The FDA monitors compliance of cosmetic products through random inspections of cosmetic manufacturers and distributors. The FDA utilizes an “intended use” doctrine to determine whether a product is a drug or cosmetic by the labeling claims made for the product. If a cosmetic product is intended for a disease condition or to affect the structure or any function of the human body, the FDA will regulate the product as a drug rather than as a cosmetic. The product will then be subject to all drug requirements under the FDCA. The labeling of cosmetic products is subject to the requirements of the FDCA, the Fair Packaging and Labeling Act and other FDA regulations.

We have only limited experience in regulatory affairs, which may affect our ability or the time we require to obtain necessary regulatory approvals. We have only limited experience in regulatory affairs, including the preparation and filing of applications to gain the regulatory approvals necessary for pharmaceutical product candidates. Moreover, some of the products that are likely to result from our product development, licensing and acquisition programs may be based on new technologies that have not been extensively tested in humans. As a result, we may experience a longer than customary regulatory process in connection with obtaining regulatory approvals for any products that we develop, license or acquire. 

If we move forward with production of an FDA regulated product, and we are found not to be in compliance with Good Manufacturing Practices, then our operations could be harmed.

In the United States, FDA regulations on Good Manufacturing Practices and Adverse Event Reporting requirements require us and our vendors to maintain good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls and record keeping.  The ingredient identification requirement, which requires us to confirm the levels, identity, and potency of ingredients listed on our product labels within a narrow range, is particularly burdensome and difficult for us with respect to products that contain many different ingredients. We are also required to report serious adverse events associated with consumer use of our products. Our operations could be harmed if regulatory authorities make determinations that we, or our vendors, are not in compliance with these regulations or public reporting of adverse events harms our reputation for quality and safety. A finding of noncompliance may result in administrative warnings, penalties, or actions impacting our ability to continue selling certain products.  In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are qualified and in compliance.

RISKS RELATED TO OUR BUSINESS

Our products and product candidates may not achieve or maintain widespread market acceptance.

We may not achieve or maintain widespread market acceptance of our products or product candidates among physicians, patients, or healthcare providers. Our products’ success is highly dependent on physician and patient preference and market acceptance. We have a limited history of promoting our cosmeceutical products. Our significant marketing efforts to date have been focused primarily on dermatologists and plastic surgeons.

We believe that market acceptance of our products will depend on many factors including:

If our products fail to achieve or maintain market acceptance or if new products or technologies are introduced by others that are more favorably received than our products, are more cost effective or that otherwise render our products obsolete, we may experience a decline in the demand for our products.

If we are unable to market and sell our products successfully, our business, financial condition, results of operation and future growth would suffer. Our ability to compete depends upon the success of our business development activities and our ability, and the ability of our collaborators, to innovate, develop, and commercialize new products and product enhancements, as well as to identify new markets for our products.

Our business strategy requires us to develop or acquire new and innovative applications of our products, identify new markets for our existing products, and develop or acquire new technology. We are currently developing products for the treatment of burns and exploring several delivery technologies to improve our existing products. However, our development efforts may not lead to new commercial products. To successfully expand our product offerings, we must:

The process of developing product candidates involves a high degree of risk and may take several years. Product candidates we may acquire or license in the future that appear promising in the early phases of development may fail to reach the market for several reasons, including:

We may be unable to continue to develop new products, enhancements to our existing products and other technologies in the near term, if at all, in part because new products or enhancements to our existing products must meet regulatory standards and receive requisite regulatory approvals.

Our failure to introduce new products or enhancements to our existing products could adversely affect our expected growth rate and adversely affect our overall business and financial results.

Our marketed products and our products under development could be rendered obsolete by technological or medical advances.

The development of medical advances to treat the conditions that our products are designed to address may render our marketed products and our products under development obsolete or uneconomical. The enhancement to the appearance of skin, the regeneration of hair growth and the treatment of burns, acne or other skin disorders are the subjects of active research and development by many potential competitors, including major pharmaceutical companies, specialized biotechnology firms, universities and other research institutions, as well as other major cosmeceutical companies which develop wrinkle reduction or age defying skin and hair care products. While we intend to expand our technological capabilities to remain competitive, research and development by others may render our technology or products obsolete or noncompetitive or result in treatments superior to any therapy we develop.

Technological advances affecting costs of production also could adversely affect our ability to sell products. Our products could become more expensive to produce, or not competitive, which would decrease our revenues and adversely affect our results of operations and financial condition.

Our future success depends on our ability to retain our chief executive officer and to attract, retain and motivate qualified personnel.

We are highly dependent on Steven Carlson, our Chief Executive Officer. The loss of the services of Mr. Carlson might impede the achievement of our research, development, and commercialization objectives. Replacing Mr. Carlson may be difficult and time-consuming because of the limited number of individuals in our industry with the skills and experiences required to successfully develop and commercialize our products. We generally do not maintain key person life insurance to cover the loss of any of our employees.

Recruiting and retaining qualified scientific personnel, clinical personnel and sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms, if at all, given the competition for similar personnel. In addition, we rely on consultants and advisors, including production, marketing, medical, and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

During the year ended December 31, 2015, the majority of our revenues were derived from two wholesale distributors. The loss of the distributors could have a material negative effect on our financial condition.

During the year ended December 31, 2015, we derived 31.1% and 15.7% of our revenues from two wholesale distributors. These two distributors purchase products from us on a purchase order basis on negotiated terms of payment. The distributors are under no obligation to continue to purchase our products. The loss of either of the distributors, a material reduction in their purchases or the cancellation of product orders or unexpected returns of unsold products could decrease our revenues and impede our future growth prospects. We do not have long-term purchase commitments with our distributors. We are actively seeking to expand our products’ distribution channels in order to reduce the impact the loss of any one distributor would have on our Company, however we can give no assurance that we will be successful in doing so.

If we breach any of our key license or supply agreements, we could lose exclusivity rights or the agreements could be terminated.

We have an international licensing agreement with kiWW for all cosmetic products for a term of eight years. These rights are important to our business, and any breach of the agreement could result in a termination of the respective rights, which, in turn, would prevent us from marketing the affected products or developing the affected product candidates. Our agreement with kiWW require milestone and royalty payments, minimum revenue requirements or minimum annual royalty payments and other obligations. If we have insufficient demand for these products or otherwise fail to meet the minimum purchase requirements or any of the other requirements set forth in the agreement, we could lose the exclusive nature of our right to market products under the kiWW brand. Additionally, we are overdue in payments owed to kiWW. Should we not be able to cure this breach of our payment obligations under the agreement within a mutually agreeable timeframe, we face the possibility that the agreement could be terminated. In that event, others could obtain rights to sell products that compete directly with our products and our revenues and market share would correspondingly decrease. The loss of any rights under the license agreement would adversely affect our ability to sell our products and adversely affect our revenues and results of operations.

At the current time we do not have any material supply agreements. Materials are procured using purchase orders, and we do not rely upon any single vendor for materials or supplies. There may come a time in the future when we enter into supply agreements for materials. If we fail to comply with any of the requirements under these prospective supply agreements, we may lose rights under these agreements or they may be terminated in their entirety. As of the date of this prospectus, we remain committed to not entering into any such supply agreements. In that event, others could obtain rights to sell products that compete directly with our products and our revenues and market share would correspondingly decrease. The loss of any rights under any of our license and supply agreements would adversely affect our ability to sell our products and adversely affect our revenues and results of operations.

We face risks due to our reliance on third parties to perform many necessary commercial services for our products, including services related to the distribution, storage, transportation, and regulatory monitoring of our products.

We rely on third parties to perform a variety of functions related to the sale and distribution of our cosmeceutical products. These services include distribution, logistics management, inventory storage and transportation, invoicing and collections, the key aspects of which are out of our direct control. If any third-party service provider fails to comply with applicable laws and regulations, fails to meet expected deadlines or otherwise does not carry out its contractual duties to us, our ability to deliver products to meet commercial demand would be significantly impaired. In addition, we may retain one or more third parties to perform various regulatory monitoring services for our products, including adverse event reporting, safety database management and other product maintenance services. If the quality or accuracy of the data maintained by these regulatory service providers is insufficient, our ability to continue to market our approved products could be jeopardized or we could be subject to regulatory sanctions.

If our competitors develop and market products faster than we do or if the products of our competitors are considered more desirable than our products, revenues of our existing or new products may be adversely affected.

The dermatology market is highly competitive and includes a number of established, large, and mid-sized pharmaceutical and cosmeceutical companies, as well as smaller emerging companies and specialty pharmaceutical and cosmeceutical companies, whose activities are focused on our target markets and areas of expertise. We face and will continue to face, competition for our products and in the commercialization, development, licensing and discovery of our product candidates. This could negatively impact our ability to achieve significant market acceptance of our products and product candidates. Furthermore, new developments including the development of other drug technologies, delivery methods and improved formulations, occur in the pharmaceutical industry at a rapid pace. These developments may render our currently marketed products and product candidates or technologies obsolete or noncompetitive.

Compared to us, many of our competitors and potential competitors have substantially greater:

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than us. Our competitors may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates or technologies. Our competitors may also develop pharmaceutical and cosmeceutical products that are more effective and less costly than ours and may also be more successful than us in manufacturing and marketing their products.

Other competitors may invest significant amounts in achieving production economies of scale.

It is possible that our competitors may be able to reduce their cost of production so that they can aggressively price their products and increase their greater market share. Our competitors may also be able to attract and retain qualified personnel and to secure capital resources. Any of these events could adversely affect our ability to compete and our results of operations could suffer.

Our products and product candidates may cause undesirable side effects that could limit their use.

Skin irritation is a reported side effect of cosmeceutical products. Although these side effects generally are not severe, they may limit the use of our products, particularly if physicians or patients perceive the risks to outweigh the benefits or the side effects of competitive products to be less significant. If more severe side effects associated with any of our cosmeceutical products were to be reported or observed, we could be required to suspend our marketing of the products, conduct additional safety tests, and potentially cease the sale of the products. In addition, we face the potential for product liability claims from any patients who experience side effects, whether or not any action is taken by a regulatory authority.

Undesirable side effects caused by our product candidates could interrupt, delay or halt our development programs, including clinical trials, and could result in the denial of any required regulatory approval by the FDA or other regulatory authorities.

We may face liability and indemnity claims that could result in unexpected costs and damage to our reputation.

Our business exposes us to potential liability risks that arise from the testing, manufacture and sale of our cosmeceutical products. Plaintiffs in the past have received substantial damage awards against pharmaceutical companies based upon claims for injuries allegedly caused by the use of their products. Although we currently maintain product liability insurance, there is no guarantee that any claims brought against us would be within our existing or future insurance policy coverage or limits. Any judgment against us that is in excess of our policy limits would have to be paid from our cash reserves, which would reduce our capital resources. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets. Also, it may be necessary for us to recall products that do not meet approved specifications, which would result in adverse publicity, potentially significant costs in connection with the recall and a loss of revenues. Any product liability claim or series of claims brought against us could harm our business significantly, particularly if a claim results in adverse publicity or damage awards outside or in excess of our insurance policy limits.

Failure to adequately comply with information security policies or to safeguard against breaches of such policies could adversely affect our operations and could damage our business, reputation, financial position, and results of operations.  

In the process of making sales using consumer credit cards as a method of payment, we may handle and transfer such information as part of our business. These activities are subject to laws and regulations, as well as industry standards, in the United States and other jurisdictions in which our products and services are available. These requirements, which often differ materially and sometimes conflict among the many jurisdictions in which we operate, are designed to protect the privacy of consumers’ personal information and to prevent that information from being inappropriately used or disclosed. We maintain and review technical and operational safeguards designed to protect this information and generally require others with whom we work to do so as well. However, despite those safeguards, it is possible that hackers, employees acting contrary to our policies, third-party agents or others could improperly access relevant systems or improperly obtain or disclose data about our consumers, or that we may be determined not to be in compliance with applicable legal requirements and industry standards for data security, such as the Payment Card Industry guidelines. A breach or purported breach of relevant security policies that compromises consumer data or determination of non-compliance with applicable legal requirements or industry standards for data security could expose us to regulatory enforcement actions, card association or other monetary fines or sanctions, or contractual liabilities, limit our ability to provide our products and services, subject us to legal action and related costs and damage our business reputation, financial position, and results of operations.

Changes in economic conditions could materially affect our ability to maintain or increase sales.

The cosmeceutical industry depends on consumer discretionary spending.  The United States in general or the specific markets in which we operate may suffer from depressed economic activity, recessionary economic conditions, higher fuel or energy costs, low consumer confidence, high levels of unemployment, reduced home values, increases in home foreclosures, investment losses, personal bankruptcies, reduced access to credit or other economic factors that may affect consumers’ discretionary spending. Economic conditions may remain volatile and may depress consumer confidence and discretionary spending in the future. Negative economic conditions, if and when they exist, might cause consumers to make changes to their discretionary spending behavior, including spending currently made on our cosmeceutical line of products. If such sales decrease, our profitability could decline as we spread fixed costs across a lower level of sales and this could materially adversely affect our business, financial condition, or results of operations.

The cosmeceutical industry in which we operate is highly competitive and increased competition could reduce our sales and profitability.

We compete in different markets within the cosmeceutical industry on the basis of the uniqueness of our product offerings, the quality of our products, customer service, price, and distribution.  Our markets are highly competitive.  Our competitors vary in size and many may have greater financial and marketing resources than we do.  If we cannot maintain quality and pricing that are comparable or superior to our competitors, we may not be able to grow our revenues and operating profits and we may lose market share.  Competitive conditions could result in our experiencing reduced revenues, gross margins, and operating results and could cause an investor in our Company to lose a substantial amount or all of its investment in our Company.

The loss of suppliers or shortages in ingredients could harm our business.

We acquire ingredients and products from third-party suppliers and manufacturers under purchase orders and not under supply agreements. A loss of any of these suppliers and any difficulties in finding or transitioning to alternative suppliers could harm our business. In the event we are unable to procure certain ingredients, we may need to discontinue some products or develop substitute products, which could harm our revenue. In addition, if we experience supply shortages or regulatory impediments with respect to the raw materials and ingredients we use in our products, we may need to seek alternative supplies or suppliers and may experience difficulties in finding ingredients that are comparable in quality and price. Some of our products incorporate products that may have limited supplies. If demand exceeds forecasts, we may have difficulties in obtaining additional supplies to meet the excess demand. If we are unable to successfully respond to such issues, our business could be harmed.

Risks Related to Our Common Stock and Warrants

The recent public market for our shares has been and may continue to be volatile. This volatility may affect the ability of our investors to sell their shares and warrants as well as the price at which they sell their shares and warrants.

The market price for our shares and warrants may be significantly affected by factors such as variations in the volume of trading activity, quarterly and yearly operating results, general trends in the markets we serve, press releases announcing developments and changes in state or federal regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations may adversely affect the market price of our common stock and warrants.

Because our stock price is volatile, purchasers of our common stock and warrants could incur substantial losses.

Our stock price has been and may continue to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our common stock and warrants may be influenced by many factors, including:

The application of the “penny stock” rules to our common stock and warrants could limit the trading and liquidity of our common stock and warrants, adversely affect the market price of our common stock and warrants, and increase your transaction costs to sell those shares and warrants.  

As long as the trading price of our common stock is below $5 per share, and our common stock and warrants are not listed on a national securities exchange, the open-market trading of our common stock and warrants will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets, excluding principal residence, in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and warrants, and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.  Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include 1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; 2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; 3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; 4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and 5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price. Although we intend to ask our shareholders to approve a reverse stock split to increase the price per share of our common stock such that it would not be subject to the “penny stock” rules, no assurance can be given that we will be able to effect such reverse stock split or that the per share price of our common stock will improve following the reverse stock split such that our stock will no longer be subject to these rules.

We may not be able to attract the attention of brokerage firms, which could have a material adverse impact on the market value of our common stock and warrants. 

Security analysts of brokerage firms are unlikely to provide coverage of our common stock warrants since there is no incentive to brokerage firms to recommend the purchase of our common stock and warrants. The absence of such coverage limits the likelihood that an active market will develop or be maintained for our common stock and warrants. It will also likely make it more difficult to attract new investors at times when we require additional capital.

Future sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock and warrant price.  

There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock and warrants.

Our directors and principal stockholders beneficially own or control a substantial portion of our outstanding common stock, which may limit the ability of our stockholders, whether acting alone or together, to propose or direct the management on the overall direction of our Company. 

This concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. A substantial portion of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our officers and directors. Accordingly, our principal stockholders together with our directors, Chief Executive Officer, and insider shareholders have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company.  Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions that require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock and warrants. See the Section titled “Management” for a detailed discussion of the percentage of ownership controlled by our directors and principal stockholders.

Our outstanding warrants may be exercised, our convertible promissory notes may be converted, and our outstanding shares of preferred stock may be converted, in the future, which would increase the number of shares in the public market and result in dilution to our stockholders.

We are currently authorized to issue 100,000,000 of our common stock. As of December 31, 2016 we had 40,666,086 shares of our common stock issued and outstanding, excluding shares of common stock earned but unissued, issuable upon exercise of our outstanding warrants, options, convertible promissory notes, and shares of common stock into which our issued shares of preferred stock may be converted. To the extent the shares of common stock are issued, options and warrants are exercised, convertible promissory notes are converted, or preferred stock is converted, holders of our common stock will experience dilution. In addition, in the event of any future financing of equity securities or securities convertible into or exchangeable for, common stock, holders of our common stock may experience dilution. As of December 31, 2016 outstanding warrants to purchase 6,989,625 shares of our common stock at a weighted average exercise price of approximately $0.72 per share. In addition, as of December 31, 2016 we had outstanding options to purchase 4,352,619 shares of our common stock at a weighted average exercise price of approximately $0.58 per share; and, our issued shares of preferred stock can be converted into 1,917,720 shares of our common stock. In addition, we also had approximately $3,871,056 outstanding principal amount and interest of convertible debt as of December 31, 2016 for which the conversion price varies depending on the average trading price of shares of our common stock. Accordingly, if our stock price decreases, we could be required to issue a greater number of shares of our common stock upon conversion of this debt than originally anticipated, which could lead to dilution of your investment in our Company.

There is a limited trading market for our common stock, and shareholders may have difficulty trading and obtaining quotations for our common stock and warrants.

Our common stock is quoted on the OTCQB under the symbol “NUGN” and we will apply to list our common stock on the Nasdaq Capital Market. There has been limited trading in our common stock. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities. A limited market may adversely affect the market price of our common stock and could also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or assets by using common stock as consideration.

We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, we do not expect to pay any cash dividends in the foreseeable future, and payment of cash dividends, if any, will depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends. Capital appreciation, if any, of our common stock will be investors’ sole source of gain for the foreseeable future.

Our articles of incorporation allow for our board to create series of preferred stock without further approval by our stockholders, which has and could further adversely affect the rights of the holders of our common stock and warrants.

Our articles of incorporation authorize the Board of Directors to issue up to 25,000,000 shares of “blank check” preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. We have issued 1,917,720 shares of Series A Preferred Stock to NuGene’s two founders, both of whom also serve on our Board of Directors. The Series A Preferred Stock is initially convertible into common stock at a ratio of one to one, has the right to elect a majority of the board of directors, and has in connection with any other vote of shareholders three votes for every vote available to the common stock. These outstanding shares of Series A Preferred Stock diminish and any future issuances of other series of preferred stock could further diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock and warrants. In addition, the Series A Preferred Stock could be used to restrict our ability to merge with, or sell assets to, a third party. The Series A Preferred Stock makes it more difficult, and could delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock. This summary description of the Series A Preferred Stock is qualified in its entirety by reference to the Certificate of Designations filed with Secretary of State of Nevada on December 24, 2014 and included in our Current Report on Form 8-K filed with the SEC on January 6, 2015.

CORPORATE AND OTHER RISKS

We incur substantial costs as a result of operating as a public company, and our management is required to devote substantial time to comply with public company regulations.

We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, and other federal and state laws. These requirements may place a strain on our people, systems, and resources. The Exchange Act requires that we file annual, quarterly, and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight are required. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our Chief Executive Officer and our Chief Financial Officer have limited experience in these roles in a public company.  

To serve in the roles of officer and/or director for a public company, an individual needs to be aware of responsibilities in addition to those shouldered by the leader of a private company.  Among such additional responsibilities, a senior executive officer must be able to communicate fairly and effectively with the stakeholders of a public company, be aware of the controls required to be maintained by a public company and act in accordance with the legal requirements incumbent upon such senior executives and directors. While our CEO has experience in managerial positons in large public companies and led another company through a public offering, he does not have extensive experience in operating a public company. Our CFO has never held a positon in a public company and he is not a trained financial expert. The absence of such extensive experience (and training in the case of our CFO) could increase our exposure to untimely compliance with applicable regulation that could result in possible added liability and cost to the material detriment of our operations and financial interests.  Our CFO is a medical doctor by training and has assumed the title and responsibility of a chief financial officer but has not had any prior experience in the traditional services to be rendered but has rather relied on staff and consultants in his acting in this capacity.

We have added and are continuing to add full-time resources to our finance team and we have hired additional external consultants with public company and technical accounting experience to facilitate accurate and timely accounting closes, and to accurately prepare and review financial statements and related footnote disclosures. As a result of the additional resources added to the finance function, we are allowing for separate preparation and review of the reconciliations and other account analyses. In addition, these additional finance resources are allowing us to develop a more structured close process, including enhancing our existing policies and procedures, to improve the completeness, timeliness, and accuracy of our financial reporting and disclosures including, but not limited to, those regarding proper financial statement classification and assessing more judgmental areas of accounting. The actions that have been taken are subject to continued review, supported by confirmation and testing by management, as well as audit committee oversight. We can provide no assurance that we will be able to hire and retain qualified individuals to create and maintain appropriate internal control over financial reporting. Competition for these individuals is intense.

We do not have an Audit Committee and we do not have a majority of independent persons serving on our Board of Directors.  

We do not have an independent Audit Committee. An Audit Committee qualitatively enhances a company’s internal controls over financial reporting. Among its functions, independent Audit Committees review the financial reporting, internal controls safeguarding Company assets, interact with auditors, may oversee material financial decisions and provide a sounding board for individuals who believe that there are irregularities in a Company’s accounting policies and procedures.  Our Board of Directors consists of our two founders and one independent director. With our lack of an independent Audit Committee and only one independent director, we run a greater risk that a significant error or irregularity could occur that could be materially damaging to our shareholders.

For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.”

These exceptions provide for, but are not limited to, relief from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, less extensive disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements to hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved and an extended transition period for complying with new or revised accounting standards. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We may remain an “emerging growth company” for up to five years. To the extent we use exemptions from various reporting requirements under the JOBS Act, we may be unable to realize our anticipated cost savings from those exemptions.

Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for so long as we are characterized as an “emerging growth company.”  Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with the SEC as a public company, and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company”.

We are also currently able to take advantage of certain of these exemptions as a smaller reporting company. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Not applicable.

We previously sub-leased of our sole corporate facilities at 17912 Cowan, Suite A, Irvine, California, in Orange County, California from ASP, an affiliate of our Company, for approximately $17,109 per month (including common area maintenance), consistent with the amount that is charged to ASP by the property owner. On February 5, 2015, ASP entered into a new five-year lease for the property directly with the owner beginning July 1, 2015 and subsequently amended to begin June 1, 2015. The lease was subsequently amended to increase the square footage under lease beginning in January 2016. The lease includes annual increases in the monthly lease payments of approximately 3% each year.

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and adversely affect our financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure you that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events.

On July 10, 2015, Stemage Skin Care, LLC (the “Plaintiff”) filed a complaint in the U.S. District Court for the Central District of California entitled “Stemage Skin Care LLC, a North Carolina limited liability company vs. NuGene International, Inc. et al.” (Civil Action No.8:15-cv-01078-AG-JCG). The complaint also names as defendants NuGene, Inc., Ali Kharazmi, Saeed Kharazmi, Kathy Ireland Worldwide, Stephen Roseberry, Steve Rosenblum and Erik Sterling. The complaint contains allegations of damage asserted to be grounded on: (i) copyright infringement; (ii) interference with contract; (iii) intentional interference with prospective economic advantage; (iv) negligent interference with prospective economic advantage; and (v) conspiracy. The complaint allegedly arises out of an August 20, 2012 agreement among the Plaintiff and kathy ireland inc. (“KI”) pursuant to which KI made Kathy Ireland available to perform “Ambassador Services” as defined within that agreement. That agreement effectively terminated in October 2014 and is the subject of a separate arbitration with KI and Kathy Ireland before the American Arbitration Association. On or around August 4, 2016 the Company settled the litigation. All parties to this litigation executed a settlement agreement resolving and waiving all claims, with a full dismissal, with prejudice, of the action. Pursuant to the settlement, in December 2016 the Company paid the total sum of $50,000 to the Plaintiff.

On July 31, 2015 Star Health & Beauty, LLC (“SH&B”) filed a complaint in the U.S. District Court for the Northern District of Georgia entitled “Star Health & Beauty, LLC vs. NuGene, Inc. and NuGene International, Inc. Defendants” (Case No. 1:15-cv-02634-CAP). The complaint alleges that our use of the NuGene name and trademark infringes on SH&B’s NUGEN name. SH&B seeks cancelation of our NuGene trademark, as well as unspecified monetary damages. In February, 2017 the parties agreed upon terms to settle the matter, subject to execution of a definitive written settlement agreement to include the following terms: (i) $60,000 to be paid by the Company to SH&B, in installments of $5,000 upon execution of a Settlement Agreement, $25,000 90-days thereafter, and $30,000 60-days thereafter; (ii) issuance of 125,000 shares of the Company’s common stock to SH&B upon execution of a Settlement Agreement; (iii) each side continues to use their names as the wish; (iv) full mutual releases of known and unknown claims; (v) each bears its respective cost of litigation; and, (vi) dismissal with prejudice of the action. The written Settlement Agreement is being finalized and should be executed within the next 30 days.

In May 2016, we were informed that the California Labor Commissioner scheduled a hearing in connection with two individuals that claimed our Company did not fulfill its obligations to pay a final paycheck. The two individuals are seeking back pay and penalties totaling approximately $31,000. A trial/hearing was scheduled for March 14, 2017 to decide each matter. In February 2017 we settled both matters. In exchange for a complete release from the first claimant, we will pay the first claimant a total of $9,000 in accordance with the following schedule: $4,500 on or before March 10, 2017; four additional payments of $1,000 each on the 15^th day of April, May, June, and July 2017; and, a final payment of $500 on or before the 15^th day of August. In exchange for a complete release from the second claimant, we will pay the second claimant a total of $4,000 on or before March 10, 2017.

On May 6, 2016, we were presented with a demand for payment of compensation for a former executive employee (the “Former Executive”) pursuant to his employment contract with our Company. The amount of the compensation claimed by the Former Executive totaled $49,998. The Company’s management is evaluating the merits of this matter. We believe that no amounts are due to the Former Executive and we have not accrued a liability as of December 31, 2016.

In December 2016, we were informed by the four holders of our promissory notes totaling $480,000 (the “Holders”) that they would not honor their obligation to provide an additional $600,000 in similar financing. The Holders allege that certain breaches of the notes by the Company relieve them of their obligation. The Company firmly believes there is no merit whatsoever to the claims of the Holders. Rather than pursue litigation against the Holders, the Company has elected to pursue other sources of financing. However, should the Holders seek any acceleration or damages of any kind under the Notes, NuGene is committed to aggressively protect its rights, including though not limited to seeking damages from the Holders.

On February 24, 2017, we were informed that the Company will need to respond to a lawsuit filed by Habib American Bank (“Habib”) in the Superior Court of California, County of Orange. The action names Advanced Surgical Partners, LLC (“ASP”) as a defendant, as well as a number of additional named parties including though not limited to NuGene, Inc.; our Chairman of the Board, Mohammad Ali Kharazmi (“Ali”); and, our Acting Chief Financial Officer and Board Member, Mohammad Saeed Kharazmi (“Saeed”). The action is based on a purported default under a commercial loan from Habib to ASP on or around January 2008 (the “Loan”). According to the complaint, ASP currently owes Habib approximately $2.7 million under the Loan and that ASP has defaulted on the Loan. The Loan was arranged by Ali on behalf of ASP. Ali and Saeed are owners of, and control, ASP; they are also guarantors on the Loan. Additional family members of Ali and Saeed are alleged to be additional guarantors on the Loan, as are additional business entities owned by, or affiliated with, Ali and Saeed. The Loan is secured, in part, by the pledge of real estate owned by family members of Ali and Saeed (the “Pledged Real Estate”). A Deed of Trust was recorded by Habib against the Pledged Real Estate, and there appears to be more than sufficient equity in the Pledged Real Estate to pay off the Loan. NuGene is also alleged to be an additional guarantor on the Loan. A thorough search of NuGene records and files has failed to yield any documents or indication that NuGene was in fact a guarantor on the Loan. The Company has no documentation of the Loan or its purported guaranty, and there was no business relationship between ASP and NuGene which would suggest that a guaranty would have been provided. There was no prior knowledge by the Company of the existence of the Loan or the purported guaranty. Ali has steadfastly rejected the existence of the guaranty and has affirmatively assured the Company that he never authorized NuGene to guaranty the Loan, and that he never signed any documents on behalf of NuGene regarding the Loan. At this time, the Company intends to aggressively defend its rights and reject any status as a guarantor of the Loan. We believe that the Company’s risk and liability exposure under the Loan is minimal based upon (i) good faith and evidentiary defenses; and, (ii) the fact that there is more than adequate value/equity in the Pledged Real Estate to pay off the loan.

On April 4, 2017, Habib agreed to dismiss the Company from the litigation brought by Habib. A formal Settlement Agreement and Release has been executed by and between the Company and Habib.

Other than that described above, we are not currently a party to any other material legal proceedings. We are not aware of any pending or threatened litigation against us that in our view would have a material adverse effect on our business, financial condition, liquidity, or operating results. However, legal claims are inherently uncertain, and we cannot assure you that we will not be adversely affected in the future by legal proceedings.

Not applicable.

PART II

Market Information. Since January 22, 2015, our common stock has been traded in the over-the-counter market on the OTCQB trading platform under the symbol “NUGN.” Prior thereto, our common stock was listed on the OTC Bulletin Board under the symbol “BLMK.”

To our knowledge, there was limited or no trading in our common stock under the BLMK trading symbol prior to the Merger Agreement on December 29, 2014. Accordingly, the following table only sets forth the high and low bid information for our common stock for the periods indicated since the completion of the Merger Agreement on December 29, 2014. The following price information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions:

As of April 10, 2017, the last reported sales price or our common stock on the OTCQB market was $0.19 per share.

Holders of Record. As of April 10, 2017, an aggregate of 42,260,211 shares of our common stock were issued and outstanding and were owned by approximately 56 holders of record, based on information provided by our transfer agent. The foregoing number of record holders does not include any persons who may be deemed to hold their shares of stock in a “street name.”

Recent Sales of Unregistered Securities.

In December 2014, we issued securities in connection with the merger transaction described above in the Overview Section of Management’s Discussion and Analysis of Financial Conditions and Results.

On December 29, 2014, we completed the sale of 2,000,000 shares of our common stock to 18 purchasers for proceeds totaling $2,000,000, including (a) $1,625,000 of cash and (b) automatic conversion of promissory notes in the principal amount of $375,000.

On August 14, 2015, we granted an option to purchase up to 1,000,000 shares of our common stock to each of two employees. 

On September 25, 2015, we entered into a Securities Purchase Agreement and issued a 15% Promissory Note with the principal face value of $500,000 (the “15% Note”) to an accredited investor. Under the terms of the 15% Note, all principal and related accrued interest outstanding are due and payable to the noteholder upon the earlier of: (i) September 25, 2016; or (ii) within ten business days after the consummation of an equity or convertible debt financing with aggregate gross proceeds of at least $1,000,000.

In November 2015, the Company entered into a consulting agreement with PCG Advisory Group to provide strategic advisory and investor relations services over six months. The Company agreed to pay the consultant 90,000 in shares of the Company’s restricted stock, which were issued over six months. The Company issued 30,000 shares of restricted stock in February 2016, and the remaining 60,000 shares were issued in June 2016.  The grant date value of the restricted stock award was $38,000 and was recognized in full as stock based compensation for the year ended December 31, 2016. 

During November 2015, we issued a one year 10% promissory notes payable (the “10% Note”) to a purchaser for cash proceeds totaling $50,000. In the event that we secure any future financing with aggregate gross proceeds of at least $1 million while the 10% Note is outstanding, the 10% Note and all accrued interest therefrom will be immediately due and payable within ten business days of the closing of such financing. The holder may also convert any unpaid principal under the 10% Note into any funding instrument entered into by our Company for a period of 180 days after the date of the 10% Note. The full interest of 10% of the borrowings under the 10% Note ($5,000) is due irrespective of whether paid at maturity or when required to be prepaid.

On November 30, 2015 and on four subsequent dates during December 2015, four accredited investors (the “Lenders”) advanced a total of $410,000 to the Company. The borrowings (“Advances”) were not accompanied by documentation of the terms of the Advances. However, there were various discussions as to the repayment terms, the interest expected to be paid to the Lenders and additional equity of our Company to be issued to the Lenders in connection with the Advances.

On March 17, 2016, we entered into a consulting agreement with Dignitas Consulting to provide business development and advisory services over one year. In connection with the agreement, we granted the consultant 200,000 shares of our fully vested common stock as consideration for the consultant’s services.  The grant date value of the restricted stock award was $128,000 and was recognized in full as stock based compensation for the year ended December 31, 2016. 

On March 30, 2016, an accredited investor advanced our Company $244,975. The advance was undocumented. The advance was subsequently documented on April 4, 2016 in the form of our $275,000 promissory note. We also issued 50,000 shares of our common stock to the investor. The note bears interest at rate of 8% per annum and is convertible into shares of our common stock at the rate of $0.70 per share.

On April 4, 2016, we issued our promissory note in the amount of $575,000 to an accredited investor in exchange for an aggregate purchase price of $575,000. The terms of the Note call for an interest rate of 15%, due one year from the date of issuance, though all accrued and unpaid interest and all other amounts payable under the Note are due to the investor within ten (10) business days after the closing by the Company of an equity or convertible debt financing in one or more series of transactions, with aggregate gross proceeds of at least $1 million.

In May 2016, we entered into agreements with two employees that hold options to purchase up to 1,000,000 shares of our common stock each. The agreements modified the strike price of their outstanding options from the previous strike prices of $1.50 to $0.55 per share. All other terms of the previous option agreements remained unchanged.

During January through June 2016, three accredited investors (the “Lenders”) advanced a total of $140,000 to the Company. The borrowings were not accompanied by documentation of the nature of the borrowings. However, there were general discussions as to the repayment terms and the interest expected of 10% per annum to be paid to the Lenders in connection with the borrowings.

On July 19, 2016, we issued a sixty day 15% promissory note payable to an accredited investor for cash proceeds totaling $35,000. In the event that we secure any future financing with aggregate gross proceeds of at least $500,000 while the promissory note is outstanding, the promissory note and all accrued interest therefrom will be immediately due and payable within ten business days of the closing of such financing.

During July and August 2016, four accredited investors (the “Lenders”) advanced a total of $435,000 to the Company. The borrowings (“Advances”) were not accompanied by documentation of the nature of the Advances. However, there were general discussions as to the repayment terms and the interest expected to be paid to the Lenders in connection with the Advances.

During the three months ended September 30, 2016, certain accredited investors advanced a total of $925,000 (the “Advances”) to the Company with a right to convert at no greater than $0.40 per share. We received aggregate proceeds in the amount of $925,000. In connection with the Advances, the Company also issued warrants to purchase 462,500 shares of our common stock at an exercise price $0.60 per share with a 5 year term. The Advances were not accompanied by documentation. However, there were general discussions as to the repayment terms and the interest expected of 10% per annum to be paid to the Lenders in connection with the borrowings.

On September 22, 2016, the Company entered into new compensation agreements and arrangements with two of its directors. Our Chairman was issued (i) 2,000,000 shares of our fully vested common stock; (ii) restricted stock units for 2,000,000 shares of the Company’s common stock; and, (iii) a stock option to acquire 2,352,619 shares of our common stock, with an exercise price of $0.61 per share. Our interim chief financial officer/board member was issued (i) restricted stock units for 2,000,000 shares of the Company’s common stock; and, (iii) a stock option to acquire 2,352,619 shares of our common stock, with an exercise price of $0.61 per share.

On October 21, 2016, the Company issued an accredited investor a promissory note in the total principal amount of $267,500 with 9% annual interest rate, which will be due on October 21, 2017. The Company received $250,000 of gross proceeds and granted a warrant to purchase 222,916 shares of common stock at $0.60 per share.

On November 2, 2016, the Company issued certain accredited investors promissory notes (the “Notes”) in the total principal amount of $480,000 with a 5% annual interest rate, which will be due on April 28, 2017. The Company received $400,000 of gross proceeds from the Notes. The Company also granted to the investors warrants to purchase 1,428,572 shares of common stock at no greater than $0.47 per share.

On December 15, 2016, the Company issued to Brian Kenney (“Kenney”) a promissory note in the total principal amount of $77,778 with a 10% annual interest rate, which will be due on the earlier of (i) December 15, 2017; or, (ii) the closing of the public offering under this Registration Statement (the “Secondary Offering”). The Company received $75,000 of gross proceeds from the Note. Kenney has the right to convert the note into shares of the Company’s common stock during the 15-days immediately following the closing of the Secondary Offering at a conversion price equal to 65% of the share price in the Secondary Offering. The Company also granted to Kenney warrants to purchase 77,778 shares of common stock at $0.50 per share.

No underwriters were used in the foregoing transactions. The securities were issued in reliance on the exemptions from registration provided by Section 4(a)(2) of the Securities Act and/or Rule 701 promulgated under Section 3(b) of the Securities Act as a transaction pursuant to a compensatory benefit plan or contract relating to compensation. Each purchaser received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or an available exemption from registration. All of the foregoing securities were deemed restricted securities for the purposes of the Securities Act.

Re-Purchase of Equity Securities.

None.

Dividends.

We have never declared or paid cash dividends on our capital stock and we do not anticipate declaring or paying cash dividends on our capital stock in the foreseeable future. Any payments of cash dividends will be at the discretion of our board of directors, and will depend upon our results of operations, earnings, capital requirements, legal and contractual restrictions, and other factors deemed relevant by our board of directors.

Securities Authorized for Issuance Under Equity Compensation Plans.

We have no compensation plans under which our equity securities are authorized for issuance.

We are a smaller reporting company, as defined by § 229.10(f)(1) of Regulation S-K, that is not required to provide the information required by this Item.

Overview

The following analysis of the results of operations for the years ended December 31, 2016 and 2015 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of a number of factors. An investment in our common stock involves a high degree of risk. Readers of this prospectus should carefully consider the risks set forth in the Risk Factors section of this prospectus. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” or similar expressions, variations of those terms or the negative of those terms to identify forward-looking statements. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements. 

We were incorporated in the State of Nevada on October 30, 2013 under the name “Bling Marketing, Inc.”  Until December 29, 2014, we were a wholesaler of jewelry, principally earrings, rings, and pendants (“BMI Business”). We recognized a minimal amount of revenues from operations prior to the three months ended September 30, 2014. During the three months ended September 30, 2014, we began working with several distributors to sell our jewelry products to retail outlets and as a result, recognized sales revenue of $22,025. On September 11, 2014, we filed a Current Report on Form 8-K indicating that we were no longer a shell company as defined by Rule12b-2 of the Exchange Act in light of our operations through the quarter ended September 30, 2014.

On December 26, 2014, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with NuGene Inc., a California corporation (“NuGene”), and on December 29, 2014 (the “Closing Date”) we filed a certificate of merger in the State of California whereby our subsidiary, NG Acquisition Inc. (“Acquisition Sub”) merged with NuGene. As a result, NuGene (the surviving entity) became our wholly owned subsidiary. The transaction contemplated under the Merger Agreement is deemed to be a reverse merger. Under reverse merger accounting, our Company (the legal acquirer) was considered to have been acquired by NuGene. The assets, liabilities, and operations of NuGene were brought forward at their book value and no goodwill was recognized.

In connection with the Merger Agreement, we entered into a Business Transfer and Indemnity Agreement dated December 29, 2014 (the “Indemnity Agreement”) with our former Chief Executive Officer and Director, Dena Kurland providing for:

Pursuant to the terms of the Merger Agreement, our Company issued 26,052,760 shares of Company common stock and 1,917,720 Company Series A Preferred Stock to the former NuGene, Inc. shareholders. The Series A Preferred Stock is initially convertible into common stock at a ratio of one to one. Additionally, as long as there are a minimum of 900,000 shares of Series A Preferred Stock outstanding, the holders of the Series A Preferred Stock have the right to elect a majority of the board of directors as long as there are a minimum of 900,000 shares of Series A Preferred Stock outstanding. Finally, the holders of the Series A Preferred Stock, generally voting as a class with the holders of common stock, have for each share of Series A Preferred Stock owned, three times the number of votes permitted to each share of common stock.

On December 26, 2014, our board of directors approved a 15.04 to one stock split (“Stock Split”) in the form of a stock dividend to holders of our common stock as of that date.   To effect that board action, shareholders received as a stock dividend 14.04 additional shares of common stock for every share of common stock held. Unless otherwise noted, all share numbers shown in this Registration Statement give effect to the Stock Split.

On December 29, 2014, we completed the sale of 2,000,000 shares of our common stock to 18 purchasers (“Stock Placement”) for proceeds totaling $2,000,000, including (a) $1,625,000 of cash and (b) automatic conversion of promissory notes in the principal amount of $375,000.  

At the Closing Date subsequent to the transactions described above (and giving effect to the Stock Split), we had approximately 39,197,400 shares of common stock outstanding and 1,917,720 shares of Series A Preferred Stock outstanding. At the time of the merger, an outstanding warrant to acquire shares of NuGene Inc. was exchanged for a warrant of Bling Marketing Inc. The warrant on its issuance, after giving effect to the Stock Split, evidenced the right of the holder to acquire up to 500,000 shares of common stock of our Company. The warrant has a strike price of $2.50 per share and was not exercisable for 12 months (the "Initial Exercise Date"). Any shares acquired thereunder upon exercise thereafter cannot be sold for six months following the Initial Exercise Date.

On January 22, 2015, we were advised that the Financial Industry Regulatory Association had approved our (i) 15.04 to one Stock Split, (ii) name change from Bling Marketing Inc. to NuGene International, Inc., and (iii) change of trading symbol from BLMK to NUGN.

RESULTS OF OPERATIONS

For the year ended December 31, 2016 as compared to the year ended December 31, 2015

Revenues

Revenues generated during the year ended December 31, 2016 totaled approximately $509,000 resulted primarily from the sale of our cosmeceutical products to wholesale distributors, physicians and consumers, including 12.3% and 12.2% of our revenues from two customers. Our customers generally purchase products from us on a purchase order basis on standard terms but future product sales to distributors and physicians will be tied directly to their success in reselling our products. Our customers are under no obligation to continue to purchase our products. The loss of significant customers, a material reduction in their purchases or the cancellation of product orders or unexpected returns of unsold products could significantly decrease our revenues and adversely affect our future growth prospects. We do no have long-term purchase commitments from our customers.

Revenues generated during the year ended December 31, 2015 totaling approximately $2,085,000 resulted primarily from the sales of our cosmeceutical products to distributors, online marketers and consumer online sales. Our revenue in 2016 decreased by $1,575,000 or 76% from 2015. While our revenue decrease could be attributed in part to decreases in customer demand for our products of which we are unaware at present, we believe our severe lack of liquidity was a significant contributing factor. Our cash constraints made it difficult to afford and to recruit qualified senior level employees, especially in the area of marketing. Our plans for launching a television direct marketing campaign have also been delayed for the same reasons. We estimate that absent successful procurement of the funding that we currently seek, we will be unable to build revenue in accordance with our corporate plans and revenue could continue to be stagnant or decrease significantly.

Cost of revenues

Cost of revenues during the year ended December 31, 2016 totaled approximately $719,000, representing 141% of revenues. These costs consisted primarily of an obsolescence charge of $437,000 as the Company is rebranding and repackaging its products, direct costs of labor and overhead of $153,000 as production was reduced and $129,000 primarily attributed to the cost of raw materials and product packaging of our cosmeceutical products, as well as shipping and handling. Cost of revenues during the year ended December 31, 2015 of approximately $589,000 represented 28.2% of revenues. Such costs related primarily to the cost of raw materials, product packaging, and direct labor in the manufacturing of our cosmeceutical products, as well as shipping and handling.

Advertising and promotion

Advertising and promotion totaled approximately $386,000 for the year ended December 31, 2016 compared to approximately $374,000 for 2015, resulting in a $12,000 increase from 2015 to 2016. The majority of the increase was related to marketing consultants and brand management expenses.

Personnel

Personnel expenses totaled approximately $5,826,000 for the year ended December 31, 2016 compared to approximately $3,448,000 for 2015, resulting in a $2,378,000 increase from 2015 to 2016. The majority of the increase was related to an increase in stock based compensation expense of approximately $1,865,000 related to the issuance of stock awards and amortization of stock options and $513,000 related to wage related expenses.

Selling, general and administrative (“SGA”)

SGA totaled approximately $1,216,000 for the year ended December 31, 2016 compared to approximately $1,329,000 for 2015. The decreases of approximately $113,000 was primarily related to a decrease of approximately $233,000 in marketing spend and departmental allocations and overhead of $93,000 partially offset by increases in travel expenses of $77,000 and bad debt expense of $138,000.

Research and development

Expenses related to research and development totaled approximately $115,000 for the year ended December 31, 2016 compared to approximately $360,000 for 2015. This represented a decrease of approximately $245,000 which was primarily attributable to the expensing of intellectual property in 2015 of $150,000 combined with reduced clinical spend of $121,000 partially offset by increased materials cost of $26,000.

Professional fees

Professional fees totaled approximately $1,335,000 for the year ended December 31, 2016 compared to approximately $1,147,000 for 2015. The increase of $188,000 was primarily attributable to an increase in marketing, operational, and administrative consulting and professional services of $188,000.

Other income (expenses)

Interest expense totaled approximately $1,541,000 for the year ended December 31, 2016 compared to $57,000 for 2015. The increase in interest expense was primarily attributable to the increase of our borrowings outstanding. While there was no cash interest due during the period, interest expense resulted from the accretion to face value of borrowings advanced to our Company as well as accruing interest on all debt outstanding.

Loss on issuance of debt of approximately $2,136,481 arose from the recording of our derivative instruments associated with certain borrowings received during the year ended December 31, 2016.

Change in fair value of derivative liabilities of approximately $998,000 resulted from the revaluation of our derivative instrument, which was primarily related to the reduction of our stock price from the date of issuance to the date of revaluation.

Related Party Transactions 

On July 18, 2016, the Board of Directors of the Company (the “Board”) appointed Steven R. Carlson to serve as Chief Executive Officer (“CEO”) of NuGene International, Inc. (the “Company”). His appointment is to be effective as of and on July 25, 2016. In connection with the hiring of Mr. Carlson, Ali Kharazmi resigned his position as our CEO. Mr. Kharazmi’s resignation will coincide with Mr. Carlson’s start date, July 25, 2016. Mr. Kharazmi will continue to render significant services to the Company and will continue to serve as the Company’s Chairman of the Board.

The following individuals and entities have been identified as related parties based on their affiliation with the Chairman of the Board and Acting Chief Financial Officer:

The following amounts were owed to related parties, affiliated with the Chairman of the Board and Acting Chief Financial Officer as of December 31, 2015:

The amount owed to ASP relates to legal and administrative services provided by ASP employees to our Company. Our Company temporarily advanced $95,000 to ASP prior to December 31, 2015 and was repaid in full prior to January 5, 2016. The amounts owed to Saeed Kharazmi at December 31, 2015 related to expense reimbursements incurred in the ordinary course of business. The amount owed to CWM relates to medical procedures provided to NuGene consultants as compensation for advertising and marketing services provided to NuGene. The amount owed to Ali Kharazmi and all amounts outstanding represent advances that bore no interest and were due on demand or expense reimbursements incurred in the ordinary course of business. Prior to the sale of the related party advances in November 2016, the amounts owed were as follows:

On November 7, 2016, the amounts owed to related parties totaling $382,061 were sold to two unrelated investors. The Company issued a note to each investor in the amount of $191,030 (see Note 6). The notes have an interest rate of 5% per annum and mature on the earlier of: (i) May 7, 2017; (ii) the date the Company raises a total of $2 million, subsequent to the issuance of these notes. The notes have a conversion feature under which the note holder can convert at any time at a conversion price of $0.40 per share.

As of December 31, 2016, the Company has no outstanding related party liabilities.

Liquidity and Capital Resources.

We had cash and cash equivalents of $44,507 as of December 31, 2016 and a working capital deficit of $5,918,733 as of December 31, 2016. During the fourth quarter of 2016 and through the date of this Annual Report, we have faced an increasingly challenging liquidity situation that has severely hamstrung our operations and ability to execute our operating plan. Further, we have increasingly fallen behind on agreed upon repayment terms with our lenders, products and service providers. We attempted to obtain from multiple sources new capital required to alleviate these liquidity shortfalls, but to date the amounts provided have been insufficient to meet our operating needs. Our officers have personally advanced our Company over $57,700 in funding through the date of this Annual Report, however we believe that new funding totaling at least $1.5 million will be required to satisfy the outstanding claims of our lenders and suppliers and to provide sufficient funds to execute our current operating plan. There is no assurance that our Company will be able to secure such funding on acceptable (or any) terms.  

During the year ended December 31, 2016, we reported a net loss of $11,816,521, and had negative cash flows from operating activities totaling $2,003,860 for the same period. Combined with $4,540 in cash flows used for investing activities, we had total negative cash flows of $2,008,400 in 2016 that was offset by cash flows from financing activities of $2,030,000 (all related to the issuance of notes payable). Combined with a beginning cash balance of $22,907 as of January 1, 2016, we had a positive net change in cash during 2016 of $21,600.

On April 4, 2016, we issued a note payable to Canyon Assets Holdings, Inc. (“Lender”) dated March 28, 2016 in the principal amount of $575,000. The note was issued to the Lender in consideration for the Lender’s having satisfied on the Company’s behalf an outstanding note payable (the “CAH Note”) of the Company (the “JTS Note”). The JTS Note issued September 25, 2015 was repaid in full ($500,000 face value and accrued interest of $75,000) by the Lender with the payment of $575,000 in cash. The terms of the CAH Note call for an interest rate of 15%, due one year from the date of the CAH Note.

On April 4, 2016, we issued a $275,000 face value note payable and 50,000 shares of our common stock to Gemini Master Fund, LTD (“Gemini”) pursuant to a Security Purchase Agreement dated March 30, 2016 (the date the funds were received by our Company). Under the terms of the related note payable (the “Gemini Note”), the Company received $245,000, net of costs and original issue discount.

On October 28, 2016, the Gemini Note was purchased in full, including accrued interest of approximately $13,000, by another lender in exchange for a convertible note (“the 4% Convertible Note”) issued by the Company. The 4% Convertible Note accrues interest at 4% per annum, is entitled to the same conversion features as the Gemini Note and matures on June 30, 2017. The lender charged the Company $45,000 in fees, which were added to the balance, and converted approximately $62,000 of the 4% Convertible Note balance into 331,413 shares of the Company’s common stock, resulting in a balance of $270,350 at December 31, 2016.

During January through June 2016, three individuals (the “Lenders”) advanced a total of $140,000 to the Company. The borrowings were not accompanied by documentation of the nature of the borrowings. However, there were general discussions as to the repayment terms and the interest expected of 10% per annum to be paid to the Lenders in connection with the borrowings. Accordingly, we have accounted for the borrowings based on estimates of their still undocumented final terms.

In July 19, 2016, we issued a sixty day 15% promissory note payable to a purchaser for cash proceeds totaling $35,000. In the event that we secure any future financing with aggregate gross proceeds of at least $500,000 while the promissory note is outstanding, the promissory note and all accrued interest therefrom will be immediately due and payable within ten business days of the closing of such financing.

From July through September 30, 2016, certain investors advanced a total of $925,000 (the “Advances”) to the Company with a right to convert at no greater than $0.40 per share. In connection with the Advances, the Company also issued warrants to purchase 770,833 shares of our common stock at an exercise price of $0.60 per share with a 5 year term.

On October 21, 2016, we issued a $267,500 face value convertible note that accrues interest at 9% per annum and matures on October 21, 2017 (“the 9% Convertible Note”). The Company received proceeds of $240,000, net of costs and original issuance discount. Upon holding the note for six months, the conversion terms allow the holder to convert outstanding principal into the Company’s common stock at the lower of (i) $0.40 per share or (ii) 65% of the lowest closing bid price of the common stock for the fifteen prior trading days, including upon which the conversion notice is received by the Company. The 9% Convertible Note allows for prepayment within 180 days from the date of issuance. If the note is outstanding for 90 days or less, the prepayment rate is 125% of principal plus accrued interest; and if the note is outstanding for more than 90 days but less than 180 days, the prepayment rate is 150% of principal plus accrued interest.

On October 28, 2016, we issued a $480,000 face value convertible note that accrues interest at 5% per annum and matures on April 28, 2017 (“the 5% Convertible Note”). The Company received proceeds of $375,000, net of costs and original issuance discount. The conversion terms allow the holder to convert outstanding principal into the Company’s common stock if an event of default occurs, or if the Company does not repay the note in full at the original maturity date, at 60% of the lowest closing bid price of the common stock for the thirty prior trading days immediately preceding the trading date. Prepayment rates are 115% if the note is repaid within the first sixty days from the date of issuance and 125% thereafter

On December 15, 2016, we issued a $77,779 face value convertible note that accrues interest at 10% per annum and matures on June 15, 2017 (“the 10% Convertible Note”). The Company received proceeds of $70,000, net of original issuance discount. The conversion terms allow the holder to convert outstanding principal into the Company’s common stock at 65% of the price of the common stock when the Company a capital raise transaction of at least $15,000,000 in debt, and or equity subsequent to the issuance date. The 10% Convertible Note allows for prepayment any time after 90 days from the date of issuance at a prepayment rate of 110% of principal and accrued interest outstanding.

During November 2015, we issued a one year 10% promissory notes payable (the “10% Note”) to a purchaser for cash proceeds totaling $50,000. In the event that we secure any future financing with aggregate gross proceeds of at least $1 million while the 10% Note is outstanding, the 10% Note and all accrued interest therefrom will be immediately due and payable within ten business days of the closing of such financing. The holder may also convert any unpaid principal under the 10% Note into any funding instrument entered into by our Company for a period of 180 days after the date of the 10% Note. The full interest of 10% of the borrowings under the 10% Note ($5,000) is due irrespective of whether paid at maturity or when required to be prepaid.

On November 30, 2015 and on three subsequent dates during December 2015, four individuals (the “Lenders”) provided an advance to the Company with a face value of $361,111 for cash proceeds totaling $322,500. The borrowings (“2015 Advances”) were not accompanied by documentation of the nature of the 2015 Advances. However, there were general discussions as to the repayment terms, the interest expected to be paid to the Lenders and additional equity of the Company to be issued to the Lenders in connection with the 2015 Advances. Accordingly, we have accounted for the Advances based on estimates of their final terms.

On December 11, 2015, we entered into a Securities Purchase Agreement and issued a 10% Convertible Promissory Note with the principal face value of $110,000 (the “10% 2015 Note”) to an accredited investor for cash proceeds of $87,500, net of issuance costs. Under the terms of the 10% 2015 Note, all principal and related accrued interest outstanding are due and payable to the noteholder upon the earlier of: (i) December 10, 2016; or (ii) in the event that the Company completes a financing or a series of financings, with the same or different investors, that in the aggregate result in gross proceeds to the Company of at least $3 million, then the Company is required to pre-pay and redeem the entire remaining outstanding principal amount plus Interest of this Note in cash, provided that (A) the Company shall pay the Holder one hundred twenty percent (120%) of the principal plus interest outstanding in repayment and (B) such amount must be paid in cash on the next Business Day after receipt of the gross proceeds. While any amounts are outstanding under the 10% 2015 Note, such amounts outstanding are convertible into share of the Company’s Common Stock at the lesser of: 1) $0.90 per share and 2) 75% of the price per share of the Company’s Common Stock sold in a future financing with gross proceeds of at least $1 million, subject to adjustments as stated in the Note agreement.

Off-Balance Sheet Arrangements

There are no 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, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Inflation

Inflation and changing prices have had no effect on our net sales and revenues or on our income from continuing operations over our two most recent fiscal years.

Critical Accounting Policies and Estimates

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates which have been made using careful judgment.

The financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.

We have identified the following critical accounting policies that are most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following is a review of the more critical accounting policies and methods used by us:

Use of Estimates

Conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the use of estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including but not limited to, those related to revenue recognition, collectibility of accounts receivable, contingent liabilities, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, excess and obsolete inventory, deferred tax asset valuation and income taxes. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.

Risks and Uncertainties

The Company operates in an industry that is subject to rapid change. The Company's operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential of business failure.

Inventories

The Company’s skin and hair care inventories consist of raw materials and finished goods and are valued at the lower of cost (first-in, first-out) or market. The Company evaluates its inventory for excess quantities and obsolescence on a regular basis. To determine if the cost of the Company's inventory should be written down, current and anticipated demand, customer preferences and the age of the merchandise are considered. During the year ended December 31, 2016 the Company recorded charges of approximately $437,000 to operations as a result of excess and obsolete inventory related to the rebranding and repackaging of products. During the year ended December 31, 2015, the Company did not recognize any charges to operations associated with excess and obsolete inventory.

Valuation of long-lived Assets

The Company evaluates its long-lived assets for impairment at least annually, or more frequently when a triggering event is deemed to have occurred. This assessment is subjective in nature and requires significant management judgment to forecast future operating results, projected cash flows and current period market capitalization levels. If the Company’s estimates and assumptions change in the future, it could result in a material write-down of long-lived assets. The Company recognizes an impairment charge as the difference between the net book value of such assets and the fair value of the assets on the measurement date 

Revenue Recognition

In accordance with Accounting Standards Codification (“ASC”) 605 - Revenue Recognition, the Company recognizes revenue from product sales when the product has been ordered by the customer, the selling price is fixed or determinable, the product is shipped to the customer, title has transferred and collectibility is reasonably assured.

Research and Development

Internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed. Research and development consists of consulting fees, direct labor and raw materials associated with the development of new products to be commercialized by our Company. Research and development expenses totaled $115,391 and $360,489 in 2016 and 2015, respectively.

Allowance for Doubtful Accounts

Our Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Our allowance for doubtful accounts was $532,661 and $177,140 as of December 31, 2016 and 2015, respectively. Bad debt expense totaled $361,336 and $223,631, for the years ended December 31, 2016 and 2015, respectively.

Convertible Financial Instruments

The Company bifurcates conversion options and warrants from their host instruments and accounts for them as free standing derivative financial instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.

When the Company has determined that the embedded conversion options and warrants should not be bifurcated from their host instruments, discounts are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument.

Debt Discounts - Debt discounts under these arrangements are amortized to interest expense using the interest method over the earlier of the term of the related debt or their earliest date of redemption.

Loss on Issuance - The conversion features of the notes and certain warrants were bifurcated from the host instrument as its conversion terms were not indexed to the Company’s own stock. In addition, the warrants associated with the debt instruments were also treated as a free standing derivative liability. The total fair value of the embedded conversion feature and the warrants exceeded the net proceeds received and resulted in a loss on issuance of $2.1 million.

Common Stock Purchase Warrants and Derivative Financial Instruments - Common stock purchase warrants and other derivative financial instruments are classified as equity if the contracts (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). Contracts which (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) that contain reset provisions that do not qualify for the scope exception are classified as liabilities. The Company assesses classification of its common stock purchase warrants and other derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.

Beneficial conversion feature - The issuance of the convertible debt generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid-in capital).

Share Based Payments

The Company recognizes compensation expense for all equity-based payments in accordance with ASC 718 - Share-based payments. Under ASC 718’s fair value recognition provisions, the Company recognizes equity-based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.

Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the accompanying consolidated statements of operations based on the fair values of the related payments. Such expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

The Company accounts for share-based payments granted to non-employees in accordance with ASC 505 - Equity Based Payments to Non-Employees. The Company determines the fair value of the stock based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a 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.

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

The Board of Directors and Stockholders of

NuGene International, Inc.

We have audited the accompanying consolidated balance sheet of NuGene International, Inc. (a Nevada corporation) and its subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor have we been engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NuGene International, Inc. and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring losses and negative cash flow from operations since inception. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

NuGene International, Inc.

We have audited the accompanying consolidated balance sheet of NuGene International, Inc. and subsidiaries (“the Company”) as of December 31, 2015 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NuGene International, Inc. and subsidiaries as of December 31, 2015 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the notes to the financial statements, the Company has not established sufficient revenues to cover its operating costs and has suffered from continued losses from operations. As of December 31, 2015, the Company had a working capital deficit and does not have the sufficient cash resources available to meet its planned business objectives. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan regarding these matters is also described in the notes to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Dov Weinstein & Co. C.P.A. (Isr)

www.wcpa.co.il

Jerusalem, Israel

March 30, 2016

NuGene International, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31, 2016 and 2015

See accompanying notes.

NuGene International, Inc. and Subsidiaries

Consolidated Statements of Operations

For the years ended December 31, 2016 and 2015

See accompanying notes.

NuGene International, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity (Deficit)

For the years ended December 31, 2016 and 2015

See accompanying notes.

NuGene International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31, 2016 and 2015

See accompanying notes. 

NUGENE INTERNATIONAL, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2016

NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION 

NuGene International, Inc. (also refer to as “we”, “us”, “our”, “the “Company”, “NuGene” or “NGI”) was incorporated in the State of Nevada on October 31, 2013. NuGene, Inc. (our wholly owned subsidiary) was incorporated in the state of California in December 2006. On January 20, 2015, we formed NuGene BioPharma, Inc. (“BioPharma”) as a wholly owned California incorporated subsidiary of NGI. On November 6, 2015, we formed The Aesthetic Group, Inc. (“TAG”) as a wholly owned California incorporated subsidiary of NGI. Both BioPharma and TAG have had no significant independent operations since inception.

Basis of Presentation

The accompanying consolidated financial statements of our Company have been prepared in accordance with accounting principles generally accepted in the United States. The consolidated financial statements reflect the accounts of NuGene International, Inc. and its wholly owned subsidiaries BioPharma and TAG. All significant inter-company balances and transactions have been eliminated in consolidation.

We have incurred net losses through the date of these financial statements and have yet to establish profitable operations. Our consolidated financial statements have been presented on the basis that our business is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We are subject to the risks and uncertainties associated with a business with high short-term debt, limited commercial product revenues, including limitations on our operating capital resources and uncertain demand for our products. We have incurred recurring operating losses and negative operating cash flows since inception and through December 31, 2016, and we expect to continue to incur operating losses and negative operating cash flows at least through the near future. Members of our Company’s management have been required to advance our Company funding in order to partially meet our most critical cash requirements including payroll along with those associated with certain critical goods and services. In the process of managing these situations, our management may have made representations implying their personal guarantee of certain of our Company’s obligations. For further discussion of the advances made by management to meet the Company’s most critical cash needs, see the titled “Certain Relationships and Related Transactions”.

As a result of the aforementioned factors, management has concluded that there is substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm, in its report on our 2016 consolidated financial statements, raised substantial doubt about our ability to continue as a going concern.  Our consolidated financial statements as of and for the year ended December 31, 2016 do not contain any adjustments for this uncertainty. In response to our Company’s cash needs, we raised funding as described in our footnotes that follow. Any additional amounts raised will be used for our future investing and operating cash flow needs. However, there can be no assurance that we will be successful in raising additional amounts of financing.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the use of estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including but not limited to, those related to revenue recognition, collectibility of accounts receivable, contingent liabilities, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, excess and obsolete inventory, deferred tax asset valuation and income taxes. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.

Risks and Uncertainties

Our Company operates in an industry that is subject to rapid change. Our Company's operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential of business failure.

Reclassifications

For comparability, certain prior period amounts have been reclassified, where appropriate, to conform to the current year’s financial statement presentation. These reclassifications have no impact on net loss.

Cash Equivalents

Cash equivalents include investments with initial maturities of three months or less. Our Company maintains its cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000.

Inventories

Our Company’s skin and hair care inventories consist of raw materials and finished goods and are valued at the lower of cost (first-in, first-out) or market. Our Company evaluates its inventory for excess quantities and obsolescence on a regular basis. To determine if the cost of our Company's inventory should be written down, current and anticipated demand, customer preferences and the age of the merchandise are considered. For the year ended December 31, 2016 the Company recorded charges of approximately $437,000 to operations as a result of excess and obsolete inventory related to the rebranding and repackaging of products. For the year ended December 31, 2015, the Company did not recognize any charges to operations associated with excess and obsolete inventory.

Valuation of long-lived Assets

The Company evaluates its long-lived assets for impairment at least annually, or more frequently when a triggering event is deemed to have occurred. This assessment is subjective in nature and requires significant management judgment to forecast future operating results, projected cash flows and current period market capitalization levels. If the Company’s estimates and assumptions change in the future, it could result in a material write-down of long-lived assets. The Company recognizes an impairment charge as the difference between the net book value of such assets and the fair value of the assets on the measurement date.

Property and Equipment

Property and equipment consist of office furniture, computer equipment, laboratory equipment, purchased software, website development and improvements made to our leased offices and are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the three or five year useful lives of the assets or the remaining term of the lease. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Expenditures for maintenance and repairs are expensed as incurred.

Revenue Recognition

In accordance with Accounting Standards Codification (“ASC”) 605 - Revenue Recognition, the Company recognizes revenue from product sales when the product has been ordered by the customer, the selling price is fixed or determinable, the product is shipped to the customer, title has transferred and collectibility is reasonably assured.

Concentration of Revenues

During the year ended December 31, 2016, we derived 12.3% and 12.2% of our revenues from two wholesale distributors (neither of these customers have balances in accounts receivable at December 31, 2016). During the year ended December 31, 2015, we derived 31.1% and 15.7% of our revenues from two wholesale distributors (ending balances in accounts receivable totaling $173,790 and $327,893, respectively). Our distributors purchase products from us on a purchase order basis on standard terms. The distributors are under no obligation to continue to purchase our products. The loss of any of our major distributors, a material reduction in their purchases or the cancellation of product orders or unexpected returns of unsold products could significantly decrease our revenues and impede our future growth prospects. We do not have long-term purchase commitments with our distributors.

Cost of Revenues

Cost of revenues include all of the costs to manufacture our Company’s products. For products manufactured in our Company’s own facilities, such costs include raw materials and supplies, direct labor and factory overhead. For products manufactured for our Company by third-party contractors, such cost represents the amounts invoiced by the contractors.

Research and Development

Internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed. Research and development consists of consulting fees, direct labor and raw materials associated with the development of new products to be commercialized by our Company.

Allowance for Doubtful Accounts

Our Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Our allowance for doubtful accounts was $532,661 and $177,140 as of December 31, 2016 and 2015, respectively. Bad debt expense totaled $361,336 and $223,631, for the years ended December 31, 2016 and 2015, respectively.

Convertible Financial Instruments

The Company bifurcates conversion options and warrants from their host instruments and accounts for them as free standing derivative financial instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP.

When the Company has determined that the embedded conversion options and warrants should not be bifurcated from their host instruments, discounts are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument.

Debt Discounts - Debt discounts under these arrangements are amortized to interest expense using the interest method over the earlier of the term of the related debt or their earliest date of redemption.

Loss on Issuance - The conversion features of the notes and certain warrants were bifurcated from the host instrument as its conversion terms were not indexed to the Company’s own stock. In addition, the warrants associated with the debt instruments were also treated as a free standing derivative liability. The total fair value of the embedded conversion feature and the warrants exceeded the net proceeds received and resulted in a loss on issuance of $2.1 million during the year ended December 31, 2016. 

Common Stock Purchase Warrants and Derivative Financial Instruments - Common stock purchase warrants and other derivative financial instruments are classified as equity if the contracts (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). Contracts which (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) that contain reset provisions that do not qualify for the scope exception are classified as liabilities. The Company assesses classification of its common stock purchase warrants and other derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.

Beneficial conversion feature - The issuance of the convertible debt generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid-in capital).

Share Based Payments

The Company recognizes compensation expense for all equity-based payments in accordance with ASC 718 - Share-based payments. Under ASC 718’s fair value recognition provisions, the Company recognizes equity-based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.

Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the accompanying consolidated statements of operations based on the fair values of the related payments. Such expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

The Company accounts for share-based payments granted to non-employees in accordance with ASC 505 - Equity Based Payments to Non-Employees. The Company determines the fair value of the stock based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a 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.

Net Loss per Share of Common Stock

The Company computes net loss per share in accordance with ASC 260 - Earnings Per Share. ASC 260 requires presentation of both basic and diluted net loss per share on the face of the statements of operations. Basic net loss per share is calculated by dividing the loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted net loss per share is determined by adjusting the loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all potential dilutive common shares, such as stock issuable pursuant to the exercise of stock warrants or the conversion of preferred stock into common stock.

Common stock equivalents totaling, 26,077,697 and 4,767,720 as of December 31, 2016 and 2015, respectively, were not included in the computation of diluted earnings per share on the consolidated statements of operations because the Company reported a net loss during the years ended December 31, 2016 and 2015 and therefore the effect would be anti-dilutive.

Fair Value of Financial Instruments

We measure assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements. Fair value represents the estimated amount that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs used in valuation techniques are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

The carrying values for cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued liabilities, and deferred revenue approximate their fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, the carrying value of the notes payable approximate fair value.

Website Development

Costs and expenses incurred during the planning and operating stages of our Company’s website development are expensed as incurred. The Company accounts for the development of its website by expensing all costs associated with the planning of the website as incurred and capitalizing the costs to develop the website. Once the website is available for use, the related costs will be amortized over their estimated useful life on a straight-line basis (generally estimated to be 3 years). These costs are included in property and equipment in the consolidated balance sheets.

Common Stock Purchase Warrants and Derivative Financial Instruments

Common stock purchase warrants and other derivative financial instruments are classified as equity if the contracts (1) require physical settlement or net-share settlement or (2) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). Contracts which (1) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the control of the Company), (2) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement), or (3) that contain reset provisions that do not qualify for the scope exception are classified as equity or liabilities. The Company assesses classification of its common stock purchase warrants and other derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.

Beneficial conversion feature – The issuance of the convertible debt generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the convertible debt (recorded as a component of additional paid in capital).

Royalty Expense

We recognize royalty expenses in accordance with the terms of our license agreement with a celebrity product endorser. Royalties are expensed in the statements of operation in the period that the related revenues are recognized, in cost of goods sold.

Income Taxes

Income taxes are accounted for in accordance with ASC Topic 740 - Income Taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences). Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are recovered or settled. Valuation allowances for deferred tax assets are established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Management evaluates its tax positions on an annual basis and has determined that as of December 31, 2016 and 2015, no additional accrual for income taxes is necessary. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed.

Recent Accounting Standards Updates

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated statements of cash flows.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customer (“ASU No. 2016-10”). The new guidance is an update to ASC No. 606 and provides clarity on identifying performance obligations and licensing implementation. For public companies, ASU No. 2016-10 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. The Company does not expect ASU No. 2016-10 to have a material effect on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendment is to simplify several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU No. 2016-09 are effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently assessing the impact of ASU No. 2016-09 on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations”. The purpose of ASU No. 2016-08 is to clarify the implementation of guidance on principal versus agent considerations. The amendments in ASU No. 2016-08 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of ASU No. 2016-08 on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02 - Leases (Topic 842): Simplifying the Measurement of Inventory (“Topic 842”). Topic 842 requires lessees to recognize a right-of-use asset and lease liability for virtually all of their leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Topic 842 is effective for the Company on January 1, 2019 and includes interim periods within that year. Topic 842 will be applied using a modified retrospective transition, providing for certain practical expedients. Early application is permitted and the Company is currently evaluating the potential impact that adoption may have on its consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11 - Inventory (Topic 330): Simplifying the Measurement of Inventory (“Topic 330”). Topic 330 requires measuring inventory at the lower of cost and net realizable value based on estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation (changed from the previous guidance of lower of cost or market). This update also clarified various other inventory measurement and disclosure requirements. The update does not apply to inventory measured using the LIFO or retail inventory methods. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and should be applied prospectively. Early application is permitted and the Company is currently evaluating the potential impact that adoption may have on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 - Revenue from Contracts with Customers (“ASU 2014-09). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

NOTE 3 - INVENTORIES

Inventories consist of the following:

NOTE 4 - LICENSE AGREEMENTS

In November 2014, we entered into a License Agreement with kathy ireland Worldwide^® ("kiWW^®") under which we licensed the right to utilize the trademarks and rights to the name, likeness and visual representations of Kathy Ireland (“KI”) in connection with our cosmeceutical line of products. The initial term of the license is for eight years and it may be renewed at the option of our Company for up to an additional four years. In accordance with the License Agreement, we will pay 5% of the net sales for all licensed products sold and collected under the licensed marks or a minimum guaranteed royalty of $100,000 in year one, which includes the period from approximately November 4, 2014 through December 31, 2015 (“Contract Year 1”) of the License Agreement. The minimum guaranteed royalty increases $50,000 each year in years two through eight of the License Agreement. We recognized $163,893 and $100,000 in royalty fees during the year ended December 31, 2016 and 2015, respectively.

Additionally, we are obligated to pay an annual Brand Participation Fee to kiWW^® which provides for general advertising, good will and promotion of the KI brand. NuGene prepaid kiWW $350,000 effective upon execution of the License as a Brand Participation fee for Contract Year 1. The Brand Participation Fee for Contract Years 2 through 8 is $50,000 annually (Year 2 having been completely recognized in the three months ended March 31, 2016) with an additional 1% of the total gross sales of Licensed Products of the prior year beginning in Contract Year 4. The Company is currently in arrears with respect to the payment of the Year 2 fee that was due in November 2015. We recognized $50,000 and $50,000 in brand participation fees during the year ended December 31, 2016 and 2015, respectively.

On March 17, 2015, we entered into an Intellectual Property Asset Purchase Agreement (“IP Agreement”) with an individual (“IP Seller”) to acquire all of the rights, title and interest in certain intellectual property connected with a product named SkinGuardian (“SGIP”). Upon the acquisition of SGIP, the Company issued 150,000 shares of restricted common stock (net, as amended) to the IP Seller valued at $150,000. The consideration paid for SGIP was expensed during the year ended December 31, 2015.

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment, net consist of the following:

Depreciation expense for the years ended December 31, 2016 and 2015 was $54,601 and $39,365, respectively.

NOTE 6 - PROMISSORY NOTES PAYABLE AND ADVANCES

Borrowings under notes payable and advances as of December 31, 2016 and 2015 are summarized as follows:

2016 activity

On April 4, 2016, we issued a note payable to Canyon Assets Holdings, Inc. (“Lender”) dated March 28, 2016 in the principal amount of $575,000. The note was issued to the Lender in consideration for the Lender’s having satisfied on the Company’s behalf an outstanding note payable (the “CAH Note”) of the Company (the “JTS Note”). The JTS Note issued September 25, 2015 was repaid in full ($500,000 face value and accrued interest of $75,000) by the Lender with the payment of $575,000 in cash. The terms of the CAH Note call for an interest rate of 15%, due one year from the date of the CAH Note. However, all accrued and unpaid interest and all other amounts payable under the CAH Note are due to the Lender within ten (10) business days after the closing by the Company of an equity or convertible debt financing in one or more series of transactions, with aggregate gross proceeds of at least $1 million.

On April 4, 2016, we issued a $275,000 face value note payable and 50,000 shares of our common stock to Gemini Master Fund, LTD (“Gemini”) pursuant to a Security Purchase Agreement dated March 30, 2016 (the date the funds were received by our Company). Under the terms of the related note payable (the “Gemini Note”), the Company received $245,000, net of costs and original issue discount. Other significant terms of the Gemini Note include:

The embedded conversion feature of the Gemini Note was bifurcated and valued at $106,278.

Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the convertible note, with the following weighted average key inputs:

The embedded conversion feature is separately measured at fair value, with changes in fair value recognized in current operations.  The embedded conversion has been reduced by $58,962 during the year ended December 31, 2016 (see Note 7).

In connection with the issuance of the Gemini Note, we recorded additional debt discounts related to the following:

The debt discounts are amortized to interest expense using the effective interest method over the term of the notes. During the year ended December 31, 2016, the Company recognized interest expense of approximately $202,000 resulting from the amortization of the entire debt discount noted above resulting in a Gemini Note balance of $275,000.

On October 28, 2016, the Gemini Note was purchased in full, including accrued interest of approximately $13,000, by another lender in exchange for a convertible note (“the 4% Convertible Note”) issued by the Company. The 4% Convertible Note accrues interest at 4% per annum, is entitled to the same conversion features as the Gemini Note and matures on June 30, 2017. The lender charged the Company $45,000 in fees, which were added to the balance, and converted approximately $62,000 of the 4% Convertible Note balance into 331,413 shares of the Company’s common stock, resulting in a balance of $270,350 as of December 31, 2016.

During January through June 2016, three individuals (the “Lenders”) advanced a total of $140,000 to the Company. The borrowings were not accompanied by documentation of the nature of the borrowings. However, there were general discussions as to the repayment terms and the interest expected of 10% per annum to be paid to the Lenders in connection with the borrowings. Accordingly, we have accounted for the borrowings based on estimates of their still undocumented final terms.

In July 19, 2016, we issued a sixty day 15% promissory note payable to a purchaser for cash proceeds totaling $35,000. In the event that we secure any future financing with aggregate gross proceeds of at least $500,000 while the promissory note is outstanding, the promissory note and all accrued interest therefrom will be immediately due and payable within ten business days of the closing of such financing.

From July through September 30, 2016, certain investors advanced a total of $925,000 (the “Advances”) to the Company with a right to convert at no greater than $0.40 per share. In connection with the Advances, the Company also issued warrants to purchase 770,833 shares of our common stock at an exercise price of $0.60 per share with a 5 year term. The relative fair value of the warrants compared to the Advances was $295,540, which was recorded as a component of stockholders’ deficit with the offset recorded as a discount on the Advances. The fair value of the warrants was determined using the Black-Scholes Model (see Note 8). The Company then computed the effective conversion price of the Advances on the issuance date, noting that the Advances gave rise to a BCF of $629,460. The sum of the relative fair value of the warrants and the BCF was recorded as a debt discount to be amortized over the term of the advances.

The debt discounts are amortized to interest expense using the effective interest method over the term of the Advances. During the year ended December 31, 2016, the Company recognized interest expense of $643,469, from the amortization of the debt discount, resulting in the Advances balance of $643,469. 

The Advances contain an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the Notes was valued at inception using the Monte Carlo simulation at $1,212,384 and was recorded as a loss on the consolidated statements of operations. As of December 31, 2016, the derivative was remeasured to $491,218 (see Note 7) and the difference was recorded as a change in fair value of derivative liabilities on the consolidated statements of operations.

Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the Advances, with the following weighted average key inputs:

On October 21, 2016, we issued a $267,500 face value convertible note that accrues interest at 9% per annum and matures on October 21, 2017 (“the 9% Convertible Note”). The Company received proceeds of $240,000, net of costs and original issuance discount. Upon holding the note for six months, the conversion terms allow the holder to convert outstanding principal into the Company’s common stock at the lower of (i) $0.40 per share or (ii) 65% of the lowest closing bid price of the common stock for the fifteen prior trading days, including upon which the conversion notice is received by the Company. The 9% Convertible Note allows for prepayment within 180 days from the date of issuance. If the note is outstanding for 90 days or less, the prepayment rate is 125% of principal plus accrued interest; and if the note is outstanding for more than 90 days but less than 180 days, the prepayment rate is 150% of principal plus accrued interest. In connection with the 9% Convertible Note, the Company also issued warrants to purchase 222,916 shares of our common stock at an exercise price $0.60 per share with a 4 year term. The relative fair value of the warrants compared to the 9% Convertible Note was $56,737, which was recorded as a component of stockholders’ deficit with the offset recorded as a discount to the 9% Convertible Note. The fair value of the warrants was determined using the Black-Scholes Model (see Note 8). The Company then computed the effective conversion price of the 9% Convertible Note on the issuance date, noting that the 9% Convertible Note gave rise to a BCF of $151,112.

The 9% Convertible Note contains an embedded conversion feature that the Company has determined is a derivative requiring bifurcation in accordance with the provisions of ASC 815. The embedded conversion feature of the 9% Convertible Note was valued at inception using the Monte Carlo simulation at $296,786 with $32,150 being recorded as a discount to the 9% Convertible Note and $264,633, the remainder, being recorded as a loss on the consolidated statements of operations. Management used a Monte Carlo valuation model to estimate the fair value of the embedded conversion option at issuance of the 9% Convertible Notes, with the following weighted average key inputs: