FORM 10-Q/A
(Amendment No. 1)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 0-3338
INERGETICS, INC.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 22-1558317 | ||
| (State or other Jurisdiction of | (IRS Employer | ||
| Incorporation or Organization) | Identification No.) | ||
205 Robin Road, Suite 222, Paramus, NJ 07652
(Address of Principal Executive Office) (Zip Code)
(908) 604-2500
(Registrant’s telephone number including area code)
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 Noo
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 Noo
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.
| Large accelerated filero | Accelerated filero |
| Non-accelerated filero | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso No x
As of March 30, 2012, 34,046,312 shares of Common Stock, $0.001 par value, were outstanding.
Explanatory Note
We are filing this Amendment No. 1 on Form 10-Q/A (this “Form 10-Q/A”) to amend our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 (the “Original Filing”), as originally filed with the Securities and Exchange Commission (the “SEC”) on November 21, 2011 (the “Original Filing Date”) to reflect a restatement of the following previously filed financial statements and data (and related disclosures):
| • | our condensed consolidated balance sheet as of September 30, 2011, as discussed in Note 2 to the financial statements included in Item 1 of this 10-Q/A; |
| • | our condensed consolidated statements of operations and cash flows for the three and nine months ended September 30, 2011, as discussed in Note 2 to the financial statements included in Item 1 of this Form 10-Q/A; and |
| • | our management’s discussion and analysis of financial condition and results of operations as of and for the three and nine months ended September 30, 2011 as discussed in Item 2 of this Form10-Q/A. |
The restatement corrects the accounting treatment for the expense incurred with the Management Warrant Grant. The Company granted 5,344,356 warrants to management on September 13, 2011, in accordance with the Summary of Debt Reorganization and Financing agreement. The total expense for these warrants is $908,540, calculated by management utilizing the Black Scholes model. This restatement will increase previously reported selling, general and administrative expenses and net loss by $908,540 for the three and nine months ended September 30, 2011. Additionally, net loss per share will increase to $0.11 and $0.18 per share from $0.07 and $0.14 per share for the three and nine months ended September 30, 2011, respectively.
In connection with the restatement of our financial statements described herein, we have reported an additional material weakness in our internal controls and procedures with regard to the evaluation of, and accounting for, complex warrant grants. Due to these material weaknesses, our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures continue not to be t effective as of the end of the period covered by this report. For more information, see Item 4 included in this Form 10-Q/A.
Although this Form 10-Q/A supersedes the Original Filing in its entirety, this Form 10-Q/A amends and restates only Items 1, 2 and 4 of Part I and the two risk factors set forth in Item 1A of Part II marked with an asterisk, solely as a result of, and to reflect, the restatement, and no other information in the Original Filing is amended hereby. This Form 10-Q/A speaks as of the Original Filing Date and does not reflect any events that may have occurred subsequent to the Original Filing Date. In addition, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, as a result of this Form 10-Q/A, the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Original Report have been re-executed and re-filed as of the date of this Amended Report and are included as exhibits hereto. Concurrent with the filing of this Form 10-Q/A, we are filing our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
| 2 |
INERGETICS, INC. AND SUBSIDIARY
INDEX
Page
Number
| PART 1 - FINANCIAL INFORMATION | ||
| Item 1 | Financial Statements (unaudited): | |
| Condensed Consolidated Balance Sheets | ||
| - September 30, 2011 and December 31, 2010 (as restated) | 4 | |
| Condensed Consolidated Statements of Operations | ||
| - Three and nine months ended September 30, 2011 and 2010 (as restated) | 5 | |
| Condensed Consolidated Statements of Cash Flows | ||
| - Nine months ended September 30, 2011 and 2010 (as restated) | 6 - 7 | |
| Notes to Condensed Consolidated Financial Statements(as restated) | 8 - 18 | |
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 |
| Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 22 |
| Item 4 | Controls and Procedures | 22 |
| PART II - OTHER INFORMATION | 24 | |
| Item 1 | Legal Proceedings | 24 |
| Item 1A. | Risk Factors | 24 |
| Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 24 |
| Item 3 | Defaults Upon Senior Securities | 24 |
| Item 4 | Removed and Reserved | 24 |
| Item 5 | Other Information | 24 |
| Item 6 | Exhibits | 25 |
| SIGNATURES | 26 | |
| 3 |
PART I - Item 1
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
| Assets | September 30, | December 31, | ||||||
| Current Assets: | 2011 | 2010 | ||||||
| (as restated) | ||||||||
| Cash | $ | 501,220 | $ | 1,089 | ||||
| Accounts receivable, net | 23,315 | 1,245 | ||||||
| Inventories, net | 287,687 | 126,721 | ||||||
| Prepaid expenses | 124,619 | 254,234 | ||||||
| Total Current Assets | 936,841 | 383,289 | ||||||
| Patents, net | 5,662 | 6,094 | ||||||
| Deposits | 23,651 | 23,651 | ||||||
| Total Assets | $ | 966,154 | $ | 413,034 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 2,025,894 | $ | 3,424,211 | ||||
| Obligations to be settled in stock | 373,000 | 248,000 | ||||||
| Customer Prepayments | 59,976 | 17,798 | ||||||
| Short-term debt, net of unamortized debt discount | 1,004,347 | 5,337,712 | ||||||
| Total Current Liabilities | 3,463,217 | 9,027,721 | ||||||
| Long-term debt | 1,455,128 | - | ||||||
| Total Liabilities | 4,918,345 | 9,027,721 | ||||||
| Commitment and Contingencies | ||||||||
| Preferred stock, Convertible Series G, authorized 200,000, par value $1, stated value $50:116,685 shares issued and outstanding | 5,414,565 | - | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, authorized 500,000, par value $1: | ||||||||
| Convertible Series B, 65,141 shares issued and outstanding | 130,282 | 130,282 | ||||||
| Cumulative Series C, 64,763 shares issued and outstanding | 64,763 | 64,763 | ||||||
| Convertible Series D, 0 shares issued and outstanding | - | - | ||||||
| Convertible Series E, 0 shares issued and outstanding | - | - | ||||||
| Convertible Series F, 0 shares issued and outstanding | - | - | ||||||
| Common stock, par value $0.001; authorized 2,000,000,000 shares; issued and outstanding 23,756,893 | 23,757 | 23,757 | ||||||
| Additional paid-in capital | 64,341,130 | 61,968,508 | ||||||
| Common stock subscribed | 1,079,148 | - | ||||||
| Accumulated Deficit | (75,005,836 | ) | (70,801,997 | ) | ||||
| Total Stockholders’ Deficit | (3,952,191 | ) | (8,614,687 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 966,154 | $ | 413,034 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (as restated) | (as restated) | |||||||||||||||
| Total Revenues | $ | 14,537 | $ | 9,453 | $ | 118,752 | $ | 133,362 | ||||||||
| Cost of Goods Sold | 8,496 | 5,372 | 64,282 | 78,803 | ||||||||||||
| 6,041 | 4,081 | 54,470 | 54,559 | |||||||||||||
| Research and development cost | 12,006 | 8,395 | 29,454 | 23,761 | ||||||||||||
| Selling, general and administrative expenses | 1,820,245 | 749,190 | 2,902,248 | 2,464,317 | ||||||||||||
| Total operating expenses | 1,832,251 | 757,585 | 2,931,702 | 2,488,078 | ||||||||||||
| Loss from Operations | (1,826,210 | ) | (753,504 | ) | (2,877,232 | ) | (2,433,519 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Gain incurred in connection with troubled debt restructuring, net | 668,583 | 24,429 | 668,583 | 380,529 | ||||||||||||
| Loss on debt modification | (1,129,321 | ) | - | (1,129,321 | ) | - | ||||||||||
| Miscellaneous income (expense) | - | 21,687 | - | 64,839 | ||||||||||||
| Amortization of debt discount | (48,717 | ) | (58,724 | ) | (190,937 | ) | (298,308 | ) | ||||||||
| Interest expense | (204,241 | ) | (157,944 | ) | (674,932 | ) | (722,601 | ) | ||||||||
| Financing expense | - | (24,538 | ) | - | (3,407,170 | ) | ||||||||||
| Total Other Income (Expense) | (713,696 | ) | (195,090 | ) | (1,326,607 | ) | (3,982,711 | ) | ||||||||
| Loss before Provision for Income taxes | (2,539,906 | ) | (948,594 | ) | (4,203,839 | ) | (6,416,230 | ) | ||||||||
| Provision for Income Taxes | - | - | - | - | ||||||||||||
| Net loss | (2,539,906 | ) | (948,594 | ) | (4,203,839 | ) | (6,416,230 | ) | ||||||||
| Preferred Dividend | (46,500 | ) | - | (46,500 | ) | - | ||||||||||
| Net Loss applicable to common shareholders | $ | (2,586,406 | ) | $ | (948,594 | ) | $ | (4,250,339 | ) | $ | (6,416,230 | ) | ||||
| Net Loss per Common Share Basic and Diluted | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.18 | ) | $ | (0.44 | ) | ||||
| Weighted Average Number of | ||||||||||||||||
| Common Shares Outstanding – Basic And Diluted | 23,756,893 | 23,703,246 | 23,756,893 | 14,497,291 | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 5 |
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
| (as restated) | ||||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | (4,203,839 | ) | $ | (6,416,230 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash used in Operations | ||||||||
| Extinguishment of debt | (668,583 | ) | (380,529 | ) | ||||
| Debt modification | 1,129,321 | - | ||||||
| Depreciation and amortization | 432 | 1,172 | ||||||
| Adjustment to inventory reserve | - | (48,385 | ) | |||||
| Amortization of debt discount | 190,937 | 298,308 | ||||||
| Loss on disposal of equipment | - | 3,700 | ||||||
| Securities issued for professional services | - | 136,068 | ||||||
| Equity securities for professional services | 175,000 | 487,833 | ||||||
| Equity securities issued for interest and financing expense | - | 3,322,677 | ||||||
| Warrants issued for compensation | 908,540 | |||||||
| Changes in Assets and Liabilities | ||||||||
| Accounts receivable | (22,070 | ) | (10,257 | ) | ||||
| Inventories | (160,966 | ) | (11,760 | ) | ||||
| Prepaid contract sales | - | 166,667 | ||||||
| Prepaid expenses | 129,615 | 153,876 | ||||||
| Deposits | - | (5,299 | ) | |||||
| Customer prepayments | 42,178 | 31,000 | ||||||
| Liability for stock to be issued | 25,000 | (183,350 | ) | |||||
| Accounts payable and accrued expenses | 534,566 | 594,104 | ||||||
| Net Cash Used in Operating Activities | (1,919,869 | ) | (1,860,405 | ) | ||||
| Net Cash Used in Investing Activities | - | - | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from loans and notes payable | 1,500,000 | 2,107,500 | ||||||
| Proceeds from Preferred stock | 950,000 | - | ||||||
| Repayment of loans and notes payable | (30,000 | ) | (119,000 | ) | ||||
| Unit Note Subscriptions receivable | - | 40,000 | ||||||
| Net Cash Provided by Financing Activities | 2,420,000 | 2,028,500 | ||||||
| Net Increase (Decrease) in Cash | 500,131 | 168,095 | ||||||
| Cash at beginning of period | 1,089 | 2,370 | ||||||
| Cash at end of period | $ | 501,220 | $ | 170,465 | ||||
| Supplemental Disclosure of Cash Flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest Expense | $ | 15,671 | $ | 10,250 | ||||
| Income Taxes | $ | - | $ | - | ||||
| 6 |
| For the Nine Months Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
| (as restated) | ||||||||
| Schedule of non-cash investing and financing activities: | ||||||||
| Preferred stock – Series G issued for conversion of debt and interest 96,755 shares | $ | 4,418,065 | $ | - | ||||
| Stock issued in conjunction with Notes Payable “debt Discount” 1,781,063 shares | $ | - | $ | 2,308,091 | ||||
| Shares issued for conversion of convertible debt, 2,140,905 shares | $ | - | $ | 1,707,125 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 7 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization
On March 15, 2010 the Company changed its name to Inergetics, Inc. Inergetics, Inc. (the Company or "Inergetics"), formerly Millennium Biotechnologies Group, Inc., is a holding company for its subsidiary Millennium Biotechnologies, Inc. ("Millennium").
Millennium was incorporated in the State of Delaware on November 9, 2000 and is located in New Jersey. Millennium is a research based bio-nutraceutical corporation involved in the field of nutritional science. Millennium’s principal source of revenue is from sales of its nutraceutical supplements, Resurgex Select® and Resurgex Essential™ and Resurgex Essential Plus™ which serve as a nutritional support for immuno-compromised individuals undergoing medical treatment for chronic debilitating diseases. Millennium also sells Surgex, a sports nutritional supplement.
The accompanying unaudited condensed consolidated financial statements include the accounts of Inergetics, Inc. and its subsidiary. These condensed consolidated financial statements have been prepared in accordance with accounting principals generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principals for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2010 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission on Form 10-K.
In January 2011 The Board of Directors approved a reverse split of 1 for 80. The financial statements have retroactively restated common shares to the earliest presentation reported along with the earnings per share calculation. The reverse split was approved by FINRA and was effective July 15, 2011.
Principles of Consolidation
The Company’s operations presently consist almost exclusively of the operations of Millennium. The condensed consolidated financial statements include the accounts of the Company and its subsidiary. All significant inter-company transactions and balances have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 8 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Patents
Patents are capitalized and amortized over 240 months. Amortization expense was $432 and $144 for the nine and three months ended September 30, 2011 and 2010, respectively.
Revenue Recognition
Revenue is recognized net of discounts, rebates, promotional adjustments, price adjustments and estimated returns and upon transfer of title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance obligations and collection is reasonably assured as the majority of sales are paid for prior to shipping.
Equity Based Awards
Equity based compensation is measured at the grant date, based on the calculated fair value of the award. Compensation expense is recognized over the requisite employee service period (generally the vesting period of the grant) for stock options and based on the terms of the agreement for warrants. Compensation expense is recognized based on the estimated fair value method using the Black-Scholes valuation model at the grant date. The Company did not issue any stock options during the year ended December 31, 2010 and the period ended September 30, 2011. The Company issued5,344,356 warrants during the period ended September 30, 2011 for a total compensation expense of $908,540.
Income Taxes
The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected to be settled in the Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the nine months ended September 30, 2011, and 2010.
| 9 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Loss Per Common Share
Net loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock and convertible debt are not considered in the diluted income (loss) per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the nine and three months ended September 30, 2011 and 2010, therefore the basic and diluted weighted average common shares outstanding were the same.
Fair Value of Financial Instruments
For financial instruments including cash, accounts receivable and prepaid expenses, short-term debt, accounts payable and accrued expenses, the carrying values approximate the fair value because of the nature of these accounts and their short-term maturities.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
| 2. | RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
Subsequent to the issuance of our condensed consolidated financial statements for the quarter ended September 30, 2011, we have re-evaluated our interpretation of the management warrant grant set forth in the Summary of Debt Reorganization and Financing dated July 14, 2011 and have determined that it should have been expensed in the quarter ended September 30, 2011.
The Company granted 5,344,356 warrants to management on September 13, 2011, in accordance with the Summary of Debt Reorganization and Financing agreement. The Company valued the warrants utilizing the black scholes method with the following inputs: stock price of $0.17, exercise price of $0.17, volatility of 158.09%, term of 10 years, risk free rate of 2% and dividend rate of 0%. The warrants are fully vested upon grant. Total expense for period ended September 30, 2011 is $908,540.
The effect of this restatement is to change previously reported expenses, net loss and loss per share for the three and nine months ended September 30, 2011. The restatement relates to the timing of warrant expense and has no impact on our previously reported cash position and total assets.
Impact of the Restatement on our condensed Consolidated Financial Statements
Our condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q/A has been restated to reflect the impact from the restatement adjustments described above, as follows:
| 10 |
RECONCILIATION OF CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| As of September 30, 2011 | ||||||||||||
| As | ||||||||||||
| Reported | As | |||||||||||
| Previously | Adjustments | Restated | ||||||||||
| Assets | ||||||||||||
| Current Assets | ||||||||||||
| Cash | $ | 501,220 | $ | - | $ | 501,220 | ||||||
| Accounts receivable, net | 23,315 | - | 23,315 | |||||||||
| Inventories, net | 287,687 | - | 287,687 | |||||||||
| Prepaid expenses | 124,619 | - | 124,619 | |||||||||
| Total Current Assets | 936,841 | - | 936,841 | |||||||||
| Patents, net | 5,662 | - | 5,662 | |||||||||
| Deposits | 23,651 | - | 23,651 | |||||||||
| Total Assets | $ | 966,154 | $ | - | $ | 966,154 | ||||||
| Liabilities and Stockholders' Deficit | ||||||||||||
| Current Liabilities: | ||||||||||||
| Accounts payable and accrued expenses | $ | 2,025,894 | $ | - | $ | 2,025,894 | ||||||
| Obligations to be settled in stock | 373,000 | - | 373,000 | |||||||||
| Customer Prepayments | 59,976 | - | 59,976 | |||||||||
| Short-term debt, net of unamortized debt discount | 1,004,347 | - | 1,004,347 | |||||||||
| Total Current Liabilities | 3,463,217 | - | 3,463,217 | |||||||||
| Long-term debt | 1,455,128 | - | 1,455,128 | |||||||||
| Total Liabilities | 4,918,345 | - | 4,918,345 | |||||||||
| Commitment and Contingencies | ||||||||||||
| Preferred stock, Convettible Series G, authorized 200,000, par value $1 stated value $50: 116,685 shares issued and outstanding | 5,414,565 | - | 5,414,565 | |||||||||
| Stockholders' Deficit | ||||||||||||
| Preferred stock, authorized 500,000, par value $1 | ||||||||||||
| Convertible Series B, 65,141 shares issued and outstanding | 130,282 | - | 130,282 | |||||||||
| Convertible Series C, 64,763 shares issued and outstanding | 64,763 | - | 64,763 | |||||||||
| Convertible Series D, 0 shares issued and outstanding | - | - | - | |||||||||
| Convertible Series E, 0 shares issued and outstanding | - | - | - | |||||||||
| Convertible Series F, 0 shares issued and outstanding | - | - | - | |||||||||
| Common stock, par value $0.001; authorized 2,000,000,000 shares; issued and outstanding 23,756,893 | 23,757 | - | 23,757 | |||||||||
| Additional paid-in capital | 63,432,590 | 908,540 | 64,341,130 | |||||||||
| Common stock subscribed | 1,079,148 | - | 1,079,148 | |||||||||
| Accumulated Deficit | (74,097,296 | ) | (908,540 | ) | (75,005,836 | ) | ||||||
| Total Stockholders' Deficit | (3,952,191 | ) | - | (3,952,191 | ) | |||||||
| Total Liabilities and Stockholders' Deficit | $ | 966,154 | $ | - | $ | 966,154 | ||||||
| 11 |
RECONCILIATION OF CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, 2011 | September 30, 2011 | |||||||||||||||||||||||
| As | As | |||||||||||||||||||||||
| Previously | As | Previously | As | |||||||||||||||||||||
| Reported | Adjustments | Restated | Reported | Adjustments | Restated | |||||||||||||||||||
| Total Revenues | $ | 14,537 | $ | - | $ | 14,537 | $ | 118,752 | $ | - | $ | 118,752 | ||||||||||||
| Cost of Goods Sold | 8,496 | - | 8,496 | 64,282 | - | 64,282 | ||||||||||||||||||
| 6,041 | - | 6,041 | 54,470 | - | 54,470 | |||||||||||||||||||
| Research and development cost | 12,006 | - | 12,006 | 29,454 | - | 29,454 | ||||||||||||||||||
| Selling, general and administrative expenses | 911,705 | 908,540 | 1,820,245 | 1,993,708 | 908,540 | 2,902,248 | ||||||||||||||||||
| Total operating expenses | 923,711 | 908,540 | 1,832,251 | 2,023,162 | 908,540 | 2,931,702 | ||||||||||||||||||
| Loss from Operations | (917,670 | ) | (908,540 | ) | (1,826,210 | ) | (1,968,692 | ) | (908,540 | ) | (2,877,232 | ) | ||||||||||||
| Other Income (Expense) | ||||||||||||||||||||||||
| Gain incurred in connection with troubled debt restructuring, net | 668,583 | - | 668,583 | 668,583 | - | 668,583 | ||||||||||||||||||
| Loss on debt modification | (1,129,321 | ) | - | (1,129,321 | ) | (1,129,321 | ) | - | (1,129,321 | ) | ||||||||||||||
| Amortization of debt discount | (48,717 | ) | - | (48,717 | ) | (190,937 | ) | - | (190,937 | ) | ||||||||||||||
| Interest expense | (204,241 | ) | - | (204,241 | ) | (674,932 | ) | - | (674,932 | ) | ||||||||||||||
| Total Other Income (Expense) | (713,696 | ) | - | (713,696 | ) | (1,326,607 | ) | - | (1,326,607 | ) | ||||||||||||||
| Loss before provision for Income Taxes | (1,631,366 | ) | (908,540 | ) | (2,539,906 | ) | (3,295,299 | ) | (908,540 | ) | (4,203,839 | ) | ||||||||||||
| Provision for Income Taxes | - | - | - | - | - | - | ||||||||||||||||||
| Net Loss | (1,631,366 | ) | (908,540 | ) | (2,539,906 | ) | (3,295,299 | ) | (908,540 | ) | (4,203,839 | ) | ||||||||||||
| Preferred Dividend | (46,500 | ) | - | (46,500 | ) | (46,500 | ) | - | (46,500 | ) | ||||||||||||||
| Net Loss applicable to common shareholders | $ | (1,677,866 | ) | $ | (908,540 | ) | $ | (2,586,406 | ) | $ | (3,341,799 | ) | $ | (908,540 | ) | $ | (4,250,339 | ) | ||||||
| Net Loss per Common Share Basic and Diluted | $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.11 | ) | $ | (0.14 | ) | $ | (0.04 | ) | $ | (0.18 | ) | ||||||
| Weighted Average Number of | ||||||||||||||||||||||||
| Common Shares Outstanding - Basic And Diluted | 23,756,893 | 23,756,893 | 23,756,893 | 23,756,893 | 23,756,893 | 23,756,893 | ||||||||||||||||||
| 12 |
RECONCILIATION OF CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
| As of September 30, 2011 | ||||||||||||
| As | ||||||||||||
| Reported | As | |||||||||||
| Previously | Adjustments | Restated | ||||||||||
| Cash Flows from Operating Activities | ||||||||||||
| Net Loss | $ | (3,295,299 | ) | $ | (908,540 | ) | $ | (4,203,839 | ) | |||
| Adjustments to Reconcile Net Loss to | ||||||||||||
| Net Cash used in Operations | ||||||||||||
| Extinguishment of debt | (668,583 | ) | - | (668,583 | ) | |||||||
| Debt modification | 1,129,321 | - | 1,129,321 | |||||||||
| Depreciation and amortization | 432 | - | 432 | |||||||||
| Amortization of debt discount | 190,937 | - | 190,937 | |||||||||
| Equity securities for professional services | 175,000 | - | 175,000 | |||||||||
| Warrants grant issued for compensation | - | 908,540 | 908,540 | |||||||||
| Changes in Assets and Liabilities | ||||||||||||
| Accounts receivable | (22,070 | ) | - | (22,070 | ) | |||||||
| Inventories | (160,966 | ) | - | (160,966 | ) | |||||||
| Prepaid expenses | 129,615 | - | 129,615 | |||||||||
| Customer prepayments | 42,178 | - | 42,178 | |||||||||
| Liability for stock to be issued | 25,000 | - | 25,000 | |||||||||
| Accounts payable and accrued expenses | 534,566 | - | 534,566 | |||||||||
| Net Cash Used in Operating Activities | (1,919,869 | ) | - | (1,919,869 | ) | |||||||
| Net Cash Used in Investing Activities | - | - | - | |||||||||
| Cash Flows from Financing Activities | ||||||||||||
| Proceeds from loans and notes payable | 1,500,000 | - | 1,500,000 | |||||||||
| Proceeds from Preferred Stock | 950,000 | - | 950,000 | |||||||||
| Repayment of loans and notes payable | (30,000 | ) | - | (30,000 | ) | |||||||
| Net Cash Provided by Financing Activities | 2,420,000 | - | 2,420,000 | |||||||||
| Net Increase (Decrease) in Cash | 500,131 | - | 500,131 | |||||||||
| Cash at beginning of period | 1,089 | - | 1,089 | |||||||||
| Cash at end of period | $ | 501,220 | $ | - | $ | 501,220 | ||||||
| Supplemental Disclosure of Cash Flow information: | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest Expense | $ | 15,671 | $ | - | $ | 15,671 | ||||||
| Income Taxes | $ | - | $ | - | $ | - | ||||||
| 13 |
| 3. | GOING CONCERN |
The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. ManageCommon Shares Outstanding - Basicment believes they can raise the appropriate funds needed to support their business plan and develop an operating company which is cash flow positive.
However, the Company has working capital deficits, significant debt outstanding, incurred substantial net losses for the nine months ended September 30, 2011 and 2010 and has accumulated a deficit of approximately $75 million at September 30, 2011. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.
| 14 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 4. | CONCENTRATIONS OF BUSINESS AND CREDIT RISK |
The Company maintains cash balances in several financial institutions which are insured by the Federal Deposit Insurance Corporation up to certain federal limitations.
The Company provides credit in the normal course of business to customers located throughout the U. S. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
| 5. | INVENTORIES |
Inventories consist of work-in-process and finished goods for the Company’s product lines. Cost-of-goods sold are calculated using the average costing method. Inventories consist of the following:
| September 30, | December 31, | |||||||
| 2011 | 2010 | |||||||
| Finished Goods | $ | 280,710 | $ | 89,759 | ||||
| Raw Materials | - | 19,415 | ||||||
| Packaging | 14,057 | 24,627 | ||||||
| 294,767 | 133,801 | |||||||
| Less: Reserve for losses | (7,080 | ) | (7,080 | ) | ||||
| Total | $ | 287,687 | $ | 126,721 | ||||
| 15 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 6. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consisted of the following:
| September 30, | December 31, | |||||||
| 2011 | 2010 | |||||||
| Accounts payable | $ | 940,079 | $ | 1,397,161 | ||||
| Accrued interest | 282,675 | 1,100,044 | ||||||
| Accrued rent expense | 135,874 | 138,711 | ||||||
| Accrued salaries, bonuses and payroll taxes | 513,254 | 528,314 | ||||||
| Loan from officer | - | 165,882 | ||||||
| Accrued professional fees | 154,012 | 94,099 | ||||||
| $ | 2,025,894 | $ | 3,424,211 | |||||
| 7. | DEBT |
Gain on Troubled Debt Restructuring
The Company entered into restructuring agreements with various accredited investors. Due to the Company’s inability to repay debt, the debtholders chose to grant concessions to the Company. In accordance with ASC 470 “Debt” the Company treated the following transactions as troubled debt restructuring.
At December 31, 2010, the Company had Unit Notes issued to accredited investors with an outstanding balance of $3,350,309, which were in default and due on demand. In September 2011, the Company reached an agreement with the investors to convert this debt into Series G Preferred in full settlement of the note plus interest. The Series G preferred are convertible into 250 shares of common stock. At the dates of conversion the debt payable and accrued interest was $3,990,843 less debt discount of $228,190 totaling $3,762,653. At conversion $2,243,481 was held by a related party Investor Group and converted into 44,880 shares of Series G preferred valued at $2,099,835. The value of the debt in excess of Series G preferred of $143,646 was recorded in additional paid in capital on the Company Balance Sheet. The remaining debt and accrued interest of $1,519,170, net debt discount, was converted into 24,300 shares of Series G preferred valued at $1,136,918 which exceededthe fair market value by $382,254. Also the Company allocated restructuring charges of $167,964, which represents the pro-rata share of the $360,000 consulting fee due to the Investor Group for Unit Notes. The difference resulted in a gain on troubled debt restructuring of $214,068 has been included in the Statement of Operations in 2011. The gain incurred with debt restructuring approximates $0.01 per share.
At December 31, 2010, the Company had Unsecured Notes issued to accredited investors with an outstanding balance of $699,930, which were in default and due on demand. In September 2011, the Company reached an agreement with the investors to convert the debt into common stock in full settlement of the notes plus interest. At the dates of conversion, the debt payable and accrued interest was $1,174,446. At conversion $53,994 was held by the Investor Group and converted into 269,970 shares of common stock valued at $53,994, resulting in no gain on conversion. The remaining debt and accrued interest of $1,120,452, was converted into 3,325,728 shares of common stock valued at $665,146. The Company allocated restructuring costs of $49,429, which represents the pro-rata share of the $360,000 consulting fee due to the Investor Group. As of September 30, 2011 the gain on troubled debt restructuring of $405,877 has been included in the Statement of Operations in 2011,which represents approximately $0.02 per share.
| 16 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DEBT, Continued
During 2011, the Company had Bridge Notes issued to a member of the Investor Group, an accredited investor, with an outstanding balance of $1,050,000, which were due on demand. In July 2011, the Company reached an agreement with the investor to convert the debt into Series G preferred in full settlement of the note plus interest. At the dates of conversion, the value of the amount of the debt payable and accrued interest was $1,078,704. The debt was converted into 21,575 shares of Series G preferred stock valued at $1,009,495 and exceeded the fair market by $69,209 which was recorded in additional paid in capital on the Company’s Balance Sheet. The Company recorded an expense of $81,362 which represents the pro-rata share of the $360,000 consulting fee due to the Investor Group for Bridge Notes against the gain incurred with troubled debt restructuring in the Statement of Operations in 2011.
Also, included in the gain incurred with debt restructuring is $130,000 which was due to Ardent Advisors. This amount was forgiven and the full amount was included in the gain incurred with debt restructuring.
Modification of Debt
The following debt instruments were modified in the current period. The modification of debt included the addition of a conversion feature therefore requiring the Company to record the transaction in accordance with ASC 470 “Debt” as modification of debt accounting.
At December 31, 2010, the Company had promissory notes issued to four accredited investors with an outstanding balance of $825,000, which were in default and due on demand. In July 2011, the Company reached an agreement with the investors to convert the debt into a new convertible note in full settlement of the note plus interest. At the date of conversion, the debt payable and accrued interest was $977,268. The fair value of the new debt is $1,694,593, which includes the fair value of the conversion feature of $717,324. The Company valued the conversion feature utilizing the black scholes method with the following inputs: strike price of $0.17, exercise price of $0.20, volatility of 192.8%, years 2.25, discount rate of 15%, and dividend rate of 0%. The conversion rate on the new convertible note is $0.20 per share of common stock. The Company allocated restructuring costs of $41,131, which represents the pro-rata share of the $360,000 consulting fee due to the Investor Group for promissory note. As of September 30, 2011 the loss on debt modification of $758,455 has been included in the Statement of Operations in 2011. The loss incurred with debt restructuring represents approximately $0.03 per share.
In January, 2011, the Company issued notes to three accredited investors with an outstanding balance of $450,000, due on demand. In July 2011, the Company reached an agreement with the investors to convert the debt into a new convertible note in full settlement of the note plus interest. At the date of conversion, the value of the debt payable and accrued interest was $477,860. The fair value of the new debt is $828,614, which includes the fair value of the conversion feature of $350,754. The Company valued the conversion feature utilizing the black scholes method with the following inputs: strike price of $0.17, exercise price of $0.20, volatility of 192.8%, years 2.25, discount rate of 15%, and dividend rate of 0%. The conversion rate on the new convertible note is $0.20 per share of common stock. The Company allocated restructuring costs of $20,112, which represents the pro-rate share of the $360,000 consulting fee due to the Investor Group for the promissory note. As of September 30, 2011 the loss of $370,866 has been included in the Statement of Operations in 2011 for the loss on debt modification. The loss incurred with debt restructuring represents approximately $0.02 per share.
| 17 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 8, | COMMITMENT AND CONTINGENCIES |
The Company entered into a Marketing and Sponsorship Contract (the “Contract”) beginning September 1, 2011 and ending on June 30, 2014. As of September 30, 2011 approximately $55,000 of a $60,000 payment made in relation to the terms of the Contract during the three month period ended September 30, 2011 is included in Prepaid Expenses on the Balance Sheet. Under the Contract the Company is required to make payments of $64,800 and $70,000 on or before September 1, 2012 and on or before September 1, 2013, respectively. In addition to the cash payments the Company must provide the Sponsor with $100,000 of the Company’s product during the duration of the Contract, commencing September 2011.
| 9. | CONVERTIBLE PREFERRED SERIES G STOCK |
The Company records Convertible Series G Preferred outside of permanent equity due to a redemption feature that is not solely controlled by the issuer, in accordance with ASR 268. The Series G is convertible into common stock, at the option of the holder, at the rate of one Series G share into 250 shares of common stock. The Series G preferred pays a dividend quarterly, for an annual yield of 10%. During quarter ended September 30, 2011 the Company issued a stock dividend of 930 Series G preferred shares which totaled $46,500. On November 16, 2011 the Company issued the shares which are reflected in the accompanying balance sheet in Preferred Stock, Convertible Series G. The Company received cash proceeds of $950,000 representing 19,000 shares and converted debt totaling $4,418,065 representing 96,755 Series G shares.
| 10. | RELATED PARTY TRANSACTIONS |
During the period ended September 30, 2011, the Investor Group, consisting of a director of the Company and two other parties received a $360,000 consulting fee for their assistance in the troubled debt reorganization and financing performed by the Company. The $360,000 fee, payable in common stock, is recorded in Common Stock Subscribed in the Balance Sheet. The fee has been reported net of gain incurred in connection with troubled debt restructuring on the Statement of Operations.
| 11. | SUBSEQUENT EVENTS |
In October, 2011, the Board of Directors of the Company granted each of the independent directors 125,000 shares of common stock for their respective 2011 director fees. In addition, the Board of Directors approved a revision to the Management Warrant Grant Program which was originally calculated at eleven percent (11%) of the “fully diluted” shares less 2,189,050 shares. Effective October 2011,the Board reinstated the 2,189,050 shares. Accordingly, 2,189,050 management warrants have been granted with an exercise price of $0.17 per warrant. The management warrants are fully vested upon grant and exercisable for a period of ten years. The holders of the management warrants are restricted from selling shares issuable for a period of 12 months from the date of grant.
| 18 |
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Pursuant To "Safe Harbor" Provisions
Of Section 21e Of The Securities Exchange Act Of 1934
Except for historical information, the Company's reports to the Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases, as well as other public documents and statements, contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the statements. These risks and uncertainties include general economic and business conditions, development and market acceptance of the Company's products, current dependence on the willingness of investors to continue to fund operations of the Company and other risks and uncertainties identified in the risk factors discussed below and in the Company's other reports to the Securities and Exchange Commission, periodic press releases, or other public documents or statements.
Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.
Results of Operations for the quarter ended September 30, 2011 compared to the quarter ended
September 30, 2010:
Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, Resurgex Select® and Surgex™ for the quarter ended September 30, 2011 totaled $14,537, an increase of 54% from the quarter ended September 30, 2010 which totaled $9,453. The primary reason for the increase was due to increased orders and the Company fulfilling those order in the third quarter ended June 30, 2011 versus the orders which was done in 2010.
At this stage in the Company’s development, revenues are not yet sufficient to cover ongoing operating expenses.
Gross profits for the quarter ended September 30, 2011 amounted to $6,041 for a 42% gross margin as compared to 43% in the quarter ended September 30, 2010. Gross profits increased $1,960 or 48% for the quarter ended September 30, 2011 compared to $4,081 for the quarter ended September 30, 2010. The increase in gross profits is a result of higher revenue.
After deducting research and development costs of $12,006 and selling, general and administrative expenses of $1,820,245, the Company realized an operating loss of $1,826,210 for the quarter ended September 30, 2011. Operating losses of $1,826,210 increased $1,072,706 or 142% as compared to the third quarter of 2010 operating loss of $753,504. The increase in the amount of $908,540 was due to the management warrant expense which was earned as of the completion of the debt restructuring. The balance of the increase in the amount of $164,166 was due to additional marketing, promotional and travel relating to the roll out of the Surgex sports nutritional products.
Other Income (Expense) totaled ($713,696) for the quarter ended September 30, 2011 an increase of 266% or $518,606 as compared to ($195,090) for the quarter ended September 30, 2010. The increase in other income (expenses) of $518,606 was primarily due to a increase of $1,129,321 from loss on debt modification resulting from the conversion of Senior Notes and bridge notes offset by a gain incurred in connection with troubled debt restructuring.
| 19 |
The net result for the quarter ended September 30, 2011 was a loss of $2,539,906 or $0.11 per share, compared to a loss of $948,594 or $0.04 per share for the third quarter of 2010 due to the above mentioned reasons.
Management will continue to make an effort to lower operating expenses and increase revenue. The Company will continue to invest in further expanding its operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting the name and products of the Company. Given the fact that most of the operating expenses are fixed or have quasi-fixed, character management expects them to significantly decrease as a percentage of revenues as revenues increase.
Results of Operations for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010:
Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, Resurgex Select® and Surgex™ for the nine months ended September 30, 2011 totaled $118,752, a decrease of 11% from the nine months ended September 30, 2010 which totaled $133,362. The primary reason for the decrease was due to the weak U.S. dollar and its impact on foreign sales.
At this stage in the Company’s development, revenues are not yet sufficient to cover ongoing operating expenses.
Gross profits for the nine months ended September 30, 2011 amounted to $54,470 for a 46% gross margin as compared to $54,559 for a 41% in the nine months ended September 30, 2010. The decrease in the gross margin is a result of the weak U.S. dollar and its impact on foreign sales.
After deducting research and development costs of $29,454 and selling, general and administrative expenses of $2,902,248, the Company realized an operating loss of $2,877,232 for the nine months ended September 30, 2011. Operating losses of $2,877,232 increased $443,713 or 18% as compared to the nine months ended 2010 operating loss of $2,433,519. The increase was due the management warrant expense which was earned as of the completion of the debt restructuring in the amount of $908,540. The increase of the management warrant grant was offset by the decrease of approximately $465,000 of expenses due to the termination of various sales and business consultants.
Other Income and (Expense) totaled ($1,326,607) for the nine months ended September 30, 2011 a decrease of 67% or $2,656,104 as compared to ($3,982,711) for the nine months ended September 30, 2010. The decrease in other income (expenses) of $2,656,104 was primarily due to a decrease of $3,407,170 of interest expense and financing expense resulting from the conversion of Unit Notes offset by a gain incurred in connection with troubled debt restructuring, reduced by the loss on debt modification.
The net result for the nine months ended September 30, 2011 was a loss of $4,203,839 or $0.18 per share, compared to a loss of $6,416,230 or $0.44 per share for the nine months ended September 30, 2010 due to the above mentioned reasons.
Management will continue to make an effort to lower operating expenses and increase revenue. The Company will continue to invest in further expanding its operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting the name and products of the Company. Given the fact that most of the operating expenses are fixed or have quasi-fixed character, management expects them to significantly decrease as a percentage of revenues as revenues increase.
| 20 |
Liquidity and Capital Resources
The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. Management believes they can raise the appropriate funds needed to support their business plan and develop an operating, cash flow positive company. The Company has been operating with negative cash flows for the past 11 years.
The Company incurred substantial net losses for the nine months ended September 30, 2011 and the year ended December 31, 2010 and has accumulated a deficit of $75,005,836 at September 30, 2011. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has never reported Net Income.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.
The Company’s business operations generally have been financed by debt investments through promissory notes with accredited investors. During the nine months of 2011, the Company obtained new debt from the issuance of promissory notes that supplied the majority of the funds that were needed to finance operations during the reporting period. Such new borrowings resulted in the receipt by the Company of $450,000 which are convertible into Series G preferred stock upon the conversion of the debt into equity. The Company also raised $950,000 from the sale of Series G preferred stock. While these funds sufficed to compensate for the negative cash flow from operations they were not sufficient to build up a liquidity reserve. As a result, the Company’s financial position at the end of the reporting period showed a working capital deficit of $2,526,376. During the first nine months of 2011 the Company obtained new financing sufficient to fund ongoing working capital requirements. We need to continue to raise funds to cover working capital requirements until we are able to raise revenues to a point of positive cash flow.
Disclosure About Off-Balance Sheet Arrangements
We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.
Critical Accounting Policies
Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in this report.
| 21 |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 4.Control and Procedures
Evaluation of disclosure controls and procedures
Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness and significant deficiencies in our internal control over financial reporting described below, our disclosure controls and procedures were not effective, as of the September 30, 2011, to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the criteria set forth inInternal Control��Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation, our management concluded that, as of September 30, 2011, our internal control over financial reporting was not effective.
A significant deficiency is a deficiency, or combination of deficiencies in internal control over financial reporting, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Management identified the following material weakness and significant deficiencies in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2010 and September 30, 2011:
| · | Material weakness: The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with the Company’s financial reporting requirements. In addition the Company does not have an audit committee. |
| · | Significant deficiencies: |
| o | Inadequate segregation of duties |
| o | Untimely account reconciliations |
| o | Evaluation of, and accounting for, complex warrant grants |
| 22 |
Nevertheless, based on a number of factors, including the performance of additional procedures performed by management designed to ensure the reliability of our financial reporting, our Chief Executive Officer and Chief Financial Officer believe that the consolidated financial statements included with this periodic report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with United States Generally Accepted Accounting Principals.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, other than what has been reported above.
| 23 |
PART II - OTHER INFORMATION
Item 1Legal Proceedings
Creative Healthcare Solutions, LLC vs. Millennium Biotechnologies Inc, Ct. of Common Pleas of Delaware County Ohio, Case No. 07 CV H 11 1420) Millennium was not satisfied with the service rendered by Creative Healthcare Solutions, LLC in 2005 which were associated with the development of Resurgex Select collateral materials developed in December of 2005. Millennium subsequently was forced to destroy and dispose of over 80% of the materials provided by Creative Healthcare Solutions due to the poor quality of the materials. Millennium has been unsuccessful in resolving the dispute and subsequently Creative Healthcare Solutions, LLC has filed legal action for demand of payment in the amount of $63,718 for services rendered. Millennium continues to negotiate a settlement through counsel with regards to this legal proceeding.
Ronald Burgert vs. Millennium Biotechnologies, Inc., et al. filed on the 9th day of October 2008 in District Court of Dallas County, Dallas, Texas. Mr. Burgert has filed a claim in the amount of $25,000 based on a note dated May 18, 2006. As of March 26, 2008 the balance due on the note, including unpaid principal and interest, was $31,635. On December 1, 2008, the 14th Judicial District, Dallas County, Dallas, Texas issued a default judgment against Millennium Biotechnologies, Inc. in the amount of $31,636 plus interest and unpaid attorney’s fees.
Robert Half International vs. Millennium Biotechnologies, Inc. filed on September 30, 2009 in the Superior Court of New Jersey, Law Division, Middlesex County. Robert Half International claims a total of $18,507 plus costs and fees based upon the Millennium Biotechnologies, Inc.’s failure to pay the plaintiff the fees associated with the full time hiring of an employee.
First Insurance Fund vs. Millennium Biotechnologies filed on November 18, 2010 in the Superior Court of New Jersey, Civil Division, Somerset/Hunterdon-Special Civil Part, Case# SOM-DC007284-10. First Insurance Fund claims a total of $13,489.99 including costs and fees based upon Millennium Biotechnologies failure to pay the plaintiff for Insurance invoices. On February 28, 2011, there was a levy on Millennium’s bank account in the amount of $1,644.
Item 1ARisk Factors
Not Applicable
Item 2Unregistered Sales of Equity Securities and Use of Proceeds
- None
Item 3Defaults Upon Senior Securities
See Note 6 to the Consolidated Financial Statements in Part I above.
Item 4Removed and Reserved
Item 5Other Information
- None
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Item 6 a)Exhibits
| 31.1 | Certification of Mark C. Mirken, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of Michael C. James, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Mark C. Mirken, Chief Executive Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
| 32.2 | Certification of Michael C. James, Chief Financial Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INERGETICS, INC. | ||
| Date: April 16, 2012 | By: | /s/ Michael C. James |
| Michael C. James | ||
| Chief Financial Officer | ||
| Chief Accounting Officer | ||
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