FORM 10-Q
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 March 31, 2014
OR
¨ 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.) | |
550 Broad Street, Suite 1212, Newark, NJ 07102
(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 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 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 filer¨ | Accelerated filer¨ |
| | |
| Non-accelerated filer¨ | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of May 6, 2014, 77,679,614 shares of Common Stock, $0.001 par value.
INERGETICS, INC. AND SUBSIDIARY
INDEX
PART I - Item 1
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Assets | | | | | | | | |
| Current Assets: | | | | | | | | |
| Cash | | $ | 106,165 | | | $ | 106,773 | |
| Accounts receivable, net | | | 319,098 | | | | 472,297 | |
| Receivable from the Technology Business Tax Certificate Transfer Program | | | - | | | | 3,357,144 | |
| Deferred cost of goods sold | | | 456,741 | | | | 569,036 | |
| Inventories, net | | | 1,087,506 | | | | 420,186 | |
| Prepaid expenses | | | 566,099 | | | | 447,355 | |
| Total Current Assets | | | 2,535,609 | | | | 5,372,791 | |
| | | | | | | | | |
| Patents and intangible assets, net | | | 148,997 | | | | 149,391 | |
| Goodwill | | | 135,000 | | | | 135,000 | |
| Deposits | | | 195,806 | | | | 421,191 | |
| Total Assets | | $ | 3,015,412 | | | $ | 6,078,373 | |
| Liabilities and Stockholders’ Deficit | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 3,420,437 | | | $ | 5,089,488 | |
| Deferred Revenue | | | 1,010,178 | | | | 1,269,470 | |
| Obligations to be settled in stock | | | 939,888 | | | | 699,085 | |
| Derivative liability | | | 1,332,000 | | | | 318,000 | |
| Short-term debt, net of unamortized debt discount | | | 1,038,257 | | | | 1,276,358 | |
| Short-term debt to affiliates, net of unamortized debt discount | | | 4,219,846 | | | | 2,843,728 | |
| Total Current Liabilities | | | 11,960,606 | | | | 11,496,129 | |
| Long-term debt | | | 151,098 | | | | 103,912 | |
| Long-term debt, net to affiliates | | | - | | | | 1,425,522 | |
| | | | 12,111,704 | | | | 13,025,563 | |
| Commitments and Contingencies | | | | | | | | |
| Preferred stock, Convertible Series G, authorized 400,000 par $1, stated Value $50: 217,528 and 198,074 shares issued and outstanding | | | 9,280,126 | | | | 8,743,284 | |
| Stockholders’ Deficit | | | | | | | | |
| Preferred stock: | | | | | | | | |
| Convertible Series B, par value $2; 65,141 shares issued and outstanding | | | 130,282 | | | | 130,282 | |
| Cumulative Series C, par value $1; 64,763 shares issued and outstanding | | | 64,763 | | | | 64,763 | |
| Convertible Series D, par value $1; 0 shares issued and outstanding | | | - | | | | - | |
| Convertible Series E, par value$1; 0 shares issued and outstanding | | | - | | | | - | |
| Convertible Series F, par value $1; 0 shares issued and outstanding | | | - | | | | - | |
Common stock, par value $0.001; authorized 2,000,000,000 shares; issued and
outstanding 73,229,104 and 62,461,448 shares, respectively | | | 73,230 | | | | 62,462 | |
| Additional paid-in capital | | | 70,619,370 | | | | 68,789,021 | |
| Accumulated Deficit | | | (89,264,063 | ) | | | (84,737,002 | ) |
| Total Stockholders’ Deficit | | | (18,376,418 | ) | | | (15,690,474 | ) |
| Total Liabilities and Stockholders’ Deficit | | $ | 3,015,412 | | | $ | 6,078,373 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| | | | | | | |
| Total Revenues | | $ | 479,802 | | | $ | 6,775 | |
| Cost of Goods Sold | | | 362,603 | | | | 4,770 | |
| Gross Profit | | | 117,199 | | | | 2,005 | |
| | | | | | | | | |
| Research and development | | | 4,408 | | | | - | |
| Selling, general and administrative expense | | | 3,140,720 | | | | 1,391,896 | |
| Total operating expenses | | | 3,145,128 | | | | 1,391,896 | |
| Loss from Operations | | | (3,027,929 | ) | | | (1,389,891 | ) |
| | | | | | | | | |
| Other Income (Expense) | | | | | | | | |
| Amortization of debt discount | | | (133,353 | ) | | | (37,054 | ) |
| Gain on extinguishment of debt | | | 15,591 | | | | - | |
| Gain (loss) on fair market valuation of derivatives | | | (1,014,000 | ) | | | (71,000 | ) |
| Interest and financing cost, net | | | (367,370 | ) | | | (80,807 | ) |
| Total Other Income (Expense) | | | (1,499,132 | ) | | | (188,861 | ) |
| Loss before Provision for Income taxes | | | (4,527,061 | ) | | | (1,578,752 | ) |
| State taxes | | | - | | | | 3,499 | |
| Net Loss | | | (4,527,061 | ) | | | (1,582,251 | ) |
| Preferred Dividend | | | 258,438 | | | | 441,900 | |
| Net Loss applicable to common shareholders | | $ | (4,785,499 | ) | | $ | (2,024,151 | ) |
| | | | | | | | | |
| Net Loss per Common Share - Basic and Diluted | | $ | (0.08 | ) | | $ | (0.04 | ) |
| | | | | | | | | |
| Weighted Average Number of common shares outstanding - Basic and Diluted | | | 64,008,126 | | | | 48,265,436 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | For the Three Months Ended
March 31, | |
| | | 2014 | | | 2013 | |
| Cash Flows from Operating Activities | | | | | | | | |
| Net Loss | | $ | (4,527,061 | ) | | $ | (1,582,251 | ) |
| Adjustments to Reconcile Net Loss to | | | | | | | | |
| Net Cash Used In Operations | | | | | | | | |
| Loss on fair market valuation of derivatives | | | 1,014,000 | | | | 71,000 | |
| Depreciation and amortization | | | 394 | | | | 144 | |
| Common Stock issued for financing expenses | | | 3,082 | | | | - | |
| Preferred Stock issued for financing expenses | | | 36,378 | | | | - | |
| Common Stock issued for services | | | 86,905 | | | | 42,000 | |
| Common stock issued for compensation | | | 1,323,883 | | | | 450,600 | |
| Amortization of Prepaid expenses paid for in stock | | | - | | | | - | |
| Gain on extinguishment of debt | | | (15,591 | ) | | | - | |
| Accretion of debt discount | | | 133,353 | | | | 37,054 | |
| | | | | | | | | |
| Changes in Assets and Liabilities | | | | | | | | |
| Decrease in accounts receivable | | | 153,199 | | | | - | |
| Decrease in receivable from Technology Business Tax Certificate Transfer Program | | | 3,357,144 | | | | 2,209,715 | |
| (Increase) in inventories | | | (667,320 | ) | | | (100,924 | ) |
| Decrease in deferred cost of goods sold | | | 112,295 | | | | - | |
| (Increase) Decrease in prepaid expenses | | | (205,649 | ) | | | 346,587 | |
| (Increase) in note receivable | | | - | | | | (5,680 | ) |
| (Increase) Decrease in deposits | | | 225,385 | | | | (4,666 | ) |
| (Decrease) in accounts payable and accrued expenses | | | (543,714 | ) | | | (262,632 | ) |
| (Decrease) in deferred Revenue | | | (259,292 | ) | | | - | |
| | | | | | | | | |
| Net Cash Provided by Operating Activities | | | 227,391 | | | | 1,200,947 | |
| | | | | | | | | |
| Cash Flows from Investing Activities | | | | | | | | |
| Acquisition of business | | | - | | | | (75,000 | ) |
| Net Cash Used in Investing Activities | | | - | | | | (75,000 | ) |
| | | | | | | | | |
| Cash Flows from Financing Activities | | | | | | | | |
| Proceeds from debt | | | 300,000 | | | | 130,000 | |
| Repayment of debt | | | (528,000 | ) | | | (1,171,522 | ) |
| Net Cash Used in Financing Activities | | | (228,000 | ) | | | (1,041,522 | ) |
| | | | | | | | | |
| Net Increase in Cash | | | (609 | ) | | | 84,425 | |
| Cash at beginning of period | | | 106,774 | | | | 8,846 | |
| Cash at end of period | | $ | 106,165 | | | $ | 93,271 | |
| | | | | | | | | |
| Supplemental Disclosure of Cash Flow information: | | | | | | | | |
| Cash paid during the period for: | | | | | | | | |
| Interest Expense | | $ | 213,621 | | | $ | 85,575 | |
| Income Taxes | | $ | - | | | $ | 3,499 | |
| | | | | | | | | |
| Non-cash | | | | | | | | |
| Common Stock issued for prepaid services (8,037,500 shares) | | $ | - | | | $ | 84,000 | |
| Issuance of G shares as Preferred dividend (4,135 and 8,838 shares) | | $ | 258,438 | | | $ | 441,900 | |
| Change in liability of stock to be Issued | | $ | 240,803 | | | $ | - | |
| Issuance of G shares for Business Acquisition | | $ | - | | | $ | 140,000 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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 has developed Surgex for the sport nutritional market. The Company acquired Bikini Ready®, a leader in weight loss lifestyle solutions and SlimTrim™, the affordable, premium value diet brand. The Company has a licensing agreement to sell the Martha Stewart Essentials line of supplements. The Company’s efforts going forward will focus on sales of Martha Stewart Essentials™ line of supplements, Surgex in powder and pill forms as well as powder and pills for Bikini Ready and pills for SlimTrim.
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 principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Certain information in footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America has been condensed or omitted pursuant to such principles and the financial results for the periods presented may not be indicative of the full year’s results. The Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the December 31, 2013 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission on Form 10-K.
Principles of Consolidation
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.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Goodwill
Goodwill and other acquired intangible assets with indefinite lives are not amortized, but are tested for impairment annually and when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Our annual testing date is December 31. We test goodwill for impairment by first comparing the carrying value of net assets to the fair value of the related operations. If the fair value is determined to be less than carrying value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment. Intangibles consist of brand and trade names acquired in business combinations. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the brand and trade names. Any excess carrying value over the amount of discounted cash flows represents the amount of the impairment.
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 to various customers when all performance obligations are met and collectability is reasonably assured revenue is recognized. Upon shipment to specific customers with the right of return the Company defers revenues as returns are not reasonably estimable. As of March 31, 2014 and December 31, 2013, deferred revenue totaled $1,010,178 and $1,268,470, respectively.
Deferred Revenue and Deferred Cost of Goods Sold
Deferred revenue consists substantially of amounts billed or payments received in advance of revenue recognition. Deferred cost of goods sold as of March 31, 2014 and December 31, 2013 of $456,741 and $569,036, respectively, related to deferred product revenues includes direct product costs. Once all revenue recognition criteria have been met, the deferred revenues and associated cost of goods sold are recognized.
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.
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. Common Stock equivalents have not been included in this computation since the effect would be anti-dilutive. 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.
Fair Value of Financial Instruments
For financial instruments including cash, accounts receivable, prepaid expenses, debt, accounts payable and accrued expenses, the carrying values approximated their fair value.
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.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. GOING CONCERN AND LIQUIDITY ISSUES
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 company which is cash flow positive.
However, the Company has a working capital deficit, significant debt outstanding, incurred substantial net losses for the Three months ended March 31, 2014 and 2013 and has accumulated a deficit of approximately $ 89 million at March 31, 2014. 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.
3. BUSINESS ACQUISITION
On January 9, 2013 (the “Acquisition date”), the Company entered into a definitive agreement pursuant to which it acquired, through its Millennium Biotechnologies, Inc. wholly-owned subsidiary, the trademark of Bikini Ready® and the brand SlimTrim™. Under the agreement the Company acquired the URL’s, formula and customer list. Under the terms of this agreement the Company paid $ 100,000 cash and 8,000 shares of Series G preferred stock valued at $ 140,000 .
The transaction was accounted for as a purchase business combination. The results from operations for the period from acquisition date to March 31, 2014 have been included in the Company’s condensed consolidated statement of operations. Pro forma information with respect to the acquisition are not included in these financial statements as the information is not material.
In accordance with generally accepted accounting principles, intangible assets are recorded at fair values as of the date of the transaction. The Company’s allocation to identifiable intangible assets and liabilities according to their respective fair values, is as follows:
| Intangible assets, trademarks | | $ | 100,000 | |
| Intangible assets, customer list | | | 5,000 | |
| Goodwill | | | 135,000 | |
| Purchase Price | | $ | 240,000 | |
Intangible assets with estimated useful lives are amortized over a 5 year period. The goodwill is not amortized for financial statement purposes in accordance with generally accepted accounting principles.
| 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.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORIES
Inventories are stated at the lower of cost or market on a first in, first out basis. Inventories consist of work-in-process, raw materials, finished goods, and packaging for the Company’s Martha Stewart Essentials, SURGEX®, RESURGEX ESSENTIAL®, Bikini Ready® and SlimTrim™ product lines. Cost-of-goods sold are calculated using the average costing method. Inventories consist of the following:
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Finished Goods | | $ | 1,029,452 | | | $ | 378,472 | |
| Packaging | | | 58,054 | | | | 41,714 | |
| | | | 1,087,506 | | | | 420,186 | |
| Less: Reserve for obsolescence | | | - | | | | - | |
| Total | | $ | 1,087,506 | | | $ | 420,186 | |
6. PREPAID EXPENSES
Prepaid expenses are for services that have been paid in advance primarily with stock that are amortized over the life of the contract. The agreements pertain to pricing structure, distribution, warehousing, inventory management, financial advisory services, pro athlete endorsements and licensing agreements.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Accounts payable | | $ | 2,527,020 | | | $ | 2,866,017 | |
| Owed to officer | | | 5,650 | | | | 16,088 | |
| Accrued interest | | | 411,269 | | | | 1,016,584 | |
| Accrued rent expense | | | 135,874 | | | | 135,874 | |
| Accrued salaries, bonuses and payroll taxes | | | 143,648 | | | | 824,492 | |
| Accrued professional fees | | | 196,976 | | | | 230,433 | |
| | | $ | 3,420,437 | | | $ | 5,089,488 | |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. SHORT TERM DEBT, NET OF DEBT DISCOUNT
In the first Three months of 2014, the Company realized gross proceeds of $ 300,000 in new cash. Proceeds from the sale of its 12% to 15.0% twelve month Unsecured Convertible Notes, in the aggregate original principal amount of $ 300,000 (the “Notes”) to accredited investors (the “Investors”). Interest on the outstanding principal balance of the Notes is payable upon maturity of the note. The outstanding principal balance of the Notes and all accrued but unpaid interest thereon may be converted at any time at the option of each Investors into shares of Common Stock at the Conversion Price of $ .20 per share. The Company may prepay the Notes at any time without penalty to the Investors.
Unsecured Notes, net debt discount, consist of the following:
| | | March 31, | | | December 31, | |
| | | 2014 | | | 2013 | |
| Unsecured Convertible Notes | | $ | 1,261,867 | | | $ | 1,450,333 | |
| Debt discount | | | (72,512 | ) | | | (70,063 | ) |
| | | | 1,189,355 | | | | 1,380,270 | |
| Less long term portion | | | 151,098 | | | | 1,276,358 | |
| Short term portion | | $ | 1,038,257 | | | $ | 103,912 | |
The Company committed to issue 561,918 shares of common stock for origination fees during the three months ended March 31, 2014 and recorded a debt discount of $ 77,207.
Gain on Troubled Debt Restructuring
2014 Modification of Debt
The following debt instruments were modified in 2014. 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” modification of debt accounting.
At December 31, 2013, the Company had promissory notes issued to one affiliated investor with an outstanding balance of $2,000,000, which were due on demand. During January 2014, the Company reached an agreement with the investor to extend the debt for twelve months. At the date of extension, the debt payable was $2,000,000. The fair value of the new debt is $1,791,713. As of March 31, 2013 the loss on debt modification of $208,287 has been included in the Stockholders’ Deficit.
At December 31, 2013, the Company had promissory notes issued to three accredited investors with an outstanding balance of $249,535, which were due on demand. During January 2014, the Company reached an agreement with the investors to extend the debt for six to twelve months. At the date of extension, the debt payable was $249,535. The fair value of the new debt is $223,548. The conversion rate on the new convertible note is $0.20 per share of common stock. As of March 31, 2013 the loss on debt modification of $25,987 has been included in the Statement of Operations. The loss incurred with debt restructuring approximates $0.00 per share.
At December 31, 2013, the Company had Notes issued to two accredited investors in March 2004 and August 2013 with an outstanding principal and interest balance of $111,978, which were due on demand. In January 2014, the Company reached an agreement with the investors to convert into 275,000 shares of common stock plus $43,725 in cash as full settlement. The debt and accrued interest was valued at $111,978 which exceededthe fair market value of the common stock and cash by $41,5778. The difference resulted in a gain on troubled debt restructuring of $41,578 has been included in the Statement of Operations in the three months ended March 31, 2014. The gain incurred with debt restructuring approximates $0.00 per share.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SHORT TERM DEBT, Continued
The Secured Promissory Unit Note issued in November 2009 with the principal amount outstanding of $ 85,726 and accrued interest of $59,163 as of March 31, 2014 is in default due to non-payment. The Secured Promissory Unit Note in the original amount of $85,726 and interest accrued thereon was originally repayable in five quarterly installments beginning 18 months after issue.
9. SHORT TERM DEBT – RELATED PARTIES, NET OF DEBT DISCOUNT
In the three months ended March 31, 2014, the Company realized gross proceeds of $ 100, from the sale of its 12.0 % six month Unsecured Convertible Notes and Secured Promissory Notes, in the aggregate original principal amount of $100,000 (the “Notes”) to an accredited investor (the “Investor”). Interest on the outstanding principal balance of the Notes is payable upon maturity of the note. The Company may prepay the Notes at any time without penalty to the Investors.
The Company issued 125,000 shares of common stock for origination fees during the three months ended March 31, 2014, in connection with this debt and recorded a debt discount of $26,740.
10. FAIR VALUE MEASUREMENTS
The following table represents the fair value hierarchy for those financial assets measured at fair value on a recurring basis
| | | Fair Value at | | | | | | | | | | |
| | | March 31, | | | Fair Value Measurement Using | |
| | | 2014 | | | Level 1 | | | Level 2 | | | Level 3 | |
| Derivative liability – Conversion Feature | | $ | 1,332,000 | | | | - | | | | - | | | $ | 1,332,000 | |
| | | $ | 1,332,000 | | | | - | | | | - | | | $ | 1,332,000 | |
| | | Fair Value at | | | | | | | | | | |
| | | December 31, | | | Fair Value Measurement Using | |
| | | 2013 | | | Level 1 | | | Level 2 | | | Level 3 | |
| Derivative liability – Conversion Feature | | $ | 318,000 | | | | - | | | | - | | | $ | 318,000 | |
| | | $ | 318,000 | | | | - | | | | - | | | $ | 318,000 | |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE MEASUREMENTS, Continued
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (Derivative liability – Conversion Feature) for the three months ended March 31, 2014:
| | | March 31, | |
| | | 2014 | |
| Balance at December 31, 2013 | | $ | 318,000 | |
| Derivative converted into Equity | | | (8,000 | ) |
| Change in fair market value of Conversion Feature | | | 1,022,000 | |
| Balance at March 31, 2014 | | $ | 1,332,000 | |
11. WARRANTS
Warrant activity for the three months ended March 31, 2014 is as follows:
| | | | | | Weighted | | | | | | | |
| | | | | | Average | | | Remaining | | | Aggregate | |
| | | Number of | | | Exercise | | | Contractual Term In | | | Intrinsic | |
| | | Warrants | | | Price | | | Months | | | Value | |
| Outstanding at December 31, 2013 | | | 19,323,406 | | | $ | 0.200 | | | | 63 | | | $ | 300,000 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | - | | | | - | | | | 55 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Exercised | | | (531,262 | ) | | | 0.104 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Expired or cancelled | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Outstanding and exercisable at March 31, 2014 | | | 18,792,144 | | | $ | 0.197 | | | | 11-92 | | | $ | 1,878,967 | |
13. COMMITMENTS AND CONTINGENCIES
The Company entered into a license agreement with minimum royalty payments totaling $ 1,800,000 , $ 2,100,000 , $ 2,700,000 , $ 3,200,000 and $ 3,800,000 for each of the years ended 2014, 2015, 2016, 2017 and 2018, respectively. $ 900,000 was paid as of March 31, 2014 and recorded in prepaid expenses.
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 March 31, 2014 compared to the quarter ended March 31, 2013:
Total revenues generated from the sales of Surgex™, Bikini Ready®, SlimTrim™ and Martha Stewart Essentials™ for the quarter ended March 31, 2014 totaled $479,802 an increase of 6,982% from the quarter ended March 31, 2012 which totaled $6,775. The primary reason for the increase was due to the Company’s introduction of Martha Stewart Essentials and the newly formulated Surgex brand along with the introduction of Bikini Ready and SlimTrim to the retailers during the quarter ended March 31, 2014. The introduction of these brands continues to show growth into the second quarter of 2014.
At this stage in the Company’s development, revenues are not yet sufficient to cover ongoing operating expenses.
Gross profit for the quarter ended March 31, 2014 amounted to $117,119 for a 24% gross margin. Gross profit increased $115,194 or 5745% for the quarter ended March 31, 2014 compared to $2,005 for the quarter ended March 31, 2013. The increase in gross profit is a result of higher sales in the quarter ended March 31, 2014.
After research and development cost and selling, general and administrative expenses of $3,145,128, the Company realized an operating loss of $3,027,929 for the quarter ended March 31, 2014. Operating losses of $3,027,929 increased $1,753,232 or 126% as compared to the first quarter of 2013 operating loss of $1,389,891. The majority of the increase was due to the increase in promotion and royalty for the launch of the various products into the retail in the amount of $890,292. Additional employees were hired to support the infrastructure of the business in addition to stock awards in the amount of $980,652. There was an reduction in other professional fees in the amount of $235,404.
Non-operating expenses totaled $1,499,132 for the quarter ended March 31, 2014 an increase of 694% or $1,310,271 as compared to $188,861 for the quarter ended March 31, 2013. The increase in non-operating expenses of $1,310,271 was due to the accretion of debt discount in the amount of $133,353 and a increase in loss associated with the fair value of the derivative instruments issued with the convertible debt in the amount of $943,000. There was an increase in interest expense of $286,563 due to more debt outstanding.
The net result for the quarter ended March 31, 2014 was a loss of $4,785,499 or $0.07 per share which included a preferred dividend on the Series G stock in the amount of $258,438, compared to a loss of $2,024,151 or $0.04 per share for the first quarter of 2013. The net loss for the first quarter of 2014 increased by $2,761,348 or 136% as compared to the first quarter of 2013, primarily due to an increase in selling, general and administrative expenses and accretion of debt discount, increase loss of derivatives and increased interest expense due to additional debt outstanding. 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.
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 Estimates
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.
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 12 years.
The Company incurred substantial net losses for the three months ended March 31, 2014 and the year ended December 31, 2014 and has accumulated a deficit of $89,264,063 at March 31, 2014. 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 three months of 2014, the Company obtained new debt from the issuance of promissory notes that supplied the funds that were needed to finance operations during the reporting period. The new issuance of debt requires conversion of existing debt which may not be able to convert on favorable terms. Such new borrowings resulted in the receipt by the Company of $300,000. 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 $9,424,997. During the first three months of 2014 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.
The Company entered into a license agreement with minimum royalty payments totaling $1,800,000, $2,100,000, $2,700,000, $3,200,000 and $3,800,000 for each of the years ended 2014, 2015, 2016, 2017 and 2018, respectively. $900,000 was paid as of March 31, 2014. Total royalaties due through March 31, 2014 of $900,000 are to be paid quarterly on the first day of the quarter commencing April 1, 2014.
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, our disclosure controls and procedures were not effective, as of the March 31, 2014, 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.
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.
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.
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.
Item 1ARisk Factors
Not Applicable
Item 2Unregistered Sales of Equity Securities and Use of Proceeds
See Note 3 and Note 8 to the Condensed Consolidated Financial Statements in Part I above.
Item 3Defaults Upon Senior Securities
See Note 8 to the Condensed Consolidated Financial Statements in Part I above.
Item 4Mine Safety Disclosures
Not Applicable
Item 5Other Information
- None
Item 6 a)Exhibits
| | 31.1 | | Certification of Michael C. James, Chief Executive Officer and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| | 32.1 | | Certification of Michael C. James, Chief Executive Officer and Chief Financial Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
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| | 101.INS* | | XBRL Instance Document |
| | | | |
| | 101.SCH* | | XBRL Taxonomy Extension Schema |
| | | | |
| | 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase |
| | | | |
| | 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase |
| | | | |
| | 101.LAB* | | XBRL Taxonomy Extension Label Linkbase |
| | | | |
| | 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase |
| * | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability. |
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: May 15, 2014 | By: | /s/ Michael C. James |
| | | Michael C. James |
| | | Chief Executive Officer |
| | | Chief Financial Officer |
