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 September 30, 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 November 10, 2014, 114,655,493 shares of Common Stock, $0.001 par value.
INERGETICS, INC. AND SUBSIDIARY
INDEX
| 2 |
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 12,613 | $ | 106,773 | ||||
| Accounts receivable, net | 207,310 | 472,297 | ||||||
| Receivable from the Technology Business Tax Certificate Transfer Program | - | 3,357,144 | ||||||
| Deferred cost of goods sold | 338,054 | 569,036 | ||||||
| Inventories, net | 992,227 | 420,186 | ||||||
| Prepaid expenses | 249,287 | 447,355 | ||||||
| Total Current Assets | 1,799,491 | 5,372,791 | ||||||
| Patents and intangible assets, net | 148,209 | 149,391 | ||||||
| Goodwill | 135,000 | 135,000 | ||||||
| Deposits | 87,116 | 421,191 | ||||||
| Total Assets | $ | 2,169,816 | $ | 6,078,373 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 3,247,306 | $ | 5,089,488 | ||||
| Deferred Revenue | 756,922 | 1,269,470 | ||||||
| Obligations to be settled in stock | 658,620 | 699,085 | ||||||
| Derivative liability | 3,929,000 | 318,000 | ||||||
| Short-term debt, net of unamortized debt discount | 3,376,897 | 1,276,358 | ||||||
| Short-term debt to affiliates, net of unamortized debt discount | 3,819,778 | 2,843,728 | ||||||
| Total Current Liabilities | 15,788,523 | 11,496,129 | ||||||
| Long-term debt | - | 103,912 | ||||||
| Long-term debt, net to affiliates | - | 1,425,522 | ||||||
| 15,788,523 | 13,025,563 | |||||||
| Commitments and Contingencies | ||||||||
| Preferred stock, Convertible Series G, authorized 400,000 par $1, stated Value $50: 218,086 and 198,074 shares issued and outstanding | 8,956,898 | 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 100,490,706 and 62,461,448 shares, respectively | 100,491 | 62,462 | ||||||
| Additional paid-in capital | 72,053,952 | 68,789,021 | ||||||
| Accumulated Deficit | (94,925,093 | ) | (84,737,002 | ) | ||||
| Total Stockholders’ Deficit | (22,575,605 | ) | (15,690,474 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 2,169,816 | $ | 6,078,373 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 3 |
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Total Revenues | $ | 430,242 | $ | 203,348 | $ | 1,433,659 | $ | 276,790 | ||||||||
| Cost of Goods Sold | 360,167 | 228,117 | 1,033,207 | 283,362 | ||||||||||||
| Gross Profit | 70,075 | (24,769 | ) | 400,452 | (6,572 | ) | ||||||||||
| Research and development | 10,619 | 5,807 | 23,548 | 5,807 | ||||||||||||
| Selling, general and administrative expense | 1,294,042 | 2,209,577 | 5,990,273 | 4,468,260 | ||||||||||||
| Total operating expenses | 1,304,661 | 2,215,384 | 6,013,821 | 4,474,067 | ||||||||||||
| Loss from Operations | (1,234,586 | ) | (2,240,153 | ) | (5,613,369 | ) | (4,480,639 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Amortization of debt discount | (51,327 | ) | (165,271 | ) | (220,330 | ) | (247,403 | ) | ||||||||
| Gain on extinguishment of debt | - | - | 18,378 | 46,978 | ||||||||||||
| Loss from warrants/derivatives issued with debt greater than debt carrying value | (2,043,000 | ) | - | (2,043,000 | ) | - | ||||||||||
| Gain(loss) on fair market valuation of derivatives | (1,096,000 | ) | 100,000 | (1,568,000 | ) | 64,000 | ||||||||||
| Interest and financing cost, net | 8,070 | (376,747 | ) | (760,270 | ) | (576,056 | ) | |||||||||
| Total Other Income (Expense) | (3,182,257 | ) | (442,018 | ) | (4,573,222 | ) | (712,481 | ) | ||||||||
| Loss before Provision for Income taxes | (4,416,843 | ) | (2,682,171 | ) | (10,186,591 | ) | (5,193,120 | ) | ||||||||
| State taxes | (1,500 | ) | (1,500 | ) | (1,500 | ) | (5,499 | ) | ||||||||
| Net Loss | (4,418,343 | ) | (2,683,671 | ) | (10,188,091 | ) | (5,198,619 | ) | ||||||||
| Preferred Dividend | (459,280 | ) | (374,900 | ) | (1,039,243 | ) | (1,118,800 | ) | ||||||||
| Net Loss applicable to common shareholders | $ | (4,877,623 | ) | $ | (3,058,571 | ) | $ | (11,227,334 | ) | $ | (6,317,419 | ) | ||||
| Net Loss per Common Share - Basic and Diluted | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.14 | ) | $ | (0.12 | ) | ||||
| Weighted Average Number of common shares outstanding - Basic and Diluted | 92,397,477 | 58,692,339 | 78,300,398 | 53,365,095 | ||||||||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 4 |
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2014 | 2013 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | (10,188,091 | ) | $ | (5,198,619 | ) | ||
| Adjustments to Reconcile Net Loss to Net Cash Used In Operations | ||||||||
| (Gain) Loss on fair market valuation of derivatives | 1,568,000 | (64,000 | ) | |||||
| Depreciation and amortization | 1,182 | 1,158 | ||||||
| Common Stock issued for financing expenses | 4,952 | 16,026 | ||||||
| Preferred Stock issued for financing expenses | 273,394 | - | ||||||
| Common Stock issued for services | 245,931 | 269,600 | ||||||
| Common stock issued for compensation | 1,462,515 | 450,600 | ||||||
| Gain on extinguishment of debt | (18,378 | ) | (46,978 | ) | ||||
| Accretion of debt discount | 220,330 | 247,403 | ||||||
| Warrants issued for compensation | - | 73,800 | ||||||
| Equity instruments issued with debt greater than debt carrying amount | 2,043,000 | - | ||||||
| Changes in Assets and Liabilities | ||||||||
| (Increase) in accounts receivable | 264,987 | (844,321 | ) | |||||
| Decrease in receivable from Technology Business Tax Certificate Transfer Program | 3,357,144 | 2,209,715 | ||||||
| (Increase) in inventories | (572,041 | ) | (316,735 | ) | ||||
| Decrease in deferred cost of goods sold | 230,982 | (607,806 | ) | |||||
| (Increase) Decrease in prepaid expenses | (47,863 | ) | 239,837 | |||||
| (Increase) of intangible assets | - | (41,000 | ) | |||||
| (Increase) Decrease in deposits | 334,075 | (421,866 | ) | |||||
| (Decrease) in accounts payable and accrued expenses | (778,762 | ) | 1,701,020 | |||||
| (Decrease) in customer deposits | - | (39,970 | ) | |||||
| (Decrease) in deferred revenue | (512,548 | ) | 1,358,186 | |||||
| Net Cash Provided by Operating Activities | (2,111,191 | ) | (1,013,950 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Acquisition of business | - | (100,000 | ) | |||||
| Net Cash Used in Investing Activities | - | (100,000 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from debt | 2,545,030 | 3,331,688 | ||||||
| Repayment of debt | (528,000 | ) | (1,251,522 | ) | ||||
| Net Cash Used in Financing Activities | 2,017,030 | 2,080,166 | ||||||
| Net Decrease in Cash | (94,161 | ) | 966,216 | |||||
| Cash at beginning of period | 106,774 | 8,846 | ||||||
| Cash at end of period | $ | 12,613 | $ | 975,062 | ||||
| Supplemental Disclosure of Cash Flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest Expense | $ | 213,621 | $ | 85,575 | ||||
| Income Taxes | $ | - | $ | 5,499 | ||||
| Non-cash | ||||||||
| Common Stock issued for prepaid services (1,850,000 shares) | $ | 399,163 | $ | - | ||||
| Issuance of G shares as Preferred dividend (24,548 and 22,376 shares) | $ | 1,039,243 | $ | 1,118,800 | ||||
| Change in liability of stock to be Issued | $ | 40,465 | $ | 130,809 | ||||
| Issuance of G shares for Business Acquisition | $ | - | $ | 140,000 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
| 5 |
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 and OmEssentials®.
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 are prepared in accordance with accounting principles generally accepted in the United States. All significant inter-company transactions and balances have been eliminated.
Certain information in footnote disclosure normally included in the financial statements have been condensed or omitted and the financial statements might not be indicative of a full year’s results. The Company believes the disclosures are adequate to make the information presented not misleading.
The financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for fiscal year-ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed on March 31, 2014.
| 6 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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.
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 September 30, 2014 and December 31, 2013, deferred revenue totaled $756,922 and $1,269,470, 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 September 30, 2014 and December 31, 2013 of $338,054 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.
| 7 |
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. 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.
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 nine months ended September 30, 2014 and 2013 and has accumulated a deficit of approximately $95 million at September 30, 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.
| 8 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. 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.
4. 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®, Bikini Ready®, SlimTrim™ and Om Essentials® product lines. Inventories consist of the following:
| September 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Finished Goods | $ | 938,077 | $ | 378,472 | ||||
| Raw materials | 908 | - | ||||||
| Packaging | 53,242 | 41,714 | ||||||
| 992,227 | 420,186 | |||||||
| Less: Reserve for obsolescence | - | - | ||||||
| Total | $ | 992,227 | $ | 420,186 | ||||
5. 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.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
| September 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Accounts payable | $ | 2,116,818 | $ | 2,866,017 | ||||
| Owed to officer | 32,592 | 16,088 | ||||||
| Accrued interest | 651,630 | 1,016,584 | ||||||
| Accrued rent expense | 135,874 | 135,874 | ||||||
| Accrued salaries, bonuses and payroll taxes | 112,064 | 824,492 | ||||||
| Accrued professional fees | 198,328 | 230,433 | ||||||
| $ | 3,247,306 | $ | 5,089,488 | |||||
| 9 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. SHORT TERM DEBT, NET OF DEBT DISCOUNT
In the first Nine months of 2014, the Company realized gross proceeds of $2,545,030 in new cash. Proceeds from the sale of its 12% to 15.0% twelve month Unsecured Convertible Notes and Unsecured Notes, in the aggregate original principal amount of $2,545,030 (the “Notes”) to accredited investors (the “Investors”). Interest on the outstanding principal balance of the Notes is payable upon maturity of the notes. For the convertible notes, 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 ranging from $0.20 per share to 62% of the lowest trading price of the Common Stock as quoted by Bloomberg L.P. for the ten trading days immediately preceding the date of conversion (subject to adjustments as provided in the Note . The Company may prepay the Notes at any time with a penalty to the Investors ranging from zero to 40% of the outstanding principal and accrued interest.
Unsecured Notes, net debt discount, consist of the following:
| September 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Unsecured Convertible Notes | $ | 3,439,271 | $ | 1,450,333 | ||||
| Debt discount | (62,374 | ) | (70,063 | ) | ||||
| 3,376,897 | 1,380,270 | |||||||
| Less long term portion | - | 103,912 | ||||||
| Short term portion | $ | 3,376,897 | $ | 1,276,358 | ||||
The Company committed to issue 575,000 shares of common stock for origination fees during the Nine months ended September 30, 2014 and recorded a debt discount of $ 91,923.
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 new debt payable was $2,000,000. The new debt incurred origination fees paid through the issuance of Series G preferred stock valued at $232,500, resulting in an adjustment to 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 September 30, 2014 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.
| 10 |
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SHORT TERM DEBT, NET OF DEBT DISCOUNT, Continued
At December 31, 2013, the Company had Notes issued to six accredited investors with an outstanding principal and interest balance of $465,872, which were due on demand. In the nine months ended September 30, 2014, the Company reached an agreement with the investors to convert into 1,336,918 shares of common stock plus $43,725 in cash as full settlement. The debt and accrued interest was valued at $506,801 which exceeded the fair market value of the common stock and cash by $18,378. The difference resulted in a gain on troubled debt restructuring of $18,378 has been included in the Statement of Operations in the nine months ended September 30, 2014. The gain incurred with debt restructuring approximates $0.00 per share.
8. SHORT TERM DEBT – RELATED PARTIES, NET OF DEBT DISCOUNT
In the Nine months ended September 30, 2014, the Company realized gross proceeds of $ 1,135,030, from the sale of its 12.0 % six month Unsecured Convertible Notes and Secured Promissory Notes, in the aggregate original principal amount of $1,135,030 (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 Nine months ended September 30, 2014, in connection with this debt and recorded a debt discount of $26,740.
9. 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 | ||||||||||||||||
| September 30, | Fair Value Measurement Using | |||||||||||||||
| 2014 | Level 1 | Level 2 | Level 3 | |||||||||||||
| Derivative liability – Conversion Feature | $ | 3,929,000 | - | - | $ | 3,929,000 | ||||||||||
| $ | 3,929,000 | - | - | $ | 3,929,000 | |||||||||||
| 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 | |||||||||||
| 11 |
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 Nine months ended September 30, 2014:
| September 30, | ||||
| 2014 | ||||
| Balance at December 31, 2013 | $ | 318,000 | ||
| Change in fair market value of Conversion Feature | 1,568,000 | |||
| Issuance of equity instruments with debt greater than debt carrying amount | 2,043,000 | |||
| Balance at September 30, 2014 | $ | 3,929,000 | ||
10. WARRANTS
Warrant activity for the nine months ended September 30, 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 | $ | - | ||||||||||
| Granted | 2,500,000 | 0.200 | 58 | - | ||||||||||||
| Exercised | (531,262 | ) | 0.104 | - | - | |||||||||||
| Expired or cancelled | - | - | - | - | ||||||||||||
| Outstanding and exercisable at September 30, 2014 | 21,292,144 | $ | 0.223 | 5-85 | $ | - | ||||||||||
11. 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. $1,350,000 was paid and expensed as of September 30, 2014.
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INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 12. | SUBSEQUENT EVENTS |
During the third quarter, the Company was not able to make the payment that was due July 1, 2014 to Martha Stewart Living Omnimedia pursuant to our license agreement. While we are in discussions to work out terms of payment, we most likely will need to raise additional funds to meet our obligations under the license agreement.
On October 27, 2014, Inergetics, Inc. (the “Company”) issued a convertible debenture in the principal amount of $165,000 (the “Debenture”) to Macallan Partners, LLC (“Macallan”) pursuant to which it borrowed $150,000. The additional $15,000 represents original issue discount.
Principal is due and payable under the Debenture on October 30, 2015. At the option of the Company, the principal may be prepaid before the due date at a premium of 130% (the “Prepayment Penalty”). Upon the occurrence of an “Events of Default” (as such term is defined in the Debenture), Macallan (including hereinafter, any subsequent holder of the Debenture) has the right to accelerate payment of all unpaid principal and interest and any applicable Prepayment Penalty. Interest on the foregoing shall be the lesser of 18% per annum or the highest legal rate.
At any time after six months from the date the Debenture was issued, at the option of Macallan, principal and accrued interest is convertible into shares of the Company’s Common Stock at a price (the “Conversion Price”) equal to the lower of: 55% of the lowest traded price during the 15 trading days prior to the election to convert or 55% of the bid price on the date of the election to convert. If conversion shares are not deliverable by DWAC, then an additional 5% discount will apply to the conversion price. If the shares are ineligible for deposit into the DTC system for any reason and only eligible for “X clearing” then an additional 10% discount will apply to the conversion price. If the Company’s common stock price closes below 0.005 at any time while the Debenture is outstanding then an additional 15% discount will apply to the conversion price. However, if the Company’s common stock price at any time loses “the bid” (e.g., .0001 on “the ask” with zero market makers on the bid as per level 2 quotations), then the conversion price may, in the Lender’s sole and absolute discretion, be reduced to a fixed price equal to par value.
During the fourth quarter of 2014, the 31 Group LLC converted $184,979 of principal and interest into 14,164,787 common shares.
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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, 2014 compared to the quarter ended September 30, 2013:
Total revenues generated from the sales of Surgex™, Bikini Ready®, SlimTrim™ and Martha Stewart Essentials™ for the quarter ended September 30, 2014 totaled $430,242 an increase of 112% from the quarter ended September 30, 2013 which totaled $203,348. The primary reason for the increase was due to the Company’s distribution 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 September 30, 2014. The introduction of these brands continues to show growth into the fourth 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 September 30, 2014 amounted to $70,075 for a 16% gross margin. Gross profit increased $94,844 for the quarter ended September 30, 2014 compared to a negative gross margin of $24,769 for the quarter ended September 30, 2013. The increase in gross profit is a result of higher sales in the quarter ended September 30, 2014.
After research and development cost and selling, general and administrative expenses of $1,304,661, the Company realized an operating loss of $1,234,586 for the quarter ended September 30, 2014. Operating losses of $1,234,586 decreased $1,005,567 or 45% as compared to the third quarter of 2013 operating loss of $2,240,153. The majority of the decrease was due to the decrease in promotion for the launch of the Martha Stewart line from the prior year in the approximate amount of $843,000.
Non-operating expense totaled $3,182,257 for the quarter ended September 30, 2014 an increase of $2,740,239 as compared to an expense of $442,018 for the quarter ended September 30, 2013. The increase in non-operating expense of $2,740,239 was due to the decrease in accretion of debt discount in the amount of $113,944 and an increase in loss associated with the fair value of the derivative instruments issued with the convertible debt in the amount of $1,196,000. There was a loss of $2,043,000 from equity instruments issued with debt greater than debt carrying amount. There was an decrease in interest expense of $384,817 due to an over accrual.
The net result for the quarter ended September 30, 2014 was a loss of $4,877,623 or $0.05 per share which included a preferred dividend on the Series G stock in the amount of $459,280, compared to a loss of $3,058,571 or $0.05 per share for the third quarter of 2013. The net loss for the third quarter of 2014 increased by $1,819,052 or 59% as compared to the third quarter of 2013, primarily due to an decrease in selling, general and administrative expenses and gain on fair valuation of derivatives. 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.
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Results of Operations for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013:
Total revenues generated from the sales of Surgex™, Bikini Ready®, SlimTrim™ and Martha Stewart Essentials™ for the nine months ended September 30, 2014 totaled $1,433,659 an increase of 518% from the nine months ended September 30, 2013 which totaled $276,790. The primary reason for the increase was due to the Company’s distribution of Martha Stewart Essentials and the newly formulated Surgex brand along with the introduction of Bikini Ready and SlimTrim to the retailers during the nine months ended September 30, 2014. The introduction of these brands continues to show growth into the fourth 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 nine months ended September 30, 2014 amounted to $400,452 for a 28% gross margin. Gross profit increased $407,024 for the nine months ended September 30, 2014 compared to a negative gross margin of $6,572 for the nine months ended September 30, 2013. The increase in gross profit is a result of higher sales in the nine months ended September 30, 2014.
After research and development cost and selling, general and administrative expenses of $6,013,821, the Company realized an operating loss of $5,613,369 for the nine months ended September 30, 2014. Operating losses of $5,613,369 increased $1,132,730 or 25% as compared to the first nine months of 2013 operating loss of $4,480,639. The majority of the increase was due to the increase in promotion and royalty for the launch of the various products into the retail channel in the approximate amount of $572,000. Additional employees were hired to support the infrastructure of the business in addition to stock awards in the approximate amount of $1,108,000. There was a reduction in professional fees in the approximate amount of $274,000.
Non-operating expenses totaled $4,573,222 for the nine months ended September 30, 2014 an increase of 542% or $3,860,741 as compared to $712,481 for the nine months ended September 30, 2013. The increase in non-operating expenses of $3,860,741 was due to the decrease in accretion of debt discount in the amount of $27,073 and an increase in loss associated with the fair value of the derivative instruments issued with the convertible debt in the amount of $1,632,000. There was a loss of $2,043,000 from equity instruments issued with debt greater than debt carrying amount. There was an increase in interest expense of $184,214 due to more debt outstanding. There was a decrease in the gain on extinguishment of debt in the amount of $28,600 compared to the nine months ended September 30, 2013.
The net result for the nine months ended September 30, 2014 was a loss of $11,227,334 or $0.14 per share which included a preferred dividend on the Series G stock in the amount of $1,039,243, compared to a loss of $6,317,419 or $0.12 per share for the nine months of 2013. The net loss for the nine months of 2014 increased by $4,909,915 or 78% as compared to the nine months 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.
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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 13 years.
The Company incurred substantial net losses for the nine months ended September 30, 2014 and the year ended December 31, 2014 and has accumulated a deficit of $94,925,093 at September 30, 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 nine 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 $2,545,030. 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 $13,989,032. During the first nine 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. $1,350,000 was paid as of September 30, 2014. Total royalties due through September 30, 2014 of $1,350,000 are to be paid quarterly on the first day of the quarter commencing April 1, 2014.
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During the third quarter, the Company was not able to make the payment that was due July 1, 2014 to Martha Stewart Living Omnimedia pursuant to our license agreement. While we are in discussions to work out terms of payment, we most likely will need to raise additional funds to meet our obligations under the license agreement.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
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 September 30, 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.
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.
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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.
Not Applicable
- None
| 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. | ||
| 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 |
| 18 |
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: November 14, 2014 | By: | /s/ Michael C. James |
| Michael C. James | ||
| Chief Executive Officer | ||
| Chief Financial Officer | ||
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