Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - INERGETICS INCFinancial_Report.xls
EX-31.2 - CERTIFICATION OF MICHAEL C. JAMES, CHIEF FINANCIAL OFFICER, PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - INERGETICS INCv230812_ex31-2.htm
EX-32.2 - CERTIFICATION OF MICHAEL C. JAMES, CHIEF FINANCIAL OFFICER, PURSUANT TO SECTIONS 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 - INERGETICS INCv230812_ex32-2.htm
EX-31.1 - CERTIFICATION OF MARK C. MIRKEN, CHIEF EXECUTIVE OFFICER, PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - INERGETICS INCv230812_ex31-1.htm
EX-32.1 - CERTIFICATION OF MARK C. MIRKEN, CHIEF EXECUTIVE OFFICER, PURSUANT TO SECTIONS 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 - INERGETICS INCv230812_ex32-1.htm

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 June 30, 2011

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.)
 
 
  205 Robin Road, Suite 222, Paramus, NJ 07652
(Address of Principal Executive Office)  (Zip Code)

 (908) 604-2500
(Registrant’s telephone number including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x   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 company x
 
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 August 3, 2011, 23,756,132 shares of Common Stock, $0.001 par value.
 
 
 

 
 
INERGETICS, INC. AND SUBSIDIARY

INDEX
 
 
Page
 
 
Number
     
PART  1  -  FINANCIAL INFORMATION
 
     
Item 1
Financial Statements (unaudited):
 
 
 
 
 
Condensed Consolidated Balance Sheets - June 30, 2011 and December 31, 2010
3
 
 
 
 
Condensed Consolidated Statements of Operations - Three and six months ended June 30, 2011 and 2010
4
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2011 and 2010
5
     
 
Notes to Condensed Consolidated Financial Statements
6 – 11
     
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
 
 
 
Item 3
Quantitative and Qualitative Disclosures about Market Risk
15
     
Item 4
Controls and Procedures
15
     
PART II  -  OTHER INFORMATION
17
     
Item 1
Legal Proceedings
17
     
Item 1A.
Risk Factors 
17
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
17
     
Item 3
Defaults Upon Senior Securities
17
     
Item 4
Removed and Reserved
17
     
Item 5
Other Information
17
     
Item 6
Exhibits
18
     
SIGNATURES
 
19

 
2

 

PART I  - Item 1
INERGETICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

   
June 30,
   
December 31,
 
   
2011
   
2010
 
Assets
           
Current Assets:
           
Cash
  $ 5,073     $ 1,089  
Accounts receivable, net
    23,173       1,245  
Inventories, net
    79,012       126,721  
Prepaid expenses
    87,014       254,234  
Total Current Assets
    194,272       383,289  
                 
Patents, net
    5,806       6,094  
Deposits
    23,651       23,651  
Total Assets
  $ 223,729     $ 413,034  
Liabilities and Stockholders’ Deficit
               
Current Liabilities:
               
Accounts payable and accrued expenses
  $ 3,719,441     $ 3,424,211  
Obligations to be settled in stock
    248,000       248,000  
Customer Prepayments
    59,976       17,798  
Short-term debt, net of unamortized debt discount
    6,474,932       5,337,712  
Total Current Liabilities
    10,502,349       9,027,721  
                 
Commitment and Contingencies
    -       -  
                 
Stockholders’ Deficit
               
Preferred stock, authorized 500,000, par value $1:
               
Convertible Series B, 65,141 shares issued and outstanding
    130,282       130,282  
Cumulative Series C, 64,763 shares issued and outstanding
    64,763       64,763  
Convertible Series D, 0 shares issued and outstanding
    -       -  
Convertible Series E, 0 shares issued and outstanding
    -       -  
Convertible Series F, 0 shares issued and outstanding
    -       -  
                 
Common stock, par value $0.001; authorized 2,000,000,000 shares; issued
and outstanding 23,756,132
    23,757       23,757  
Additional paid-in capital
    61,968,508       61,968,508  
Accumulated Deficit
    (72,465,930 )     (70,801,997 )
Total Stockholders’ Deficit
    (10,278,620 )     (8,614,687 )
                 
Total Liabilities and Stockholders’ Deficit
  $ 223,729     $ 413,034  
 
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
June 30,
   
Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Total Revenues
  $ 90,141     $ 15,277     $ 104,215     $ 123,909  
Cost of Goods Sold
    47,323       5,436       55,786       73,431  
      42,818       9,841       48,429       50,478  
                                 
Research and development cost
    3,698       1,755       17,448       15,366  
Selling, general and administrative expenses
    502,552       922,723       1,082,003       1,715,127  
Total operating expenses
    506,250       924,478       1,099,451       1,730,493  
                                 
Loss from Operations
    (463,432 )     (914,637 )     (1,051,022 )     (1,680,015 )
                                 
Other Income (Expense)
                               
Gain incurred in connection with debt restructuring, net
    -       356,100       -       356,100  
Miscellaneous income (expense)
    -       (23,588 )     -       43,152  
Amortization of debt discount
    (71,503 )     (146,381 )     (142,220 )     (239,584 )
Interest expense
    (243,169 )     (368,101 )     (470,691 )     (564,657 )
Financing expense
    -       (3,342,335 )     -       (3,382,632 )
Total Other Income (Expense)
    (314,672 )     (3,524,305 )     (612,911 )     (3,787,621 )
Loss before Provision for Income taxes
    (778,104 )     (4,438,942 )     (1,663,933 )     (5,467,636 )
                                 
Provision for Income Taxes
    -       -       -       -  
                                 
Net Loss
  $ (778,104 )   $ (4,438,942 )   $ (1,663,933 )   $ (5,467,636 )
Net Loss per Common Share Basic and Diluted
  $ (0.03 )   $ (0.30 )   $ (0.07 )   $ (0.56 )
Weighted Average Number of
                               
Common Shares Outstanding – Basic And Diluted
    23,756,132       14,583,976       23,756,132       9,818,021  

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 Six Months Ended June 30,  
   
2011
   
2010
 
Cash Flows from Operating Activities
           
Net Loss
  $ (1,663,933 )   $ (5,467,636 )
Adjustments to Reconcile Net Loss to
               
Net Cash used in Operations
               
Depreciation and amortization
    288       1,028  
Adjustment to inventory reserve
    -       (48,385 )
Amortization of debt discount
    142,220       239,584  
Equity securities issued for interest and Financing expense
    -       3,810,510  
Extinguishment of debt
    -       (356,100 )
                 
Changes in Assets and Liabilities
               
Accounts receivable
    (21,928 )     (3,299 )
Unit Note Subscriptions receivable
    -       (35,000 )
Inventories
    47,709       45,579  
Prepaid contract sales
    -       166,667  
Prepaid expenses
    167,220       184,755  
Customer prepayments
    42,178       -  
Liability for stock to be issued
    -       60,000  
Accounts payable and accrued expenses
    295,230       193,490  
Net Cash Used in Operating Activities
    (991,016 )     (1,208,807 )
                 
Net Cash Used in Investing Activities
    -       -  
                 
Cash Flows from Financing Activities
               
Proceeds from loans and notes payable
    1,025,000       1,282,500  
Repayment of loans and notes payable
    (30,000 )     (75,000 )
Net Cash Provided by Financing Activities
    995,000       1,207,500  
                 
Net Increase (Decrease) in Cash
    3,984       (1,307 )
Cash at beginning of period
    1,089       2,370  
Cash at end of period
  $ 5,073     $ 1,063  
                 
Supplemental Disclosure of Cash Flow information:
               
Cash paid during the period for:
               
Interest Expense
  $ 15,671     $ 2,250  
Income Taxes
  $ -     $ -  
                 
Schedule of non-cash investing and financing activities:
               
                 
Stock issued in conjunction with Notes Payable “Debt Discount”
  $ -     $ 769,296  

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.

The accompanying unaudited condensed consolidated financial statements include the accounts of Inergetics, Inc. and its subsidiary. These condensed consolidated financial statements have been prepared in accordance with accounting principals generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principals for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. It is suggested that these condensed consolidated financial statements be read in conjunction with the December 31, 2010 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission on Form 10-K.

In January 2011 The Board of Directors approved a reverse split of 1 for 80. The financial statements have retroactively restated common shares to the earliest presentation reported along with the earnings per share calculation. The reverse split was approved by FINRA and was effective July 15, 2011.

Principles of Consolidation

The Company’s operations presently consist almost exclusively of the operations of Millennium.  The condensed consolidated financial statements include the accounts of the Company and its subsidiary.  All significant inter-company transactions and balances have been eliminated.

Use of Estimates

The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
 
6

 
 
INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

Patents

Patents are capitalized and amortized over 240 months. Amortization expense was $288 and $144 for the six and three months ended June 30, 2011 and 2010, respectively.

Revenue Recognition

Revenue is recognized net of discounts, rebates, promotional adjustments, price adjustments and estimated returns and upon transfer of title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance obligations and collection is reasonably assured as the majority of sales are paid for prior to shipping.

Stock-Based Awards

Stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). Compensation expense is recognized based on the estimated grant date fair value method using the Black-Scholes valuation model. The Company did not issue any stock options during the year ended December 31, 2010 and the period ended June 30, 2011.

Income Taxes

The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected to be settled in the Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the six months ended June 30, 2011, and 2010.
 
 
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. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock and convertible debt are not considered in the diluted income (loss) per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the six and three months ended June 30, 2011 and 2010, therefore the basic and diluted weighted average common shares outstanding were the same.

Fair Value of Financial Instruments

For financial instruments including cash, accounts receivable and prepaid expenses, short-term debt, accounts payable and accrued expenses, the carrying values approximate the fair value because of the nature of these accounts and their short-term maturities.
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

2.         GOING CONCERN

The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing.  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 working capital deficits, significant debt outstanding, incurred substantial net losses for the six months ended June 30, 2011 and 2010 and has accumulated a deficit of approximately $72 million at June 30, 2011. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.
 
 
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 consist of work-in-process and finished goods for the Company’s product lines. Cost-of-goods sold are calculated using the average costing method. Inventories consist of the following:

   
June 30,
   
December 31,
 
   
2011
   
2010
 
Finished Goods
  $ 34,452     $ 89,759  
Work in Process
    18,168       -  
Raw Materials
    19,415       19,415  
Packaging
    14,057       24,627  
      86,092       133,801  
Less: Reserve for losses
    (7,080 )     (7,080 )
Total
  $ 79,012     $ 126,721  

 
9

 

INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Accounts payable
  $ 1,161,550     $ 1,397,161  
Accrued interest
    1,555,064       1,100,044  
Accrued rent expense
    135,875       138,711  
Accrued salaries, bonuses and payroll taxes
    594,655       528,314  
Loan from officer
    165,882       165,882  
Accrued professional fees
    106,415       94,099  
                 
    $ 3,719,441     $ 3,424,211  

6. SHORT-TERM DEBT, NET OF UNAMORTIZED DEBT DISCOUNT

In 2011, the Company raised, from three related parties’ $1,025,000 through bridge financing, which is in the process of being refinanced into a 30 month Secured Promissory Note to the investors which will bear interest at 10% per annum and will have the right to convert into common stock. The note holders have the right to convert principal and any accrued but unpaid interest into shares of Common Stock at the volume weighted average price of the Company’s Common Stock for the ten trading day period commencing on the fifth trading day (at that point the conversion rate becomes a fixed price) after the date of the public announcement of the transactions in a Current Report on Form 8-K which was filed on July 15, 2011. This fifteen day period represents a potential derivative liability which management has deemed immaterial. The conversion price shall not be greater than $0.20 or less than $0.08.

7. SUBSEQUENT EVENTS

On July 15, 2011 the Company filed a Form 8-K which included the following:
 
 
·
Summary of Debt Reorganization and Financing and obtained a commitment from Seahorse Enterprises, LLC (a related party) to fund up to $2,000,000. The investment is subject to the Company getting the holders of at least 80% of the unsecured short term debt, to convert to common stock. The Company must also get 90% of the holders of the secured short term debt to exchange it for Series G preferred stock, which is junior to all debt. Seahorse Enterprises, LLC. has provided $700,000 of the funding commitment as of July 1, 2011 of which $575,000 was funded in the six month period ended June 30, 2011. Seahorse Enterprises, LLC shall be issued a 30 month Secured Promissory Note for the early funding of this funding commitment. Once the debt has been converted, the 30 month Secured Promissory Note shall convert into Series G preferred stock, at an exchange rate of one share of Series G preferred for every $50 of debt, which will pay a dividend quarterly, for an annual yield of 10%. The Series G is convertible into common stock, at the option of the holder, at the conversion
 
 
10

 
 
 INERGETICS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUBSEQUENT EVENTS, Continued

 
 
price based on the volume weighted average price of the Company’s Common Stock for the ten trading day period commencing on July 25, 2011 and include certain price protection features.

 
·
The Board of Directors designated 200,000 authorized shares of preferred stock as Series G preferred. Series G preferred are entitled to vote equal to the common shares entitled to, if converted. Such stock will have a par value of $1 and a stated value of $50 and a liquidation preference equal to the stated value. In addition, the holders have the right to convert the principal amount and any accrued but unpaid interest under the First Position Bridge Notes (as defined in the July 15, 2011 8-K) into shares of common stock at the following rate per share: the volume weighted average price of the Company’s Common Stock for the ten trading day period commencing on July 25, 2011. Notwithstanding the foregoing, the conversion price shall not be greater than $0.20 or less than $0.08.

 
·
The employment agreement of CEO Mark Mirken shall be amended effective as of January 1, 2011 to reduce his salary to $175,000 per annum until the Company reaches three consecutive fiscal quarters of positive net income at which point his annual salary will increase to $240,000.

 
·
The employment agreement of CFO Michael James shall be amended effective as of January 1, 2011 to reduce his salary to $150,000 per annum until the Company reaches three consecutive fiscal quarters of positive net income at which point his annual salary will increase to $200,000. Michael James will also receive a bonus of $25,000 in common stock once the holders of at least 80% of the unsecured debt, excluding trade payables convert to common stock and 90% of the holders of the secured debt to exchange it for Series G preferred stock. Michael James shall convert his accrued salary of $100,000 into common stock at the conversion price based on the volume weighted average price of the Company’s Common Stock for the ten trading day period commencing on the fifth trading day after the date of the first public announcement of Transactions in a Current Report of Form 8-K..
 
 
·
The employment agreement of COO Frank Guarino shall be amended effective as of January 1, 2011 to reduce his salary to $100,000 per annum until the Company reaches three consecutive fiscal quarters of positive net income at which point his annual salary will increase to $150,000.

 
·
The Company shall enter into a consulting agreement with Kenneth Sadowsky, one of the Company’s directors, Seahorse Enterprises, LLC and the Primary Creditor (collectively, the “Investor Group”). The Investor Group for their assistance in structuring the above referenced transactions shall be paid a fee of $360,000 upon the consummation of the transactions, payable in common stock based on the volume weighted average price of the Company’s common stock for the ten trading day period commencing on the thirtieth calendar day after the Company effects the one-for-eighty reverse split approved by the Company’s stockholders in March 2010.
 
 
·
The Company’s Board of Directors has approved a Management Warrant Grant. Upon the earlier of November 1, 2011 or the date upon which the First and Second Equity Offerings have been completed or terminated the Company’s management shall be granted Management Warrants exercisable for such shares of Common Stock equal, in the aggregate, to 11% of the “fully diluted” shares of the Company’s Common Stock as of the Determination Date, less 2,189,050 shares. The Management Warrants will be exercisable for a period of ten years at an exercise price as to not cause a taxable event to management or the Company. The holders of the Management Warrants will be restricted from selling the shares issuable upon the exercise of Management Warrants for 15 months from the date of the grant of the Management Warrants.

 
11

 
 
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 June 30, 2011 compared to the quarter ended June 30, 2010:

Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, Resurgex Select® and Surgex™ for the quarter ended June 30, 2011 totaled $90,141, an increase of 490% from the quarter ended June 30, 2010 which totaled $15,277. The primary reason for the significant increase was due to a foreign distributor placing an order and the Company fulfilling the order in the second quarter ended June 30, 2011 versus the first quarter which was done in 2010.

At this stage in the Company’s development, revenues are not yet sufficient to cover ongoing operating expenses.

Gross profits for the quarter ended June 30, 2011 amounted to $42,818 for a 48% gross margin as compared to 64% in the quarter ended June 30, 2010. Gross profits increased $32,977 or 335% for the quarter ended June 30, 2011 compared to $9,841 for the quarter ended June 30, 2010.  The increase in gross profits is a result of higher revenue from a foreign distributor.

After deducting research and development costs of $3,698 and selling, general and administrative expenses of $502,552, the Company realized an operating loss of $463,432 for the quarter ended June 30, 2011.  Operating losses of $463,432 decreased $451,205 or 49% as compared to the second quarter of 2010 operating loss of $914,637.
 
Other Income (Expense) totaled $314,672 for the quarter ended June 30, 2011 a decrease of 91% or $3,209,633 as compared to $3,524,305 for the quarter ended June 30, 2010.  The decrease in other income (expenses) of $3,209,633 was primarily due to a decrease of $3,467,267 of interest expense and financing expense resulting from the conversion of Unit Notes offset by a gain incurred in connection with debt restructing..
 
The net result for the quarter ended June 30, 2011 was a loss of $778,104 or $0.03 per share, compared to a loss of $4,438,942 or $0.30 per share for the second quarter of 2010. The net loss for the second quarter of 2011 decreased by $3,660,838 or 82% as compared to the second quarter of 2010, primarily due to reduction in selling, general and administrative expenses and the reduction in interest and financing cost. 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.
 
 
12

 
 
Results of Operations for the six months ended June 30, 2011 compared to the six months ended June 30, 2010:

Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, Resurgex Select® and Surgex™ for the six months ended June 30, 2011 totaled $104,215, a decrease of 16% from the six months ended June 30, 2010 which totaled $123,909. The primary reason for the decrease was due to the weak U.S. dollar from foreign sales.

At this stage in the Company’s development, revenues are not yet sufficient to cover ongoing operating expenses.

Gross profits for the six months ended June 30, 2011 amounted to $48,429 for a 46% gross margin as compared to 41% in the six months ended June 30, 2010. Gross profits decreased $2,049 or 4% for the six months ended June 30, 2011 compared to $50,478 for the six months ended June 30, 2010.  The decrease in gross profits is a result of the weak U.S. dollar from foreign sales.

After deducting research and development costs of $17,448 and selling, general and administrative expenses of $1,082,003, the Company realized an operating loss of $1,051,022 for the six months ended June 30, 2011.  Operating losses of $1,051,022 decreased $628,993 or 37% as compared to the six months ended 2010 operating loss of $1,680,015.  Other Income and (Expense) totaled $612,911 for the six months ended June 30, 2011 a decrease of 84% or $3,174,710 as compared to $3,787,621 for the six months ended June 30, 2010.  The decrease in other income (expenses) of $3,174,710 was primarily due to a decrease of $3,467,598 of interest expense and financing expense resulting from the conversion of Unit Notes offset by a gain incurred in connection with debt restructing..
 
The net result for the six months ended June 30, 2011 was a loss of $1,663,933 or $0.07 per share, compared to a loss of $5,467,636 or $0.56 per share for the six months ended June 30, 2010. The net loss for the six months ended June 30, 2011 decreased by $3,803,703 or 70% as compared to the six months ended June 30, 2010, primarily due to reduction in selling, general and administrative expenses and the reduction in interest and financing cost. 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.
 
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 10 years.

The Company incurred substantial net losses for the six months ended June 30, 2011 and the year ended December 31, 2010 and has accumulated a deficit of $72,465,930 at June 30, 2011. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has never reported Net Income.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.
 
 
13

 

 
The Company’s business operations generally have been financed by debt investments through promissory notes with accredited investors.  During the six months of 2011, the Company obtained new debt from the issuance of promissory notes that supplied the majority of the funds that were needed to finance operations during the reporting period. 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 $1,025,000.  The new borrowings shall be issued 30 month Secured Promissory Note which shall convert into Series G preferred stock upon the conversion of the debt into equity.  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 $10,308,077.  During the first six months of 2011 the Company obtained new financing sufficient to fund ongoing working capital requirements.  We need to continue to raise funds to cover working capital requirements until we are able to raise revenues to a point of positive cash flow.
 
Disclosure About Off-Balance Sheet Arrangements

e do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

Critical Accounting Policies

Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in this report.

 
14

 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. Control and Procedures

Evaluation of disclosure controls and procedures

Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness and significant deficiencies in our internal control over financial reporting described below, our disclosure controls and procedures were not effective, as of the June 30, 2011, to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on the evaluation, our management concluded that, as of June 30, 2011, our internal control over financial reporting was not effective.

A significant deficiency is a deficiency, or combination of deficiencies in internal control over financial reporting, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Management identified the following material weakness and significant deficiencies in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2010 and June 30, 2011:

 
·
Material weakness: The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with the Company’s financial reporting requirements.
 
·
Significant deficiencies:
 
o
Inadequate segregation of duties
 
o
Untimely account reconciliations

Nevertheless, based on a number of factors, including the performance of additional procedures performed by management designed to ensure the reliability of our financial reporting, our Chief Executive Officer and Chief Financial Officer believe that the consolidated financial statements included with this periodic report fairly present, in all material respects, our financial position, results of operations, and cash flows as of the dates, and for the periods, presented, in conformity with United States Generally Accepted Accounting Principals.
 
 
15

 

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.

 
16

 

PART II - OTHER INFORMATION

Item 1  Legal Proceedings

Creative Healthcare Solutions, LLC vs. Millennium Biotechnologies Inc, Ct. of Common Pleas of Delaware County Ohio, Case No. 07 CV H 11 1420)  Millennium was not satisfied with the service rendered by Creative Healthcare Solutions, LLC in 2005 which were associated with the development of Resurgex Select collateral materials developed in December of 2005.  Millennium subsequently was forced to destroy and dispose of over 80% of the materials provided by Creative Healthcare Solutions due to the poor quality of the materials.  Millennium has been unsuccessful in resolving the dispute and subsequently Creative Healthcare Solutions, LLC has filed legal action for demand of payment in the amount of $63,718 for services rendered.  Millennium continues to negotiate a settlement through counsel with regards to this legal proceeding.

Ronald Burgert vs. Millennium Biotechnologies, Inc., et al. filed on the 9th day of October 2008 in District Court of Dallas County, Dallas, Texas.  Mr. Burgert has filed a claim in the amount of $25,000 based on a note dated May 18, 2006.  As of March 26, 2008 the balance due on the note, including unpaid principal and interest, was $31,635.  On December 1, 2008, the 14th Judicial District, Dallas County, Dallas, Texas issued a default judgment against Millennium Biotechnologies, Inc. in the amount of $31,636 plus interest and unpaid attorney’s fees.

Robert Half International vs. Millennium Biotechnologies, Inc. filed on September 30, 2009 in the Superior Court of New Jersey, Law Division, Middlesex County.  Robert Half International claims a total of $18,507 plus costs and fees based upon the Millennium Biotechnologies, Inc.’s failure to pay the plaintiff the fees associated with the full time hiring of an employee.

Growthink Inc. vs. Millennium Biotechnologies, Inc. filed on June 15, 2009 in the Superior Court of New Jersey, Law Division, Somerset-Special Civil Part, Case #DC-004225-09.  Growthink Inc. claims a total of $7,941.04 plus cost and attorney fees based upon Millennium Biotechnologies, Inc. failure to pay the plaintiff for the reasonable value of goods sold and delivered and/or services rendered by the plaintiff to the defendant.  On October 6, 2010 there was a levy on the Company’s bank and the settlement has been resolved.

First Insurance Fund vs. Millennium Biotechnologies filed on November 18, 2010 in the Superior Court of New Jersey, Civil Division, Somerset/Hunterdon-Special Civil Part, Case# SOM-DC007284-10.  First Insurance Fund claims a total of $13,489.99 including costs and fees based upon Millennium Biotechnologies failure to pay the plaintiff for Insurance invoices.  On February 28, 2011, there was a levy on Millennium’s bank account in the amount of $1,644.

Item 1A  Risk Factors

Not Applicable
 
Item 2   Unregistered Sales of Equity Securities and Use of Proceeds

- None

Item 3   Defaults Upon Senior Securities

See Note 6 to the Consolidated Financial Statements in Part I above.

Item 4   Removed and Reserved

Item 5   Other Information

- None

 
17

 

Item 6    a)  Exhibits

 
31.1
Certification of Mark C. Mirken, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
Certification of Michael C. James, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
Certification of Mark C. Mirken, Chief Executive Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 
32.2
Certification of Michael C. James, Chief Financial Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

 
18

 

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:     August 3, 2011
By:
/s/ Michael C. James
   
Michael C. James
   
Chief Financial Officer
   
Chief Accounting Officer
 
 
19