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EXCEL - IDEA: XBRL DOCUMENT - TheraBiogen, Inc. | Financial_Report.xls |
EX-32.1 - CERTIFICATION - TheraBiogen, Inc. | trab_ex321.htm |
EX-31.1 - CERTIFICATION - TheraBiogen, Inc. | trab_ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2012
[ ] 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 000-53008
THERABIOGEN, INC.
(Exact name of registrant as specified in its charter)
NEVADA | 98-0559606 |
State or other jurisdiction of incorporation or organization | (I.R.S. Employer Identification No.) |
|
|
PO Box 296 |
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Manalapan, NJ | 07726 |
(Address of principal executive offices) | (Zip Code) |
866-284-9561
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Former Address:
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.
[X] Yes [ ] 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 (§. 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] Yes [ ] 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.
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|
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
As of July 23, 2012 we had 72,162,810 shares of common stock outstanding.
2
INDEX
3
PART I.
ITEM 1. FINANCIAL STATEMENTS
THERABIOGEN, INC.
CONDENSED BALANCE SHEETS
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|
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|
|
| May 31,2012 |
| February 29,2012 | ||
| (unaudited) |
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| ||
ASSETS |
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| ||
Current assets: |
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| ||
Cash and cash equivalents | $ | 166 |
| $ | 290 |
Deposits |
| 10,437 |
|
| 9,627 |
Accounts receivable |
| 617 |
|
| 1,921 |
Inventory |
| 441,651 |
|
| 441,880 |
Prepaid expenses |
| 16,282 |
|
| 16,282 |
Total current assets |
| 469,153 |
|
| 470,000 |
Other assets: |
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|
|
License, net of amortization of $371,309 and $348,007 |
| 2,056,891 |
|
| 2,080,193 |
Deferred financing costs |
| 42,642 |
|
| 74,624 |
Goodwill |
| 101,183 |
|
| 101,183 |
Total other assets |
| 2,200,716 |
|
| 2,256,000 |
Total assets | $ | 2,669,869 |
| $ | 2,726,000 |
LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities |
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Current liabilities: |
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Accounts payable and other accrued liabilities | $ | 756,801 |
| $ | 632,169 |
Accrued rebates |
| 440,527 |
|
| 441,771 |
Accrued interest |
| 279,761 |
|
| 263,070 |
Notes payable-related parties |
| 525,489 |
|
| 604,054 |
Notes payable - net of discount of $100,572 |
| 820,254 |
|
| 744,216 |
Total current liabilities |
| 2,822,832 |
|
| 2,685,280 |
Other liabilities: |
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|
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Liability for unissued common stock |
| 5,000 |
|
| 5,000 |
Total Liabilities |
| 2,827,832 |
|
| 2,690,280 |
STOCKHOLDERS EQUITY |
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|
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|
|
Common stock, $0.001 par value, 150,000,000 shares authorized, 71,392,815 and 61,059,483 issued at May 31, 2012 and February 29, 2012 |
| 71,393 |
|
| 61,059 |
Additional paid-in capital |
| 21,627,646 |
|
| 21,380,879 |
Accumulated deficit |
| (21,857,002) |
|
| (21,406,218) |
Total stockholders equity |
| (157,963) |
|
| 35,720 |
Total liabilities and stockholders equity | $ | 2,669,869 |
| $ | 2,726,000 |
The accompanying notes are an integral part of these financial statements
4
THERABIOGEN, INC.
CONDENSED STATEMENT OF OPERATIONS
(unaudited)
| For the three months ended May 31, | ||
| 2012 |
| 2011 |
SALES - net | (1,241) |
| 4,213 |
EXPENSES |
|
|
|
Cost of goods sold | 229 |
| 52,860 |
Marketing and sales | 42,023 |
| 1,704,705 |
General and administrative | 300,283 |
| 11,549,721 |
Total expenses | 342,535 |
| 13,307,286 |
| (343,776) |
| (13,303,073) |
|
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|
OPERATING LOSS |
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|
|
Other income (expense): |
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|
|
Interest expense | (107,008) |
| (88,968) |
Total other income (expense) | (107,008) |
| (88,968) |
NET (LOSS) | $(450,784) |
| $(13,392,041) |
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|
Net loss per share- basic and diluted | $ (0.01) |
| $ (0.33) |
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Weighted average common shares outstanding |
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|
Basic and diluted | 65,838,468 |
| 40,696,009 |
The accompanying notes are an integral part of these financial statements
5
THERABIOGEN, INC.
CONDENSED STATEMENT OF CASH FLOWS
(unaudited)
| Three months ended | ||||
| May 31, | ||||
| 2012 |
| 2011 | ||
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss | $ | (450,784) |
| $ | (13,392,041) |
Adjustments to reconcile to net cash used by operating activities: |
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Amortization expense |
| 23,302 |
|
| 23,301 |
Stock issued for services |
| - |
|
| 2,174,961 |
Warrants and options issued for services |
| 60,000 |
|
| 10,806,800 |
Amortization of debt discount |
| 31,982 |
|
| 37,658 |
Changes in assets and liabilities: |
|
|
|
|
|
Accounts receivable |
| 1,304 |
|
| 22,349 |
Inventory |
| 229 |
|
| (62,757) |
Deposits |
| (810) |
|
| 35,231 |
Accrued Rebates |
| (1,244) |
|
| - |
Accounts payable/Accrued Expenses |
| 274,271 |
|
| 164,019 |
Accrued interest payable |
| 16,691 |
|
| 22,067 |
Payroll Taxes Payable |
| - |
|
| (938) |
Net cash used by operating activities |
| (45,059) |
|
| (169,350) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Note and interest receivable |
| - |
|
| 12,252 |
Advance to affiliate |
| - |
|
| - |
Net cash provided by investing activities |
| - |
|
| 12,252 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from issuance of common stock |
| - |
|
| 83,000 |
Proceeds from notes payable |
| 44,935 |
|
| 20,241 |
Proceeds from notes payable - related parties |
| - |
|
| 53,896 |
Net cash provided by financing activities |
| 44,935 |
|
| 157,137 |
Net increase in cash |
| (124) |
|
| 39 |
Cash and cash equivalents, beginning of period |
| 290 |
|
| 0 |
Cash and cash equivalents, end of period | $ | 166 |
| $ | 39 |
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|
SUPPLEMENTAL CASH FLOW INFORMATION |
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Noncash transactions: |
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Debt discount/deferred finance costs credited to equity | $ | - |
| $ | 37,358 |
Issue shares to satisfy liability for shares | $ | - |
| $ | 131,000 |
Conversion of debt to equity | $ | 197,100 |
| $ | 20,000 |
Accounts payable capitalized into notes payable | $ | 70,000 |
| $ | - |
The accompanying notes are an integral part of these financial statements
6
THERABIOGEN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Nature of Operations
TheraBiogen, Inc., formerly Kushi Resources, Inc., (the Company) was incorporated on October 3, 2005, under the laws of the State of Nevada.
In November, 2009, the Company entered into an Agreement and Plan of Merger with TheraBiogen, Inc., a Nevada corporation, which was incorporated in April 2000. The merger closed on January 5, 2010, and as a result of the transaction, the Company changed its name to TheraBiogen, Inc.
In July 2008, Former TheraBiogen entered into an exclusive licensing agreement with Nasal Therapeutics, Inc., to develop, manufacture, market and sell four homeopathic nasal sprays, THERA MAX® Cold Relief, THERA MAX® Flu Relief, THERA MAX® Allergy Relief and THERA MAX® Migraine Relief, on an exclusive basis in North America and, and as a result of a subsequent transaction, in July 2009, the Company has the rights for all areas of the world for twenty-five years. THERA MAX® Cold Relief and THERA MAX® Flu Relief are now marketed as a single product, THERA MAX® Cold and Flu Relief. The principal of Nasal Therapeutics, Inc., Dr. Charles Hensley had also developed the ZICAM® homeopathic nasal product.
We are a developer and manufacturer of over-the-counter homeopathic pharmaceutical products which aid in the relief of various symptoms and illnesses. We have products for which we licensed the formulation from a third party as described elsewhere in this document. We sell those products to the consumer through third parties. Our typical client is a pharmaceutical retail chain or a grocery retail chain. We advertise and promote our products to our ultimate consumer customer through our retail client or directly to the consumer. Our retail clients often requires in-store promotions, advertising and placement discounts and rebates for the consumer, all funded by us. In addition, we have advertised through radio, TV and online through social media channels.
The challenges of our business model include succeeding in getting the retailers to put our products on the shelves and then to encourage consumers to purchase those products from the retailers. We have succeeded in getting our products on the shelves at Walgreens, Rite-Aid, Hannaford Supermarkets, Discount Drug Mart, Big Y Supermarkets and Food Lion. The 2011-2012 cold and flu season was unusually mild, significantly diminishing the demand for our product. As a result, the sales we experienced in our retailers outlets were much lower than we expected and this has led to a change in our business strategy. Furthermore, as a result of the growth of Social Media and online marketing we are contemplating a modification of our strategy wherein we would focus our primary strategy on online direct-to-consumer marketing. In this modification to our Business Model, we would advertise through Social Media sites, invest in Search Engine Optimization (SEO) marketing to drive consumers to our website where they would be able to purchase our products directly from us. This strategy is expected to deliver enhanced sales and gross margins since we will be selling at retail, not wholesale.
An additional modification to our business model is that we would add more products to the THERA MAX product line, whether developed internally or acquired or licensed from others. To that end, we have developed THERA MAX Sore Throat Relief which we plan to introduce to the market this year in addition to the existing THERA MAX Cold and Flu relief, THERA MAX Allergy Relief and the recently announced THERA MAX Migraine Relief.
7
Basis of Presentation and Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern. This basis of accounting contemplates the recovery of the Companys assets and the satisfaction of liabilities in the normal course of business. The Company has not as yet attained a level of operations which allows it to meet its current overhead and may not attain profitable operations within its first few business operating cycles, nor is there any assurance that such an operating level can ever be achieved. The Company is dependent upon obtaining additional financing adequate to fund its operations. While the Company has funded its initial operations with private placements and secured loans principally from related parties, there can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company. The Companys ability to continue as a going concern is also dependent on many events outside of its direct control, including, among other things improvement in the economic climate. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X, as appropriate. In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements for the interim period, have been included.
Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full year.
These interim condensed financial statements should be read in conjunction with the Companys audited financial statements and notes for the period ended February 29, 2012 filed with the Securities and Exchange Commission on Form 10-K/A on July 18, 2011.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue from product sales when the risks and rewards of ownership have transferred to the customer. Transfer of risks and rewards is considered to have occurred upon shipment of the finished product to retailers. Sales incentives, promotional allowances and returns are estimated and recognized as a reduction from revenue at the date of shipment based upon current agreements with customers and as the Company develops more revenues historical activity will also be utilized. The allowance for sales incentives, promotional allowances and returns reflects our historical experience and will be reviewed regularly to ensure that it reflects potential chargebacks from customers. The allowance as of May 31, 2012 is based upon our experience through July 2011. We review the need for a return provision at least quarterly and adjust the reserve amounts if actual chargebacks differ materially from our reserve percentage once established.
Inventory
Inventory consists of finished goods and components purchased from suppliers and delivered to the Companys contract manufacturer of the THERA MAX® products. Inventory is carried at the lower of cost or market on a first in, first out basis.
8
License Agreement
The Company recorded as an intangible asset the cost of the license agreement entered into with Nasal Therapeutics, Inc. based on the consideration paid. The intangible asset is amortized on a straight-line basis over the 25 year life of the agreement. The amortization charge is included in cost of goods sold. Prior to the initiation of sales during the third quarter of 2010 amortization expense had been charged to general and administrative expense. The Company evaluates for impairment when events and circumstances warrant in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350-30, and an impairment loss will be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset will be its new accounting basis.
Goodwill
The Company recorded goodwill as the excess of the consideration paid over the estimated fair values of the assets acquired and liabilities assumed in a business combination. The goodwill is not amortized, but is subject to an annual impairment test in accordance with FASB ASC Topic 350-20. The two step test first determines whether the carrying amount of the reporting unit exceeds the fair value of the reporting unit. If so, the next step is to measure the impairment loss as the difference between the implied fair value of the goodwill and the carrying amount of the reporting unit.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying balance sheets of all financial instruments approximates their fair values because of the immediate or short-term maturity of these financial instruments or comparable interest rates of similar instruments. The Company follows newly issued accounting guidance relating to fair value measurements. This guidance establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 -- quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.
Level 2 -- inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.
Level 3 -- unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
The asset or liabilitys fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the unobservable inputs.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits in bank accounts insured by the FDIC. As part of its cash management process, the Company performs periodic evaluations of the relative credit standing of this financial institution. The Company has not experienced any losses in cash balances and does not believe it is exposed to any significant credit risk on its cash.
9
Accounting Estimates
The preparation of these unaudited financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these unaudited financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Per Share Information
Basic earnings per share are calculated using the weighted average number of common shares outstanding for the period presented. Diluted loss per share is the same as basic loss per share, as the effect of potentially dilutive securities are anti-dilutive.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded and deducted from deferred tax assets when the deferred tax assets are not expected to be realized based on currently available evidence. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Management has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. Additionally, management believes that no accruals for tax liabilities are necessary. Therefore, no reserves for uncertain tax positions have been recorded.
Stock-Based Compensation
Compensation costs attributable to stock options or similar equity instruments granted are measured at the fair value at the grant date, and expensed over the expected vesting period.
Cost of Goods Sold
Cost of goods sold includes amortization of product license, cost of materials, inventory management and manufacturing costs and shipping and handling costs to deliver product to customers.
Advertising
Advertising costs are expensed as incurred as a marketing and sales expense.
Concentrations
There is no concentration of risk in the volume of sales to certain customers as their sales volume exceeded 10% of the Companys total revenues because sales were so low in the three months ended May 31, 2012.
10
Recently Issued Accounting Standards
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income, which eliminates the current option to present components of other comprehensive income as part of the statements of changes in stockholders equity and requires entities to present comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the components of other comprehensive income. The new disclosure requirements were effective for the three months ended May 31, 2012 and had no impact on the financial statements.
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company.
NOTE 3 - LICENSE AGREEMENT
In September 2008, the Company acquired licensing rights to the THERA MAX® products for a cash payment of $150,000 and the issuance of 15,300,000 shares of common stock. In July 31, 2009, the Company renegotiated the terms of the license agreement, extending the territory to the entire world and the term to 25 years from July 31, 2009, and also received a transfer of all trademark rights to the THERA MAX® name in exchange for $75,000. Amortization expense related to the license is charged to cost of sales in the accompanying statement of operations and amounted to approximately $23,000 for the three months ended May 31, 2012.
NOTE 4 - ACCOUNTS RECEIVABLE
Pursuant to an agreement dated July 25, 2011, the Company transfers some of its accounts receivable to a financial institution with full recourse. The financial institution retains 15% of the proceeds from the receivable transfer as reserves, which are released to the Company as the receivables are collected. Through an intercreditor agreement with the finance company providing the material acquisition and purchase order financing (see Note 6), the financial institution disburses funds for transferred receivables, less reserves and applicable fees, directly to the purchase order lender as long as there is an outstanding balance on that facility. The maximum commitment under this facility is $1,000,000. The facility bears interest at 3.75% over the Wall Street Journal Prime Rate and is secured by a first priority security interest in the personal property and fixtures of the Company There is no current balance due under this agreement.
NOTE 5 - DEFERRED TAX ASSETS
As of May 31, 2012, the Company had net operating loss (NOL) carry-forwards and deductible temporary differences available to offset future taxable income of approximately $21.8 million including approximately $104,000 from Kushi Resources, Inc. at date of merger. The utilization of the NOL carry-forwards and deductible temporary differences is dependent upon the tax laws in effect at the time they can be utilized. As of May 31, 2012, a full valuation allowance of $8.2 million has been recorded against the deferred tax assets due to the uncertainty surrounding their realization caused by the Companys recurring losses. The change in the valuation allowance during the three months ended May 31, 2012 was $170,000. The NOL carry-forwards will expire from 2020 through 2032.
11
NOTE 6 - NOTES PAYABLE
The Company has entered into notes payable agreements with a related party to issue notes at par. The principal balance of the outstanding notes total $525,489 as of May 31, 2012 with interest due under the notes aggregating $221,829. During the first quarter of 2013, the related party lender converted $117,100 of notes into common stock at values consistent with the timing of various conversions. On October 6, 2011, the lender signed a retroactive amendment to modify the due dates of all outstanding notes to the later of one year from the date of the agreement or the stated due date. This due date was amended to August 15, 2012. These debentures are also limited to a 9.9% of the issued and outstanding conversion limitation. These convertible notes are payable at maturity, bear interest at 12% per year and have a minimum conversion price of $0.10 per share until October 2012 at which time they revert to their original conversion price of $0.01.
In December 2010, the Company entered into a master materials acquisition and purchase order assignment agreement with a finance company under which the Company can request the finance company to acquire materials necessary to manufacture inventory in order to fulfill the Companys orders from customers. The finance company charges 5% of the material purchase order amount per month for each transaction, plus its expenses related to the transaction. In October 2011 the material acquisition and purchase order assignment agreement was amended to provide a total of $1 million in purchase order and inventory financing and a line of credit of $250,000 for working capital. The financing is secured by all assets of the Company and bears interest at 5% per month. In consideration for making the amendment, the finance company received 2,558,535 shares of common stock valued at $127,927 and a non-dilutable warrant to purchase 3,017,170 shares of common stock at $0.05 per share valued at $120,686. Additionally the Company has granted a sublicense to the finance company that allows it or its assignee to develop and implement a direct television marketing program for the Companys products. At May 31, 2012 there was $774,876 outstanding under this agreement including the recourse liability.
On April 20, 2012, the finance company with which we have a Master Materials Acquisition and Purchase Order Assignment Agreement required a Binding Term Sheet, as a condition to advancing an additional $20,000 in order to make a payment on the rebate account payable. The Term Sheet requires that we make certain payments to them to reduce the outstanding balances based on a percentage of funds received from equity or debt raises we accomplish and reduce the balance due amounts to $450,000 for the Master Materials Acquisition and Purchase Order Assignment Agreement and to reduce the Working Capital loan from its current principal balance of $250,000 within ninety days from the date of the Term Sheet. This agreement has been extended thirty days as noted in Note 8.
As of May 31, 2012, the Company is also obligated under outstanding promissory notes totaling $139,550 to unrelated parties. The notes bear interest at 6 to 10 percent per annum, with interest and principal payable at maturity.
On May 21, 2012 a qualified investor loaned the Company $6,400 on a short term note to be converted to a debenture or common stock on the same terms as the Company agrees to in its next debt financing.
12
NOTE 7 - COMMON STOCK, OPTIONS AND WARRANTS
During the three months ended May 31, 2012, the Company issued 5,333,000 shares of common stock in full payment of $80,000 of notes that had matured and converted $125,000 of accounts payable.
During the first quarter, a related party converted $117,100 of convertible debt into 5,000,000 shares of common stock at various prices consistent with the timing of the conversions.
During the quarter, the Company granted 2,000,000 five year options to its CEO with an exercise price of $.50. The fair value of the options on the date of the grant was $60,000 which was charged to general and administrative expense for the period.
The following table summarizes the warrants and options outstanding at May 31, 2012:
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| Options and Warrants |
|
| Weighted Average Exercise Price |
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|
|
|
|
|
Outstanding at February 29, 2012 |
| 19,608,140 |
|
| $ .62 |
Granted |
| 2,000,000 |
|
| $ .50 |
Cancelled/forfeited |
| - |
|
|
|
Expired |
| - |
|
|
|
Exercised |
| - |
|
| - |
Outstanding at May 31, 2012 |
| 21,608,140 |
|
| $ .61 |
NOTE 8 - SUBSEQUENT EVENTS
On July 12, 2012 and July 18, 2012 an investor loaned the Company a total of $15,000 on terms to be determined by our next debenture financing.
On July 12, 2012 a related party lender loaned the Company $2,760 on their standard debenture terms.
2,500,000 shares approved to be granted to DBI, LLC pursuant to a consulting agreement were issued on July 18, 2012.
On July 19, 2012 a related party lender agreed that the due date of debentures which had been extended to July 1, 2012 has now been extended to August 15, 2012.
On July 19, 2012 the financing company lending the Company under the Master Materials Acquisition and Purchase Order Assignment Agreement agreed that the due date of the letter agreement of April 20, 2012, which was 90 days from the date of the agreement, is amended to August 20, 2012.
13
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed financial statements and related notes appearing elsewhere in this quarterly report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to those set forth under Risk Factors in our annual report on Form 10-K/A, filed with the SEC July 18, 2012.
OVERVIEW
Our business model is, currently, as a developer and manufacturer of over-the-counter homeopathic pharmaceutical products which aid in the relief of various symptoms and illnesses. We have products for which we licensed the formulation from a third party as described elsewhere in this document. We sell those products to the consumer through third parties. Our typical client is a pharmaceutical retail chain or a grocery retail chain. We advertise and promote our products to our ultimate consumer customer through our retail client or directly to the consumer. Our retail clients often requires in-store promotions, advertising and placement discounts and rebates for the consumer, all funded by us. In addition, we have advertised through radio, TV and online through social media channels.
When we advertise or promote within the store, according to Generally Accepted Accounting Principles, that marketing and advertising cost is a credit to gross revenue and, then, reflected in the net revenue. When we advertise directly, it is a business expense reflected in the profit and loss statement.
The challenges of our business model include succeeding in getting the retailers to put our products on the shelves and then to encourage consumers to purchase those products from the retailers. We have succeeded in getting our products on the shelves at Walgreens, Rite-Aid, Hannaford Supermarkets, Discount Drug Mart, Big Y Supermarkets and Food Lion.
The 2011-2012 cold and flu season was unusually mild, significantly diminishing the demand for our product. As a result, the sell through we experienced in our retailers outlets was much lower than we expected and has led to a change in our business strategy. Furthermore, as a result of the growth of Social Media and online marketing we are contemplating a modification of our strategy wherein we would focus our primary strategy on online direct-to-consumer marketing. In this modification to our Business Model, we would advertise through Social Media sites, invest in Search Engine Optimization (SEO) marketing to drive consumers to our website where they would be able to purchase our products directly from us. This strategy is expected to deliver enhanced sales and gross margins since we will be selling at retail, not wholesale.
An additional modification to our business model is that we would add more products to the THERA MAX product line, whether developed internally or acquired or licensed from others. To that end, we have developed THERA MAX Sore Throat Relief which we plan to introduce to the market this year in addition to the existing THERA MAX Cold and Flu relief, THERA MAX Allergy Relief and the recently announced THERA MAX Migraine Relief.
The Company has decided to focus its efforts for the near future on marketing directly to the consumer online. We will launch this program as soon as funds are available. We will continue to support our retail outlet customers but not seek any additional programs due to the cost of getting and keeping our products on the retailers shelves. The Gross profit margins in online direct-to-consumer are, typically, much higher and may enable us to grow the company with less investor capital.
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On April 20, 2012, the finance company with whom we have a Master Materials Acquisition and Purchase Order Assignment Agreement, required a Binding Term Sheet, as a condition to advancing an additional $20,000 in order to make a payment on the Rebate account payable. The Term Sheet requires that we make certain payments to them to reduce the outstanding balances based on a percentage of funds received from equity or debt raises we accomplish and reduce the balance due amounts to $450,000 for the Master Materials Acquisition and Purchase Order Assignment Agreement and to reduce the Working Capital loan from its current principal balance of $250,000 within ninety days from the date of the Term Sheet. This agreement has been extended thirty days as noted in Note 8.
Some of our creditors have indicated they may turn over our accounts to a collection agency though no such notices have been received. The Debentures held by a related party were previously extended to July 1, 2012 and have been subsequently extended to August 15, 2012. The LeadDog debentures contain a provision wherein they are restricted to conversions that will not allow their holdings to exceed 9.9% of the issued and outstanding shares at any time. As part of the Agreement with the financing company, the related party lender agreed to limit the exercise price of its debentures to a floor of $0.10 until October 2012 with the exception of up to $158,000 of debt conversions allowed in March and April of 2012 with a conversion price at 75% of the then market price. The related party lender converted approximately five million shares on that basis.
Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate our as a going concern. This basis of accounting contemplates our recovery of the Companys assets and the satisfaction of liabilities in the normal course of business. We have not as yet attained a level of operations which allows us to meet our current overhead, nor is there any assurance that such an operating level can ever be achieved. We are dependent upon obtaining additional financing adequate to fund our operations. While we have funded our initial operations with private placements and secured loans principally from related parties, there can be no assurance that adequate financing will continue to be available to us and, if available, on terms that are favorable to us. The report of our auditors on our financial statements for the year ended February 29, 2012 includes a reference to going concern risks. Our ability to continue as a going concern is also dependent on many events outside of our direct control, including, among other things improvement in the economic climate. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Results of operations
Three months ended May 31, 2012 versus three months ended May 31, 2011
We generated sales during the three months ended May 31, 2012 of $(1,241). Gross sales were approximately $756 reduced by rebates, discounts and marketing allowances of approximately $1,996 which then resulted in negative revenue due to the application of those rebates, discounts and marketing allowances. Gross sales for the three months ending May 31, 2011 were approximately $4,799 and allowances were approximately $586 resulting in net sales of approximately $4,213. These low revenue numbers in the first quarter reflect a combination of the seasonality of our products, combined with our inability to adequately advertise our products due to the lack of cash. This lack of cash to advertise and ship product to our customers will continue until additional funding occurs.
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Costs of goods sold for the three months ended May 31, 2012 were approximately $229 versus approximately $52,860 for the three months ended May 31, 2011. The decrease in cost of goods over the prior year is a result of the decrease in sales. We charge various charges, such as amortization of license and shipping charges to deliver product to our customers, against cost of goods.
Marketing and sales expenses for the three months ended May 31, 2012, were approximately $42,023 versus approximately $1,704,705 for the three months ended May 31, 2011. The decrease in expense over the prior year is the result of a decrease of funds available to execute the marketing plan. Due to our limited cash position we are unable to invest in marketing and sales at the levels necessary to properly promote our products until and unless we raise additional funding.
General and administrative expenses for the three months ended May 31, 2012 were approximately $300,284 compared to approximately $11,549,721 for the three months ended May 31, 2011. The decrease in expense is the result of a decrease in funds available. Due to our limited cash position we are unable to hire sufficient personnel to perform necessary general and administrative functions.
Interest expense for the three months ended May 31, 2012 was approximately $107,000 versus approximately $89,000 for the three months ended May 31, 2011. The interest expense increased primarily due to higher outstanding balances on the outstanding loan amounts with the inventory and purchases financing.
Liquidity and Capital Resources
As of May 31, 2012, we had a cash balance of approximately $166 and negative working capital of approximately $2,353,679. Our primary sources of liquidity are sales of our products, a factoring arrangement for our accounts receivable, a financing arrangement to fund inventory and material purchases and debentures as we are able to secure them. We have not as yet attained a level of operations which allows us to meet our current overhead, nor is there any assurance that such an operating level can ever be achieved. The report of our auditors on our financial statements for the year ended February 29, 2012, includes a reference to going concern risks. While we have funded our initial operations with private placements, and secured loans as well as entering into a financing arrangement, there can be no assurance that adequate financing will continue to be available and, if available, on terms that are favorable to us. Our ability to continue as a going concern is also dependent on many events outside of our direct control, including, among other things, our ability to achieve our business goals and objectives, as well as improvement in the economic climate.
In October 2011 we amended a number of our financing and loan agreements to increase borrowing limits, extend maturities and convert certain notes into convertible debentures and stock. While these amendments provided additional funding last year, we require additional in order to continue operations and we continue our efforts to obtain such funding; however there are there are no assurances that any funding will be available. The failure to obtain funding could continue to have a material adverse effect on our ability to operate.
Cash Flows
Our cash on hand at May 31, 2012 and February 29, 2012 was approximately $166 and $290, respectively.
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Operating cash flows: Our operating source of cash was from our sales of THERA MAX® products.
Net cash used in operating activities for the three months ended May 31, 2012 was $(45,059) as compared to $(169,350) in the prior year period. The decrease in the cash used in operating activities in the current period was principally the result of an increase in accounts payable and other liabilities of approximately $110,000. In the prior year quarter, we also used a significant amount of non-cash compensation in the form of common stock, warrants and options in lieu of cash.
Investing cash flows: Net cash provided by investing activities was $0. No cash was provided or used by investing activities in the three months ended May 31, 2012.
Financing cash flows: Net cash provided by financing activities was $44,935 and $157,137 in 2012 and 2011, respectively. Further financing was provided by additional notes payable of $44,935 in 2012 and $157,137 in 2011.
OFF-BALANCE SHEET ARRANGEMENTS
As of May 31, 2012 we have no off-balance sheet arrangements.
Related Parties
Information concerning related party transactions is included in the financial statements and related notes, appearing elsewhere in this quarterly report on Form 10-Q.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at 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. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain.
We have identified certain accounting policies, described below, that are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in the notes to our financial statements included in the Annual Report on Form 10-K/A for the year ended February 29, 2012.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company is in the process of implementing disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange Act), that are designed to ensure that information required to be disclosed in the Companys Exchange Act reports are recorded, processed, summarized, and reported within the time periods specified in rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our Chief Executive Officer to allow timely decisions regarding required disclosure.
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As of May 31, 2012, the Chief Executive Officer carried out an assessment, of the effectiveness of the design and operation of our disclosure controls and procedure and concluded that the Companys disclosure controls and procedures were not effective as of May 31, 2012, because of the material weakness described below.
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 Companys annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness identified during management's assessment was the lack of review over transactions due to the limited resources of the accounting and finance function. This control deficiency did not result in adjustments to the Companys interim financial statements. However, this control deficiency could result in a material misstatement of significant accounts or disclosures that would result in a material misstatement to the Companys interim or annual financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.
The Chief Executive Officer performed additional accounting and financial analyses and other post-closing procedures including detailed validation work with regard to balance sheet account balances, additional analysis on income statement amounts and managerial review of all significant account balances and disclosures in the Quarterly Report on Form 10-Q, to ensure that the Companys Quarterly Report and the financial statements forming part thereof are in accordance with accounting principles generally accepted in the United States of America. Accordingly, management believes that the financial statements included in this Quarterly Report fairly present, in all material respects, the Companys financial condition, results of operations, and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
During the three months ended May 31, 2012 there were no changes in our system of internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We have been sued in California in a purported class action regarding allegations that the product packaging should be modified. We have reviewed the packaging with Registrar Corp, which helps businesses comply with U.S. FDA Drug registration and listing requirements by providing Registration, U.S. Agent and Compliance Assistance for U.S. and Non-U.S. Companies in the Drug Industry. Registrar Corp's Drug Labeling and Ingredient Review service helps companies determine their drug's likely classification and compliance with applicable labeling requirements. All products packaging and labeling was reviewed by and received approval from Registrar before going to market. Mr. Jimmy Conde is the plaintiff and alleges that our products package labeling is inadequate. Notwithstanding the above, and even though we believe the suit is without merit, we are attempting to negotiate a modest settlement that may include minor additions to the packaging labels. The litigation has been moved to Federal Court and we are negotiating a settlement agreement in the amount of $21,000 which is fully dependent upon our ability to pay this amount, the agreement of the parties and approval by the Court. No assurances can be given as to the outcome of this litigation or its impact upon us or our business.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I Item 1A. Risk Factors in our Annual Report on Form 10-K/A for the fiscal year ended February 29, 2012, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K/A are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended May 31, 2012, we converted $197,000 of notes payable into 10,333,333 shares of common stock. All of these issuances were exempt from registration pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933 as amended as transactions not involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On April 20, 2012, the finance company with which we have a Master Materials Acquisition and Purchase Order Assignment Agreement required a Binding Term Sheet, as a condition to advancing an additional $20,000 in order to make a payment on the rebate account payable. The Term Sheet requires that we make certain payments to them to reduce the outstanding balances based on a percentage of funds received from equity or debt raises we accomplish and reduce the balance due amounts to $450,000 for the Master Materials Acquisition and Purchase Order Assignment Agreement and to reduce the Working Capital loan from its current principal balance of $250,000 within ninety days from the date of the Term Sheet. This agreement has been extended thirty days as noted in Note 8.
ITEM 4. (Removed and Reserved)
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on July 23, 2012.
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| TheraBiogen, Inc. | |
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| By: | /s/ Kelly T. Hickel |
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| Chief Executive Officer |
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