Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - INERGETICS INCv321922_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - INERGETICS INCv321922_ex31-1.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, 2012

 

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 15, 2012, 42,516,901 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, 2012 and December 31, 2011   3
         
    Condensed Consolidated Statements of Operations    
    - Three and six months ended June 30, 2012 and 2011   4
         
    Condensed Consolidated Statements of Cash Flows    
    - Six months ended June 30, 2012 and 2011   5
         
    Notes to Condensed Consolidated Financial Statements   6 – 15
         
  Item 2 Management’s Discussion and Analysis of Financial Condition    
    and Results of Operations   16
         
  Item 3 Quantitative and Qualitative Disclosures about Market Risk   18
         
  Item 4 Controls and Procedures   19
         
PART II  -  OTHER INFORMATION   20
         
  Item 1 Legal Proceedings   20
         
  Item 1A. Risk Factors   20
         
  Item 2 Unregistered Sales of Equity Securities and Use of Proceeds   20
         
  Item 3 Defaults Upon Senior Securities   20
         
  Item 4 Removed and Reserved   20
         
  Item 5 Other Information   20
         
  Item 6 Exhibits   21
         
SIGNATURES   22

 

2
 

 

PART I - Item 1

INERGETICS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

 

   June 30,   December 31, 
   2012   2011 
Assets          
Current Assets:          
Cash  $29,314   $2,517 
Accounts receivable, net   4,981    1,895 
Inventories, net   86,388    136,094 
Prepaid services   1,823,851    253,878 
Total Current Assets   1,944,534    394,384 
Patents, net   5,230    5,518 
Deposits   2,299    2,299 
Total Assets  $1,952,063   $402,201 
Liabilities and Stockholders’ Deficit          
Current Liabilities:          
Accounts payable and accrued expenses  $2,395,619   $2,038,999 
Obligations to be settled in stock   1,138,500    665,500 
Customer Prepayments   39,970    39,970 
Derivative liability   631,000    - 
Short-term debt, net of debt discount   927,692    839,747 
Short-term debt – related parties   274,600    149,600 
Total Current Liabilities   5,407,381    3,733,816 
Long-term debt, net of debt discount   52,523    29,606 
Long-term debt – related parties   1,425,522    1,425,522 
    6,885,426    5,188,944 
Commitment and Contingencies          
Preferred stock, Convertible Series G, authorized 200,000, par $1, stated          
Value $50: 131,557 and 120,827 shares issued and outstanding   6,178,415    5,621,665 
Stockholders’ Deficit          
Preferred stock:          
Convertible Series B, par value $2; 65,141 shares issued and outstanding   130,282    130,282 
Cumulative Series C, par value $1; 64,763 shares issued and outstanding   64,763    64,763 
Convertible Series D, par value $1; 0 shares issued and outstanding   -    - 
Convertible Series E, par value$1; 0 shares issued and outstanding   -    - 
Convertible Series F, par value $1; 0 shares issued and outstanding   -    - 
           
Common stock, par value $0.001; authorized 2,000,000,000 shares; issued and outstanding 40,191,826 and 27,780,205 shares, respectively   40,192    27,781 
Additional paid-in capital   67,685,380    65,281,614 
Common stock subscribed   360,000    360,000 
Accumulated Deficit   (79,392,395)   (76,272,848)
Total Stockholders’ Deficit   (4,933,363)   (4,786,743)
Total Liabilities and Stockholders’ Deficit  $1,952,063   $402,201 

 

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   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
                 
Total Revenues  $12,684   $90,141   $21,181   $104,215 
Cost of Goods Sold   8,195    47,323    13,404    55,786 
    4,489    42,818    7,777    48,429 
                     
Research and development cost   8,880    3,698    45,578    17,448 
Selling, general and administrative expenses   1,481,940    502,552    2,407,579    1,082,003 
Total operating expenses   1,490,820    506,250    2,453,157    1,099,451 
                     
Loss from Operations   (1,486,331)   (463,432)   (2,445,380)   (1,051,022)
                     
Other Income (Expense)                    
Amortization of debt discount   (48,778)   (71,503)   (115,861)   (142,220)
Loss from warrants / derivatives issued with debt greater than debt carrying value   (284,000)   -    (736,000)   - 
Gain on fair market valuation of derivatives   465,000    -    466,000    - 
Interest and financing cost, net   (116,540)   (243,169)   (288,306)   (470,691)
Total Other Income (Expense)   15,682    (314,672)   (674,167)   (612,911)
Loss before Provision for Income taxes   (1,470,649)   (778,104)   (3,119,547)   (1,663,933)
                     
Provision for Income Taxes   -    -    -    - 
Net loss.   (1,470,649)   (778,104)   (3,119,547)   (1,663,933)
Preferred Dividend   (278,450)   -    (427,300)   - 
                     
Net Loss applicable to common shareholders  $(1,749,099)  $(778,104)  $(3,546,847)  $(1,663,933)
                     
Net Loss per Common Share Basic and Diluted  $(0.05)  $(0.03)  $(0.10)  $(0.07)
                     
Weighted Average Number of Common Shares Outstanding – Basic And Diluted   34,748,689    23,756,132    32,442,516    23,756,132 

 

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, 
   2012   2011 
Cash Flows from Operating Activities          
Net Loss  $(3,119,547)  $(1,663,933)
Adjustments to Reconcile Net Loss to          
Net Cash used in Operations:          
           
Gain from derivatives mark to market   (466,000)   - 
Depreciation and amortization   288    288 
Common Stock issued for services   1,571,285    - 
Common Stock issued for financing expenses    113,226    - 
Equity instruments issued with debt greater than debt carrying amount   736,000    - 
Amortization of debt discount   115,861    142,220 
           
Changes in Assets and Liabilities          
Increase in accounts receivable   (3,086)   (21,928)
Decrease in inventories   49,706    47,709 
Decrease in prepaid expenses   26,444    167,220 
Increase in customer prepayments   -    42,178 
Increase in accounts payable and accrued expenses   356,620    295,230 
Net Cash Used in Operating Activities   (619,203)   (991,016)
           
Net Cash Used in Investing Activities   -    - 
           
Cash Flows from Financing Activities          
Proceeds from loans and notes payable   546,000    1,025,000 
Proceeds from Preferred stock   135,000    - 
Repayment of loans and notes payable   (35,000)   (30,000)
Net Cash Provided by Financing Activities   646,000    995,000 
           
Net Increase in Cash   26,797    3,984 
Cash at beginning of period   2,517    1,089 
Cash at end of period  $29,314   $5,073 
           
Supplemental Disclosure of Cash Flow information:          
Cash paid during the period for:          
Interest Expense  $-   $15,671 
Income Taxes  $-   $- 
           
Non-cash          
Convertible Preferred Stock G issued for prepaid services (20,500 shares)  $1,042,250   $- 
Common Stock issued for prepaid services (6,737,500 shares)  $1,649,451   $- 
Issuance of Convertible Preferred Stock G shares as Preferred dividend (8,546 shares)  $427,300   $- 
Prepaid expenses for liability of stock to be Issued for services (3,550,000 shares)  $824,500   $- 
Common stock issued for accrued expenses (2,125,000 shares)  $380,000   $- 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

Millennium Biotechnologies Group, Inc., is a holding company for its subsidiary Millennium Biotechnologies, Inc. ("Millennium"). On March 15, 2010 the Company changed its name to Inergetics, Inc. Inergetics, Inc. (the “Company” or "Inergetics").

 

Millennium was incorporated in the State of Delaware on November 9, 2000 and is located in New Jersey.  Millennium is a research based bio-nutraceutical corporation involved in the field of nutritional science.  Millennium’s principal source of revenue is from sales of its nutraceutical supplements, Resurgex Select® and Resurgex Essential™ and Resurgex Essential Plus™ which serve as a nutritional support for immuno-compromised individuals undergoing medical treatment for chronic debilitating diseases. Millennium has developed Surgex for the sport nutritional market. The Company’s efforts going forward will focus on sales of Surgex in powder, bar and ready to drink forms.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Inergetics, Inc. and its subsidiary. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Certain information in footnote disclosures normally included in the financial statements prepared in conformity with accounting principles generally accepted in the United States of America has been condensed or omitted pursuant to such principles and the financial results for the periods presented may not be indicative of the full year’s results. The Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the December 31, 2011 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission on Form 10-K.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its subsidiary.  All significant inter-company transactions and balances have been eliminated.

 

Use of Estimates

 

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

 

6
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

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.

 

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 have been established 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, 2012 and 2011.

 

Loss Per Common Share

 

Net loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been included in this computation since the effect would be anti-dilutive. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock and convertible debt are not considered in the diluted income (loss) per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the six months ended June 30, 2012 and 2011, therefore the basic and diluted weighted average common shares outstanding were the same. The number of fully dilutive shares as of June 30, 2012 would be approximately 102,600,000.

 

Fair Value of Financial Instruments

 

For financial instruments including cash, accounts receivable, prepaid expenses, debt, accounts payable and accrued expenses and short-term dent, the carrying values approximated their fair value. The Black-Scholes valuation model is used to estimate the fair value of the warrants and derivatives.

 

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.

 

7
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.GOING CONCERN AND LIQUIDITY ISSUES

 

The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing.  Management believes they can raise the appropriate funds needed to support their business plan and develop an operating company which is cash flow positive.

 

However, the Company has a working capital deficit, significant debt outstanding, incurred substantial net losses for the six months ended June 30, 2012 and 2011 and has accumulated a deficit of approximately $79 million at June 30, 2012. 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 in the future.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

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

 

3.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.

 

4.INVENTORIES

 

Inventories are stated at the lower of cost or market on a first in, first out basis. Inventories consist of work-in-process, raw materials, finished goods, and packaging for the Company’s SURGEX®, RESURGEX ESSENTIAL® and RESURGEX ESSENTIAL PLUS® product lines. Cost-of-goods sold are calculated using the average costing method. Inventories consist of the following:

 

   June 30,   December 31, 
   2012   2011 
Finished Goods  $243,558   $266,733 
Work in Process   49,200    - 
Raw Materials   56,073    131,213 
Packaging   36,057    36,648 
    384,888    434,594 
Less: Reserve for losses   (298,500)   (298,500)
Total  $86,388   $136,094 

 

8
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5.PREPAID EXPENSES

 

Prepaid expenses are for services that have been paid in advance primarily with stock that are amortized over the life of the contract. The stock that is granted is valued at market on the date the agreement is executed. The life of the contracts range for a period of five months to twelve months. The agreements pertain to pricing structure, distribution, warehousing, inventory management, financial advisory services and pro athlete endorsements. During the six months ended June 30, 2012 the Company issued Series G Preferred Stock and common stock for prepaid services of approximately $2,426,000. The amortization of prepaid expenses was $1,443,028 and $167,220 for the six months ended June 30, 2012 and 2011, respectively.

 

6.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

   June 30,   December 31, 
   2012   2011 
Accounts payable  $989,960   $864,542 
Accrued interest   478,691    344,328 
Accrued rent expense   135,874    135,874 
Accrued salaries, bonuses and payroll taxes   582,738    491,646 
Accrued professional fees   208,356    202,609 
   $2,395,619   $2,038,999 

 

9
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7.LONG TERM DEBT, NET OF DEBT DISCOUNT

 

In the first half of 2012, the Company realized gross proceeds of $200,000 from the sale of its 10.0% eighteen and thirty six month Unsecured Convertible Notes, in the aggregate original principal amount of $200,000 (the “Notes”) and Warrants to five accredited investors (the “Investors”).  Interest on the outstanding principal balance of the Notes is payable quarterly in arrears in shares of Common Stock at a value of $0.20 per share.  The entire outstanding principal balance of the Notes and the accrued but unpaid interest thereon is due between eighteen and thirty six months from date of issue.  The outstanding principal balance of the Notes and all accrued but unpaid interest thereon may be converted at any time at the option of each Investor into shares of Common Stock at the Conversion Price of $.20 per share.  The Company may prepay the Notes at any time without penalty to the Investors.

 

The Notes provide for anti-dilution protection in the event that any shares of Common Stock, or securities convertible into Common Stock, are issued at less than the Conversion Price. If the Company issues or sells shares of Common stock for a consideration per share less than the Conversion price in effect, then concurrent with such dilutive issuance, the Conversion Price then in effect shall be reduced to an amount equal to the new securities issuance price.

 

Unsecured Convertible Notes, net debt discount, consist of the following:

 

   June 30,   June 30, 
   2012   2011 
Unsecured Convertible Notes  $200,000   $- 
Debt discount   (177,084)   - 
   $22,916   $- 

 

The Company recorded a debt discount from the derivative associated with the Note and the conversion option of the Warrants of $200,000.  The debt discount is being amortized over the life of the Notes and is included in other income and expense.

 

The Company recorded an immediate loss on the issuance of the Unsecured Convertible Notes due to the fair value of the conversion options and warrants exceeding the carrying value of the convertible debt by $594,000. The $594,000 loss on issuance is included in loss from issuance of convertible debt and warrants with derivative features on the accompanying condensed consolidated statement of operations.

 

8.SHORT TERM DEBT

 

In the first half of 2012 the Company issued two convertible promissory nine month notes in the amount of $126,000 to an accredited investor. The notes bear interest at the annual rate of 8%. The notes are convertible at a 42% discount of the lowest market price during the ten (10) trading day period on the latest complete trading day after being outstanding for six months. The Company recorded an immediate loss on the issuance of the Unsecured Convertible Notes due to the fair value of the conversion options exceeding the carrying value of the convertible debt by $91,000. The $91,000 loss on issuance is included in loss from issuance of convertible debt and warrants with derivative features on the accompanying condensed consolidated statement of operations.

 

10
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SHORT TERM DEBT, Continued

 

In the first half of 2012 the Company issued two convertible promissory eight month notes in the amount of $50,000 to an accredited investor. The notes bear interest at the annual rate of 24%. The notes are convertible into common stock at a price of $0.20 per share. The holders also received 62,500 shares of common stock valued at $12,500 which is included in interest and financing expense in the accompanying income statements as a one-time origination fee.

 

In the first half of 2012 the Company issued a convertible promissory six month note in the amount of $10,000 to an accredited investor. The notes bear interest at the annual rate of 12%. The notes are convertible into common stock at a price of $0.20 per share. The holder also received 60,000 shares of common stockvalued at $12,000 which is included in interest and financing expense in the accompanying income statements as a one-time origination fee.

 

Unsecured Convertible Notes, net debt discount, consist of the following:

 

   June 30,   June 30, 
   2012   2011 
Unsecured Convertible Notes  $126,000   $- 
Debt discount   (98,055)   - 
   $27,945   $- 

 

The Secured Promissory Unit Notes issued in November 2009 with the principal amount outstanding of $152,747 and accrued interest of $59,974 as of June 30, 2012 are in default due to non-payment. The Secured Promissory Unit Notes and interest accrued thereon are repayable in five quarterly installments beginning 18 months after issue.

 

 

9.SHORT-TERM DEBT – RELATED PARTIES

 

During the six months ended June 30, 2012 the Company issued two short term debts totaling $125,000 to Seahorse Enterprises, LLC, a related party. The $75,000 note is payable on demand and bears interest at the annual rate of 12%. The holder of the note was also issued three year cashless warrants to purchase 150,000 shares at an exercise price of $.20. The Warrants were valued at $30,000, bifurcated from the debt, recorded as equity in additional paid in capital together with a corresponding debt discount and were expensed on the grant date due to the notes being due on demand. The Company valued the warrants utilizing the black scholes method with the following inputs: stock price of $0.22, exercise price of $0.20, volatility of 197.86%, term of 3 years, risk free rate of 2% and dividend rate of 0%. The second note in the amount of $50,000 bears interest at the annual rate of 24%. The note matures eight months from the funding of the note. The holder received a one time origination fee of $12,500 payable in Series G Preferred Stock.

 

11
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SHORT-TERM DEBT – RELATED PARTIES, Continued

 

During the six months ended June 30, 2012 the Company issued 2 short term Unsecured Convertible Notes in the aggregate amount of $35,000 and warrants to an entity controlled by an Officer of the Company. The Notes paid interest at 10% per annum and were convertible into shares of the Company’s Common Stock at a conversion rate of $.20 per share. The Company bifurcated the warrants and conversion option of the debt from the debt because the warrants and conversion option contained a down round provision that triggered derivative liability treatment. The Company recorded an immediate loss on the issuance of the Unsecured Convertible Notes due to the fair value of the conversion options and warrants exceeding the carrying value of the convertible debt by $51,000. The $51,000 loss on issuance is included in loss on issuance of convertible debt and warrants on the accompanying condensed consolidated statement of operations. The Unsecured Convertible Notes were paid in full with cash by the Company under the terms of the Unsecured Convertible Notes during the six month period ending June 30, 2012. On the date of payment of the Notes the Company expensed $35,000 of associated debt discount to amortization expense which is included in other income and expense in the accompanying condensed consolidated statement of operations. The warrants associated with the related party debt are still outstanding as of June 30, 2012.

 

10.DERIVATIVE LIABILITY

 

Secured Convertible Notes Conversion Option

The Notes (as defined in note 7 above) and the short term debt (see Note 8) are convertible into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a conversion price of $0.20 per share (the “Conversion Price.”) The conversion feature was bifurcated from the Notes due to a down round provision in the terms of the conversion feature and accounted for as a free standing derivative liability in the accompanying condensed balance sheet.

 

The table below summarizes the fair values of the Company’s financial liabilities:

 

   Fair Value at             
   June 30,   Fair Value Measurement Using 
   2012   Level 1   Level 2   Level 3 
Derivative liability – Conversion Feature  $311,000    -    -   $311,000 
   $311,000    -    -   $311,000 

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (Derivative liability – Conversion Feature) for the six months ended June 30, 2012 and 2011:

 

   June 30,   June 30, 
   2012   2011 
Balance at beginning of period – January 1, 2012 and 2011, respectively  $-   $- 
Additions to derivative instruments   450,000    - 
Change in fair market value of Conversion Feature   (114,000)   - 
Retirement of Conversion Feature   (25,000)   - 
Balance at end of period – June 30, 2012 and 2011, respectively  $311,000   $- 

 

12
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

DERIVATIVE LIABILITY, Continued

 

The Company computed the fair value of the conversion feature using the Black-Scholes model except for two notes which contained a discounted conversion feature (58% of the volume average weighted price of the three lowest trading days in the ten days before notice of conversion). These notes were valued both at inception date and as of June 30, 2012 at the discounted conversion rate multiplied by a variable number shares. The value of the conversion feature was $217,000 at inception and as of June 30, 2012 and is included in the table above.

 

The following are the key assumptions used in connection with this computation:

 

   June 30, 2012   Inception 
         
Number of shares   1,000,000    1,175,000 
Conversion Price   .20    .20 
Volatility   174.60 – 189.64   197.65- 203.19
Risk-free interest rate   2%   2%
Expected dividend yield   0%   0%
Life of Notes   14 to 32 months    18 to 36 months 

 

Warrant Liability

 

In connection with the issuance of the Notes, the Company issued warrants to purchase up to 2,462,500 shares of Common Stock (the “Warrants”).  The Warrants are exercisable for a 36 month period of time since the date of issuance and have an exercise price of $0.20 per share (the “Exercise Price”).

 

The Warrants provide for anti-dilution protection in the event that any shares of Common Stock, or securities convertible into Common Stock, are issued at less than the Exercise Price. The Company accounts for the Warrants as derivative liabilities in the accompanying condensed consolidated balance sheet.

 

The Company computed the value of the warrants using the Black-Scholes model.

 

The following are the key assumptions used in connection with this computation:

 

   June 30, 2012   Inception 
Number of shares   2,462,500    2,462,500 
Conversion Price   .20    .20 
Volatility   174.05-189.64   197.65- 203.19
Risk-free interest rate   2%   2%
Expected dividend yield   0%   0%
Life of Warrants   33 months    36 months 

 

The Company recognizes their derivative financial instruments as assets or liabilities in the financial statements and measures them at fair value with changes in fair value reflected as current period income or loss.

 

13
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

DERIVATIVE LIABILITY, Continued

 

The table below summarizes the fair values of the Company’s financial liabilities:

 

   Fair Value at             
   June 30,   Fair Value Measurement Using 
   2012   Level 1   Level 2   Level 3 
Derivative liability – Warrants  $320,000    -    -   $320,000 
   $320,000    -    -   $320,000 

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (warrant derivative liability) for the six months ended June 30, 2012 and 2011:

 

   June 30,   June 30, 
   2012   2011 
Balance at beginning of period – January 1, 2012 and 2011, respectively  $-   $- 
Additions to derivative instruments   647,000    - 
Change in fair market value of Warrants   (327,000)   - 
Balance at end of period – June 30, 2012 and 2011, respectively  $320,000   $- 

 

The Company issued a put feature in a three year warrant for 625,000 shares of common stock. The warrant may be put back to the Company in full prior to the seven month anniversary of issuance. Upon the holder exercising the put warrant the Company shall issue to the holder 208,333 shares of common stock for the termination of the warrant. The put option was valued using the fair market value of the stock at the valuation date amounting to $50,000 at the date of inception. As of June 30, 2012, the put option was valued at $25,000 representing a gain on change in the market value of the put option of $25,000. These transactions are included in the table above.

 

11.PREFERRED DIVIDEND

 

The Convertible Series G Preferred stock pays a dividend, quarterly, at an annual rate of 10% (as a percentage of the Stated Value per share) payable in G Preferred based on the equivalent of 90% of the average of the last ten trading day closing price of the Common Stock prior to the dividend payment date. The amount of the dividend paid during the six months ended June 30, 2012 was $427,300. The amount of the dividend paid during the three months ended June 30, 2012 was $278,450.

 

14
 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12.WARRANTS

 

Warrant activity for the six months ended June 30, 2012 is as follows:

 

       Weighted     
       Average     
   Number of   Exercise   Remaining 
   Warrants   Price   Contractual Term 
Outstanding at December 31, 2011   7,631,544   $0.404    9 – 117 Months 
                
Granted   3,087,500    0.200    36 Months 
                
Exercised   -    -    - 
                
Outstanding and exercisable at June 30, 2012   10,719,044   $0.345    4 – 113 Months 

 

During the six months ended June 30, 2012, the Company issued 3,087,500 warrants with a term of three years and a exercise price of $0.20.

 

13.SUBSEQUENT EVENTS

 

During the third quarter the Company issued to Seahorse Enterprises, LLC Notes in the amount of $100,000 that bear interest at the annual rate of 24%. The Notes mature eight months from the funding of the Notes. The holder received a one time origination fee of $25,000 payable in Series G Preferred Stock.

 

During the third quarter of 2012 the Company issued two convertible promissory eight month notes in the amount of $50,000 to an accredited investor. The notes bear interest at the annual rate of 24%. The notes are convertible into common stock at a price of $0.20 per share. The holders also received 62,500 shares of common stock.

 

During the third quarter the Company issued 840,075 shares of common stock that was included in Common Stock Subscribed as of June 30, 2012.

 

During the third quarter the Company issued 1,322,500 shares of common stock that was included in Obligations to be settled in stock as of June 30, 2012.

 

During the third quarter the Company issued 100,000 shares of common stock for professional services.

 

15
 

 

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, 2012 compared to the quarter ended June 30, 2011:

 

Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, Resurgex Select® and Surgex™ for the quarter ended June 30, 2012 totaled $12,684, a decrease of 86% from the quarter ended June 30, 2011 which totaled $90,141. The primary reason for the decrease was due to lack of sales from our Resurgex Essential Plus and Resurgex Select product line due to Companys’ focus on building the Surgex brand during the quarter ended June 30, 2012.

 

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, 2012 amounted to $4,489 for a 35% gross margin. Gross profits decreased $38,329 or 90% for the quarter ended June 30, 2012 compared to $42,818 for the quarter ended June 30, 2011.  The decrease in gross profits is a result of lower revenue due to lack of inventory for our Resurgex Essential Plus and Resurgex Select product line.

 

After deducting research and development costs of $8,880 and selling, general and administrative expenses of $1,481,940, the Company realized an operating loss of $1,486,331 for the quarter ended June 30, 2012.  Operating losses of $1,486,331 increased $1,022,899 or 221% as compared to the second quarter of 2011 operating loss of $463,432.  The majority of the increase was due to professional fees in the amount of $975,247 associated with pricing structures, distribution, warehousing, inventory management, financial advisory services, pro athlete endorsements and investor relations. Non-operating income totaled $15,682 for the quarter ended June 30, 2012 an increase of 105% or $330,354 as compared to an expense of $314,672 for the quarter ended June 30, 2011.  The reduction in non-operating expenses of $314,672 was due to the gain associated with the fair value of the derivative instruments issued with the convertible debt and warrants in the amount of $465,000 offset by $284,000 from the loss on issuance of convertible debt. The amortization of debt discount decreased by $22,725 and the decrease in interest and financing expense of $126,629 due to less debt outstanding.

 

The net result for the quarter ended June 30, 2012 was a loss of $1,749,099 or $0.05 per share which included a preferred dividend on the Series G stock in the amount of $278,450, compared to a loss of $778,104 or $0.03 per share for the second quarter of 2011. The net loss for the second quarter of 2012 increased by $970,995 or 125% as compared to the second quarter of 2011, primarily due to an increase in selling, general and administrative expenses and loss incurred in the issuance of convertible debt and warrants. 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.

 

16
 

 

Results of Operations for the six months ended June 30, 2012 compared to the six months ended June 30, 2011:

 

Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, Resurgex Select® and Surgex™ for the six months ended June 30, 2012 totaled $21,181, a decrease of 80% from the six months ended June 30, 2011 which totaled $104,215. The primary reason for the decrease was due to lack of sales from our Resurgex Essential Plus and Resurgex Select product line due to Companys’ focus on building the Surgex brand during the quarter ended June 30, 2012.

 

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, 2012 amounted to $7,777 for a 37% gross margin. Gross profits decreased $40,652 or 84% for the six months ended June 30, 2012 compared to $48,429 for the six months ended June 30, 2011.  The decrease in gross profits is a result of lower revenue due to lack of inventory for our Resurgex Essential Plus and Resurgex Select product line.

 

After deducting research and development costs of $45,578 and selling, general and administrative expenses of $2,407,579, the Company realized an operating loss of $2,445,380 for the six months ended June 30, 2012.  Operating losses of $1,051,022 increased $1,394,358 or 133% as compared to the second quarter of 2011 operating loss of $1,051,022.  The majority of the increase was due to professional fees in the amount of $1,492,807 associated with pricing structures, distribution, warehousing, inventory management, financial advisory services, pro athlete endorsements and investor relations. Non-operating expense totaled $674,167 for the six months ended June 30, 2012 an decrease of 10% or $61,256 as compared to an expense of $612,911 for the six months ended June 30, 2011.  The increase in non-operating expenses of $61,256 was due to the gain associated with the fair value of the derivative instruments issued with the convertible debt and warrants in the amount of $466,000 offset by a decrease of $736,000 from the loss on issuance of convertible debt. The amortization of debt discount decreased by $26,359 and the decrease in interest and financing expense of $182,385 due to less debt outstanding.

 

The net result for the six months ended June 30, 2012 was a loss of $3,546,847 or $0.10 per share which included a preferred dividend on the Series G stock in the amount of $427,300, compared to a loss of $1,663,933 or $0.07 per share for the second quarter of 2011. The net loss for the second quarter of 2012 increased by $1,882,914 as compared to the second quarter of 2011, primarily due to an increase in selling, general and administrative expenses and loss incurred in the issuance of convertible debt and warrants. Management will continue to make an effort to lower operating expenses and increase revenue.  The Company will continue to invest in further expanding its operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting the name and products of the Company. Given the fact that most of the operating expenses are fixed or have quasi-fixed character management expects them to significantly decrease as a percentage of revenues as revenues increase.

 

Disclosure About Off-Balance Sheet Arrangements

 

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

 

17
 

 

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.

 

Liquidity and Capital Resources

 

The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing.  Management believes they can raise the appropriate funds needed to support their business plan and develop an operating, cash flow positive company. The Company has been operating with negative cash flows for the past 11 years.

 

The Company incurred substantial net losses for the six months ended June 30, 2012 and the year ended December 31, 2011 and has accumulated a deficit of $79,392,395 at June 30, 2012. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company has never reported Net Income.

 

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

 

The Company’s business operations generally have been financed by debt investments through promissory notes with accredited investors.  During the first six months of 2012, the Company obtained new debt from the issuance of promissory notes and the sale of Preferred stock 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 $546,000.  The Company sold 2,700 shares of Series G Preferred stock to two accredited investors that resulted in $135,000 of proceeds. 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 $3,462,847.  During the first six months of 2012 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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable

 

18
 

 

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, 2012, 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, 2011 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, 2012, 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, 2011 and June 30, 2012:

 

·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:

 

oInadequate segregation of duties

 

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

 

Changes in Internal Control over Financial Reporting

 

Management of the Company has evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, other than what has been reported above.

 

19
 

 

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.

 

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 8 to the Consolidated Financial Statements in Part I above.

 

Item 4  Removed and Reserved

 

Item 5  Other Information

 

- None

 

20
 

 

Item 6 a) Exhibits

 

31.1Certification of Michael C. James, Chief Executive Officer and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Michael C. James, Chief Executive Officer and Chief Financial Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
 101* Interactive Data File (Form 10-Q for the quarterly period ended June 30, 2012 furnished in XBRL) 

 

 

*To be filed by amendment and shall not be filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.

 

21
 

 

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 20, 2012 By: /s/ Michael C. James  
    Michael C. James  
    Chief Executive Officer  
    Chief Financial Officer  

 

22