FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC 20549

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31, 2013

 

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                   to                

 

Commission file number 0-3338

 

INERGETICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware	22-1558317
(State or other Jurisdiction of	(IRS Employer
Incorporation or Organization)	Identification No.)

 

550 Broad Street, Suite 1212, Newark, NJ 07102

(Address of Principal Executive Office)  (Zip Code)

 

(908) 604-2500

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x

No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x 

 

As of May 3, 2013, 47,957,103 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 - March 31, 2013 and December 31, 2012	3
		Condensed Consolidated Statements of Operations - Three months ended March 31, 2013 and 2012	4
		Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2013 and 2012	5
		Notes to Condensed Consolidated Financial Statements	6 – 14
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	17
	Item 4	Controls and Procedures	17
PART II  -  OTHER INFORMATION			19
	Item 1	Legal Proceedings	19
	Item 1A.	Risk Factors	19
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	19
	Item 3	Defaults Upon Senior Securities	19
	Item 4	Removed and Reserved	19
	Item 5	Other Information	19
	Item 6	Exhibits	20
SIGNATURES			21

 

 

PART I - Item 1

INERGETICS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS – UNAUDITED

 

		March 31,				December 31,
		2013				2012
Assets
Current Assets:
Cash		$	93,271			$	8,846
Receivable from the Technology Business Tax Certificate Transfer Program			-				2,209,715
Note receivable, current			2,127				-
Inventories, net			105,100				4,176
Prepaid expenses			259,454				522,041
Total Current Assets			459,952				2,744,778
Patents, net			4,798				4,942
Intangible assets			105,000				-
Goodwill			135,000				-
Note receivable, long term			3,553				-
Deposits			6,965				2,299
Total Assets		$	715,268			$	2,752,019
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable and accrued expenses		$	2,607,551			$	2,846,181
Obligations to be settled in stock			1,151,525				564,500
Short-term debt, net of debt discount			993,508				1,144,375
Short-term debt – related parties			1,575,122				2,441,622
Customer Prepayments			39,970				39,970
Derivative liability			298,000				227,000
Total Current Liabilities			6,665,676				7,263,648
Long-term debt, net of debt discount			43,056				39,584
			6,708,732				7,303,232
Commitment and Contingencies
Preferred stock, Convertible Series G, authorized 200,000, par $1, stated Value $50: 167,776 and 150,938 shares issued and outstanding			7,729,365				7,147,465
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 47,957,103 and 48,707,103 shares, respectively			47,958				48,708
Additional paid-in capital			68,165,529				68,606,679
Accumulated Deficit			(82,131,361	)			(80,549,110	)
Total Stockholders’ Deficit			(13,722,829	)			(11,698,678	)
Total Liabilities and Stockholders’ Deficit		$	715,268			$	2,752,019

 

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

 

 

INERGETICS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended March 31,
		2013				2012
Total Revenues		$	6,775			$	8,497
Cost of Goods Sold			4,770				5,209
Gross Profit			2,005				3,288
Research and development			-				36,698
Selling, general and administrative expense			1,391,896				925,639
Total operating expenses			1,391,896				962,337
Loss from Operations			(1,389,891	)			(959,049	)
Other Income (Expense)
Amortization of debt discount			(37,054	)			(67,083	)
Loss from warrants/derivatives issued with debt greater than debt carrying value			-				(452,000	)
Gain (loss) on fair market valuation of derivatives			(71,000	)			1,000
Interest and financing cost, net			(80,807	)			(171,766	)
Total Other Income (Expense)			(188,861	)			(689,849	)
Loss before Provision for Income taxes			(1,578,752	)			(1,648,898	)
State taxes			3,499				-
Net Loss			(1,582,251	)			(1,648,898	)
Preferred Dividend			441,900				148,850
Net Loss applicable to common shareholders		$	(2,024,151	)		$	(1,797,748	)
Net Loss per Common Share - Basic and Diluted		$	(0.04	)		$	(0.06	)
Weighted Average Number of common shares outstanding - Basic and Diluted			48,265,436				30,136,344

 

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

 

 

INERGETICS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Three Months Ended March 31,
		2013				2012
Cash Flows from Operating Activities
Net Loss		$	(1,582,251	)		$	(1,648,898	)
Adjustments to Reconcile Net Loss to
Net Cash used in Operations
(Gain) loss on fair market valuation of derivatives			71,000				(1,000	)
Depreciation and amortization			144				144
Common Stock issued for financing expenses			-				109,033
Common Stock issued for services			42,000				853,992
Common Stock issued for compensation			450,600				-
Loss on issuance of convertible debt and warrants			-				452,000
Accretion of debt discount			37,054				67,083
Changes in Assets and Liabilities
Decrease in accounts receivable			-				225
Decrease in receivable from Technology Business Tax Certificate Transfer Program			2,209,715				-
(Increase) Decrease in inventories			(100,924	)			38,810
Decrease in prepaid expenses			346,587				504,406
(Increase) in note receivable			(5,680	)			-
(Increase) in deposits			(4,666	)			-
Increase (decrease) in accounts payable and accrued expenses			(262,632	)			256,232
Net Cash Provided (Used) in Operating Activities			1,200,947				(221,965	)
Cash Flows from Investing Activities
Acquisition of intangible assets			(75,000	)			-
Net Cash Used in Investing Activities			(75,000	)			-
Cash Flows from Financing Activities
Proceeds from debt			130,000				260,000
Repayment of debt			(1,171,522	)			(35,000	)
Net Cash Provided (Used) by Financing Activities			(1,041,522	)			225,000
Net Increase (decrease) in Cash			84,425				3,035
Cash at beginning of period			8,846				2,517
Cash at end of period		$	93,271			$	5,552
Supplemental Disclosure of Cash Flow information:
Cash paid during the period for:
Interest Expense		$	85,575			$	-
Income Taxes		$	3,499			$	-
Non-cash
Convertible Preferred Stock G issued for prepaid services (12,000 shares)		$	-			$	556,500
Common Stock issued for prepaid services (600,000 and 3,644,357 shares)		$	84,000			$	963,026
Issuance of G shares as Preferred dividend (8,838 and 2,977 shares)		$	441,900			$	148,850
Prepaid expenses for liability of stock to be  Issued for services (2,900,000 shares)		$	-			$	739,900
Issuance of 8,000 Preferred G shares for Business acquisition		$	140,000			$	-
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.

 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

 

In 2010 the Company changed its name to Inergetics, Inc. Inergetics, Inc. (the Company or "Inergetics"), formerly Millennium Biotechnologies Group, Inc., is a holding company for its subsidiary Millennium Biotechnologies, Inc. ("Millennium").

 

Millennium was incorporated in the State of Delaware on November 9, 2000 and is located in New Jersey.  Millennium is a research based bio-nutraceutical corporation involved in the field of nutritional science.  Millennium’s principal source of revenue is from sales of its nutraceutical supplements, Resurgex Select® and Resurgex Essential™ and Resurgex Essential Plus™ which serve as a nutritional support for immuno-compromised individuals undergoing medical treatment for chronic debilitating diseases. Millennium has developed Surgex for the sport nutritional market. The Company acquired Bikini Ready®, a leader in weight loss lifestyle solutions and SlimTrim™, the affordable, premium value diet brand. The Company’s efforts going forward will focus on sales of Surgex in powder and pill forms as well as powder and pills for Bikini Ready and pills for SlimTrim.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Inergetics, Inc. and its subsidiary. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Certain information in footnote disclosures normally included in the financial statements were 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, 2012 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission on Form 10-K.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Goodwill

 

Goodwill and other acquired intangible assets with indefinite lives are not amortized, but are tested for impairment annually and when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Our annual testing date is December 31. We test goodwill for impairment by first comparing the carrying value of net assets to the fair value of the related operations. If the fair value is determined to be less than carrying value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of goodwill impairment. Indefinite-lived intangibles consist of brand and trade names acquired in business combinations. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the brand and trade names. Any excess carrying value over the amount of discounted cash flows represents the amount of the impairment.

 

Revenue Recognition

 

Revenue is recognized net of discounts, rebates, promotional adjustments, price adjustments and estimated returns and upon transfer of title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, 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 are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

Loss Per Common Share

 

Net loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been included in this computation since the effect would be anti-dilutive. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock and convertible debt are not considered in the diluted income (loss) per share calculation since the effect would be anti-dilutive.

 

Fair Value of Financial Instruments

 

For financial instruments including cash, accounts receivable, prepaid expenses, debt, accounts payable and accrued expenses, the carrying values approximated their fair value.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2.

GOING CONCERN AND LIQUIDITY ISSUES

 

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

 

However, the Company has a working capital deficit, significant debt outstanding, incurred substantial net losses for the three months ended March 31, 2013 and 2012 and has accumulated a deficit of approximately $82 million at March 31, 2013. The Company has not been able to generate sufficient cash from operating activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or raise capital to support its operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

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

 

3.

BUSINESS ACQUISITION

 

On January 9, 2013, the Company entered into a definitive agreement pursuant to which it acquired, through its Millennium Biotechnologies, Inc. wholly-owned subsidiary, the trademark of Bikini Ready® and the brand SlimTrim™. Under the agreement the Company acquired the URL’s, formula and customer list. Under the terms of this agreement the Company paid $75,000 cash, 8,000 shares of Series G preferred stock valued at $140,000, and $25,000 contingent cash consideration that the Company expects to pay.

 

The transaction was accounted for as a business acquisition. The results from operations for the period from acquisition (January 9, 2013) to March 31, 2013 have been included in the Company’s condensed consolidated statement of operations. Pro forma information with respect to the acquisition are not included in these financial statements as the information is not material.

 

In accordance with generally accepted accounting principles, intangible assets are recorded at fair values as of the date of the transaction. The Company has preliminarily allocated the $240,000 consideration paid to the acquired assets as follows:

 

	Intangible assets, trademarks		$	100,000
	Intangible assets, customer list			5,000
	Goodwill			135,000
	Fair value acquired		$	240,000

 

Intangible assets with estimated useful lives are amortized over a 5 year period. The goodwill and trademarks are not amortized for financial statement purposes in accordance with generally accepted accounting principles.

 

  

4.

CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash balances in several financial institutions which are insured by the Federal Deposit Insurance Corporation up to certain federal limitations.

 

The Company provides credit in the normal course of business to customers located throughout the U. S. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.

 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5.

INVENTORIES

 

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

 

		March 31,				December 31,
		2013				2012
Finished Goods		$	26,035			$	2,344
Work in Process			126,471				49,200
Raw Materials			-				-
Packaging			1,794				1,832
			154,300				53,376
Less: Reserve for losses			(49,200	)			(49,200	)
Total		$	105,100			$	4,176

 

6.

PREPAID EXPENSES

 

Prepaid expenses are for services that have been paid in advance primarily with stock that are amortized over the life of the contract. The agreements pertain to pricing structure, distribution, warehousing, inventory management, financial advisory services and pro athlete endorsements.

 

7.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

		March 31,				December 31,
		2013				2012
Accounts payable		$	1,012,867			$	1,224,313
Accrued interest			663,295				669,035
Accrued rent expense			135,874				135,874
Accrued salaries, bonuses and payroll taxes			590,623				612,712
Accrued professional fees			204,892				204,247
		$	2,607,551			$	2,846,181

 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.

CONVERTIBLE NOTES, NET OF DEBT DISCOUNT

 

In the first quarter of 2013, the Company realized gross proceeds of $130,000 in new cash. Repayment in the amount of $30,000 was made in January 2013. Proceeds from the sale of its 15.0% twelve month Unsecured Convertible Notes, in the aggregate original principal amount of $100,000 (the “Notes”) were sold to an accredited investor (the “Investor”).  Interest on the outstanding principal balance of the Notes is payable upon maturity of the note. The outstanding principal balance of the Notes and all accrued but unpaid interest thereon may be converted at any time at the option of each Investor into shares of Common Stock at the Conversion Price of $.25 per share.  The Company may prepay the Notes at any time without penalty to the Investors.

 

In connection with the newly issued debt the Company recorded a debt discount from the conversion option in the Notes of approximately $9,427.  The debt discount is being amortized over the life of the Debentures and is included in other income and expense. The holder will receive 125,000 shares of common stock valued at $25,000 which is included in the debt discount and gets amortized over the life of the loan.

 

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

 

		March 31,				December 31,
		2013				2012
Unsecured Convertible Notes		$	1,144,353			$	1,319,376
Debt discount			(107,789	)			(135,417	)
			1,036,564				1,183,959
Less long term portion			43,056				1,144,375
Short term portion			993,508				39,584

 

9.

SHORT TERM DEBT

 

The Secured Promissory Unit Notes issued in November 2009 with the principal amount outstanding of $152,747 and accrued interest of $79,449 as of March 31, 2013 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.

 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10.

DERIVATIVE LIABILITY

 

Secured Convertible Notes Conversion Option

In 2012 the Company issued notes that 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 derivative liability in the accompanying condensed balance sheet.

 

The Company recorded the conversion feature as a liability based upon its fair value on each reporting date.

 

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

 

		Fair Value at
		March 31,				Fair Value Measurement Using
		2013				Level 1				Level 2				Level 3
Derivative liability – Conversion Feature		$	67,000				-				-			$	67,000
		$	67,000				-				-			$	67,000

 

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 three months ended March 31, 2013:

 

		March 31,
		2012
Balance at December 31, 2012		$	49,000
Additions to derivative instruments			-
Change in fair market value of Conversion Feature			18,000
Balance at end of period – March 31, 2013		$	67,000

 

The Company computed the fair value of the conversion feature using the Black-Scholes model.

 

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

 

		March 31, 2013		Inception
Number of shares		875,000		1,175,000
Conversion Price		.20		.20
Volatility		148.34 – 180.62%		197.70- 203.19%
Risk-free interest rate		2%		2%
Expected dividend yield		0%		0%
Life of Notes		5 to 23 months		18 to 36 months

 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

DERIVATIVE LIABILITY, Continued

 

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 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:

 

		March 31, 2012		Inception
Number of shares		2,150,000		2,462,500
Conversion Price		.20		.20
Volatility		147.64-180.62%		197.70- 203.19%
Risk-free interest rate		2%		2%
Expected dividend yield		0%		0%
Life of Warrants		24 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.

 

 

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
		March 31,				Fair Value Measurement Using
		2013				Level 1				Level 2				Level 3
Derivative liability – Warrants		$	231,000				-				-			$	231,000
		$	231,000				-				-			$	231,000

 

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 three months ended March 31, 2013:

 

		March 31,
		2013
Balance at December 31, 2012		$	178,000
Change in fair market value of Warrants			53,000
Balance at end of period – March 31, 2013		$	231,000

  

11.

PREFERRED DIVIDEND

 

The Series G Preferred 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 quarter ended March 31, 2013 and 2012 was $441,900 and $148,850, respectively.

 

 

 

INERGETICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12.

WARRANTS

 

Warrant activity for the three months ended March 31, 2012 is as follows:

 

						Weighted
						Average								Aggregate
		Number of				Exercise					Remaining			Intrinsic
		Warrants				Price					Contractual Term			Value
Outstanding at December 31, 2012			18,190,906			$	0.225				1 Mo’s – 106 Mo’s			$	-
Granted			-				-				-				-
Exercised			-				-				-				-
Expired or cancelled			(320,000	)			1.60				-				-
Outstanding and exercisable at March 31, 2013			17,870,906			$	0.201				24 Mo’s – 103 Mo’			$	187,500

  

13.

COMMITMENTS AND CONTINGENCIES

 

The Company entered into a license agreement with minimum royalty payments totaling $1,800,000, $2,100,000, $2,700,000, $3,200,000, and $3,800,000 for each of the years ended 2014, 2015, 2016, 2017, and 2018, respectively.

 

14.

SUBSEQUENT EVENTS

 

During the second quarter of 2013 a Secured Promissory Unit Note issued in November 2009 in the principal amount of $67,021 plus accrued interest converted their liability into Series G Preferred Stock at the underlying common stock price of $0.20 per share.

 

During the second quarter of 2013 the Company issued to Seahorse Enterprises, LLC notes in the amount of $350,000 that bears interest at the annual rate of 15%. The note matures nine months from the funding of the notes. The holder received a one time origination fee of $87,500 payable in common stock at the conversion price of $0.20 per share. 

 

During the second quarter of 2013 the Company issued to accredited investors three notes totaling the amount of $300,000 that bears interest at the annual rate of 15%. The note matures nine months from the funding of the notes. The holder of each note received a one time origination fee of $25,000 payable in common stock at the conversion price of $0.20 per share.

 

During the second quarter of 2013 the Company entered into a multi-year licensing agreement with Martha Stewart Living Omnimedia Inc. The Company will manufacture and distribute a line of six specially crafted supplements to support good health into the retail channel.

 

In May 2013 the Company paid $450,000 in connection with the minimum royalty payments.

 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Pursuant To "Safe Harbor" Provisions
Of Section 21e Of The Securities Exchange Act Of 1934

 

Except for historical information, the Company's reports to the Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases, as well as other public documents and statements, contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the statements. These risks and uncertainties include general economic and business conditions, development and market acceptance of the Company's products, current dependence on the willingness of investors to continue to fund operations of the Company and other risks and uncertainties identified in the risk factors discussed below and in the Company's other reports to the Securities and Exchange Commission, periodic press releases, or other public documents or statements.

 

Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

 

Results of Operations for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011:

 

Total revenues generated from the sales of Surgex™, Bikini Ready® and SlimTrim™ for the quarter ended March 31, 2013 totaled $6,775, a decrease of 20% from the quarter ended March 31, 2012 which totaled $8,497. The primary reason for the decrease was due to the Company’s introduction of the newly formulated Surgex brand along with the introduction of Bikini Ready and SlimTrim to the retailers during the quarter ended March 31, 2013. The introduction of these brands are expected to start showing revenue in third quarter of 2013.

 

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

 

Gross profit for the quarter ended March 31, 2013 amounted to $2,005 for a 30% gross margin. Gross profit decreased $1,283 or 39% for the quarter ended March 31, 2013 compared to $3,288 for the quarter ended March 31, 2012.  The decrease in gross profit is a result of lower revenue.

 

After selling, general and administrative expenses of $1,391,896, the Company realized an operating loss of $1,389,891 for the quarter ended March 31, 2013.  Operating losses of $1,389,891 increased $430,842 or 45% as compared to the first quarter of 2012 operating loss of $962,337.  The majority of the increase was due to compensation in the amount of $494,258 associated more five more employees in 2013 and common stock to be issued for wages.

 

Non-operating expenses totaled $188,861 for the quarter ended March 31, 2013 a decrease of 73% or $500,988 as compared to $689,849 for the quarter ended March 31, 2012.  The decrease in non-operating expenses of $500,988 was due to the prior year’s loss associated with the fair value of the derivative instruments issued with the convertible debt and warrants in the amount of $452,000 offset by a decrease of $30,029 from the reduction of amortization of debt discount and a reduction in interest expense of $90,959 due to less debt outstanding.

 

The net result for the quarter ended March 31, 2013 was a loss of $2,024,151 or $0.04 per share which included a preferred dividend on the Series G stock in the amount of $441,900, compared to a loss of $1,797,748 or $0.06 per share for the first quarter of 2012. The net loss for the first quarter of 2013 increased by $226,403 or 13% as compared to the first quarter of 2012, 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.

 

Critical Accounting Estimates

 

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

 

Liquidity and Capital Resources

 

The Company’s future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing.  Management believes they can raise the appropriate funds needed to support their business plan and develop an operating, cash flow positive company. The Company has been operating with negative cash flows for the past 12 years.

 

The Company incurred substantial net losses for the three months ended March 31, 2013 and the year ended December 31, 2012 and has accumulated a deficit of $82,131,361 at March 31, 2013. 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 collected $2,209,715 in January 2013 under the New Jersey Technology Business Tax Certificate Transfer Program. The Company was approved for $5,187,471 in 2012 but was allocated $2,209,715. The Company will reapply to the program for the funding it did not receive along with the New Jersey Net Operating Loss generated in 2012. The Company’s business operations generally have been financed by debt investments through promissory notes with accredited investors.  During the three months of 2013, the Company obtained new debt from the issuance of promissory notes that supplied the funds that were needed to finance operations during the reporting period. The new issuance of debt requires conversion of existing debt which may not be able to convert on favorable terms. Such new borrowings resulted in the receipt by the Company of $130,000.  While these funds sufficed to compensate for the negative cash flow from operations they were not sufficient to build up a liquidity reserve.  As a result, the Company’s financial position at the end of the reporting period showed a working capital deficit of $6,205,724.  During the first three months of 2013 the Company obtained new financing sufficient to fund ongoing working capital requirements through June 2013.  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

 

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 March 31, 2013, 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, 2012 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 March 31, 2013, 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, 2012 and March 31, 2013:

 

·

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

·

Significant deficiencies:

 

 

o

Inadequate segregation of duties

 

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.

 

 

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 9^th 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 14^th 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.

 

First Insurance Fund vs. Millennium Biotechnologies filed on November 18, 2010 in the Superior Court of New Jersey, Civil Division, Somerset/Hunterdon-Special Civil Part, Case# SOM-DC007284-10. First Insurance Fund claims a total of $13,489.99 including costs and fees based upon Millennium Biotechnologies failure to pay the plaintiff for Insurance invoices. On February 28, 2011, there was a levy on Millennium’s bank account in the amount of $1,644. On February 14, 2012, there was a levy on Millennium’s bank account in the amount of $2,320.

 

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

 

On May 7, 2013, the Company entered into a multi-year licensing agreement with Martha Stewart Living Omnimedia Inc. The Company will manufacture and distribute Martha Stewart NaturalsTM, a line of six specially crafted supplements to support good health into the retail channel. The Company anticipates that the line will be available at retailers and drug stores starting in the Fall of 2013.

 

 

Item 6 a) Exhibits

 

	10.1	License and Promotion Agreement by and between Martha Stewart Living Omnimedia, Inc. and Inergetics, Inc. dated May 7, 2013.
	31.1	Certification of Michael C. James, Chief Executive Officer and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

Certification of Michael C. James, Chief Executive Officer and Chief Financial Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	INERGETICS, INC.
Date:  May 15, 2013	By:	/s/ Michael C. James
		Michael C. James
		Chief Executive Officer
		Chief Financial Officer