Item
1.
Condensed
Financial Statements - Unaudited
OPTIGENEX
INC.
Condensed
Balance Sheet - Unaudited
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September
30,
2007
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ASSETS
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|
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Current
assets:
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|
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Cash
|
|
$
|
47,090
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|
|
Accounts
receivable, net
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|
|
16,250
|
|
|
Inventories,
net
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|
|
827,402
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|
|
Prepaid
expenses and other current assets
|
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49,247
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|
|
|
|
|
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Total
current assets
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|
|
939,989
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|
|
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|
|
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Property
and equipment, net
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43,418
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Intangible
assets, net
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1,364,348
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Other
assets
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50,458
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Total
Assets
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$
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2,398,213
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LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
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Current
liabilities:
|
|
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Accounts
payable
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$
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273,297
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Accrued
expenses
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573,954
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Current
portion of callable secured convertible notes
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1,105,209
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Deferred
income
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139,860
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Total
current liabilities
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2,092,320
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Callable
secured convertible notes, net of current portion and debt
discount
of
$2,105,894; including embedded derivative liability
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5,997,880
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Common
stock warrants
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266,021
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Total
liabilities
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8,356,221
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Stockholders'
deficiency:
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Preferred
stock - $0.001 par value; 5,000,000 shares authorized,
none
issued
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-
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Common
stock - $0.001 par value; 100,000,000 shares authorized,
16,318,774
shares issued and outstanding
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16,318
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Additional
paid-in capital
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18,083,790
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Accumulated
deficit
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(24,058,116
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)
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Total
stockholders’ deficiency
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(5,958,008
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)
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Total
Liabilities and Stockholders’ Deficiency
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$
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2,398,213
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See
notes
to condensed financial statements
OPTIGENEX
INC.
Condensed
Statements of Operations - Unaudited
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Three
Months Ended
September
30,
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Nine
Months Ended
September
30,
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2007
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2006
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2007
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2006
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Net
sales
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$
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150,538
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$
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77,603
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$
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360,243
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$
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201,387
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Cost
of sales
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79,089
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179,137
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149,531
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268,392
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Gross
profit
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71,449
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(101,534
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)
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210,712
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(67,005
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)
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Selling,
general and administrative
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302,605
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465,392
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1,080,580
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2,407,384
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(Loss)
from operations
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(231,156
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)
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(566,926
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)
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(869,868
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)
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(2,474,389
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)
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Other
(income) expense:
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Interest
expense, net
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491,974
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8,483,380
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2,299,704
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9,527,320
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Equity
in loss from joint ventures
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(2,705
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)
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36,145
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Net
(income) due to change in fair value
of
common stock warrants
and
derivative liability
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(1,221,048
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)
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(4,582,942
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)
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(2,036,556
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)
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(4,667,916
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)
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Net
income (loss)
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$
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497,918
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$
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(4,464,659
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)
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$
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(1,133,016
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)
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$
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(7,369,938
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)
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Net income
(loss)
per common share:
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Basic
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$
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0.04
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$
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(0.41
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)
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$
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(0.10
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)
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$
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(0.69
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)
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Diluted
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$
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0.00
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$
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(0.41
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)
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$
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(0.10
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)
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$
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(0.69
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)
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Weighted
average number of common
shares
outstanding:
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Basic
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12,073,461
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10,850,234
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11,500,670
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10,744,007
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Diluted
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2,991,010,609
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10,850,234
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11,500,670
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10,744,007
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See
notes
to condensed financial statements
OPTIGENEX
INC.
Condensed
Statements of Cash Flows - Unaudited
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Nine
Months Ended
September
30,
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2007
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|
2006
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Cash
flows from operating activities:
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Net
cash used in operating activities
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$
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(356,063
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)
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$
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(2,251,823
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)
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Cash
flows from investing activities:
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Investment
in joint venture
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-
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(5,000
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)
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Proceeds
from sale of investment in joint venture
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-
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6,841
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Patent
costs
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-
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(26,559
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)
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Net
cash used in investing activities
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-
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(24,718
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)
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Cash
flows from financing activities:
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Proceeds
from the sale of convertible notes
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250,000
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1,865,000
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Principal
payments under convertible notes
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-
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(115,555
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)
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Deferred
financing costs
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-
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(20,200
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)
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Net
cash provided by financing activities
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250,000
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1,729,245
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Net
decrease in cash
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(106,063
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)
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(547,296
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)
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Cash
- beginning of period
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153,153
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969,289
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Cash
- end of period
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$
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47,090
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$
|
421,993
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Supplemental
schedule of cash flow information:
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Cash
paid for interest
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$
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-
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$
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205,123
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Supplemental
schedule of non-cash investing and financing
activities:
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Debt
discount in connection with recording
value
of embedded derivative liability
feature
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$
|
312,500
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$
|
1,865,000
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Allocation
of convertible note proceeds to warrants
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$
|
800,000
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$
|
8,021,094
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Common
stock issued in connection with conversion of
convertible
notes
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$
|
24,815
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$
|
51,600
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See
notes
to condensed financial statements
Optigenex
Inc. - Notes to Condensed Financial
Statements September 30, 2007 (Unaudited)
Note
1.
Basis
of Presentation
The
accompanying unaudited condensed interim financial statements of Optigenex
Inc.
(the “Company”) have been prepared in accordance with generally accepted
accounting principles for interim financial information and the requirements
of
Item 310(b) of Regulation S-B. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
unaudited condensed interim financial statements for the three and nine month
periods ended September 30, 2007 and 2006 include all adjustments (consisting
only of those of a normal recurring nature) necessary for a fair statement
of
the results of the interim period.
The
results of operations for the nine month period ended September 30, 2007 are
not
necessarily indicative of the results of operations expected for the year ending
December 31, 2007. These financial statements should be read in conjunction
with
the audited financial statements as of December 31, 2006 and for the year then
ended and the notes thereto, which are contained in the Company’s Form 10-KSB
for the year ended December 31, 2006 filed with the Securities and Exchange
Commission.
The
Company maintains cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses on these
accounts.
Accounts
receivable are reported at their outstanding unpaid principal balances reduced
by an allowance for doubtful accounts. The Company estimates doubtful accounts
based on historical bad debts, factors related to specific customers' ability
to
pay and current economic trends. The Company writes off accounts receivable
against the allowance when a balance is determined to be
uncollectible.
Inventories
are stated at the lower of cost, determined by the average cost method, or
market. Inventories consists of (i) raw materials that are purchased from a
sole
supplier in Brazil; (ii) the Company’s proprietary compound known as AC-11 which
is manufactured in Brazil; and (iii) finished nutritional supplement and skin
care products that are produced by a contract manufacturer in the United States.
The Company periodically reviews its inventories for evidence of spoilage and/or
obsolescence and removes these items from inventory at their carrying value.
An
inventory valuation allowance is established when management determines that
quantities on hand may exceed projected demand prior to the expiration date
of
the inventory item.
The
Company reviews long-lived assets for impairment whenever events or changes
in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An asset is considered to be impaired when the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. The amount of
impairment loss, if any, is measured as the difference between the net book
value of the asset and its estimated fair value.
Management
does not believe that any recently issued, but not yet effective, accounting
standards if currently adopted would have a material effect on the accompanying
financial statements.
Optigenex Inc. - Notes to
Condensed Financial Statements September 30, 2007
(Unaudited)
Note
2.
Loss
per Share
Basic
loss per share is computed by dividing net loss by the weighted-average number
of shares of common stock outstanding during the period. Diluted earnings per
share gives effect to dilutive options, warrants and other potential common
stock outstanding during the period. Potential common stock, consisting of
options and warrants outstanding are shown in the table below:
Potential
common stock consists of the following:
|
At
September 30,
|
|
|
2007
|
|
|
Stock
options
|
|
|
1,664,605
|
|
|
Common
stock warrants
|
|
|
120,891,918
|
|
|
Common
stock issuable upon
conversion
of convertible notes (1)
|
|
|
2,856,380,625
|
|
|
Total
|
|
|
2,978,937,148
|
|
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(1)
At
September 30, 2007 the Company had Callable Secured Convertible Notes
outstanding of $4,570,209. The Notes are convertible into shares of the
Company's common stock at the Note Holders' option, at the lower of (i) $3.20
per share or (ii) 60% of the average of the three lowest intra-day trading
prices for the common stock as quoted on the Over-the-Counter Bulletin Board
for
the 20 trading days preceding the conversion date. At September 30, 2007 the
Notes would have been convertible into shares of the Company’s common stock at a
price of $0.0016. See Note 6 for a complete discussion of the Callable Secured
Convertible Notes.
Note
3.
Inventories
Inventories
consisted of the following components at September 30, 2007:
|
Raw
materials
|
|
$
|
791,241
|
|
|
Finished
goods
|
|
|
1,108,783
|
|
|
Inventory
reserve
|
|
|
(1,072,622
|
)
|
|
|
|
$
|
827,402
|
|
The
Company recorded an inventory valuation allowance of $1,072,622 at December
31,
2006. This allowance relates to quantities of raw materials and finished goods
that management determined would not be sold prior to their respective
expiration dates. The amount of the inventory allowance was equal to the book
value of the inventory items at December 31, 2006 which was $691,355 for raw
materials and $381,267 for finished goods.
Note
4.
Deferred
Income
In
July
2007, the Company sold a two-year exclusive license to a new customer in
exchange for an upfront fee of $159,840. The entire amount of the license fee
was collected as of September 30, 2007. The Company recorded the upfront license
fee as deferred income and will amortize it to revenue in equal monthly amounts
of $6,660 over the two-year period of the license. During the three months
ended
September 30, 2007, the Company recorded license fee revenue of $19,980. The
balance of deferred income at September 30, 2007 was $139,860.
Note
5.
Stockholders’
Deficiency
From
September 4, 2007 through September 27, 2007, the Note Holders converted a
total
of $22,772 of Convertible Notes into 5,050,458 shares of the Company's common
stock at conversion prices ranging from of $0.0091 to $0.00181 per
share.
On
February 16, 2007, the Note Holders converted a total of $723 of Convertible
Notes into 109,850 shares of the Company's common stock at a price of $0.0066
per share.
On
January 29, 2007, the Note Holders converted a total of $1,320 of Convertible
Notes into 200,000 shares of the Company's common stock at a price of $0.0066
per share.
Optigenex Inc. - Notes to
Condensed Financial Statements September 30, 2007
(Unaudited)
Note
6.
Callable
Secured Convertible Notes and Common Stock Warrants
On
February 14, 2007, the Company entered into a Securities Purchase Agreement
(the
"Securities Purchase Agreement") with New Millennium Capital Partners II, LLC,
AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC
(collectively, the "Note Holders"). Under the terms of the Securities Purchase
Agreement, the Note Holders purchased an aggregate of (i) $250,000 in callable
secured convertible notes (the "notes") and (ii) issued warrants to purchase
20,000,000 shares of the Company’s common stock (the "warrants").
The
notes
bear interest at 8% per annum and mature on February 14, 2010. The Company
is
not required to make any principal payments during the term of the notes. The
notes are convertible into shares of the Company's common stock at the Note
Holders' option, at the lower of (i) $0.10 per share or (ii) 60% of the average
of the three lowest intra-day trading prices for the Company’s common stock as
quoted on the Over-the-Counter Bulletin Board for the 20 trading days preceding
the conversion date. The full principal amount of the notes is due upon the
occurrence of an event of default. The warrants are exercisable for a period
of
seven years from the date of issuance and have an exercise price of $0.07 per
share.
The
Company committed to registering the shares of common stock underlying the
Notes
upon written demand of the Note Holders (“Demand Notice”). The Company is
required to file a registration statement within forty-five (45) days from
the
date on which it receives the Demand Notice otherwise it may be subject to
penalty provisions. There are also penalty provisions should the filing not
be
declared effective within 120 days from the date on which the Company receives
the Demand Notice.
Prior
to
the sale of notes and issuance of warrants on February 14, 2007 described above,
the Company sold an aggregate of $4,515,000 of notes and issued warrants to
purchase an aggregate of 100,625,000 shares of its common stock to the same
Note
Holders. These sales were made in four installments as follows:
|
·
|
On
August 31, 2005, the Company sold $1,300,000 of notes and issued
five-year
warrants to purchase 203,124 shares of its common stock at an exercise
price of $4.50 per share (the "First Installment"). The Company received
net cash proceeds of $1,165,334 after the payment of transaction
costs of
$100,000 and prepaid interest of $34,666. The transaction costs were
capitalized and are being expensed over the three year term of the
notes.
The prepaid interest represented four months of interest on the notes
and
was amortized to interest expense
accordingly.
|
|
·
|
On
October 19, 2005, the Company sold an additional $1,350,000 of notes
and
issued five-year warrants to purchase 210,938 shares of its common
stock
at an exercise price of $4.50 per share (the "Second Installment").
The
Company received net cash proceeds of $1,304,000 after the payment
of
transaction costs of $10,000 and prepaid interest of $36,000. The
transaction costs were capitalized and are being expensed over the
three
year term of the notes. The prepaid interest represented four months
of
interest on the notes and was amortized to interest expense accordingly.
|
|
·
|
On
February 17, 2006, the Company sold an additional $1,350,000 of notes
and
issued five-year warrants to purchase 210,938 shares of its common
stock
at an exercise price of $4.50 per share (the "Third Installment").
The
Company received net cash proceeds of $1,304,000 after the payment
of
transaction costs of $10,000 and prepaid interest of $36,000. The
transaction costs were capitalized and are being expensed over the
three
year term of the notes. The prepaid interest represented four months
of
interest on the notes and was amortized to interest expense accordingly.
|
|
·
|
On
September 15, 2006, the Company sold an additional $515,000 of notes
and
issued seven-year warrants to purchase 100,000,000 shares of its
common
stock at an exercise price of $0.10 per share (the "Fourth Installment").
The Company received net cash proceeds of $489,800 after the payment
of
transaction costs of $10,200 and key-man life insurance of $15,000.
The
transaction costs were capitalized and are being expensed over the
three
year term of the notes. The key-man life insurance is being expensed
over
the one-year term of the policy.
|
In
each
of the four installments described above, the notes bear interest at 8% per
annum and have a maturity date of three years from the respective date of each
issuance. The Company is not required to make any principal payments during
the
term of the notes. The Notes are convertible into shares of the Company's common
stock at the Note Holders' option, at the lower of (i) $3.20 per share ($.10
per
share for the fourth installment) or (ii) 60% of the average of the three lowest
intra-day trading prices for the Company’s common stock as quoted on the
Over-the-Counter Bulletin Board for the 20 trading days preceding the conversion
date. The full principal amount of the notes is due upon the occurrence of
an
event of default.
The
conversion price of the notes and the exercise price of the warrants will be
adjusted in the event that the Company issues common stock at a price below
the
initial fixed conversion price of $3.20 per share ($.10 per share for the fourth
installment), with the exception of any shares of common stock issued in
connection with the notes. The conversion price of the notes and the exercise
price of the warrants may also be adjusted in certain circumstances such as
if
the Company pays a stock dividend, subdivides or combines outstanding shares
of
common stock into a greater or lesser number of shares, or takes such other
actions as would otherwise result in dilution of the Note Holders'
position.
Optigenex Inc. - Notes to
Condensed Financial Statements September 30, 2007
(Unaudited)
The
Note
Holders have contractually agreed to restrict their ability to convert their
notes or exercise their warrants and receive shares of the Company's common
stock such that the number of shares of common stock held by the Note Holders
and their affiliates after such conversion or exercise does not exceed 4.99%
of
the then issued and outstanding shares of common stock. In addition, the Company
has granted the Note Holders a security interest in substantially all of the
Company's assets.
The
Company has the right to prepay the entire outstanding balance of the notes
under certain circumstances at a premium of 50%. The Company also has the right
to prepay a portion of the notes (“Partial Call Option”) each month in an amount
equal to 104% of the then outstanding principal balance divided by 36, plus
one
month’s interest. The Company may only prepay the notes in the event that no
event of default exists, there are a sufficient number of shares available
for
conversion of the notes and the market price is at or below $3.20 per share.
This partial call option has the effect of preventing the Note Holders from
converting their notes into shares of the Company’s common stock in the
succeeding month.
The
Company committed to registering the shares of common stock underlying the
notes
in sold in the fourth installment upon written demand of the Note Holders
(“Demand Notice”). The Company is required to file a registration statement
within forty-five (45) days from the date on which it receives the Demand Notice
otherwise it may be subject to penalty provisions. There are also penalty
provisions should the filing not be declared effective within 120 days from
the
date on which the Company receives the Demand Notice
In
accounting for the convertible notes and warrants described above, the Company
considered the guidance contained EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed To, and Potentially Settled In, a Company's Own
Common Stock," and SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities." In accordance with the guidance provided in EITF 00-19, the Company
determined that the conversion feature of the notes represents an embedded
derivative since the note is convertible into a variable number of shares upon
conversion and a liquidated damage clause contained in the Registration Rights
Agreement requires the Company to pay liquidated damages of 2.0% per month
of
the outstanding principal amount of the notes, in cash or shares of common
stock
to the Note Holders in the event that a registration statement covering the
shares underlying the notes and warrants is not declared effective within 120
days from the date that the Note Holders notify the Company that such
registration statement is required to be filed. Accordingly, the notes are
not
considered to be "conventional" convertible debt under EITF 00-19 and thus
the
embedded conversion feature must be bifurcated from the debt host and accounted
for as a derivative liability.
The
Company calculated the fair value of the embedded conversion feature related
to
the $250,000 of notes on February 14, 2007 using the Black-Scholes valuation
model with the following assumptions: market price of $0.04; exercise price
of
$0.024, which represents a 40% discount to the market price on February 14,
2007; risk free interest rate of 4.76%; expected volatility of 111% and an
expected life of 3 years. The fair value of $312,500 was recorded as a debt
discount, which reduced the carrying amount of the notes. To determine the
liability related to the warrants, the Company calculated the fair value of
the
warrants on February 14, 2007 using the Black-Scholes valuation model with
the
following assumptions: market price of $0.04; exercise price of $0.07; risk
free
interest rate of 4.76%; expected volatility of 162% and an expected life of
7
years. The fair value of $800,000 was also recorded as a debt discount. The
total debt discount attributable to the warrants and embedded conversion feature
of $1,112,500 exceeded the principal amount of the notes by $862,500 and
accordingly this excess amount was charged directly to interest expense on
February 14, 2007. The remaining $250,000 of debt discount will be amortized
over the three year term of the notes using the interest method.
Re-measurement
of the fair value of common stock warrants
The
Company is required to measure the fair value of the warrants on the date of
each reporting period. The effect of this re-measurement is to adjust the
carrying value of the liability related to the warrants. Accordingly, the
Company measured the fair value of the 120,625,000 warrants at September 30,
2007 using the Black-Scholes valuation model with the following assumptions:
market price of common stock on the measurement date of $0.0027, exercise price
of warrants ranging from $0.07 to $4.50, risk-free interest rate of 4.26%,
expected volatility ranging from 125% to 162% and expected lives ranging from
2.9 to 6.3 years. This resulted in an aggregate fair value for the 120,625,000
warrants of $266,021 at September 30, 2007. As a result of this re-measurement,
the Company recorded non-cash other income of $934,815 for the three months
ended September 30, 2007. For the nine months ended September 30, 2007, the
Company recorded non-cash other income of $1,535,026 related to the
re-measurement of the fair value of the common stock warrants.
Re-measurement
of the fair value of the embedded conversion feature
The
Company is required to measure the fair value of the embedded conversion feature
related to the $4,570,209 of convertible notes on the date of each reporting
period. The effect of this re-measurement is to adjust the carrying value of
the
liability related to the embedded conversion feature. Accordingly, the Company
measured the fair value of the embedded conversion feature at September 30,
2007
using the Black-Scholes valuation model with the following assumptions: market
price of common stock on the measurement date of $0.0027, exercise price of
$0.0016 which represents a 40% discount to the market price on September 30,
2007; risk-free interest rate of 4.26%, expected volatility of 111% and expected
lives ranging from 0.9 to 2.3 years. This resulted in an aggregate fair value
for the embedded conversion feature of $4,638,774 at September 30, 2007. As
a
result of this re-measurement, the Company recorded non-cash other income of
$286,233 for the three months ended September 30, 2007. For the nine months
ended September 30, 2007, the Company recorded non-cash other income of $501,530
related to the re-measurement of the fair value of the embedded conversion
feature.
Optigenex Inc. - Notes to
Condensed Financial Statements September 30, 2007
(Unaudited)
In
total,
for the three and nine months ended September 30, 2007, the Company recorded
non-cash other income of $1,221,048 and $2,036,556 respectively, related to
the
net change in the fair value of the liabilities related to the common stock
warrants and embedded conversion feature.
A
summary
of the Callable Secured Convertible Notes at September 30, 2007 is as follows:
|
Callable
Secured Convertible Notes; 8% per annum;
due
August 31,2008
|
|
$
|
1,105,209
|
|
|
|
|
|
|
|
|
Callable
Secured Convertible Notes; 8% per annum;
due
October 19, 2008
|
|
|
1,350,000
|
|
|
|
|
|
|
|
|
Callable
Secured Convertible Notes; 8% per annum;
due
February 17, 2009
|
|
|
1,350,000
|
|
|
|
|
|
|
|
|
Callable
Secured Convertible Notes; 8% per annum;
due
September 15, 2009
|
|
|
515,000
|
|
|
|
|
|
|
|
|
Callable
Secured Convertible Notes; 8% per annum;
due
February 14, 2010
|
|
|
250,000
|
|
|
|
|
|
|
|
|
Sub-Total
|
|
|
4,570,209
|
|
|
|
|
|
|
|
|
Less:
Current Portion
|
|
|
(1,105,209
|
)
|
|
|
|
|
|
|
|
Less:
Debt Discount, net of accumulated
amortization of $2,020,453
|
|
|
(2,105,894
|
)
|
|
|
|
|
|
|
|
Plus:
Embedded Derivative Liability
|
|
|
4,638,774
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,997,880
|
|
During
the three months ended September 30, 2007, the Note Holders converted a total
of
$22,772 of the Convertible Notes due August 31, 2008 into 5,050,458 shares
of
the Company's common stock at conversion prices ranging from of $0.0091 to
$0.00181 per share.
As
of
September 30, 2007, the total amount of accrued but unpaid interest due under
the Notes was $492,326. This amount is included in accrued expenses at September
30, 2007.
Note
7.
Stock
Based Compensation
In
July
2004, the Board of Directors and then sole stockholder of the Company adopted
the 2004 Stock Incentive Plan, pursuant to which 5,000,000 shares of common
stock have been reserved for issuance. The plan provides for grants of incentive
stock options, non-qualified stock options and shares of common stock to
employees, non-employee directors and others. In the case of an incentive stock
option, the exercise price cannot be less than the fair market value of the
Company's common stock on the date of grant. Vesting schedules for options
and
stock awards and certain other conditions are to be determined by the Board
of
Directors or a committee appointed by the Board of Directors.
The
fair
value of each option award is estimated on the date of each option grant using
the Black-Scholes option valuation model using the assumptions noted in the
following table. Because the Company’s common stock has only traded publicly
since April 2005, the expected volatility for the three and nine months ended
September 30, 2006 was estimated based on a sampling of similar size companies.
The Company has limited history by which to estimate the expected holding period
of the options, and therefore, has estimated that the expected holding period
for all stock options granted is equal to the contractual life of the
option.
|
|
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
S
eptember
30,
|
|
|
|
|
|
2007
(1)
|
|
|
2006
|
|
|
2007
(1)
|
|
|
2006
|
|
|
Expected
life (in years)
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
5
|
|
|
Risk-free
interest rate
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
4.66
-5.2
|
%
|
|
Volatility
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
100
|
%
|
|
Dividend
yield
|
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
None
|
|
(1)
The
Company did not issue any stock options during the three and nine months ended
September 30, 2007 and the three months ended September 30, 2007.
Optigenex Inc. - Notes to
Condensed Financial Statements September 30, 2007
(Unaudited)
The
following table summarizes the stock option activity for the nine months ended
September 30, 2007:
|
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,664,605
|
|
$
|
2.44
|
|
|
|
|
|
Granted
|
|
|
--
|
|
|
--
|
|
|
|
|
|
Exercised
|
|
|
--
|
|
|
--
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
--
|
|
|
--
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
1,664,605
|
|
$
|
2.44
|
|
$
|
16
|
|
|
Exercisable
at September 30, 2007
|
|
|
1,664,605
|
|
$
|
2.44
|
|
$
|
16
|
|
|
Vested
and expected to vest at September 30, 2007
|
|
|
1,664,605
|
|
$
|
2.44
|
|
$
|
16
|
|
A
summary
of the status of the Company’s non-vested stock options as of September 30,
2007, and changes during the nine months ended September 30, 2007, is presented
below:
|
|
|
|
Number
of
Options
|
|
|
Non-vested
at December 31, 2006
|
|
|
--
|
|
|
Granted
|
|
|
--
|
|
|
Vested
|
|
|
--
|
|
|
Forfeited/Cancelled
|
|
|
--
|
|
|
Outstanding
at September 30, 2007
|
|
|
--
|
|
The
Company did not issue any stock options during the three and nine months ended
September 30, 2007 and during the three months ended September 30, 2006. The
weighted average grant-date fair value of options granted during the nine months
ended September 30, 2006 was $0.08.
The
following table summarizes information about stock options outstanding and
exercisable at September 30, 2007:
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
Exercise
prices
|
|
|
Number
outstanding
|
|
|
Weighted
average
remaining
contractual
life
(years
)
|
|
|
Weighted
average
exercise
price
|
|
|
Number
exercisable
|
|
|
Weighted
average
exercise
price
|
|
|
$0.001
|
|
|
9,210
|
|
|
1.16
|
|
$
|
0.001
|
|
|
9,210
|
|
$
|
0.001
|
|
|
$0.01
|
|
|
16,000
|
|
|
2.00
|
|
$
|
0.01
|
|
|
16,000
|
|
$
|
0.01
|
|
|
$0.30
|
|
|
100,000
|
|
|
1.65
|
|
$
|
0.30
|
|
|
100,000
|
|
$
|
0.30
|
|
|
$1.00
|
|
|
165,000
|
|
|
.25
|
|
$
|
1.00
|
|
|
165,000
|
|
$
|
1.00
|
|
|
$2.00
|
|
|
259,395
|
|
|
.33
|
|
$
|
2.00
|
|
|
259,395
|
|
$
|
2.00
|
|
|
$3.00
|
|
|
1,115,000
|
|
|
1.92
|
|
$
|
3.00
|
|
|
1,115,000
|
|
$
|
3.00
|
|
|
$0.001
- $3.00
|
|
|
1,664,605
|
|
|
1.49
|
|
$
|
2.44
|
|
|
1,664,605
|
|
$
|
2.44
|
|
Optigenex
Inc. - Notes to Condensed Financial Statements September 30, 2007
(Unaudited)
Note
8.
Going
Concern
The
Company’s financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business.
The
Company has experienced a significant loss from operations as a result of its
investment necessary to achieve its operating plan, which is long-range in
nature. For the nine months ended September 30, 2007, the Company had a net
loss
of $1,133,016 and had working capital and stockholders’ deficits of $1,152,331
and $5,958,008, respectively at September 30, 2007.
The
Company’s ability to continue as a going concern is contingent upon its ability
to secure additional financing, increase ownership equity and achieve profitable
operations. In addition, the Company’s ability to continue as a going concern
must be considered in light of the problems, expenses and complications
frequently encountered by entrance into established markets and the competitive
environment in which the Company operates.
The
Company is pursuing financing for its operations and seeking additional private
investments. In addition, the Company is seeking to expand its revenue base.
Failure to secure such financing or to raise additional equity capital and
to
expand its revenue base may result in the Company depleting its available funds
and not being able pay its obligations.
The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability
of
the Company to continue as a going concern.
Note
9.
Subsequent
Event
From
October 1, 2007 through November 12, 2007, the Note Holders converted a total
of
$20,059 of Convertible Notes due August 31, 2008 into 15,636,357 shares of
the
Company's common stock at conversion prices ranging from of $0.00157 to $0.00125
per share.
Item
2.
Management’s
Discussion and Analysis or Plan of Operation
The
following discussion and analysis should be read in conjunction with our
Condensed Financial Statements and Notes thereto included elsewhere in this
Form
10-QSB.
Cautionary
Note Regarding Forward Looking Statements
Certain
statements in this Quarterly Report on Form 10-QSB constitute forward-looking
statements for purposes of the securities laws. Forward-looking statements
include all statements that do not relate solely to the historical or current
facts, and can be identified by the use of forward looking words such as "may",
"believe", "will", "expect", "expected", "project", "anticipate", "anticipated",
"estimates", "plans", "strategy", "target", "prospects" or "continue". These
forward looking statements are based on the current plans and expectations
of
our management and are subject to a number of uncertainties and risks that
could
significantly affect our current plans and expectations, as well as future
results of operations and financial condition and may cause our actual results,
performances or achievements to be materially different from any future results,
performances or achievements expressed or implied by such forward-looking
statements. Such risks and uncertainties include those set forth in our most
recent report on Form 10-KSB. In making these forward-looking statements, we
claim the protection of the safe-harbor for forward-looking statements contained
in the Private Securities Reform Act of 1995. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been correct.
We
do not assume any obligation to update these forward-looking statements to
reflect actual results, changes in assumptions, or changes in other factors
affecting such forward-looking statements.
Overview
We
supply
bulk material
and
finished products
featuring
our
patented and wholly natural compound AC-11® (“AC-11”) as a core ingredient to
wholesale distributors, skin care and nutrace
u
tical
marketing companies. These companies create their own private labeled products
utilizing our compound and technology for the retail market
.
In
addition, we license our technology and trademark to third party marketers
and
manufacturers of skin care and
nutraceutical
products
.
The
decision to purchase our patented ingredient and license our technology is
driven in large part by the scientific and clinical evidence validating the
safety and efficacy of AC-11. In third party studies AC-11 has been shown to
repair damage to DNA due to multiple factors including; over exposure to the
sun, environmental pollution, stress and other toxins. In addition, AC-11 has
demonstrated effectiveness as an inhibitor of pro-inflammatory agents and as
an
immune system enhancer.
AC-11
is
a bioactive form of the medicinal herb known as
Uncaria
tomentosa
which is
indigenous to the Amazon rainforest and other tropical areas of South and
Central America. AC-11 is manufactured
using
our
specialized equipment and patented process
by the
Centroflora Group of Sao Paulo, Brazil,
to
deliver
a
unique
alkaloid
free, water soluble extract, standardized to an 8% carboxyl alkyl ester
concentration. This facility complies with worldwide, voluntary standards for
quality management
and Good
Manufacturing Practices
.
In
October of 2007 we discontinued our direct to consumer sales of Activar AC-11
oral nutritional supplements through our Internet website
www.AC-11.com
.
The
decision to cease sales through this channel was influenced by the exclusive
rights we granted to Solgar Herb and Vitamin to market AC-11 supplements to
the
retail market. We have no plans to re-introduce the Activar AC-11 oral
supplement through our Internet site in the near future.
We
sell
AC-11 as a bulk ingredient to companies in the
nutraceutical
,
cosmeceutical
,
skin
care and hair care industries. Although we have executed
bulk
ingredient supply
and
trademark license
agreements with
customers such as Itochu Corporation (Tokyo, Japan), Solgar Herb and Vitamin
Company and
Life
Extension, we continue to be highly dependent on a small base of customers
that
purchase bulk AC-11 as an ingredient and as such, these customers make purchases
from us only when required to do so in connection with their manufacturing
cycle
and market demand. We rely on independent commissioned sales people, consultants
and management to introduce us to prospective marketing partners and
customers.
We
have
developed
a
line of
proprietary topical skin care products which contain AC-11 as an active
ingredient.
C
onsist
ing
of a day
cream, night cream and eye cream
the
products
are
designed to repair damage to the skin
due
to
multiple
causes including; exposure to ultraviolet rays, stress and pollution while
enhancing skin elasticity, and reducing wrinkles and other visible signs of
aging.
Our
products
are
marketed
to
appeal to a targeted demographic audience which includes women ages 30 and
over.
These
skin
care
products are manufactured for us by Celmark, a division of Garden State
Nutritional
.
We
are
currently in discussions with wholesale marketing companies who may distribute
our manufactured skin care products to the retail consumer. Also, through our
partner Itochu Corporation Tokyo and on a direct basis, we are exploring
strategies to license our technology and trademark (AC-11®) for use in a variety
of skin care products containing our patented ingredient. We
plan
to
seek other wholesale channels of distribution for bulk AC-11
,
manufactured skin care
skin
care products
and our
technology
to
distribution
networks both domestically and in international markets.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. On an on-going basis, we evaluate our estimates, including
those related to collection of accounts receivable, inventory obsolescence,
sales returns and non-monetary transactions such as stock based compensation,
impairment of intangible assets and derivative liabilities related to
convertible notes payable. We base our estimates on historical experience and
on
other assumptions that are believed to be reasonable under the circumstances.
As
the number of variables and assumptions affecting the probable future resolution
of the uncertainties increase, these judgments become even more subjective
and
complex. Actual results may differ from these estimates.
We
have
identified the following critical accounting policies, described below, that
are
the most important to the portrayal of our current financial condition and
results of operations.
Accounts
Receivable and Bad Debt Expense
Accounts
receivable are reported at their outstanding unpaid principal balances net
of an
allowance for doubtful accounts. We estimate bad debt expense based upon past
experience related to specific customers' ability to pay and current economic
conditions. At September 30, 2007, our allowance for doubtful accounts was
approximately $27,000.
Inventory
Our
inventories are stated at the lower of cost, determined by the average cost
method, or market. Our inventories consists of (i) raw materials that we
purchase from a sole supplier in Brazil; (ii) our proprietary compound known
as
AC-11 which is manufactured in Brazil; and (iii) our line of nutritional
supplement and skin care products that are produced for us by a contract
manufacturer in the United States. We periodically review our inventories for
evidence of spoilage and/or obsolescence and we remove these items from
inventory at their carrying value. During 2006, we incurred inventory write-offs
of approximately $280,000 as follows: (i) $152,000 of obsolete inventory which
consisted of finished nutritional supplements that reached their stated
expiration date; (ii) $51,000 of obsolete packaging components related to our
skin creams and discontinued nutritional supplements; and (iii) $77,000 of
raw
material inventory in connection with the production of finished bulk AC-11
powder that did not conform to our specifications. An inventory valuation
allowance is established when we determine that quantities of inventory items
on
hand may exceed projected demand prior to the expiration date of such inventory
items. At December 31, 2006, we recorded an inventory allowance of approximately
$1,073,000 related to the book value certain raw material and finished goods
inventory items that we determined may not be sold prior to their respective
expiration dates. To date, we have not taken any additional inventory
write-downs in 2007.
Revenue
Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, the product
has
been delivered, the rights and risks of ownership have passed to the customer,
the price is fixed and determinable, and collection of the resulting receivable
is reasonably assured. For arrangements that include customer acceptance
provisions, revenue is not recognized until the terms of acceptance are met.
For
our
nutritional supplements, we provide a 100% money back guarantee on all unopened
and undamaged products that are returned to us within 60 days of purchase.
We
estimate an allowance for product returns at the time of shipment based on
historical experience. In 2006, product returns were negligible. We monitor
our
estimates on an ongoing basis and we may revise our allowance for product
returns to reflect recent experience. To date, we have not made any significant
changes in our allowance for returns. Products returned as a result of damage
incurred during shipment are replaced at our cost. We do not estimate an
allowance for returns due to damage as historically the level of returns has
been negligible. For our bulk sales of AC-11, our standard return policy
provides for a reimbursement of the full purchase price for any bulk AC-11
that
does not conform with the stated specifications. We must receive notification
of
a return request within 30 days from the date that the customer accepts
delivery
Intangibles
We
account for long-lived assets and certain identified intangible assets such
as
patents and trademarks in accordance with Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
Management reviews these long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. An asset is considered to be impaired when the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. The amount of
impairment loss, if any, is measured as the difference between the net book
value of the asset and its estimated fair value. We monitor our projections
of
expected future net cash flows on an ongoing basis. If we determine that our
projections require revision due to specific events such as a delayed product
launch or a change in our product mix, or changes in economic conditions, we
may
incur additional write-offs. We recorded an impairment charge of approximately
$935,000 in 2006. To date, we have not incurred any additional impairment
charges in 2007.
Derivative
Instrument Liabilities related to Convertible Notes and Warrants
In
connection with the sale of convertible notes and warrants on August 31, 2005,
October 17, 2005, February 17, 2006, September 15, 2006 and February 14, 2007,
we determined that in accordance with EITF No. 00-19, "Accounting for Derivative
Financial Instruments Indexed To, and Potentially Settled in, a Company's Own
Stock," and SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," that the conversion feature of the convertible notes represents
an
embedded derivative. As such, we are required to estimate the fair value of
the
embedded derivative and the warrants at of the end of each reporting period
and
these values are recorded as liabilities. We estimate fair value using the
Black-Scholes option pricing model. This model requires us to make estimates
such as the expected holding period, the expected future volatility of our
common stock and the risk-free rate of return over the holding period. These
estimates directly affect the reported amounts of the derivative instrument
liabilities.
Employee
Stock Options and Stock Based Compensation
Effective
January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
for all share-based payment awards to employees and directors based on estimated
fair values. We adopted SFAS 123(R) using the modified prospective transition
method. Under this transition method, share-based compensation expense
recognized during 2006 included: (a) compensation expense for all
share-based awards granted prior to, but not yet vested, as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, and (b) compensation expense for all share-based
awards granted on or after January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). In accordance with
the modified prospective transition method, our consolidated financial
statements for prior periods have not been restated to reflect the impact of
SFAS 123(R).
Recent
Accounting Pronouncements
In
February 2006, the FASB issued Statement No. 155,
Accounting
for Certain Hybrid Financial Instruments, an amendment of FASB Statements No.
133 and 140
.
Among other matters, that statement provides that where a company is required
to
bifurcate a derivative from its host contract, the company may irrevocably
elect
to initially and subsequently measure that hybrid financial instrument in its
entirety at fair value, with changes in fair value recognized in operations.
The
statement is effective for financial instruments issued after the beginning
of
an entity’s first fiscal year that begins after September 15, 2006. Earlier
adoption is permitted as of the beginning of an entity’s fiscal year, provided
the entity has not yet issued financial statements, including financial
statements for any interim period for that fiscal year.
In
June 2006, the FASB issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
FIN
48 is effective for fiscal years beginning after December 15, 2006. We are
currently reviewing this new standard to determine its effects, if any, on
our
results of operations or financial position.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”, which establishes a framework for reporting fair value and
expands disclosures about fair value measurements. SFAS No. 157 is
effective for the Company January 1, 2008. We are currently evaluating the
impact of this new standard on our consolidated financial
statements.
Management
does not believe that any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
RESULTS
OF OPERATIONS
For
the three months ended September 30, 2007 compared to the three months ended
September 30, 2006.
Net
Sales
Our
net
sales are derived from the sale of our nutritional supplement product Activar
AC-11® and our line of proprietary skin care products. We also sell AC-11 as a
bulk ingredient to other companies in the nutritional supplement and
cosmeceutical industries who utilize it in their own proprietary products.
We
sell Activar AC-11 direct to consumers through our Internet website
www.ac-11.com
.
During
2006, we began selling our skin care products via a 30-minute TV infomercial.
We
discontinued the infomercial in June 2006 and as a result, we are not currently
selling our skin care products direct to the consumer. In October of 2007 we
discontinued our direct to consumer sales of Activar AC-11 nutritional
supplements through our Internet website. The decision to cease sales through
this channel was influenced by the exclusive rights we granted to Solgar Herb
and Vitamin to market AC-11 supplements to the retail market. We have no plans
to re-introduce the Activar AC-11 oral supplement through our Internet site
in
the near future.
Net
sales
for the quarter ended September 30, 2007 were $150,538 compared to net sales
of
$77,603 for the quarter ended September 30, 2006, an increase of $72,935 or
94.0%. Our net sales by product line are summarized in the following
table:
|
|
|
|
Three
months ended
September
30,
|
|
|
$
|
|
|
%
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Inc/(Dec)
|
|
|
Inc/(Dec)
|
|
|
Activar
AC-11
|
|
$
|
4,058
|
|
$
|
9,399
|
|
$
|
(5,341
|
)
|
|
(56.8
|
%)
|
|
Bulk
AC-11
|
|
|
126,500
|
|
|
39,175
|
|
|
87,325
|
|
|
222.9
|
%
|
|
Skin
Care Products
|
|
|
--
|
|
|
18,495
|
|
|
(18,495
|
)
|
|
(100.0
|
%)
|
|
License
Fee
|
|
|
19,980
|
|
|
--
|
|
|
19,980
|
|
|
NA
|
|
|
Other
|
|
|
--
|
|
|
10,534
|
|
|
(10,534
|
)
|
|
(100.0
|
%)
|
|
Total
Revenue
|
|
$
|
150,538
|
|
$
|
77,603
|
|
$
|
72,935
|
|
|
94.0
|
%
|
Sales
of
our nutritional supplement product Activar AC-11 decreased $5,341 or 56.8%
in
the quarter ended September 30, 2007 compared to the quarter ended September
30,
2006. This decrease was due to lower unit volume and not the result of a price
decrease or discounting.
Sales
of
bulk AC-11 increased $87,325 or 222.9% in the quarter ended September 30, 2007
compared to the quarter ended September 30, 2006. This increase was due
primarily to sales made to new customers in 2007.
We
did
not sell any of our skin care products during the quarter ended September 30,
2007. In the quarter ended September 30, 2006, we sold $18,495 of our skin
care
products, of which, $15,000 was sold to a new customer.
In
July
2007, we sold a two-year exclusive trademark license in exchange for an upfront
fee of $159,840. We recorded the upfront license fee as deferred income and
we
will amortize it to revenue in equal monthly amounts of $6,660 over the two-year
period of the license. During the three months ended September 30, 2007, the
Company recorded license fee revenue of $19,980. The balance of deferred income
at September 30, 2007 was $139,860.
Other
sales consist primarily of sales that we made to our joint venture companies
PMO
Products and Prometheon Labs in 2006. Also included in other sales are royalties
that we earned from products sold by third parties that utilize our trademark
AC-11®. We did not make sales to these joint venture companies in 2007 as we
sold our joint venture interests in 2006.
Cost
of Sales
Cost
of
sales includes direct and indirect costs associated with manufacturing AC-11
and
our line of nutritional supplement and skin care products that contain AC-11
as
an ingredient. Cost of sales was $79,089 and $179,137 for the quarters ended
September 30, 2007 and 2006, respectively. Gross profit was $71,449 or 47.5%
of
net sales for the three months ended September 30, 2007. We incurred a gross
loss of $101,534 for the comparable period in 2006 due primarily to a write-off
of expired inventory of $151,921.
Selling,
General and Administrative Expenses
Selling,
general and administrative (SG&A) expenses include salaries, employee
benefits, marketing and advertising costs, professional fees related to
scientific research, legal and accounting fees, rent and other office related
expenses. Also included in SG&A are various non-cash expenses such as
depreciation, amortization of intangible assets including patents and other
intellectual property, and stock-based compensation.
The
table
below highlights the major components of our SG&A expenses:
|
|
|
|
Three
months ended
September
30,
|
|
|
$
|
|
|
%
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Inc/(Dec)
|
|
|
Inc/(Dec)
|
|
|
Employee
compensation and benefits
|
|
$
|
57,768
|
|
$
|
119,555
|
|
$
|
(61,787
|
)
|
|
(51.7
|
%)
|
|
Marketing,
advertising and promotion
|
|
|
46,144
|
|
|
44,480
|
|
|
1,664
|
|
|
3.7
|
%
|
|
Research
and development
|
|
|
1,250
|
|
|
8,884
|
|
|
(7,634
|
)
|
|
(85.9
|
%)
|
|
Consulting
and other professional services
|
|
|
13,022
|
|
|
2,178
|
|
|
10,844
|
|
|
497.9
|
%
|
|
Legal
and accounting
|
|
|
82,340
|
|
|
130,146
|
|
|
(47,806
|
)
|
|
(36.7
|
%)
|
|
General
and administrative
|
|
|
36,525
|
|
|
48,754
|
|
|
(12,229
|
)
|
|
(25.1
|
%)
|
|
Occupancy
|
|
|
11,022
|
|
|
36,782
|
|
|
(25,760
|
)
|
|
(70.0
|
%)
|
|
Stock
based compensation
|
|
|
--
|
|
|
2,000
|
|
|
(2,000
|
)
|
|
(100.0
|
%)
|
|
Depreciation
and amortization
|
|
|
54,534
|
|
|
72,613
|
|
|
(18,079
|
)
|
|
(24.9
|
%)
|
|
Total
SG&A
|
|
$
|
302,605
|
|
$
|
465,392
|
|
$
|
(162,787
|
)
|
|
(35.0
|
%)
|
In
total,
SG&A expenses decreased $162,787 or 35.0% from $465,392 for the three months
ended September 30, 2006 to $302,605 for the comparable period in 2007. Areas
where we achieved significant cost savings are as follows:
|
·
|
Employee
compensation expense decreased $61,787 or 51.7% in 2007 compared
to 2006.
This decrease is due to a reduction in the number of full-time
employees.
|
|
·
|
Occupancy
expenses decreased $25,760 in 2007 compared to 2006. In August 2007,
we
relocated our corporate headquarters to Lyndhurst, New Jersey which
resulted in a reduction of our monthly
rent.
|
|
·
|
Legal
and accounting expenses decreased $47,806 or 36.7% in 2007 compared
to
2006. We incurred higher legal costs in 2006 related to (i) the
maintenance of our patent portfolio and (ii) the services of a compliance
officer.
|
Interest
Expense
Interest
expense for the three months ended September 30, 2007 was $491,974 compared
to
$8,483,380 in the comparable period in 2006. Of the total in 2007, $399,452
was
non-cash interest expense resulting from the accounting treatment of our
convertible notes. The remaining $92,522 was interest due under the convertible
notes. As of September 30, 2007, we have not paid $492,326 of interest due
under
our convertible notes and accordingly this amount is included in accrued
expenses at September 30, 2007.
Net
Change in Value of Common Stock Warrants and Embedded Derivative
Liability
We
are
required to measure the fair value of the warrants and the embedded conversion
feature related to our convertible notes on the date of each reporting period.
The effect of this re-measurement is to adjust the carrying value of the
liabilities related to the warrants and the embedded conversion feature.
Accordingly, during the three months ended September 30, 2007, we recorded
non-cash other income of $1,221,048 related to the decrease in the fair value
of
the warrants and embedded derivative liability.
Net
Income
Net
income for the three months ended September 30, 2007 was $497,918 or $0.04
per
share, compared to a net loss of $4,464,659 or $0.41 for the three months ended
September 30, 2007.
RESULTS
OF OPERATIONS
For
the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006.
Net
Sales
Net
sales
for the nine months ended September 30, 2007 were $360,243 compared to net
sales
of $201,387 for the nine months ended September 30, 2006, an increase of
$158,856 or 78.9%. Our net sales by product line are summarized in the following
table:
|
|
|
|
Nine
months ended
September
30,
|
|
|
$
|
|
|
%
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Inc/(Dec)
|
|
|
Inc/(Dec)
|
|
|
Activar
AC-11
|
|
$
|
20,491
|
|
$
|
34,442
|
|
$
|
(13,951
|
)
|
|
(40.5
|
%)
|
|
Bulk
AC-11
|
|
|
307,937
|
|
|
82,000
|
|
|
225,937
|
|
|
275.5
|
%
|
|
Skin
Care Products
|
|
|
10,839
|
|
|
61,947
|
|
|
(51,108
|
)
|
|
(82.5
|
%)
|
|
License
Fee
|
|
|
19,980
|
|
|
--
|
|
|
19,980
|
|
|
NA
|
|
|
Other
|
|
|
996
|
|
|
22,998
|
|
|
(22,002
|
)
|
|
(95.7
|
%)
|
|
Total
Revenue
|
|
$
|
360,243
|
|
$
|
201,387
|
|
$
|
158,856
|
|
|
78.9
|
%
|
For
the
nine months ended September 30, 2007, sales of our nutritional supplement
product Activar AC-11 decreased $13,951 or 40.5% compared to the nine months
ended September 30, 2006. This decrease was due to lower unit volume and not
the
result of a price decrease or discounting.
For
the
nine months ended September 30, 2007, sales of bulk AC-11 increased $225,937
or
275.5% compared to the nine months ended September 30, 2006. This increase
was
due primarily to sales made to new customers in 2007.
For
the
nine months ended September 30, 2007, sales of our skin care products decreased
$51,108 or 82.5% compared to the nine months ended September 30, 2006. In 2006,
we sold our skin care products via a TV infomercial which we discontinued during
the third quarter of 2006.
In
July
2007, we sold a two-year exclusive trademark license in exchange for an upfront
fee of $159,840. We recorded the upfront license fee as deferred income and
we
will amortize it to revenue in equal monthly amounts of $6,660 over the two-year
period of the license. During the three months ended September 30, 2007, the
Company recorded license fee revenue of $19,980. The balance of deferred income
at September 30, 2007 was $139,860
Other
sales consist primarily of sales that we made to our joint venture companies
PMO
Products and Prometheon Labs in 2006. Also included in other sales are royalties
that we earned from products sold by third parties that utilize our trademark
AC-11®. We did not make sales to these joint venture companies in 2007 as we
sold our joint venture interests in 2006.
Cost
of Sales
Cost
of
sales includes direct and indirect costs associated with manufacturing AC-11
and
our line of nutritional supplement and skin care products that contain AC-11
as
an ingredient. Cost of sales was $149,531 and $268,392 for the nine months
ended
September 30, 2007 and 2006, respectively. Gross profit was $210,712 or 58.5%
of
net sales for the nine months ended September 30, 2007. We incurred a gross
loss
of $67,005 for the comparable period in 2006 due to a write-off of expired
inventory of $151,921.
Selling,
General and Administrative Expenses
Selling,
general and administrative (SG&A) expenses include salaries, employee
benefits, marketing and advertising costs, professional fees related to
scientific research, legal and accounting fees, rent and other office related
expenses. Also included in SG&A are various non-cash expenses such as
depreciation, amortization of intangible assets including patents and other
intellectual property, and stock-based compensation.
The
table
below highlights the major components of our SG&A expenses:
|
|
|
|
Nine
months ended
September
30,
|
|
|
$
|
|
|
%
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Inc/(Dec
)
|
|
|
Inc/(Dec
)
|
|
|
Employee
compensation and benefits
|
|
$
|
175,623
|
|
$
|
505,340
|
|
$
|
(329,717
|
)
|
|
(65.2
|
%)
|
|
Marketing,
advertising and promotion
|
|
|
172,433
|
|
|
487,815
|
|
|
(315,382
|
)
|
|
(64.7
|
%)
|
|
Research
and development
|
|
|
8,300
|
|
|
79,439
|
|
|
(71,139
|
)
|
|
(89.6
|
%)
|
|
Consulting
and other professional services
|
|
|
40,251
|
|
|
137,848
|
|
|
(97,597
|
)
|
|
(70.8
|
%)
|
|
Legal
and accounting
|
|
|
270,662
|
|
|
462,907
|
|
|
(192,245
|
)
|
|
(41.5
|
%)
|
|
General
and administrative
|
|
|
143,639
|
|
|
179,023
|
|
|
(35,384
|
)
|
|
(19.8
|
%)
|
|
Occupancy
|
|
|
95,050
|
|
|
122,857
|
|
|
(27,807
|
)
|
|
(22.6
|
%)
|
|
Stock
based compensation
|
|
|
--
|
|
|
211,175
|
|
|
(211,175
|
)
|
|
(100.0
|
%)
|
|
Depreciation
and amortization
|
|
|
174,622
|
|
|
220,980
|
|
|
(46,358
|
)
|
|
(21.0
|
%)
|
|
Total
SG&A
|
|
$
|
1,080,580
|
|
$
|
2,407,384
|
|
$
|
(1,326,804
|
)
|
|
(55.1
|
%)
|
In
total,
SG&A expenses decreased $1,326,804 or 55.1% from $2,407,384 for the nine
months ended September 30, 2006 to $1,080,580 for the comparable period in
2007.
Areas where we achieved significant cost savings are as follows:
|
·
|
Employee
compensation expense decreased $329,717 or 65.2% in 2007 compared
to 2006.
This decrease is due to a reduction in the number of full-time
employees.
|
|
·
|
Marketing,
advertising and promotion expenses decreased $315,382 or 64.7% in
2007
compared to 2006. During 2006, we incurred one time costs related
to the
production of our TV infomercial and the purchase of media
time.
|
|
·
|
Research
and development expenses decreased $71,139 or 89.6% in 2007 compared
to
2006. This decrease was due to higher product development costs and
higher
costs related to services provided by scientific advisors in 2006
compared
to 2007.
|
|
·
|
Consulting
and other professional services decreased $97,597 or 70.8% in 2007
compared to 2006. A majority of this decrease is due to the fact
that in
2006, we engaged the services of consultants in the areas of strategic
planning, mergers and acquisitions, investor relations and business
development. We terminated many of these relationships during
2007.
|
|
·
|
Legal
and accounting expenses decreased $192,245 or 41.5% in 2007 compared
to
2006. In 2006 we incurred one time costs related to (i) an accounting
system conversion and (ii) the filing of a Form SB-2 registration
statement with the SEC. We also incurred higher legal costs in 2006
related to the maintenance of our patent
portfolio.
|
|
·
|
We
incurred stock based compensation expense of $211,175 in 2006 related
to
stock options issued to employees pursuant to FASB 123R. We did not
incur
stock based compensation during the comparable period in 2007.
|
Interest
Expense
Interest
expense for the nine months ended September 30, 2007 was $2,299,704 compared
to
$9,527,320 in the comparable period in 2006. Of the total in 2007, $2,027,369
was non-cash interest expense resulting from the accounting treatment of our
convertible notes. The remaining $272,335 was interest due under the convertible
notes. As of September 30, 2007, we have not paid $492,326 of interest due
under
our convertible notes and accordingly this amount is included in accrued
expenses at September 30, 2007.
Net
Change in Value of Common Stock Warrants and Embedded Derivative
Liability
We
are
required to measure the fair value of the warrants and the embedded conversion
feature related to our convertible notes on the date of each reporting period.
The effect of this re-measurement is to adjust the carrying value of the
liabilities related to the warrants and the embedded conversion feature.
Accordingly, during the nine months ended September 30, 2007, we recorded
non-cash other income of $2,036,556 related to the decrease in the fair value
of
the warrants and embedded derivative liability.
Net
Loss
Net
loss
for the nine months ended September 30, 2007 was $1,133,016 or $0.10 per share,
compared to a net loss of $7,369,938 or $0.69 for the nine months ended
September 30, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Based
upon our recurring losses from operations, a stockholders’ deficit of $5,958,008
as of September 30, 2007, our current rate of cash consumption and the
uncertainty of liquidity related initiatives described below, there is
substantial doubt as to our ability to continue as a going concern. Future
losses are likely to continue unless we successfully implement our business
plan. At September 30, 2007, we had cash of $47,090 and a net working capital
deficit of $1,152,331. Excluding $827,402 of inventory, our net working capital
deficit is $1,979,733. As of that same date, we had $2,092,320 in current
liabilities which includes $1,105,209 of callable secured convertible notes
that
are due and payable in full on August 31, 2008. Also included in current
liabilities is $492,326 of accrued interest which is owed to the holders of
our
secured convertible notes.
At
September 30, 2007, we have an aggregate of $4,570,209 of secured convertible
notes outstanding, which may hinder our ability to raise additional debt or
equity capital. In addition, we have granted a security interest in
substantially all of our assets to the holders of the notes. If we were required
to repay all or a portion of the outstanding balance of the notes in cash due
to
the occurrence of an event of default, we would be required to raise additional
funds in the event that we do not have sufficient cash available. As of November
16, 2007, the note holders have not placed the Company in default due to the
non-payment of interest.
During
the three months ended September 30, 2007 and through November 12, 2007, the
note holders converted a total of $42,831 of convertible notes into 20,686,815
shares of the Company's common stock at conversion prices ranging from of
$0.0091 to $0.00125 per share. These shares were issued without a restrictive
legend pursuant to Rule 144 and were eligible for immediate resale without
any
limitations.
In
mid-October 2007, we made a formal request for additional funds to the existing
holders of our secured convertible notes. As of November 16, 2007, we have
not
been notified by the note holders as to whether or not they are willing to
provide the Company with such additional funds.
We
continue to seek additional sources of debt and/or equity capital in order
to
fund our ongoing operational activities. There can be no assurance that any
additional financing will be available on commercially reasonable terms or
at
all. If we were to seek asset based financing, we would need the approval of
the
existing note holders which we may not receive. Any additional equity financing
may involve substantial dilution to our then existing shareholders.
Consequently, if we were unable to repay the notes, the note holders could
commence legal action against us and foreclose on all of our assets to recover
the amounts due. Any such action would require us to curtail or cease
operations.
We
plan
to seek other channels of wholesale distribution for our nutritional supplement
product, bulk AC-11 and proprietary skin care products such as multi-level
marketing organizations and other distribution networks both domestically and
in
certain international markets. Future sales generated from our products will
depend on numerous factors including the degree to which consumers' perceive
that these products offer superior benefits compared to other more established
brands. If consumers do not believe that our products offer benefits
commensurate with the purchase price, our sales may suffer.
We
maintain high levels of inventory relative to our historical product sales.
We intend to aggressively market our existing inventory of skin care products
and bulk AC-11 in order to convert this inventory into cash. The shelf life
of
our bulk AC-11 is approximately three years from the date of processing. In
October 2006, we began testing certain lots of our existing inventory of bulk
AC-11 using established and accepted protocols to determine the stability of
the
active ingredient and its microbiology profile. We contracted with an
independent laboratory to perform these tests. Based on the results of this
testing, we extended the shelf life of these specific lots for an additional
24
month period. As a result, the earliest expiration date for our inventory of
bulk AC-11 is December 2008. In the event that future lots are retested and
the
test results indicate that the active ingredient and/or microbiology profile
do
not meet our specifications, we will be required to write-off the value of
this
inventory. We are unable to predict the likelihood at this time of future
write-offs related to our bulk inventory however at December 31, 2006, we
incurred an allowance for inventory obsolescence of approximately $1,073,000
to
reflect the uncertainty of being able to sell our existing inventory prior
to
its expiration.
Given
our
limited cash on hand, we have taken steps to decrease the amount of cash
required to fund our existing operations. We estimate that we will require
approximately $900,000 over the next twelve months or $75,000 per month to
fund
our existing operations. These costs include (i) compensation and healthcare
benefits for our two full-time employees, (ii) compensation for consultants
who
we deem critical to our business, (iii) general office expenses including rent
and utilities, (iv) insurance, and (v) outside legal and accounting
services.
We
currently do not have the required cash on hand and therefore, we will be
relying on product sales to augment our existing cash. In addition, the
estimated amount required to fund our operations of $100,000 per month does
not
include costs related to (i) marketing and advertising our products, (ii) cash
needed to satisfy existing accounts payable, (iii) research and new product
development and; (iv) interest payable under our notes which at September 30,
2007 was approximately $492,000.