UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2008

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period _________ to____________

Commission file number: 000-51248

OPTIGENEX INC.
(Exact name of small business issuer as specified in its charter)

Delaware
20-1678933
(State or other jurisdiction of
(IRS Employer I.D. Number)
incorporation or organization)
 

1170 Valley Brook Avenue, 2 nd Floor Suite B, Lyndhurst, NJ 07071
(Address of principal executive offices)

(201) 355-2098
(Issuer’s telephone number)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated file, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o  (Do not check if a smaller reporting company)
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 of 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

There were 66,533,776 shares of Common Stock outstanding as of July 28, 2008.



OPTIGENEX INC.

Table of Contents

PART I
FINANCIAL INFORMATION
 3
     
Item 1.
Financial Statements
  3
     
 
Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007
  3
     
 
Statements of Operations for the three and six months ended June 30, 2008 and 2007 (Unaudited)
 4
     
 
Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (Unaudited)
 5
     
 
Notes to Financial Statements (Unaudited)
 6
     
Item 2.
Management's Discussion and Analysis or Plan of Operation
 14
     
Item 3.
Controls and Procedures
 23
     
PART II
OTHER INFORMATION
 23
     
Item 1.
Legal Proceedings
 23
     
Item 6.
Exhibits
  23
     
SIGNATURES
 24

2


PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements.
 
OPTIGENEX INC.

Balance Sheets

   
June 30,
 
December 31,
 
   
2008
 
2007
 
   
(Unaudited)
     
ASSETS
             
               
Current Assets:
             
Cash
 
$
21,398
 
$
6,758
 
Accounts receivable, net
   
-
   
10,882
 
Inventories, net
   
368,933
   
468,774
 
Prepaid expenses and other current assets
   
5,464
   
16,541
 
Total current assets
   
395,795
   
502,955
 
               
Property and equipment, net
   
15,675
   
19,868
 
Intangible assets, net
   
1,248,881
   
1,325,859
 
Other assets
   
17,908
   
39,608
 
Total Assets
 
$
1,678,259
 
$
1,888,290
 
               
               
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
             
               
Current Liabilities:
             
Accounts payable
 
$
383,525
 
$
340,949
 
Accrued expenses
   
31,667
   
45,000
 
Current portion of callable secured convetible notes
   
8,182,349
   
4,513,669
 
Deferred income
   
79,920
   
119,880
 
Total current liabilities
   
8,677,461
   
5,019,498
 
               
Callable secured convertible notes, net of debt discount including embedded derivative liability
   
3,243,475
   
4,427,067
 
Common stock warrants
   
33,656
   
124,054
 
Total liabilities
   
11,954,592
   
9,570,619
 
               
Commitments
             
               
Stockholders' deficiency:
             
Preferred stock
             
Series A Super Preferred - $0.001 par value; 5,000,000 shares authorized 5,000,000 and -0- issued and outstanding, respectively
   
5,000
   
-
 
               
Common stock - $0.001 par value; 100,000,000 shares authorized, 66,533,776 and 52,212,067 issued and outstanding, respectively
   
66,534
   
52,212
 
 
             
Additional paid-in capital
   
18,120,628
   
18,088,319
 
 
             
Accumulated deficit
   
(28,468,495
)
 
(25,822,860
)
Total stockholders' deficiency
   
(10,276,333
)
 
(7,682,329
)
               
Total Liabilities and Stockholders' Deficiency
 
$
1,678,259
 
$
1,888,290
 

See notes to financial statements

3


OPTIGENEX INC.

Statements of Operations - Unaudited

   
Three Months Ended
 
Six Months Ended
 
   
June 30,
 
June 30,
 
   
2007
 
2008
 
2007
 
2008
 
                   
Net sales
 
$
92,136
 
$
182,820
 
$
209,705
 
$
378,244
 
                           
Cost of sales
   
26,606
   
63,781
   
70,442
   
152,499
 
                           
Gross profit
   
65,530
   
119,039
   
139,263
   
225,745
 
                           
Selling, general and administrative expenses
   
376,313
   
315,456
   
777,975
   
605,059
 
                           
Loss from operations
   
(310,783
)
 
(196,417
)
 
(638,712
)
 
(379,314
)
                           
Other (income) expense:
                         
                           
Interest expense, net
   
483,176
   
521,655
   
945,230
   
1,030,832
 
                           
Net (income) expense due to change in fair value common stock warrants and derivative liability
   
(53,697
)
 
(1,732,672
)
 
46,992
   
1,235,489
 
                           
Net income (loss)
 
$
(740,262
)
$
1,014,600
 
$
(1,630,934
)
$
(2,645,635
)
                           
Net income (loss) per common share - basic
 
$
(0.07
)
$
0.02
 
$
(0.15
)
$
(0.04
)
                           
Net income (loss) per common share - diluted
 
$
(0.07
)
$
0.00
 
$
(0.15
)
$
(0.04
)
                           
Weighted-average number of common
                         
shares outstanding - basic
   
11,268,316
   
66,533,776
   
11,209,528
   
65,589,487
 
                           
Weighted-average number of common
                         
shares outstanding - diluted
   
11,268,316
   
17,073,308,776
   
11,209,528
   
65,589,487
 

See notes to financial statements

4


OPTIGENEX INC.

Statements of Cash Flows – Unaudited

   
Six Months Ended
 
   
June 30,
 
   
2007
 
2008
 
           
Cash flows from operating activities:
             
Net cash used in operating activities
 
$
(360,375
)
$
(140,360
)
               
Cash flows from investing activities:
             
Net cash used in investing activities
   
-
   
-
 
               
Cash flows from financing activities:
             
Proceeds from the sale of convertible notes
   
250,000
   
155,000
 
Net cash provided by financing activities
   
250,000
   
155,000
 
               
Net increase (decrease) in cash
   
(110,375
)
 
14,640
 
Cash - beginning of year
   
153,153
   
6,758
 
Cash - end of year
 
$
42,778
 
$
21,398
 
               
Supplemental schedule of cash flow information:
             
               
Cash paid for interest
 
$
-
 
$
-
 
               
Supplemental schedule of non-cash investing and financing activities:
             
 
             
Debt discount in connection with recording value of embedded derivative liability
 
$
312,500
 
$
926,704
 
Allocation of convertible note proceeds to warrants
 
$
800,000
 
$
9,420
 
Common stock issued in connection with conversion of convertible notes
 
$
2,043
 
$
14,322
 
Convertible notes issued for payment of interest
 
$
-
 
$
771,704
 

See notes to financial statements

5


Optigenex Inc. –   Notes to Financial Statements (Unaudited): June 30, 2008

Note 1. Basis of Presentation

The accompanying unaudited 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 Rule 8.03 of Regulation S-X. 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 interim financial statements for the three and six month periods ended June 30, 2008 and 2007 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 six month period ended June 30, 2008 are not necessarily indicative of the results of operations expected for the year ending December 31, 2008. These financial statements should be read in conjunction with the audited financial statements as of December 31, 2007, 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, 2007, 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 consist of (i) raw materials that are purchased from a sole supplier in Brazil and (ii) the Company’s proprietary compound known as AC-11 which is manufactured in Brazil. 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.

6

 
Optigenex Inc. – Notes to Financial Statements (Unaudited): June 30, 2008

Note 2. Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing net earnings (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 June 30,
 
2008
 
Stock options
   
1,215,210
 
Common stock warrants
   
130,891,918
 
Common stock issuable upon conversion of convertible notes (1)
   
17,006,775,000
 
Total
   
17,138,882,128
 

(1) At June 30, 2008 the Company had Callable Secured Convertible Notes outstanding of $5,442,168. 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) 45% 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 June 30, 2008, the Notes would have been convertible into shares of the Company’s common stock at a price of $0.00032. See Note 6 for a complete discussion of the Callable Secured Convertible Notes. The Company does not currently have sufficient authorized common shares to affect the exercise of the stock options or warrants or conversion of the notes.

Note 3. Inventories

Inventories net of reserves consisted of the following components at June 30, 2008 and December 31, 2007:

   
June 30,
2008
 
December 31,
2007
 
Raw materials
 
$
791,570
 
$
789,274
 
Finished goods
   
810,363
   
912,500
 
Inventory reserve
   
(1,233,000
)
 
(1,233,000
)
   
$
368,933
 
$
468,774
 

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 inventory reserve at June 30, 2008 is equal to the book value of the inventory items which was $691,355 for raw materials and $541,645 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 six months ended June 30, 2008, the Company recorded license fee revenue of $39,960. The balance of deferred income at June 30, 2008 was $79,920.

7


Optigenex Inc. – Notes to Financial Statements (Unaudited): June 30, 2008

Note 5. Stockholders’ Deficiency

During the six months ended June 30, 2008, the Note Holders converted a total of $14,322 of Convertible Notes into 14,321,709 shares of the Company's common stock at a conversion price of $0.001 per share.

On May 23, 2008, the Company issued 5,000,000 shares of Series A Super Preferred Stock (the “Preferred Shares”) to Daniel Zwiren, its Chairman and Chief Executive Officer for services rendered. The company recorded stock based compensation of $25,000 in connection with the issuance of the preferred shares.

The preferred shares (i) carry voting rights equal to 20 times the number of votes as each share of common stock, (ii) carry no dividends, (iii) carry no liquidation preference, (iv) carry no conversion rights, and (v) are not subject to reverse stock splits and other changes to the common stock of the Company.

Note 6. Callable Secured Convertible Notes and Common Stock Warrants

Between August 31, 2005 and June 30, 2008, the Company entered into a series of eight Securities Purchase Agreements with a group of five accredited investors (New Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd., AJW Partners, LLC and AJW Master Fund Ltd., collectively the "Note Holders") for the sale of an aggregate of $5,691,704 of Callable Secured Convertible Notes (the "Convertible Notes") and warrants to purchase up to 130,625,000 shares of its common stock (the “Warrants”).

The first five tranches of the Convertible Notes, which were issued between August 31, 2005 and February 14, 2007, bear interest at 8% per annum. Tranche six, which was issued on January 31, 2008 to settle all accrued interest of $584,062 outstanding as of December 31, 2007, bears interest at 2% per annum. Tranche seven, which was issued on April 15, 2008 for $155,000, bears interest at 8% per annum. Tranche eight, which was issued on June 30, 2008 to settle all accrued interest of $187,642 outstanding as of June 30, 2008, bears interest at 2% per annum.

All notes mature three years from the date of issuance. The Company is not required to make any principal payments during the three year term of the Convertible Notes. At June 30, 2008, tranche one has been partially converted by the Note Holders.

The Convertible Notes are convertible into shares of the Company's common stock at the Note Holders' option, at the lower of (i) a fixed price which, depending on the note, is between $0.10 and $3.20 per share or (ii) the “Applicable Percentage” (60% for tranches one to six and 45% for tranches seven and eight) 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. In connection with the issuance of tranche seven on April 15, 2008, the Applicable Percentage for tranches one to six was reduced to 45%.
 
As of June 30, 2008, 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 preceding trading days was $0.0007, resulting in an effective conversion price at that date for the tranches outstanding at that date of $0.00032 per share. During the six months ended June 30, 2008, the Note Holders converted a total of $14,322 of the Convertible Notes due August 31, 2008 into 14,321,709 shares of the Company's common stock at a conversion price of $0.001 per share.

The Convertible Notes provide for certain Events of Default, which include non-payment of principal and interest when due and failure to effect registration of the common shares underlying conversion of the Convertible Notes and exercise of the Warrants, if and when required. If an Event of Default occurs, the Holders may demand repayment at the greater of (a) 140% of the “Default Sum”, being principal outstanding, together with accrued interest, default interest due (if any) and registration penalties due (if any) or the “parity value” of the Default Sum, where parity value means (a) the number of shares of Common Stock issuable upon conversion of the Default Sum, treating the trading day immediately preceding the repayment date as the “conversion date” for purposes of determining the applicable conversion price, multiplied by (b) the highest closing price for the Common Stock during the period beginning on the date of first occurrence of the Event of Default and ending one day prior to the repayment date.

8


Optigenex Inc. – Notes to Financial Statements (Unaudited): June 30, 2008

If the Convertible Notes are not in default, the Company has the right to prepay the Convertible Notes under certain circumstances at a premium ranging from 35% to 50% of the principal amount, depending on the timing of such prepayment. The Company has granted the Note Holders a security interest in substantially all of the Company's assets.

The 130,625,000 warrants issued (of which 120,625,000 were issued in connection with tranches one to five and 10,000,000 were issued on April 15, 2008, in connection with tranche seven) are exercisable for a period of seven years from the date of issuance and have exercise prices that range from $0.001 per share to $4.50 per share.

The conversion price of the Convertible 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 or exercise price, with the exception of any shares of common stock issued in connection with the Convertible Notes. The conversion price of the Convertible 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.
 
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.

The Company has the right to prepay the entire outstanding balance of the notes under certain circumstances at a premium of up to 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.

Pursuant to Registration Rights Agreements entered into with the Note Holders, the Company may be required to register for resale, within defined time periods, the shares underlying the Warrants and the shares issuable on conversion of the Convertible Notes. The terms of the Registration Rights Agreements provide that, in the event that the required registration statements are not filed or do not become effective within the required time periods, the Company is required to pay to the Note Holders, as liquidated damages, an amount equal to 2% per month of the principal amount of the Convertible Notes. This amount may be paid in cash or, at the Company’s option, in shares of common stock priced at the conversion price then in effect on the date of the payment. The estimated cost of any such liquidated damages is accrued when the Company believes it is probable they will be incurred. The required registration statement for tranches one to three became effective on February 15, 2006. For tranches four to eight, the Company is required to file a registration statement only if requested by the Note Holders. As of July 28, 2008, no request for registration has been received from the Note Holders and, at June 30, 2008, no accrual for liquidated damages has been made.

Because the number of shares that may be required to be issued on conversion of the Convertible Notes is dependent on the price of the Company’s common stock and is therefore indeterminate, the embedded conversion option of the Convertible Notes and the Warrants are accounted for as derivative instrument liabilities (see below) i n accordance with EITF Issue 00-19, "Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company's Own Common Stock" (EITF 00-19). Accordingly, the initial fair values of the embedded conversion options and the Warrants were recorded as derivative instrument liabilities. For option-based derivative instruments, the Company estimates fair value using the Black-Scholes valuation model, based on the market price of the common stock on the valuation date, an expected dividend yield of 0%, a risk-free interest rate based on constant maturity rates published by the U.S. Federal Reserve applicable to the remaining term of the instruments , and an expected life equal to the remaining term of the instruments. Because of the limited historical trading period of our common stock, the expected volatility of our common stock over the remaining life of the conversion options and Warrants has been estimated based on a review of the volatility of companies considered by management to be comparable to the Company. The Company is required to re-measure the fair value of these derivative instrument liabilities at each reporting period.

9


Optigenex Inc. – Notes to Financial Statements (Unaudited): June 30, 2008

The Company calculated the fair value of the embedded conversion feature related to the $584,062 of Convertible Notes (Tranche 6) issued on January 31, 2008 to be $1,317,265, using the Black-Scholes valuation model with the following assumptions: market price of $0.0018; exercise price of $0.00066, risk free interest rate of 2.27%; expected volatility of 115% and an expected life of 3 years. Because the fair value of the embedded conversion feature exceeded the principal amount of the notes by $733,203, this excess amount was charged directly to expense on January 31, 2008, and the Convertible Notes were initially recorded with no carrying value. The resulting discount from the face amount of the Convertible Notes is being amortized over their three year term using the effective interest rate method.

The Company calculated the fair value of the 10,000,000 warrants issued in connection with the $155,000 of Convertible Notes (Tranche 7) issued on April 15, 2008 to be $9,420 using the Black-Scholes valuation model with the following assumptions: market price of $0.001; exercise price of $0.001, risk free interest rate of 3.08%; expected volatility of 140% and an expected life of 7 years.

The Company calculated the fair value of the embedded conversion feature related to the $155,000 of Convertible Notes (Tranche 7) issued on April 15, 2008 using the Black-Scholes valuation model with the following assumptions: market price of $0.001; exercise price of $0.00045, risk free interest rate of 2.05%; expected volatility of 120% and an expected life of 3 years. The resulting fair value of the embedded conversion feature was $291,503 which exceeded the remaining proceeds to be allocated of $145,580 ($155,000 face value, less the fair value of the warrants of $9,420) by $145,923. As a result, this excess amount was charged directly to expense on April 15, 2008, and the Convertible Notes were initially recorded with no carrying value. The resulting discount from the face amount of the Convertible Notes is being amortized over their three year term using the effective interest rate method.

The Company calculated the fair value of the embedded conversion feature related to the $187,642 of Convertible Notes (Tranche 8) issued on June 30, 2008 to be $340,829 using the Black-Scholes valuation model with the following assumptions: market price of $0.0007; exercise price of $0.00032, risk free interest rate of 2.91%; expected volatility of 120% and an expected life of 3 years. Because the fair value of the embedded conversion feature exceeded the principal amount of the notes by $153,187, this excess amount was charged directly to expense on June 30, 2008, and the Convertible Notes were initially recorded with no carrying value. The resulting discount from the face amount of the Convertible Notes is being amortized over their three year term using the effective interest rate method.

A summary of the Callable Secured Convertible Notes at June 30, 2008, is as follows:

Tranche #
 
Issue Date
 
Due Date
 
Face Amount
 
Principal Outstanding
 
1
   
08-31-2005
   
08-31-2008
 
$
1,300,000
 
$
1,050,464
 
                                                                                   
2
   
10-19-2005
   
10-19-2008
   
1,350,000
   
1,350,000
 
                           
3
   
02-17-2006
   
02-17-2009
   
1,350,000
   
1,350,000
 
                           
4
   
09-15-2006
   
09-15-2009
   
515,000
   
515,000
 
                           
5
   
02-14-2007
   
02-14-2010
   
250,000
   
250,000
 
                           
6
   
01-31-2008
   
01-31-2011
   
584,062
   
584,062
 
                                                              
7
   
04-15-2008
   
04-15-2011
   
155,000
   
155,000
 
                           
8
   
06-30-2008
   
06-30-2011
   
187,642
   
187,642
 
               
$
5,691,704
 
$
5,442,168
 
Less: unamortized discount
             
(1,781,913
)
                       
3,660,255
 
Add: embedded derivative liability
       
7,765,569
 
                       
11,425,824
 
Less: current portion
             
(8,182,349
)
                     
$
3,243,475
 

The current portion represents the net carrying value of tranches one to three, including the embedded derivative liability.

10


Optigenex Inc. – Notes to Financial Statements (Unaudited): June 30, 2008

Re-measurement of the fair value of common stock warrants

The Company is required to re-measure the fair value of the Warrants at the end of each reporting period and adjust the carrying value of the liability related to the Warrants. Accordingly, the Company re-measured the fair value of the 130,625,000 Warrants outstanding at June 30, 2008, using the Black-Scholes valuation model with the following assumptions: market price of common stock on the measurement date of $0.0007, exercise prices ranging from $0.001 to $4.50, risk-free interest rates ranging from 2.63% to 3.61%, expected volatility ranging from 120% to 140% and expected lives equal to the remaining term of the warrants, ranging from 2.17 to 6.88 years. This resulted in an aggregate fair value for the 130,625,000 warrants of $33,656 at June 30, 2008. As a result of this re-measurement, for the three and six months ended June 30, 2008, the Company recorded non-cash income of $104,566 and $99,818 respectively, related to the re-measurement of the fair value of the Warrants.
 
Re-measurement of the fair value of the embedded conversion feature
 
The Company is required to re-measure the fair value of the embedded conversion feature related to the outstanding 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 June 30, 2008, using the Black-Scholes valuation model with the following assumptions: market price of common stock on the measurement date of $0.0007, exercise price of $0.00032; risk-free interest rates ranging from 1.75% to 2.91%, expected volatility ranging from 120% to 130% and expected lives ranging from 0.17 to 3.0 years. This resulted in an aggregate fair value for the embedded conversion feature of $7,765,569 at June 30, 2008. As a result of this re-measurement, the Company recorded non-cash income of $1,927,216 for the three months ended June 30, 2008 and non-cash expense of $302,994 for the six months ended June 30, 2008.

The table below summarizes the calculation of the net (income) expense due to the change in the fair value of the common stock warrants and the derivative liabilities for the three months and six months ended June 2008:

   
Three Months
Ended
March 31, 2008
 
Three Months
Ended
June 30, 2008
 
Six Months
Ended
June 30, 2008
 
Initial charge to income: Tranche 6
 
$
733,203
 
$
-
 
$
733,203
 
Initial charge to income: Tranche 7
   
-
   
145,923
   
145,923
 
Initial charge to income: Tranche 8
   
-
   
153,187
   
153,187
 
Change in fair value of embedded conversion feature
   
2,230,210
   
(1,927,216
)
 
302,994
 
Change in fair value of common stock warrants
   
4,748
   
(104,566
)
 
(99,818
)
Net (income) expense
 
$
2,968,161
 
$
(1,732,672
)
$
1,235,489
 

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 Company did not issue any stock options during the six months ended June 30, 2008 and 2007.

11


Optigenex Inc. – Notes to Financial Statements (Unaudited): June 30, 2008

The following table summarizes the stock option activity for the six months ended June 30, 2008:

   
Number of
Options
 
Weighted
Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Outstanding at December 31, 2007
   
1,664,605
 
$
2.44
       
Granted
   
   
       
Exercised
   
   
       
Forfeited/Cancelled
   
449,395
 
$
1.69
       
Outstanding at June 30, 2008
   
1,215,210
 
$
2.72
 
$
0
 
Exercisable at June 30, 2008
   
1,215,210
 
$
2.72
 
$
0
 
Vested and expected to vest at June 30, 2008
   
1,215,210
 
$
2.72
 
$
0
 

 
The following table summarizes information about stock options outstanding and exercisable at June 30, 2008:
   
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
   
.41
 
$
0.001
   
9,210
 
$
0.001
 
$
0.01
   
16,000
   
1.25
 
$
0.01
   
16,000
 
$
0.01
 
$
0.30
   
100,000
   
0.90
 
$
0.30
   
100,000
 
$
0.30
 
$
3.00
   
1,090,000
   
1.17
 
$
3.00
   
1,090,000
 
$
3.00
 
$
0.001 - $3.00
   
1,215,210
   
1.14
 
$
2.72
   
1,215,210
 
$
2.72
 

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 six months ended June 30, 2008, the Company had a net loss of $2,645,635 and had working capital and stockholders’ deficits of $8,281,666 and $10,276,333, respectively at June 30, 2008.

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.

12


Optigenex Inc. – Notes to Financial Statements (Unaudited): June 30, 2008

Note 9. Significant Customers

For the three months ended June 30, 2008, the Company’s largest customer accounted for 61.1% of total sales and the Company’s three largest customers accounted for 74.6% of total sales.

For the six months ended June 30, 2008, the Company’s largest customer accounted for 29.5% of total sales and the Company’s three largest customers accounted for 55.9% of total sales.

Note 10. Subsequent Event

On July 15, 2008, the Company entered into a Callable Secured Convertible Note (the “Note”) with an existing note holder for working capital purposes. The principal amount of the note was $25,000. The Note bears interest rate at 8% per annum and matures on July 15, 2011. At the election of the note holder, the Note is convertible into shares of the Company’s common stock at the lesser of (i) $3.20 or (ii) 45% 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 Company also granted the note holder a warrant to purchase 30,000,000 shares of the Company’s common stock at an exercise price of $0.001. The warrant expires seven years from the date of issuance.

13


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements including the notes thereto contained in this report. In addition to historical information, the following discussion and other parts of this annual report contain forward-looking information that involves risks and uncertainties.

Cautionary Note Regarding Forward Looking Statements

Certain statements in this Quarterly Report on Form 10-Q 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 in this report on Form 10-Q. 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) and Solgar Herb and Vitamin Company, 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.

14

 
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 June 30, 2008, 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 consist of raw materials that we purchase from a sole supplier in Brazil and our proprietary compound known as AC-11 which is manufactured in Brazil. We periodically review our inventories for evidence of spoilage and/or obsolescence and we remove these items from inventory at their carrying value. At June 30, 2008, our inventory valuation allowance is $1,233,000.
 
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.

We estimate an allowance for product returns at the time of shipment based on historical experience. During the six months ended June 30, 2008, 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

15


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 did not incur an impairment charge in 2007 or during the six months ended June 30, 2008.

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, February 14, 2007, January 31, 2008, April 15, 2008 and June 30, 2008, 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

We account for stock-based compensation in accordance with 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.
 
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.

16


RESULTS OF OPERATIONS

For the three months ended June 30, 2008 compared to the three months ended June 30, 2007.

Net Sales

Our net sales are derived primarily from the sale of AC-11 as a bulk ingredient to other companies in the nutritional supplement and cosmeceutical industries who utilize it in their own proprietary products. During 2007, we also sold our line of proprietary skin care products which contain AC-11 as a core ingredient to domestic and international distributors. Currently we do not sell our skin care products direct to consumers. In October 2007, we discontinued direct to consumer sales of our Activar AC-11 oral nutritional supplement 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 their own proprietary AC-11 supplement to the retail market. We do sell Activar AC-11 to channel partners in certain foreign countries. 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 three months ended June 30, 2008 were $182,820 compared to net sales of approximately $92,136 for the three months ended June 30, 2007, an increase of $90,684 or 98.4%. Our net sales by product category are summarized in the following table:

   
Three Months Ended
         
   
June 30,
 
   $
 
%
 
   
2008
 
2007
 
Inc/(Dec)
 
Inc/(Dec)
 
Activar AC-11
 
$
7,000
 
$
7,575
 
$
(575
)
 
(7.6
%)
Bulk AC-11
   
155,840
   
79,341
   
76,499
   
96.4
%
Skin Care Products
   
   
4,838
   
(4,838
)
 
(100.0
%)
License Fee
   
19,980
   
   
19,980
   
NA
 
Other
   
   
382
   
(382
)
 
(100.0
%)
Net Sales
 
$
182,820
 
$
92,136
 
$
90,684
   
98.4
%

Sales of bulk AC-11 increased $76,499 or 96.4% for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. This increase was primarily due to a sale made to a new customer in 2008.

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 June 30, 2008, we recorded license fee revenue of $19,980. The balance of deferred income at June 30, 2008 was $79,920.
 
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 $63,781 and $26,606 for the three months ended June 30, 2008 and 2007, respectively. Gross profit as a percentage of net sales was 65.1% for the three months ended June 30, 2008 compared to 71.1% for the comparable period in 2007. The decrease in gross profit percentage was due primarily to a sale made to a new customer which carried a lower price than sales made to existing customers.

17


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
         
   
June 30,
 
$
 
%
 
   
2008
 
2007
 
Inc/(Dec)
 
Inc/(Dec)
 
Employee compensation and benefits
 
$
45,086
 
$
58,864
 
$
(13,778
)
 
(23.4
%)
Marketing, advertising and promotion
   
54,222
   
63,341
   
(9,119
)
 
(14.4
%)
Research and development
   
   
2,486
   
(2,486
)
 
(100.0
%)
Consulting and other professional services
   
33,500
   
11,100
   
22,400
   
201.8
%
Legal and accounting
   
63,235
   
77,353
   
(14,118
)
 
(18.3
%)
General and administrative
   
27,005
   
49,747
   
(22,742
)
 
(45.7
%)
Occupancy
   
15,975
   
53,382
   
(37,407
)
 
(70.1
%)
Stock based compensation
   
25,000
   
   
25,000
   
NA
 
Depreciation and amortization
   
51,433
   
60,040
   
(8,607
)
 
(14.3
%)
Total SG&A
 
$
315,456
 
$
376,313
 
$
(60,857
)
 
(16.2
%)

In total, SG&A expenses decreased $60,857 or 16.2% from $376,313 for the three months ended June 30, 2007 to $315,456 for the three months ended June 30, 2008. Areas where we achieved significant cost savings are as follows:

 
·
Employee compensation expense decreased $13,778 or 23.4% in 2008 compared to 2007. This decrease is due to a reduction in the number of full-time employees from two in 2007 to one in 2008.

 
·
Legal and accounting expenses decreased $14,118 or 18.3% in 2008 compared to 2007. This decrease is due primarily to a reduction in legal fees related to the maintenance of our patent portfolio.

 
·
General and administrative expenses decreased $22,742 or 45.7% in 2008 compared to 2007. This decrease was due to a reduction in insurance costs and travel and entertainment expenses.

 
·
Occupancy costs decreased $37,407 or 70.1% in 2008 compared to 2007 due to the relocation of our office from New York City to Lyndhurst, New Jersey.

Interest Expense

Interest expense for the three months ended June 30, 2008 was $521,655 compared to $483,176 in the comparable period in 2007. Of the total in 2008, $426,065 was non-cash interest expense resulting from the accounting treatment of our convertible notes. The remaining $95,590 was interest due under our convertible notes.

18


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 June 30, 2008, we recorded non-cash other income of $1,732,672 related to the decrease in the fair value of the warrants and embedded derivative liabilities compared to non-cash other income of $53,697 in the comparable period in 2007.

Net Income

Net income for the three months ended June 30, 2008 was $1,014,600 or $0.02 per share, compared to a net loss of $740,262 or $0.07 per share for the three months ended June 30, 2007. Excluding the effect of the non-cash income related to the change in value of the liabilities related to the warrants and the embedded conversion feature, our net loss was $718,072 for the three months ended June 30, 2008 compared to a loss of $793,959 for the comparable period in 2007.
 
For the six months ended June 30, 2008 compared to the six months ended June 30, 2007.

Net Sales

Our net sales are derived primarily from the sale of AC-11 as a bulk ingredient to other companies in the nutritional supplement and cosmeceutical industries who utilize it in their own proprietary products. During 2007, we also sold our line of proprietary skin care products which contain AC-11 as a core ingredient to domestic and international distributors. Currently we do not sell our skin care products direct to consumers. In October 2007, we discontinued direct to consumer sales of our Activar AC-11 oral nutritional supplement 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 their own proprietary AC-11 supplement to the retail market. We do sell Activar AC-11 to channel partners in certain foreign countries. 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 six months ended June 30, 2008 were $378,244 compared to net sales of approximately $209,705 for the six months ended June 30, 2007, an increase of $168,539 or 80.4%. Our net sales by product category are summarized in the following table:

   
Six Months Ended
         
   
June 30,
 
$
 
%
 
   
2008
 
2007
 
Inc/(Dec)
 
Inc/(Dec)
 
Activar AC-11
 
$
23,200
 
$
16,433
 
$
6,767
   
41.2
%
Bulk AC-11
   
314,465
   
181,437
   
133,028
   
73.3
%
Skin Care Products
   
   
10,838
   
(10,838
)
 
(100.0
%)
License Fee
   
39,960
   
   
39,960
   
NA
 
Other
   
619
   
997
   
(378
)
 
(37.9
%)
Net Sales
 
$
378,244
 
$
209,705
 
$
168,539
   
80.4
%

Sales of bulk AC-11 increased $133,028 or 73.3% for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. This increase was primarily due to a sale made to a new customer in 2008.

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 six months ended June 30, 2008, we recorded license fee revenue of $39,960. The balance of deferred income at June 30, 2008 was $79,920.

19


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 $152,499 and $70,442 for the six months ended June 30, 2008 and 2007, respectively. Gross profit as a percentage of net sales was 59.7% for the six months ended June 30, 2008 compared to 66.4% for the comparable period in 2007. The decrease in gross profit percentage was due primarily to a sale made to a new customer which carried a lower price than sales made to existing customers.

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:

   
Six Months Ended
         
   
June 30,
 
$
 
%
 
   
2008
 
2007
 
Inc/(Dec)
 
Inc/(Dec)
 
Employee compensation and benefits
 
$
89,875
 
$
117,855
 
$
(27,980
)
 
(23.7
%)
Marketing, advertising and promotion
   
116,930
   
126,289
   
(9,359
)
 
(7.4
%)
Research and development
   
   
7,050
   
(7,050
)
 
(100.0
%)
Consulting and other professional services
   
55,300
   
27,229
   
28,071
   
103.1
%
Legal and accounting
   
125,380
   
188,322
   
(62,942
)
 
(33.4
%)
General and administrative
   
57,753
   
107,114
   
(49,361
)
 
(46.1
%)
Occupancy
   
31,950
   
84,028
   
(52,078
)
 
(62.0
%)
Stock based compensation
   
25,000
   
   
25,000
   
NA
 
Depreciation and amortization
   
102,871
   
120,088
   
(17,217
)
 
(14.3
%)
Total SG&A
 
$
605,059
 
$
777,975
 
$
(172,916
)
 
(22.2
%)

In total, SG&A expenses decreased $172,916 or 22.2% from $777,975 for the six months ended June 30, 2007 to $605,059 for the six months ended June 30, 2008. Areas where we achieved significant cost savings are as follows:

 
·
Employee compensation expense decreased $27,980 or 23.7% in 2008 compared to 2007. This decrease is due to a reduction in the number of full-time employees from two in 2007 to one in 2008.

 
·
Legal and accounting expenses decreased $62,942 or 33.4% in 2008 compared to 2007. This decrease is due to (i) a reduction in legal fees related to the maintenance of our patent portfolio; (ii) a reduction in accounting fees related to a change in auditing firms and; (iii) a reduction in fees paid to a consultant who provides accounting and financial reporting services to the Company.

 
·
General and administrative expenses decreased $49,361 or 46.1% in 2008 compared to 2007. This decrease was due to a reduction in insurance costs and travel and entertainment expenses.

 
·
Occupancy costs decreased $52,078 or 62.0% in 2008 compared to 2007 due to the relocation of our office from New York City to Lyndhurst, New Jersey.

Interest Expense

Interest expense for the six months ended June 30, 2008 was $1,030,832 compared to $945,320 in the comparable period in 2007. Of the total in 2008, $843,190 was non-cash interest expense resulting from the accounting treatment of our convertible notes. The remaining $187,642 was interest due under our convertible notes.

20


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 six months ended June 30, 2008, we recorded non-cash other expense of $1,235,489 related to the increase in the fair value of the warrants and embedded derivative liabilities compared to non-cash other expense of $46,992 in the comparable period in 2007.

Net Loss

Net loss for the six months ended June 30, 2008 was $2,645,635 or $0.04 per share, compared to a net loss of $1,630,934 or $0.15 per share for the six months ended June 30, 2007. Excluding the effect of the non-cash expense related to the change in value of the liabilities related to the warrants and the embedded conversion feature, our net loss was $1,410,146 for the six months ended June 30, 2008 compared to a loss of $1,583,942 for the comparable period in 2007.

LIQUIDITY AND CAPITAL RESOURCES

Based upon our recurring losses from operations, an accumulated deficit of $28,468,495 as of June 30, 2008, 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 June 30, 2008, we had cash of $21,398 and a net working capital deficit of $8,281,666. We have callable secured convertible notes in the principal amounts of $1,050,464, $1,350,000 and $1,350,000 that are due and payable on August 31, 2008, October 19, 2008, and February 17, 2009, respectively. We do not anticipate having the necessary cash available to repay these amounts when due.

On April 15, 2008, we entered into a Securities Purchase Agreement with our four existing note holders for the sale of $155,000 in callable secured convertible notes and warrants to purchase 10,000,000 shares of our common stock. The notes bear interest at 8% and mature on April 15, 2011. We are not required to make any principal payments during the term of the notes. The notes are convertible into shares of our common stock at the note holders' option, at the lower of (i) $0.10 per share or (ii) 45% (the “Applicable Percentage”) multiplied by the average of the three lowest intra-day trading prices for our 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. Interest on the notes is paid quarterly in arrears.

The warrants are exercisable for a period of seven years from the date of issuance and have an exercise price of $0.001 per share. In addition, the conversion price of the notes and the exercise price of the warrants will be adjusted in the event that we issue common stock at a price below the fixed conversion price of $0.001, with the exception of any shares of common stock issued in connection with the notes. We have the right to prepay the entire outstanding balance of the notes under certain circumstances at premiums ranging from 35% to 50%. We also have the right to prepay a portion of the notes each month in an amount equal to 104% of the then outstanding principal balance divided by 36, plus one month’s interest.

In connection with entering into the notes on April 15, 2008, we also amended all previously executed notes with our existing note holders to increase the discount to market that the note holders reduce the Applicable Percentage under such notes from 60% to 45%. The aforementioned notes were entered into on August 31, 2005, October 19, 2005, February 14, 2006, September 15, 2006, February 12, 2007 and January 31, 2008.

On June 30, 2008, we entered into three (3) callable secured convertible notes with our existing note holders for the purpose of capitalizing interest owed under all previously executed notes dated August 31, 2005, October 19, 2005, February 14, 2006, September 15, 2006, February 12, 2007, January 31, 2008 and April 15, 2008. The aggregate principal amount of the three notes is $187,642 which was equal to the aggregate amount of interest owed to the note holders as of June 30, 2008. We did not receive any funds in connection with entering into these notes. The notes carry an interest rate of 2% and a maturity date of April 15, 2011 and are convertible into shares of our common stock at 45% (the “Applicable Percentage”) multiplied by the average of the three lowest intra-day trading prices for our 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. Interest on the notes is paid quarterly in arrears.

21


On July 15, 2008, we entered into a Securities Purchase Agreement with an existing note holder for the sale of $25,000 in callable secured convertible notes and warrants to purchase 30,000,000 shares of our common stock. The note bears interest at 8% and matures on July 15, 2011. We are not required to make any principal payments during the term of the notes. The notes are convertible into shares of our common stock at the note holders' option, at the lower of (i) $3.20 per share or (ii) 45% (the “Applicable Percentage”) multiplied by the average of the three lowest intra-day trading prices for our 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. Interest on the notes is paid quarterly in arrears.

The warrants are exercisable for a period of seven years from the date of issuance and have an exercise price of $0.001 per share. In addition, the conversion price of the notes and the exercise price of the warrants will be adjusted in the event that we issue common stock at a price below the fixed conversion price of $0.001, with the exception of any shares of common stock issued in connection with the notes. We have the right to prepay the entire outstanding balance of the notes under certain circumstances at premiums ranging from 35% to 50%. We also have the right to prepay a portion of the notes each month in an amount equal to 104% of the then outstanding principal balance divided by 36, plus one month’s interest.

As a result of the sale of this additional note, at July 15, 2008, we have an aggregate of $5,467,168 of callable 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. There can be no assurance that any additional financing will be available when needed, 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 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, 2007, we incurred an allowance for inventory obsolescence of approximately $174,000 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 $720,000 over the next twelve months or $60,000 per month to fund our existing operations. These costs include (i) compensation and healthcare benefits for our full-time employee, (ii) compensation for consultants who we deem critical to our business, (iii) general office expenses including rent and utilities, (iv) insurance, (v) outside legal and accounting services and, (vi) order fulfillment operations.

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, this estimated “burn-rate” 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.

22


Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable

Item 4T. Controls and Procedures.

a)   Evaluation of Disclosure Controls and Procedures: As of June 30, 2008, an evaluation was carried out under the supervision and with the participation of Daniel Zwiren, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. The system of disclosure controls and procedures was designed to be effective at a reasonable assurance level. Based on that evaluation, Mr. Zwiren has concluded that our disclosure controls and procedures are effective at the reasonable assurance level to timely alert him of information required to be disclosed by us in reports that we file or submit under the Securities Act of 1934. During the quarter ended June 30, 2008, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

b)   Changes in internal controls: There were no changes in internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.

Item 6.   Exhibits.

Exhibit No.
 
Title
     
31.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.
     
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

23


SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 4, 2008

OPTIGENEX INC.
Registrant

By:
/s/ Daniel Zwiren
 
Daniel Zwiren
 
President, Chief Executive Officer and Chief Financial Officer

24

 
Optigenex (CE) (USOTC:OPGX)
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