The accompanying notes are an integral part of the condensed
consolidated financial statements.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
The accompanying notes are an integral part of the condensed
consolidated financial statements.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
On March 15, 2010 the Company
changed its name to Inergetics, Inc. Inergetics, Inc. (the Company or "Inergetics"), formerly Millennium Biotechnologies
Group, Inc., is a holding company for its subsidiary Millennium Biotechnologies, Inc. ("Millennium").
Millennium was incorporated in
the State of Delaware on November 9, 2000 and is located in New Jersey. Millennium is a research based bio-nutraceutical
corporation involved in the field of nutritional science. Millennium’s principal source of revenue is from sales
of its nutraceutical supplements, Resurgex Select® and Resurgex Essential™ and Resurgex Essential Plus™ which serve
as a nutritional support for immuno-compromised individuals undergoing medical treatment for chronic debilitating diseases. Millennium
has developed Surgex for the sport nutritional market. The Company acquired Bikini Ready®, a leader in weight loss lifestyle
solutions and SlimTrim™, the affordable, premium value diet brand. The Company has a licensing agreement to sell the Martha
Stewart Essentials line of supplements. The Company’s efforts going forward will focus on sales of Martha Stewart
Essentials™ line of supplements, Surgex in powder and pill forms as well as powder and pills for Bikini Ready and pills for
SlimTrim.
The accompanying unaudited condensed
consolidated financial statements include the accounts of Inergetics, Inc. and its subsidiary. These condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Regulation S-X. Certain information in footnote disclosures normally included
in financial statements prepared in conformity with accounting principles generally accepted in the United States of America has
been condensed or omitted pursuant to such principles and the financial results for the periods presented may not be indicative
of the full year’s results. The Company believes that the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary
for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with
the December 31, 2013 audited financial statements and the accompanying notes thereto filed with the Securities and Exchange Commission
on Form 10-K.
Principles of Consolidation
The condensed consolidated financial statements include
the accounts of the Company and its subsidiary and are prepared in accordance with accounting principles generally accepted in
the United States. All significant inter-company transactions and balances have been eliminated.
Certain information in footnote disclosure normally
included in the financial statements have been condensed or omitted and the financial statements might not be indicative of a full
year’s results. The Company believes the disclosures are adequate to make the information presented not misleading.
The financial statements should be read in conjunction
with the Company’s audited financial statements and the notes thereto for the fiscal year-ended December 31, 2013 included
in the Company’s Annual Report on Form 10-K filed on March 31, 2014.
Use of Estimates
The preparation of the financial statements in conformity
with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
Continued
Goodwill
Goodwill and other acquired
intangible assets with indefinite lives are not amortized, but are tested for impairment annually and when an event occurs or circumstances
change such that it is more likely than not that an impairment may exist. Our annual testing date is December 31. We test goodwill
for impairment by first comparing the carrying value of net assets to the fair value of the related operations. If the fair value
is determined to be less than carrying value, a second step is performed to compute the amount of the impairment. In this process,
a fair value for goodwill is estimated, based in part on the fair value of the operations, and is compared to its carrying value.
The shortfall of the fair value below carrying value represents the amount of goodwill impairment. Intangibles consist of
brand and trade names acquired in business combinations. We test these intangibles for impairment by comparing their carrying value
to current projections of discounted cash flows attributable to the brand and trade names. Any excess carrying value over the amount
of discounted cash flows represents the amount of the impairment.
Revenue Recognition
Revenue is recognized net of
discounts, rebates, promotional adjustments, price adjustments and estimated returns and upon transfer of title and risk to the
customer which occurs at shipping (F.O.B. terms). Upon shipment to various customers when all performance obligations are
met and collectability is reasonably assured revenue is recognized. Upon shipment to specific customers with the right of
return the Company defers revenues as returns are not reasonably estimable. As of June 30, 2014 and December 31, 2013, deferred
revenue totaled $1,075,182 and $1,269,470, respectively.
Deferred Revenue and Deferred
Cost of Goods Sold
Deferred revenue consists substantially
of amounts billed or payments received in advance of revenue recognition. Deferred cost of goods sold as of June 30, 2014 and December
31, 2013 of $493,539 and $569,036, respectively, related to deferred product revenues includes direct product costs. Once all revenue
recognition criteria have been met, the deferred revenues and associated cost of goods sold are recognized.
Income Taxes
The Company provides for income
taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected to be settled in the
Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different
periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
Continued
Loss Per Common Share
Net loss per share, in accordance
with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number
of shares of Common Stock outstanding during the period. Common Stock equivalents have not been included in this computation since
the effect would be anti-dilutive. During a loss period, the effect of the potential exercise of stock options, warrants, convertible
preferred stock and convertible debt are not considered in the diluted income (loss) per share calculation since the effect would
be anti-dilutive.
Fair Value of Financial Instruments
For financial instruments including
cash, accounts receivable, prepaid expenses, debt, accounts payable and accrued expenses, the carrying values approximated their
fair value.
Fair value estimates are made
at a specific point in time, based on relevant market information and information about the financial statement. These estimates
are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
2
.
GOING CONCERN AND LIQUIDITY ISSUES
The Company’s future success is dependent upon
its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. Management
believes they can raise the appropriate funds needed to support their business plan and develop an operating company which is cash
flow positive.
However, the Company has a working capital deficit,
significant debt outstanding, incurred substantial net losses for the six months ended June 30, 2014 and 2013 and has accumulated
a deficit of approximately $91 million at June 30, 2014. The Company has not been able to generate sufficient cash from operating
activities to fund its ongoing operations. There is no guarantee that the Company will be able to generate enough revenue and/or
raise capital to support its operations. These factors raise substantial doubt about the Company’s ability to
continue as a going concern.
The condensed consolidated financial statements do
not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result
should the Company be unable to continue as a going concern.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
3.
|
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
|
The Company maintains cash balances
in several financial institutions which are insured by the Federal Deposit Insurance Corporation up to certain federal limitations.
The Company provides credit in
the normal course of business to customers located throughout the U. S. The Company performs ongoing credit evaluations of its
customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical
trends, and other information.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Inventories are stated at the
lower of cost or market on a first in, first out basis. Inventories consist of work-in-process, raw materials, finished goods,
and packaging for the Company’s Martha Stewart Essentials, SURGEX®, RESURGEX ESSENTIAL
®,
Bikini Ready®
and SlimTrim™ product lines. Inventories consist of the
following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Finished Goods
|
|
$
|
912,574
|
|
|
$
|
378,472
|
|
Packaging
|
|
|
59,952
|
|
|
|
41,714
|
|
|
|
|
972,526
|
|
|
|
420,186
|
|
Less: Reserve for obsolescence
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
972,526
|
|
|
$
|
420,186
|
|
Prepaid expenses are for services
that have been paid in advance primarily with stock that are amortized over the life of the contract. The agreements pertain to
pricing structure, distribution, warehousing, inventory management, financial advisory services, pro athlete endorsements and licensing
agreements.
|
6.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consisted of
the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Accounts payable
|
|
$
|
2,567,449
|
|
|
$
|
2,866,017
|
|
Owed to officer
|
|
|
30,650
|
|
|
|
16,088
|
|
Accrued interest
|
|
|
453,827
|
|
|
|
1,016,584
|
|
Accrued rent expense
|
|
|
135,874
|
|
|
|
135,874
|
|
Accrued salaries, bonuses and payroll taxes
|
|
|
113,615
|
|
|
|
824,492
|
|
Accrued professional fees
|
|
|
250,434
|
|
|
|
230,433
|
|
|
|
$
|
3,551,849
|
|
|
$
|
5,089,488
|
|
INERGETICS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
SHORT TERM DEBT, NET OF DEBT DISCOUNT
|
In the first Six months of 2014, the Company realized
gross proceeds of $1,495,030 in new cash. Proceeds from the sale of its 12% to 15.0% twelve month Unsecured Convertible Notes and
Unsecured Notes, in the aggregate original principal amount of $1,495,030 (the “Notes”) to accredited investors (the
“Investors”). Interest on the outstanding principal balance of the Notes is payable upon maturity of the
note. For the convertible notes, the outstanding principal balance of the Notes and all accrued but unpaid interest thereon may
be converted at any time at the option of each Investor into shares of Common Stock at the Conversion Price of $ .20 per share. The
Company may prepay the Notes at any time without penalty to the Investors.
Unsecured Notes, net debt discount, consist of the
following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Unsecured Convertible Notes
|
|
$
|
2,739,271
|
|
|
$
|
1,450,333
|
|
Debt discount
|
|
|
(76,147
|
)
|
|
|
(70,063
|
)
|
|
|
|
2,663,124
|
|
|
|
1,380,270
|
|
Less long term portion
|
|
|
259,479
|
|
|
|
103,912
|
|
Short term portion
|
|
$
|
2,403,645
|
|
|
$
|
1,276,358
|
|
The Company committed to issue 561,918 shares of common
stock for origination fees during the Six months ended June 30, 2014 and recorded a debt discount of $ 77,207.
Gain on Troubled Debt Restructuring
2014 Modification of Debt
The following debt instruments were modified in 2014.
The modification of debt included the addition of a conversion feature therefore requiring the Company to record the transaction
in accordance with ASC 470 “Debt” modification of debt accounting.
At December 31, 2013, the Company had
promissory notes issued to one affiliated investor with an outstanding balance of $2,000,000, which were due on demand.
During January 2014, the Company reached an agreement with the investor to extend the debt for twelve months. At the date of
extension, the new debt payable was $2,000,000. The new debt incurred origination fees paid through the issuance of Series G
preferred stock valued at $232,500, resulting in an adjustment to
Stockholders’ Deficit.
At December 31, 2013, the Company had promissory notes
issued to three accredited investors with an outstanding balance of $249,535, which were due on demand. During January 2014, the
Company reached an agreement with the investors to extend the debt for six to twelve months. At the date of extension, the debt
payable was $249,535. The fair value of the new debt is $223,548. The conversion rate on the new convertible note is $0.20 per
share of common stock. As of June 30, 2014 the loss on debt modification of $25,987 has been included in the Statement of Operations.
The loss incurred with debt restructuring approximates $0.00 per share.
At December 31, 2013, the Company had Notes issued
to six accredited investors with an outstanding principal and interest balance of $465,872, which were due on demand. In the six
months ended June 30, 2014, the Company reached an agreement with the investors to convert into 1,336,918 shares of common stock
plus $43,725 in cash as full settlement. The debt and accrued interest was valued at $506,801 which exceeded
t
he
fair market value of the common stock and cash by $18,378. The difference resulted in a gain on troubled debt restr
u
ct
ur
ing
of $18,378 has been included in the Statement of Operations in the six months ended June 30, 2014. The gain incurred with debt
restructuring approximates $0.00 per share.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
8.
|
SHORT TERM DEBT – RELATED PARTIES, NET OF DEBT
DISCOUNT
|
In the Six months ended June 30, 2014, the Company
realized gross proceeds of $ 1,085,030, from the sale of its 12.0 % six month Unsecured Convertible Notes and Secured Promissory Notes,
in the aggregate original principal amount of $100,000 (the “Notes”) to an accredited investor (the “Investor”). Interest
on the outstanding principal balance of the Notes is payable upon maturity of the note. The Company may prepay the Notes at any
time without penalty to the Investors.
The Company issued 125,000 shares of common stock for
origination fees during the Six months ended June 30, 2014, in connection with this debt and recorded a debt discount of $26,740.
|
9.
|
FAIR VALUE MEASUREMENTS
|
The following table represents the fair value hierarchy
for those financial assets measured at fair value on a recurring basis
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Fair Value Measurement Using
|
|
|
|
2014
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability – Conversion Feature
|
|
$
|
790,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
790,000
|
|
|
|
$
|
790,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
790,000
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Fair Value Measurement Using
|
|
|
|
2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability – Conversion Feature
|
|
$
|
318,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
318,000
|
|
|
|
$
|
318,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
318,000
|
|
INERGETICS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FAIR VALUE MEASUREMENTS, Continued
The table below sets forth a summary of changes in
the fair value of the Company’s Level 3 financial liabilities (Derivative liability – Conversion Feature) for the Six
months ended June 30, 2014:
|
|
June 30,
|
|
|
|
2014
|
|
Balance at December 31, 2013
|
|
$
|
318,000
|
|
Derivative converted into Equity
|
|
|
(8,000
|
)
|
Change in fair market value of Conversion Feature
|
|
|
480,000
|
|
Balance at June 30, 2014
|
|
$
|
790,000
|
|
Warrant activity for the six months
ended June 30, 2014 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual Term In
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Months
|
|
|
Value
|
|
Outstanding at December 31, 2013
|
|
|
19,323,406
|
|
|
$
|
0.200
|
|
|
|
63
|
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(531,262
|
)
|
|
|
0.104
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at June 30, 2014
|
|
|
18,792,144
|
|
|
$
|
0.197
|
|
|
|
8-88
|
|
|
$
|
-
|
|
|
11.
|
COMMITMENTS AND CONTINGENCIES
|
The Company entered into a license
agreement with minimum royalty payments totaling $ 1,800,000, $ 2,100,000, $ 2,700,000, $ 3,200,000 and $ 3,800,000 for each of
the years ended 2014, 2015, 2016, 2017 and 2018, respectively. $1,350,000 was paid as of June 30, 2014 and recorded in prepaid
expenses.
INERGETICS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
During
the third quarter, the Company was not able to make the payment that was due July 1, 2014 to Martha Stewart Living Omnimedia pursuant
to our license agreement. While we are in discussions to work out terms of payment, we most likely will need to raise additional
funds to meet our obligations under the license agreement.
During the third quarter
of 2013 the Company received $1,000,000 net proceeds and issued a 12% secured subordinated convertible promissory note to
the Investor in the principal amount of $1,500,000 (the “Note”) and a Common Stock Purchase Warrant
(the “Warrant”) to purchase 2,500,000 shares of the Company’s Common Stock (the “Common
Stock”). Principal and interest (at the rate of 12% per annum) is due and payable under the Note on July 14, 2015. If
the Company files a registration statement with the Securities and Exchange Commission (the SEC”) covering the resale
of the shares of Common Stock issuable upon conversion of the Note and exercise of the Warrant on or before 45 days after
July 14, 2014, the principal amount of the Note shall be reduced by $200,000, and if the registration statement is declared
effective by the SEC within 120 days of July 14, 2014, the principal amount of the Notes shall be further reduced by
$300,000. Principal and accrued but unpaid interest is convertible into shares of the Company’s Common Stock at a price
(the “Conversion Price”) equal the lesser (i) $0.35 per share, or (ii) 62% of the lowest trading price of the
Common Stock as quoted by Bloomberg L.P. for the ten trading days immediately preceding the date of conversion (subject to
adjustments as provided in the Note). However, in no event shall the Conversion Price be less than $0.031 per share (the
“Floor Price”). The Company filed a registration statement with the Securities and Exchange Commission on August
1, 2014, reducing the principal amount by $200,000 to $1,300,000.
Item 2.