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Form 10-Q for INERGETICS INC
15-May-2014
Quarterly Report
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Pursuant To "Safe Harbor" Provisions
Of Section 21e Of The Securities Exchange Act Of 1934
Except for historical information, the Company's reports to the Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases, as well as other public documents and statements, contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the statements. These risks and uncertainties include general economic and business conditions, development and market acceptance of the Company's products, current dependence on the willingness of investors to continue to fund operations of the Company and other risks and uncertainties identified in the risk factors discussed below and in the Company's other reports to the Securities and Exchange Commission, periodic press releases, or other public documents or statements.
Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.
Results of Operations for the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013:
Total revenues generated from the sales of Surgex?, Bikini Ready?, SlimTrim? and Martha Stewart Essentials? for the quarter ended March 31, 2014 totaled $479,802 an increase of 6,982% from the quarter ended March 31, 2012 which totaled $6,775. The primary reason for the increase was due to the Company's introduction of Martha Stewart Essentials and the newly formulated Surgex brand along with the introduction of Bikini Ready and SlimTrim to the retailers during the quarter ended March 31, 2014. The introduction of these brands continues to show growth into the second quarter of 2014.
At this stage in the Company's development, revenues are not yet sufficient to cover ongoing operating expenses.
Gross profit for the quarter ended March 31, 2014 amounted to $117,119 for a 24% gross margin. Gross profit increased $115,194 or 5745% for the quarter ended March 31, 2014 compared to $2,005 for the quarter ended March 31, 2013. The increase in gross profit is a result of higher sales in the quarter ended March 31, 2014.
After research and development cost and selling, general and administrative expenses of $3,145,128, the Company realized an operating loss of $3,027,929 for the quarter ended March 31, 2014. Operating losses of $3,027,929 increased $1,753,232 or 126% as compared to the first quarter of 2013 operating loss of $1,389,891. The majority of the increase was due to the increase in promotion and royalty for the launch of the various products into the retail in the amount of $890,292. Additional employees were hired to support the infrastructure of the business in addition to stock awards in the amount of $980,652. There was an reduction in other professional fees in the amount of $235,404.
Non-operating expenses totaled $1,499,132 for the quarter ended March 31, 2014 an increase of 694% or $1,310,271 as compared to $188,861 for the quarter ended March 31, 2013. The increase in non-operating expenses of $1,310,271 was due to the accretion of debt discount in the amount of $133,353 and a increase in loss associated with the fair value of the derivative instruments issued with the convertible debt in the amount of $943,000. There was an increase in interest expense of $286,563 due to more debt outstanding.
The net result for the quarter ended March 31, 2014 was a loss of $4,785,499 or $0.07 per share which included a preferred dividend on the Series G stock in the amount of $258,438, compared to a loss of $2,024,151 or $0.04 per share for the first quarter of 2013. The net loss for the first quarter of 2014 increased by $2,761,348 or 136% as compared to the first quarter of 2013, primarily due to an increase in selling, general and administrative expenses and accretion of debt discount, increase loss of derivatives and increased interest expense due to additional debt outstanding. Management will continue to make an effort to lower operating expenses and increase revenue. The Company will continue to invest in further expanding its operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting the name and products of the Company. Given the fact that most of the operating expenses are fixed or have quasi-fixed character management expects them to significantly decrease as a percentage of revenues as revenues increase.
Disclosure About Off-Balance Sheet Arrangements
We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.
Critical Accounting Estimates
Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in this report.
Liquidity and Capital Resources
The Company's future success is dependent upon its ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. Management believes they can raise the appropriate funds needed to support their business plan and develop an operating, cash flow positive company. The Company has been operating with negative cash flows for the past 12 years.
The Company incurred substantial net losses for the three months ended March 31, 2014 and the year ended December 31, 2014 and has accumulated a deficit of $89,264,063 at March 31, 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 Company has never reported Net Income.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.
The Company's business operations generally have been financed by debt investments through promissory notes with accredited investors. During the three months of 2014, the Company obtained new debt from the issuance of promissory notes that supplied the funds that were needed to finance operations during the reporting period. The new issuance of debt requires conversion of existing debt which may not be able to convert on favorable terms. Such new borrowings resulted in the receipt by the Company of $300,000. While these funds sufficed to compensate for the negative cash flow from operations they were not sufficient to build up a liquidity reserve. As a result, the Company's financial position at the end of the reporting period showed a working capital deficit of $9,424,997. During the first three months of 2014 the Company obtained new financing sufficient to fund ongoing working capital requirements. We need to continue to raise funds to cover working capital requirements until we are able to raise revenues to a point of positive cash flow.
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. $900,000 was paid as of March 31, 2014. Total royalaties due through March 31, 2014 of $900,000 are to be paid quarterly on the first day of the quarter commencing April 1, 2014.
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