UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended: March 31, 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
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|
20-1678933
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(State
or other jurisdiction of
|
|
(IRS
Employer I.D. Number)
|
incorporation
or organization)
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|
|
1170
Valley Brook Avenue, 2
nd
Floor Suite B, Lyndhurst, NJ 07071
(Address
of principal executive offices)
(212)
905-0189
(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
|
|
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|
Non-accelerated
filer
o
(Do not check if
a smaller reporting company)
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|
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 May 12, 2008.
OPTIGENEX
INC.
Table
of Contents
PART
I
|
FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements
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2
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Balance
Sheets as of March 31, 2008 (unaudited) and December 31,
2007
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2
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Statements
of Operations for the three months ended
March
31, 2008 and 2007 (unaudited)
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3
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Statements
of Cash Flows for the three months ended
March
31, 2008 and 2007 (unaudited)
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4
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Notes
to Financial Statements
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5-11
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Item
2.
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Management's
Discussion and Analysis or Plan of Operation
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12
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Item
3.
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Controls
and Procedures
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19
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PART
II
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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19
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Item
6.
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Exhibits
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19
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SIGNATURES
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20
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PART
1. FINANCIAL INFORMATION
Item
1. Financial Statements.
OPTIGENEX
INC.
Balance
Sheets
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March
31,
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December
31,
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|
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2008
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2007
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(Unaudited)
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ASSETS
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Current
Assets:
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|
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Cash
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$
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4,335
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$
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6,758
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Accounts
receivable, net
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619
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10,882
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Inventories,
net
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413,369
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468,774
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Prepaid
expenses and other current assets
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16,507
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16,541
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Total
current assets
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434,830
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502,955
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Property
and equipment, net
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17,769
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19,868
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Intangible
assets, net
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1,287,370
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1,325,859
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Other
assets
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28,758
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39,608
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Total
Assets
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$
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1,768,727
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$
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1,888,290
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LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
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Current
Liabilities:
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Accounts
payable
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$
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447,597
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$
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340,949
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Accrued
expenses
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113,718
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45,000
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Current
portion of callable secured convetible notes
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9,271,151
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4,513,669
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Deferred
income
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99,900
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119,880
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Total
current liabilities
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9,932,366
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5,019,498
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Callable
secured convertible notes, net of debt discount
including
embedded derivative liability
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3,023,492
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4,427,067
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Common
stock warrants
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128,802
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124,054
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Total
liabilities
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13,084,660
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9,570,619
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Commitments
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Stockholders'
deficiency:
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Preferred
stock - $0.001 par value; 5,000,000 shares authorized, none
issued
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$
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-
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$
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-
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Common
stock - $0.001 par value; 100,000,000 shares authorized, 66,533,776
and
52,212,067 issued and outstanding respectively
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66,534
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52,212
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Additional
paid-in capital
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18,100,628
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18,088,319
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Accumulated
deficit
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(29,483,095
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)
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(25,822,860
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)
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Total
stockholders' deficiency
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(11,315,933
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)
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(7,682,329
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)
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Total
Liabilities and Stockholders' Deficiency
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$
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1,768,727
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$
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1,888,290
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See
notes
to financial statements
OPTIGENEX
INC.
Statements
of Operations - Unaudited
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Three
Months Ended
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March
31,
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2008
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2007
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Net
sales
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$
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195,424
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$
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117,569
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Cost
of sales
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88,718
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43,836
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Gross
profit
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106,706
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73,733
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Selling,
general and administrative
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289,603
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401,662
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Loss
from operations
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(182,897
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)
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(327,929
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)
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Other
(income) expense:
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Interest
expense, net
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509,177
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1,324,554
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Net
(income) expense due to change in fair value common stock warrants
and
derivative liability
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2,968,161
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(761,811
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)
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Net
loss
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$
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(3,660,235
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)
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$
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(890,672
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)
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Net
loss per common share - basic and diluted
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$
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(0.06
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)
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$
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(0.08
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)
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Weighted-average
number of common shares outstanding - basic and diluted
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64,645,199
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11,150,086
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See
notes
to financial statements
OPTIGENEX
INC.
Statements
of Cash Flows – Unaudited
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Three
Months Ended
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March
31,
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2008
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2007
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Cash
flows from operating activities:
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Net
cash used in operating activities
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$
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(2,423
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)
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$
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(241,100
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)
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Cash
flows from investing activities:
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Net
cash used in investing activities
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-
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-
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Cash
flows from financing activities:
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Proceeds
from the sale of convertible notes
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-
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250,000
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Net
cash provided by financing activities
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-
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250,000
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Net
increase (decrease) in cash
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(2,423
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)
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8,900
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Cash
- beginning of year
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6,758
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153,153
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Cash
- end of year
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$
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4,335
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$
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162,053
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Supplemental
schedule of cash flow information:
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Cash
paid for interest
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$
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-
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$
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-
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Supplemental
schedule of non-cash investing and financing activities:
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Debt
discount in connection with recording value of embedded derivative
liability
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$
|
584,062
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$
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312,500
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Allocation
of convertible note proceeds to warrants
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$
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-
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$
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800,000
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Common
stock issued in connection with conversion of convertible
notes
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$
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26,631
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$
|
2,043
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See
notes
to financial statements
Optigenix
Inc. - Notes to Financial Statements (Unaudited)
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 month periods ended March
31, 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 three month period ended March 31, 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.
Note
2.
Loss
per Share
Basic
loss per share is computed by dividing net loss by the weighted-average number
of shares of common stock outstanding during the period. Diluted earnings per
share gives effect to dilutive options, warrants and other potential common
stock outstanding during the period. Potential common stock, consisting of
options and warrants outstanding are shown in the table below:
Potential
common stock consists of the following:
At
March 31,
|
|
2008
|
|
Stock
options
|
|
|
1,664,605
|
|
Common
stock warrants
|
|
|
120,891,918
|
|
Common
stock issuable upon
conversion
of convertible notes (1)
|
|
|
8,792,286,207
|
|
Total
|
|
|
8,914,842,730
|
|
(1)
At
March 31, 2008 the Company had Callable Secured Convertible Notes outstanding
of
$5,099,526. The Notes are convertible into shares of the Company's common stock
at the Note Holders' option, at the lower of (i) $3.20 per share or (ii) 60%
of
the average of the three lowest intra-day trading prices for the common stock
as
quoted on the Over-the-Counter Bulletin Board for the 20 trading days preceding
the conversion date. At March 31, 2008, the Notes would have been convertible
into shares of the Company’s common stock at a price of $0.00058. 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 March 31, 2008 and
December 31, 2007:
|
|
March 31,
2008
|
|
December 31,
2007
|
|
Raw
materials
|
|
$
|
789,274
|
|
$
|
789,274
|
|
Finished
goods
|
|
|
857,095
|
|
|
912,500
|
|
Inventory
reserve
|
|
|
(1,233,000
|
)
|
|
(1,233,000
|
)
|
|
|
$
|
413,369
|
|
$
|
468,774
|
|
The
Company recorded an additional inventory valuation allowance of $160,378 at
December 31, 2007. 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 March 31, 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 three months
ended
March 31, 2008, the Company recorded license fee revenue of $19,980. The balance
of deferred income at March 31, 2008 was $99,900.
Note
5.
Stockholders’
Deficiency
During
the three months ended March 31, 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.
Note
6.
Callable
Secured Convertible Notes and Common Stock Warrants
Between
August 31, 2005 and April 15, 2008, the Company entered into a series of seven
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 $5,504,062 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. All notes mature three years from the date of issuance. The Company
is
not required to make any principal payments during the term of the Convertible
Notes. At March 31, 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 tranche seven) 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
March 31, 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 $0.00097, resulting in an effective conversion price
at that date for the tranches outstanding at that date of $0.00058 per share.
During the three months ended March 31, 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.
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.
As
of
December 31, 2007, the total amount of accrued but unpaid interest due under
the
Convertible Notes was $584,062. This amount was settled by the issuance of
additional Convertible Notes (tranche six) on January 31, 2008.
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 seven,
the Company is required to file a registration statement only if requested
by
the Note Holders. As of May 15, 2008, no request for registration has been
received from the Note Holders and, at March 31, 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.
The
Company calculated the fair value of the embedded conversion feature related
to
the $584,062 Convertible Notes 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.
A
summary
of the Callable Secured Convertible Notes at March 31, 2008, is as follows:
Issue Date
|
|
Due Date
|
|
Face Amount
|
|
Principal Outstanding
|
|
|
|
|
|
|
|
|
|
08-31-2005
|
|
|
08-31-2008
|
|
$
|
1,300,000
|
|
$
|
1,050,464
|
|
|
|
|
|
|
|
|
|
|
|
|
10-19-2005
|
|
|
10-19-2008
|
|
|
1,350,000
|
|
|
1,350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
02-17-2006
|
|
|
02-17-2009
|
|
|
1,350,000
|
|
|
1,350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
09-15-2006
|
|
|
09-15-2009
|
|
|
515,000
|
|
|
515,000
|
|
|
|
|
|
|
|
|
|
|
|
|
02-14-2007
|
|
|
02-14-2010
|
|
|
250,000
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
01-31-2008
|
|
|
01-31-2011
|
|
|
584,062
|
|
|
584,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,349,062
|
|
$
|
5,099,526
|
|
Less:
unamortized discount
|
|
|
|
|
(1,865,336
|
)
|
|
|
|
|
|
|
|
|
|
3,234,190
|
|
Add:
embedded derivative liability
|
|
9,060,453
|
|
|
|
|
|
|
|
|
|
|
12,294,643
|
|
Less:
current portion
|
|
(9,271,151
|
)
|
|
|
|
|
|
|
|
|
$
|
3,023,492
|
|
The
current portion represents the net carrying value of tranches one to three,
including the embedded derivative liability.
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
120,625,000 Warrants outstanding at March 31, 2008, using the Black-Scholes
valuation model with the following assumptions: market price of common stock
on
the measurement date of $0.0015, exercise prices ranging from $0.07 to $4.50,
risk-free interest rates ranging from 1.71% to 2.56%, expected volatility
ranging from 125% to 162% and expected lives equal to the remaining term of
the
warrants, ranging from 2.4 to 5.9 years. This resulted in an aggregate fair
value for the 120,625,000 warrants of $128,802 at March 31, 2008. As a result
of
this re-measurement, for the three months ended March 31, 2008, the Company
recorded a non-cash expense of $4,748 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 March
31, 2008, using the Black-Scholes valuation model with the following
assumptions: market price of common stock on the measurement date of $0.0015,
exercise price of $0.00058; risk-free interest rates ranging from 1.51% to
1.79%, expected volatility of 115% and expected lives ranging from 0.4 to 2.8
years. This resulted in an aggregate fair value for the embedded conversion
feature of $9,060,453 at March 31, 2008. As a result of this re-measurement,
the
Company recorded a non-cash expense of $2,230,210 for the three months ended
March 31, 2008.
In
total,
for the three months ended March 31, 2008, the Company recorded non-cash expense
of $2,968,161 related to the net change in the fair value of the liabilities
related to the Warrants and embedded conversion feature.
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 three months ended March
31,
2008 and 2007.
The
following table summarizes the stock option activity for the three months ended
March 31, 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 March 31, 2008
|
|
|
1,215,210
|
|
$
|
2.72
|
|
$
|
5.00
|
|
Exercisable
at March 31, 2008
|
|
|
1,215,210
|
|
$
|
2.72
|
|
$
|
5.00
|
|
Vested
and expected to vest at March 31, 2008
|
|
|
1,215,210
|
|
$
|
2.72
|
|
$
|
5.00
|
|
A
summary
of the status of the Company’s non-vested stock options as of March 31, 2008,
and changes during the three months ended March 31, 2008, is presented
below:
|
|
Number of
Options
|
|
Weighted
Average
Option Price
|
|
Non-vested
at December 31, 2007
|
|
|
|
|
|
NA
|
|
Granted
|
|
|
|
|
|
NA
|
|
Vested
|
|
|
|
|
|
NA
|
|
Forfeited/Cancelled
|
|
|
|
|
|
NA
|
|
Outstanding
at March 31, 2008
|
|
|
|
|
|
NA
|
|
The
following table summarizes information about stock options outstanding and
exercisable at March 31, 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
|
|
|
.66
|
|
$
|
0.001
|
|
|
9,210
|
|
$
|
0.001
|
|
$0.01
|
|
|
16,000
|
|
|
1.50
|
|
$
|
0.01
|
|
|
16,000
|
|
$
|
0.01
|
|
$0.30
|
|
|
100,000
|
|
|
1.15
|
|
$
|
0.30
|
|
|
100,000
|
|
$
|
0.30
|
|
$3.00
|
|
|
1,090,000
|
|
|
1.42
|
|
$
|
3.00
|
|
|
1,090,000
|
|
$
|
3.00
|
|
$0.001
- $3.00
|
|
|
1,215,210
|
|
|
1.39
|
|
$
|
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 three months ended March 31, 2008, the Company had a net loss
of
$3,660,235 and had working capital and stockholders’ deficits of $9,497,536 and
$11,315,933, respectively at March 31, 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.
Note
9.
Subsequent
Event
On
April
15, 2008, the Company entered into four (4) Callable Secured Convertible Notes
(the “Notes”) with its existing note holders for working capital purposes. The
aggregate principal amount of these notes was $155,000. The Notes carry an
interest rate of 8% per annum and mature on April 15, 2011. At the election
of
the note holder, the Notes are 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 holders warrants to purchase 10,000,000
shares of the Company’s common stock at an exercise price of $0.001. The
warrants expire seven years from the date of issuance.
Simultaneously
on April 15, 2008, the Company amended all previously executed Notes with its
note holders to 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.
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), Solgar Herb and Vitamin
Company and
Life
Extension, we continue to be highly dependent on a small base of customers
that
purchase bulk AC-11 as an ingredient and as such, these customers make purchases
from us only when required to do so in connection with their manufacturing
cycle
and market demand. We rely on independent commissioned sales people, consultants
and management to introduce us to prospective marketing partners and
customers.
We
have
developed
a
line of
proprietary topical skin care products which contain AC-11 as an active
ingredient.
C
onsist
ing
of a day
cream, night cream and eye cream
the
products
are
designed to repair damage to the skin
due
to
multiple
causes including; exposure to ultraviolet rays, stress and pollution while
enhancing skin elasticity, and reducing wrinkles and other visible signs of
aging.
Our
products
are
marketed
to
appeal to a targeted demographic audience which includes women ages 30 and
over.
These
skin
care
products are manufactured for us by Celmark, a division of Garden State
Nutritional
.
We
are
currently in discussions with wholesale marketing companies who may distribute
our manufactured skin care products to the retail consumer. Also, through our
partner Itochu Corporation Tokyo and on a direct basis, we are exploring
strategies to license our technology and trademark (AC-11®) for use in a variety
of skin care products containing our patented ingredient. We
plan
to
seek other wholesale channels of distribution for bulk AC-11
,
manufactured skin care
skin
care products
and our
technology
to
distribution
networks both domestically and in international markets.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. On an on-going basis, we evaluate our estimates, including
those related to collection of accounts receivable, inventory obsolescence,
sales returns and non-monetary transactions such as stock based compensation,
impairment of intangible assets and derivative liabilities related to
convertible notes payable. We base our estimates on historical experience and
on
other assumptions that are believed to be reasonable under the circumstances.
As
the number of variables and assumptions affecting the probable future resolution
of the uncertainties increase, these judgments become even more subjective
and
complex. Actual results may differ from these estimates.
We
have
identified the following critical accounting policies, described below, that
are
the most important to the portrayal of our current financial condition and
results of operations.
Accounts
Receivable and Bad Debt Expense
Accounts
receivable are reported at their outstanding unpaid principal balances net
of an
allowance for doubtful accounts. We estimate bad debt expense based upon past
experience related to specific customers' ability to pay and current economic
conditions. At March 31, 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. During 2007, we incurred inventory write-offs of
approximately $174,000 as follows: (i) $162,000 of obsolete inventory which
consisted of finished skin care products; (ii) $12,000 of bulk AC-11 which
was
damaged. An inventory valuation allowance is established when we determine
that
quantities of inventory items on hand may exceed projected demand prior to
the
expiration date of such inventory items. At December 31, 2007, we recorded
an
inventory allowance of approximately $161,000 related to the book value of
finished goods that we determined may not be sold prior to their respective
expiration dates. At March 31, 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. In 2007, product returns were negligible. We monitor
our
estimates on an ongoing basis and we may revise our allowance for product
returns to reflect recent experience. To date, we have not made any significant
changes in our allowance for returns. Products returned as a result of damage
incurred during shipment are replaced at our cost. We do not estimate an
allowance for returns due to damage as historically the level of returns has
been negligible. For our bulk sales of AC-11, our standard return policy
provides for a reimbursement of the full purchase price for any bulk AC-11
that
does not conform with the stated specifications. We must receive notification
of
a return request within 30 days from the date that the customer accepts
delivery
Intangibles
We
account for long-lived assets and certain identified intangible assets such
as
patents and trademarks in accordance with Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
Management reviews these long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. An asset is considered to be impaired when the sum of the
undiscounted future net cash flows expected to result from the use of the asset
and its eventual disposition is less than its carrying amount. The amount of
impairment loss, if any, is measured as the difference between the net book
value of the asset and its estimated fair value. We monitor our projections
of
expected future net cash flows on an ongoing basis. If we determine that our
projections require revision due to specific events such as a delayed product
launch or a change in our product mix, or changes in economic conditions, we
may
incur additional write-offs. We did not incur an impairment charge in 2007
or
during the three months ended March 31, 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
and
January 31, 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.
RESULTS
OF OPERATIONS
For
the three months ended March 31, 2008 compared to the three months ended March
31, 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 our direct to
consumer sales of our Activar AC-11 oral nutritional supplements through our
Internet website. The decision to cease sales through this channel was
influenced by the exclusive rights we granted to Solgar Herb and Vitamin to
market their own proprietary AC-11 supplements to the retail market. We have
no
plans to re-introduce the Activar AC-11 oral supplement through our Internet
site in the near future.
Net
sales
for the three months ended March 31, 2008 were $195,424 compared to
net sales of approximately $117,569 for the three months ended March 31, 2008,
an increase of $77,855 or 66.2%. Our net sales by product category are
summarized in the following table:
|
|
Three Months Ended
March 31,
|
|
$
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Inc/(Dec)
|
|
Inc/(Dec)
|
|
Activar
AC-11
|
|
$
|
16,200
|
|
$
|
8,858
|
|
$
|
7,342
|
|
|
82.9
|
%
|
Bulk
AC-11
|
|
|
158,625
|
|
|
102,096
|
|
|
56,529
|
|
|
55.4
|
%
|
Skin
Care Products
|
|
|
—
|
|
|
6,000
|
|
|
(6,000
|
)
|
|
(100.0
|
)%
|
License
Fee
|
|
|
19,980
|
|
|
—
|
|
|
19,980
|
|
|
NA
|
|
Other
|
|
|
619
|
|
|
615
|
|
|
4
|
|
|
0.00
|
%
|
Net
Sales
|
|
$
|
195,424
|
|
$
|
117,569
|
|
$
|
77,855
|
|
|
66.2
|
%
|
Sales
of
bulk AC-11 increased $56,529 for the three months ended March 31, 2008 compared
to the three months ended March 31, 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 year three months ended March 31, 2008, we
recorded license fee revenue of $19,980. The balance of deferred income at
March
31, 2008 was $99,900.
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 $88,718 and $43,836 for the three months ended
March 31, 2008 and 2007, respectively. Gross profit as a percentage of net
sales
was 54.6% for the three months ended March 31, 2008 compared to 62.7% 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:
|
|
Three
Months Ended
March
31,
|
|
$
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Inc/(Dec)
|
|
Inc/(Dec)
|
|
Employee
compensation and benefits
|
|
$
|
44,789
|
|
$
|
58,991
|
|
$
|
(14,202
|
)
|
|
(24.1
|
)%
|
Marketing,
advertising and promotion
|
|
|
62,708
|
|
|
62,948
|
|
|
(240
|
)
|
|
(0.4
|
)%
|
Research
and development
|
|
|
—
|
|
|
4,564
|
|
|
(4,564
|
)
|
|
(100.0
|
)%
|
Consulting
and other professional services
|
|
|
21,800
|
|
|
16,129
|
|
|
5,671
|
|
|
35.2
|
%
|
Legal
and accounting
|
|
|
62,145
|
|
|
110,969
|
|
|
(48,824
|
)
|
|
(44.0
|
)%
|
General
and administrative
|
|
|
30,748
|
|
|
57,367
|
|
|
(26,619
|
)
|
|
(46.4
|
)%
|
Occupancy
|
|
|
15,975
|
|
|
30,646
|
|
|
(14,671
|
)
|
|
(47.9
|
)%
|
Depreciation
and amortization
|
|
|
51,438
|
|
|
60,048
|
|
|
(8,610
|
)
|
|
(14.3
|
)%
|
Total
SG&A
|
|
$
|
289,603
|
|
$
|
401,662
|
|
$
|
(112,059
|
)
|
|
(27.9
|
)%
|
In
total,
SG&A expenses decreased $112,059 or 27.9% from $401,662 for the year ended
March 31, 2008 to $289,603 for the three months ended March 31, 2008. Areas
where we achieved significant cost savings are as follows:
|
·
|
Employee
compensation expense decreased $14,202 or 24.1% 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 $48,824 or 44.0% 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 $26,619 or 46.4% in 2008 compared
to
2007. This decrease was due to a reduction in insurance costs and
travel
and entertainment expenses.
|
|
·
|
Occupancy
costs decreased $14,671 or 47.9% 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 March 31, 2008 was $509,177
compared to $1,324,554 in the comparable period in 2007. Of the total in 2008,
$417,125 was non-cash interest expense resulting from the accounting treatment
of our convertible notes. The remaining $92,052 was interest due under the
convertible notes and was included in accrued expenses at March 31, 2008. This
amount was due and payable on April 1, 2008. As of May 20, 2008, we have not
paid such amount to the holders of our convertible notes. The failure to pay
interest constitutes an event of default under the convertible note agreements
by and between us and our note holders however, as of May 20, 2008, we have
not
received and notice of default from the note holders. In the event we receive
a
notice a notice of default and we are unable to timely cure the default, we
would be required to pay additional interest to the note holders on the unpaid
principal balance at the default rate of 15% until the default is
cured.
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 March 31, 2008, we recorded non-cash
other expense of $2,968,161 related to the increase in the fair value of the
warrants and embedded derivative liabilities.
Net
Loss
Net
loss
for the three months ended March 31, 2008 was $3,660,235 or $0.06 per share,
compared to a net loss of $890,672 or $0.08 per share for the three months
ended
March 31, 2007. The increase in net loss was due primarily to the non-cash
expense we incurred related to the change in the fair value of the derivate
liability related to the embedded conversion feature of our convertible
notes.
LIQUIDITY
AND CAPITAL RESOURCES
Based
upon our recurring losses from operations, an accumulated deficit of
$29,483,095 as of March 31, 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 March 31, 2008, we had cash of $4,335 and a net working capital deficit
of $9,497,536. 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
1, 2008, we were required to pay $92,052 of interest which was due under our
convertible notes. This interest was for the period from January 1, 2008 through
March 31, 2008. As of May 20, 2008, we have not paid such amount to the holders
of our convertible notes. The failure to pay interest constitutes an event
of
default under the convertible note agreements by and between us and our note
holders however, as of May 20, 2008, we have not received and notice of default
from the note holders. In the event we receive a notice a notice of default
and
we are unable to timely cure the default, we would be required to pay additional
interest to the note holders at the default rate of 15% on the unpaid principal
balance and until the default is cured.
On
January 31, 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 and February 12, 2007. The aggregate
principal amount of the three notes is $584,062 which was equal to the aggregate
amount of interest owed to the note holders as of December 31, 2007. 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 January 31, 2011 and are
convertible into shares of our common stock at 60% (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.
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.
As
a
result of this sale of additional notes, at April 30, 2008, we have an aggregate
of $5,254,526 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 $900,000 over the next twelve months or $75,000 per month to
fund
our existing operations. These costs include (i) compensation and healthcare
benefits for our 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.
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
March 31, 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 March 31, 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.
|
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:
September
10,
2008
OPTIGENEX
INC.
|
Registrant
|
By:
|
/s/
Daniel Zwiren
|
|
Daniel
Zwiren
|
|
President,
Chief Executive Officer and Chief Financial
Officer
|