ITEM 1.BUSINESS
SUMMARY
Inergetics, Inc. (the “Company,” “Inergetics,” “we” or “us”), formerly Millennium Biotechnologies Group, Inc., is a holding company for its sole operating 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.
On March 15, 2010 the Company changed its name to Inergetics, Inc.
NARRATIVE DESCRIPTION OF BUSINESS
Introduction
Inergetics, Inc., through its subsidiary Millennium, engages in the research, development, and marketing of specialized nutritional supplements as an adjunct to medical treatments for select medical conditions, as well as for athletes seeking improved recovery and advanced performance. The Company currently markets products which are targeted toward immuno-compromised individuals undergoing medical treatment for diseases, such as cancer, as well as wound healing and post-surgical healing and geriatric patients in long-term care facilities among other conditions. Millennium’s currently manufactures and markets four proprietary product lines and 13 SKU’s to 3 separate target markets.
Three product lines currently form the Company’s product portfolio they include, Resurgex Select®, Ready-To Drink Resurgex Essential™ and Ready-To-Drink Resurgex Essential Plus™. Resurgex Select® is a whole foods-based, calorically dense, high-protein powdered nutritional formula developed for cancer patients undergoing chemotherapy or radiation treatments. Resurgex Essential™ and Resurgex Essential Plus™ represent Millennium’s Ready-to-Drink product line and are currently being sold into the Long-Term Care geriatric markets.
The Company’s products are unique in that they deliver healthy, whole food calories and do not contain high-fructose corn syrup or corn oil, which are not healthy or suitable forms of calories for Millennium’s targeted markets. These ingredients have also shown to correlate with an increase in obesity, a promotion of insulin resistance, and are implicated in inflammation and cancer. Additionally, the use of high levels of Omega-6 fats (corn oil) has been shown to promote tumor growth in animal models. In contrast, Millennium’s nutritional products deliver nutraceutical ingredients that specifically address the needs of chronically ill and geriatric patients.
Millennium additionally developed Surgex™ (www.surgexsports.com) sports nutritional formula in late 2007. Surgex™ was clinically proven in two single-blind placebo controlled clinical trials conducted on the Division 1A Football and Soccer players at Rutgers University. Surgex™ was proven to address the nutritional concerns of both professional and amateur elite athletes. These athletes often experience similar symptoms post-workout to those battling immuno-compromised conditions, such as fatigue, loss of lean muscle, oxidative stress, and reduced immune function.
The Company and Millennium are headquartered in Paramus, New Jersey, and the Company’s common stock currently trades on the Over-the-Counter (OTC) market under the symbol “NRTI.OB.”
Distribution Channels
Direct-To Consumer Distribution
In the direct to consumer channel, customers order Resurgex Select®, Resurgex Essential™, Resurgex Essential Plus™ directly through the Company’s website, www.Resurgex.com, and Surgex™ through the Company’s website SurgexSports.com or by contacting the Company directly. The product is shipped directly to the customer’s home within one business day and arrives within 2 to 5 business days depending on the customers’ geographic location.
PRODUCTS
Resurgex Select®
Resurgex Select® is a whole foods-based nutritional product that is designed to be used throughout the course of cancer treatment (chemotherapy, radiation, etc.), as many times patients lose weight and cannot consume adequate nutrition. This product combines dietary fiber (3 g), low sugar (5 g), and high protein (15 g) with no added antioxidants to be a high-calorie (350 calorie) supplement. The omission of antioxidants is important because many oncologists prefer to avoid the risk that antioxidants may pose during their patient’s treatments. With this nutritional formula (which may be administered orally or fed through a gastrointestinal [GI] tube), the right balance of nutritional support can be provided in one drink. It is available in three flavors (Vanilla Bean, Chocolate Fudge, and Fruit Smoothie) and each can be mixed with water, milk, juices, or in soft cold foods such as yogurt, apple sauce, or pudding.
Surgex™
Surgex™ (www.surgexsports.com), is a nutritional support formula that aims to address the concerns of many elite athletes who suffer from symptoms such as (fatigue, lean muscle loss, lactic acid buildup, oxidative stress, and stressed immune systems). This formula is designed to improve recovery parameters in efforts to enhance the performance of professional and collegiate athletes.
The National Collegiate Athletic Association (NCAA) has specific rules about the use of certain amino acids, or anabolic agents. In fact, colleges and universities are prohibited from purchasing any product that contains amino acids or anabolic agents for athletes. This led to the development of the Surgex™ nutritional support formula.
Millennium has successfully tested its sports nutrition formula products at Rutgers University in New Jersey, among both the Men’s Division I Soccer Team and the Men’s Division I Football Team in two separate single-blind placebo-controlled studies. Both studies illustrated the product’s beneficial effects as a post-workout recovery aid, assisting the athlete in maximizing training responses and optimal recovery and improving performance. In addition, each batch of Surgex™ is certified by the Banned Substance Control Group (BSCG) to not contain any banned substances.
Resurgex Essential™
Millennium exited Research and Development on the Company’s first Ready to Drink Product line Resurgex Essential™ in July 2008. The Essential™ line is a ready-to-drink alternative to Ensure® and Boost® designed to be marketed into the long-term care channel. Resurgex Essential™ has 250 whole food calories containing no corn syrup or corn oil. The product also contains fruit and vegetable extracts, and FOS Fiber to provide superior quality calories and taste when compared to the competition. Resurgex Essential Plus™ contains the same high quality ingredients with a higher caloric value of 450 calories per 8 oz serving.
Product Functionality Overview
Several health concerns must be addressed when it comes to effectively providing nutritional support for any major disease or immuno-compromised condition. While other “single magic bullet” products on the market largely only focus on one area while potentially neglecting others, Millennium’s products have been developed to address the major dietary concerns that may be influenced by nutritional support, when incorporated as an adjunct to a patient’s medical care. Thus, rather than providing significant amounts of calories from corn oil, low-quality proteins, sucrose, and corn syrup combined with an inexpensive multivitamin blend, Millennium’s Resurgex Select® and Resurgex Essential™ have been developed to provide a comprehensive and complex array of nutrients, which fulfill necessary requirements in the health and well being of patients.
MARKETS
Size of the Market
The nutritional supplement market is expected to increase to around $8.5 billion by 2012 a 39% increase from 2007, according to Nutritional Supplements in the U.S., a report from Packaged Facts published in September 2008. This growth is likely to be attributed to several factors, including industry efforts to promote supplements as more essential than ever in weak economic times since they can help to avert the need for much costlier prescription drugs and medical treatments, bolstered product credibility as a result of the newly implemented federal GMP (Good Manufacturing Practices) and AER (adverse event report) requirements, increased industry self-regulation, and a steady stream of innovative new products targeting an ever broader range of increasingly specific conditions-especially the many age-related issues of aging Boomers and seniors.
Target Markets
Millennium’s products are intended to benefit patients with chronic debilitating diseases, such as cancer, as well as patients needing homecare and those undergoing wound healing or post-surgical healing, among other conditions. Millennium also launched Surgex™ in the fourth quarter of 2007. Surgex™ has been clinically proven to address sports recovery needs for amateur and professional elite athletes. Greater details on these markets are provided below.
Cancer
Cancer is a class of diseases or disorders characterized by uncontrolled division of cells and the ability of these cells to spread, either by direct growth into adjacent tissue through invasion, or by implantation into distant sites by metastasis (where cancer cells are transported through the bloodstream or lymphatic system). Cancer may affect people at all ages, but risk tends to increase with age and is one of the principal causes of death in developed countries. There are many types of cancer, all of which require specific treatments such as surgery, chemotherapy, and radiation. These treatments, as well as the disease itself, often have a direct impact on a person’s nutritional health.
Millennium has recognized the need for a product that is specific to people receiving cancer treatment. For that reason, the Company has formulated its Resurgex Select®, designed to be utilized during cancer treatment.
Nutrition in Cancer
Cancer patients have specific nutritional needs in order to fight the disease and maintain their energy and quality of life. According to the Canadian Cancer Journal Clin. 2005;55:319-321, some of the requirements of cancer patients include protein from high biological value sources, specific amino acids (BCAAs), “good fats” (Medium Chain Triglycerides [MCTs], Omega-3 fatty acids, low in Omega-6 fats), healthy fruits and vegetables, and highly soluble fiber (oat fiber, fructooligosaccharide [FOS], etc.). Enteral nutritional support during cancer treatment or recovery can help to restore normal body protein levels, restore immune function, and promote weight gain.
Diet is an important part of cancer treatment since malnutrition is a common problem in cancer patients due to side effects, such as anorexia, nausea, vomiting, diarrhea, constipation, mouth sores, trouble with swallowing, and pain, which make it difficult for cancer patients to eat well (where up to 85% of cancer patients experience malnutrition during their treatments). Malnutrition may also cause the patient to be weak, tired, and unable to resist infections or withstand some cancer therapies. Inadequate nutrition may further play an important role in adverse outcomes for patients, such as increased morbidity and mortality, as well as a decreased quality of life.
According to the NIH, the cancer and cancer treatments described below may cause nutrition-related side effects.
§Surgery. Depending on the procedure, surgery can cause mechanical or physiologic barriers to adequate nutrition, such as a short gut, which results in malabsorption after bowel resection. In addition, surgery frequently imposes an immediate metabolic response that increases the energy needs and changes the nutritional requirements necessary for wound healing and recovery at a time when baseline needs and requirements are often not being met. A well-balanced diet that contains the recommended amounts of essential nutrients and calories may help promote wound healing.
§Chemotherapy. Chemotherapy is a systemic treatment that affects the whole body and causes potentially more side effects than surgery or radiation therapy. The most commonly experienced nutrition-related side effects are anorexia, taste changes, early satiety, nausea, vomiting, mucositis/esophagitis, diarrhea, and constipation. Such side effects in combination with the cancer can greatly affect a patient’s nutritional status. Nutritional support or high-calorie/high-protein liquid supplements may be used in an effort to maintain adequate calorie and nutrient intake.
§Radiation. Radiation therapy can produce changes in normal physiologic function of healthy tissue that may ultimately diminish a patient’s nutritional status by interfering with ingestion, digestion, or absorption of nutrients. Side effects of radiation therapy depend on the area irradiated, total dose, fractionation, duration, and volume irradiated. Adequate calories and protein can help maintain patient strength and prevent body tissues from further catabolism. Individuals who do not consume adequate calories and protein make use of stored nutrients as an energy source, which leads to protein wasting and further weight loss.
oMany patients who are undergoing radiation therapy can benefit from nutritional supplements between meals. Aggressive nutritional support is indicated when oral intake alone fails to maintain an individual’s weight. Tube feedings, which are used more frequently than parenteral nutrition (primarily to preserve GI function), are usually well tolerated, pose less risk to the patient than parenteral feedings, and are more cost effective.
It is noteworthy that the use of antioxidants to promote healing during cancer treatments has been highly debated. According to the American Cancer Society, some recently published studies state that antioxidant supplementation may cause new disease or interference with treatment in some cancer patients. Thus, based on conflicting information as to the benefits and harms of antioxidants on patients undergoing treatment, Millennium has developed Resurgex Select® to support a cancer patient’s nutritional needs without containing antioxidants.
Sports Recovery
Competitive athletes often suffer from similar symptoms to those battling cancer or immuno-compromised diseases, such as fatigue, oxidative stress, muscle wasting, and possibly lack of immune support due to the demands they put on their bodies daily. In order to compete effectively, these athletes need a solution to address some of the key concerns they face, described below.
§Fatigue and Mitochondrial Dysfunction. Damage done to the mitochondria is typically attributed to the buildup of free radicals and other noxious byproducts, such as lactic acid that accumulates during and after strenuous activity.
§Oxidative Stress. Oxygen consumption greatly increases during exercise, which leads to increased free radical production. Also, free radical formation within the muscle during exercise can easily damage muscle tissue and inhibit performance by the induction of fatigue.
§Muscle Wasting. A common problem during strenuous activity is lean muscle loss or wasting as muscle tends to breakdown after vigorous activity. This problem can have a serious impact on performance and recovery.
§Immune Support. Exercise has also been shown to have a positive effect on the immune system if one does not overtrain. Signs and signals of overtraining are a constant feeling of fatigue, loss of strength or endurance, and although still exercising, a feeling of burnout. Additionally, excessive exercise or periods of very heavy conditioning could lead to suppression of immunity for several hours to a week or longer, creating a brief period of vulnerability when the risk of upper respiratory tract infections is increased.
Effect of Banned Nutritionals
In recent years, professional athletes have come under considerable scrutiny for taking different substances or performance enhancers. Whether it is the Olympics, Tour de France, baseball, or other professional sports, organizations constantly test athletes for chemicals within their body that would indicate they have taken an illegal substance to boost their performance. Millennium’s Surgex™ sports nutritional formula product is devoid of any banned substances.
Each batch of the Company’s product is tested for a list of substances by the Banned Substance Control Group (BSCG) that are outlawed by organizations such as the International Olympic Committee (IOC), the World Anti-Doping Agency (WADA), the U.S. Anti-Doping Agency (USADA), the NCAA, and the National Football League (NFL). All of the Surgex™ products receive a seal from the BSCG, a WADA-approved laboratory. Therefore, athletes need not worry about consuming any substance that could disqualify them from competition by using the Company’s products. The product also meets all NCAA guidelines for Nutritional Supplements.
Rutgers Studies: Demonstrating the Effect of Surgex™ Sports Nutrition Formula vs. Placebo
Millennium has conducted two clinical trials at Rutgers University among the Men’s Division I Soccer and Football teams, demonstrating the effect of the Surgex™ sports nutrition formula versus a placebo. Both studies showed the product’s beneficial effects as post-workout recovery aid, assisting the athlete in maximizing training responses and aiding in optimal recovery.
Division I Men’s Soccer Team-Results of the Trial-Published in The Journal for Strength and Conditioning Research
Millennium conducted its first clinical trial among the Rutgers University Men’s Division I Soccer team during their preseason training regimen. The clinical trial was accepted for publication in The Journal for Strength and Conditioning Research (“JSCR”). The JCSR is the official research journal of the National Strength and Conditioning Association, (``NSCA''). This journal is recognized as the preeminent publication for strength and conditioning coaches worldwide. These thought leaders rely on this journal for the future of leading edge science as applied to their profession.
Preseason training often places a high demand on athletes, and requires them to engage in frequent, high-intensity workouts with limited time devoted to recovery. Soccer players spend a considerable portion of a match at an intensity close to 75% of VO2 max (the maximum amount of oxygen in milliliters that one can use in one minute per kilogram of body weight) and rely on anaerobic metabolism and power during brief bursts of sprinting, kicking, and jumping. These players must be able to perform near maximal capacity for extended periods, which may result in increased oxidative stress. With outside supplementation of protective nutraceuticals, it may be possible to reduce acute and chronic oxidative stress, as well as capitalize on gains from intense preseason training.
The purpose of this study was to examine changes in performance and oxidative stress in collegiate soccer players over the course of preseason preparation, and to determine the impact of a supplemental proprietary nutraceutical blend proposed to reduce oxidative stress and enhance recovery.
Results
A summary of the findings of the soccer trial is provided in Table 8.
Table 8
Inergetics, Inc.
NUTRITIONAL SUPPLEMENTATION (Surgex™ IN MALE COLLEGE SOCCER PLAYERS:
EFFECTS ON PERFORMANCE AND OXIDATIVE STRESS
Improved Performance There were significant changes in performance capacity as reduced oxidative stress in the Surgex™ group versus the control group (leading high-protein nutritional formula).
Improved Lactic Acid Response The Surgex™ group had improved lactic acid responses to exercise and time to exhaustion versus the control group.
Reduced Oxidative Stress The Surgex™ group had significantly lower oxidative stress markers (isoprostanes and LPOs) versus the control group.
This single-blind, placebo-controlled trial found that the Company’s Surgex™ sports nutrition formula enhanced performance parameters and reduced oxidative stress levels (free radical damage caused by exercise) in players. Oxidative stress in the body is caused by imbalance or overload of oxidants (free radicals from air, food, metabolism, medications, stress, disease, etc.). Sustained oxidative stress disrupts the cells’ defenses, resulting in damage that contributes to the development of many diseases.
Results indicated a beneficial effect of the Surgex™ sports nutrition formula, including improvements in performance capacity, time to exhaustion, lactic acid response, and reduced oxidative stress. This data suggests an important role for Resurgex® in the sports fitness field in addition to its proven benefits for cancer and immuno-compromised medical patients. The fact that this trial is approved for publication in the JSCR confirms the results of this clinical trial have been reviewed and approved by an independent and accredited third party.
Rutgers’ Division I Football Team-Results of the Trial Published in the Journal of Comparative Exercise Physiology.
The Company also conducted a second clinical trial on the Rutgers University Division I Football team versus a placebo group. The study tested the recovery time, strength, and body composition of the players versus a placebo (a leading competitor sports formula). The results concluded that the Surgex™ sports nutrition formula significantly enhanced recovery parameters, strength, and body composition in the football players.
Results
Those receiving the Surgex™ sports nutrition formula showed significant increases in their peak power, as measured by Wingate testing (assessment for peak anaerobic power, anaerobic fatigue, and total anaerobic capacity through a combination of running, vertical jumping, and resistance training), better muscle to fat weight gains, and an improved testosterone:cortisol ratio, as well as reduction of interleukin 6 (IL6), creatine kinase, and isoprostanes versus the control group.
Testosterone and cortisol are the two hormones affected by training. The cortisol levels typically elevate and break down lean muscle. Testosterone, in contrast, which is the supporter of lean muscle, decreases, therefore causing lean muscle breakdown in the body after strenuous exercise. In this study, the Surgex™ group had significantly improved testosterone to cortisol ratios versus the control group. A summary of the findings of this study is provided in Table 9.
Table 9
Inergetics, Inc.
NUTRITIONAL SUPPLEMENTATION (Surgex™) IN MALE COLLEGE FOOTBALL PLAYERS:
EFFECTS ON STRENGTH, BODY COMPOSITION, AND OXIDATIVE STRESS
Improved Body Composition While both groups gained weight, the Surgex™ group gained muscle and lost a slight amount of body fat while a leading competitor sports formula (control) group gained ½ of their body weight as fat.
Improved Power and Strength Using Wingate testing, peak power was measured for each test and standardized by body weight. The increase in peak power in the Surgex™ group was approximately 86% greater than the increase in the leading competitor sports formula group.
Improved Recovery Parameters The Surgex™ ® group had a significant improvement in their testosterone:cortisol ratio, while a leading competitor sports formula group had a decrease in this ratio.
Source: Inergetics, Inc.
The practical application emerging from the study demonstrates the beneficial application of the Surgex™ sports nutrition formula as a post-workout recovery aid, assisting the athlete in maximizing training responses by helping to buffer the acute and chronic biochemical challenges to optimal recovery. The product also has the ability to reduce inflammatory and oxidative stress markers, as well as compounds that can break down muscle. Millennium believes that these findings can help the Company position the Surgex™ sports nutrition formula as an aid to help athletes increase their performance by improving recovery, strength, and energy parameters.
Intellectual Property
Millennium owns all rights to the formulations of Resurgex Select®, Resurgex®, Resurgex Plus®, Resurgex Essential™, Resurgex Essential Plus™ and Surgex™, and has filed compositional patent applications with respect to these formulations. Resurgex®, Resurgex Plus®, Resurgex Select®, and Surgex™ are registered trademarks filed with the U.S. Patent and Trademark Office (USPTO). Additionally, the Company has patents pending for all product lines in 57 countries worldwide.
On January 7, 2003, Resurgex® was issued a use and composition patent (U.S. Patent 6,503,506, Nutrient therapy for immuno-compromised patients). Millennium was granted a composition patent for Resurgex Select® in December of 2006. In addition, the Surgex™ line of products is patent pending in the United States and 57 countries worldwide. The Company relies on trade secrets and unpatented proprietary technology in addition to their patented technologies.
On March 20, 2006, Millennium received the Healthcare Common Procedure Coding System (HCPCS) code for Resurgex Select®. HCPCS is one of the formats in which nutritional formulas may be coded for Medicare reimbursement and is specifically required for Medicaid reimbursement in many states.
Medicaid Reimbursement
Medicare/Medicaid
Millennium has received federal government approval to have its Resurgex Select® nutritional product line covered by Medicare. The Company is currently applying for HCPCS Codes for the Resurgex Essential™ and Resurgex Essential Plus™ along with the tube feeding product currently in Research and Development which upon receipt will be approved for Medicare reimbursement.
Growth Strategy and Distribution
Millennium has implemented a variety of strategies and formed partnerships that are intended to penetrate the various specialized markets for nutritional products, which are targeted by the Company (oncology patients, immuno-compromised individuals, and athletes seeking effective sports recovery). Currently, products can be purchased through the Company’s websites, www.milbiotech.com and www.resurgex.com, or ordered by phone (877) RESURGX. Additionally, in select areas, Medicaid-associated pharmacies distribute the Company’s products. Furthermore, select international distribution agreements are in place (as described below), which are intended to expand the Company beyond U.S. markets. Each of the Company’s growth strategies in terms of product distribution are detailed below.
RESEARCH AND DEVELOPMENT
During 2011 and 2010, the Company spent $38,312 and $30,711, respectively, on research and development of its products. The research and development expenses incurred in 2011 are directly related to the development of the Surgex product line.
COMPETITION
The Company’s products target the nutritional supplement market, specifically the ready-to-drink beverage market, as an adjunct or meal replacement. The products that most directly compete with the Company’s products in the adult nutrition market are produced by mainstream manufacturers-Boost® by Nestle, Ensure® by the Ross Product Division of Abbott Laboratories Inc., and Carnation® Instant Breakfast® by Nestlé-as well as generic (store branded) products that are marketed head-to-head against these products.
§Resurgex Select® and Resurgex Essential™ address multiple issues that cause diminished fatigue and quality of life in immuno-compromised individuals. To the Company’s knowledge, no other product on the market can make this claim. These include the following:
oMitochondrial support (energy);
oReducing oxidative stress;
oBuilding lean muscle;
oImmune support; and
oProviding healthy, whole food calories.
§Many of the mass-market competitors manufacture their products using the least expensive ingredients, which ensures low retail price and high profitability. This means diminished bioavailability and low biological value, as well as less benefit to the end user.
§Resurgex Select® and Resurgex Essential™ were developed with the ingredients necessary in order to deliver optimal performance.
§Resurgex Select® and Resurgex Essential™ deliver therapeutic levels of active ingredients based on the scientific research.
§Millennium has a use and composition patent for the existing formulas. Ensure® and Boost® are composed of mostly corn syrup and provide “empty calories,” which could do more harm than good, especially in glucose-sensitive individuals.
While the majority of other companies in this market sell the bulk of their product through the mass market, these formulations may not transfer well into the highly critical medical market, which Millennium’s products target. Additionally, many of these products have been slow to update their formulas and incorporate the latest nutritional ingredients. Descriptions of the products which Millennium believes could be considered competitors to its own product line are provided in the accompanying section, along with a price summary of each of these products, relative to Resurgex Select®, which is provided in Table 10.
MANUFACTURING
Agropur, Inc., is the Company’s outsourced manufacturer and co-packagers for the Essential™ and Essential Plus™ lines at its kosher designated, aseptic facility in Grand Rapids, MI.
Garden State Nutritionals is the Company’s outsourced manufacture and co-packagers for the Resurgex Select® and Surgex™ lines at their facility in West Caldwell, New Jersey.
California Natural Products is the Company’s outsourced manufacture and co-packagers for the Surgex ready to drink lines at their facility in Lathrop, California.
OTHER MATTERS
Sports Nutrition Market
Based on historical acceptance by 10 NBA teams, PGA golfers, and NFL players with little or no marketing budget, management expects to exponentially improve results with proper marketing and distribution strategies which cater to the mass market of sports nutrition consumers.
Products such as those listed below, as well as many other “high protein” drinks, are marketed as sports nutrition supplements and may be considered competitive products to the Company’s Surgex™ sports nutrition formula. It is important to note that as the high-protein drink market is expansive, these competitive products are not an exhaustive list of competitors. Rather, these products are representative of some of the high-protein drink products on the market today that may compete with Surgex™ sports nutrition formula. Surgex™ sports nutrition formula will likely provide athletes with the important calories they need while being competitively priced with other products.
§BSN Syntha-6™ Extended Release Protein Blend by BSN Inc.
§Muscle Milk® by CytoSport Inc.
§FRS, an antioxidant health drink, by New Sun Nutrition, Inc.
§Gatorade® Performance Series
GOVERNMENT REGULATION HISTORY
The manufacturing, processing, formulation, packaging, labeling and advertising of all of Millennium’s product lines are subject to regulation by federal agencies, including the Food and Drug Administration (the "FDA"), the Federal Trade Commission, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Postal Service and the United States Environmental Protection Agency. These activities are also subject to regulation by various agencies of the states and localities in which the Company sells and plans to sell its products.
The Dietary Supplement Health and Education Act of 1994 (the "Dietary Supplement Law") broadly regulates nutritional labeling, claims and manufacturing requirements for dietary supplements. The Dietary Supplement Law provides for regulation of Statements of Nutritional Support ("Statements"). These Statements may be made if they are truthful and not misleading and if "adequate" substantiation for the claims is available. Statements can describe claims of enhanced well-being from use of the dietary supplement or product statements that relate to affecting a structure or function of the body. However, statements cannot claim to diagnose, treat, cure, or prevent any disease, regardless of the possible existence of scientific reports substantiating such claims.
Statements appearing in dietary supplement labeling must be accompanied by disclaimer stating that the FDA has not evaluated the Statements. Notification to the FDA of these Statements is not considered approval of the Statements. If the FDA determines in possible future proceedings that dietary supplement Statements fail to meet the requirements of the Dietary Supplement Law, a product may be subject to regulation as a drug. The FDA retains all enforcement means available to it (i.e. seizure, civil or criminal penalties, etc.), when investigating or enforcing labeling claims.
The Federal Trade Commission ("FTC") regulates advertising of dietary supplements which includes all of Millennium’s products. The Federal Trade Commission Act prohibits unfair or deceptive trade practices and false or misleading advertising. The FTC has recently been very active in its enforcement of advertising against manufacturers and distributors of nutritional dietary supplements having instituted several enforcement actions resulting in signed agreements and payment of large fines. Although the Company has not been the target of a FTC investigation, there can be no assurance that the FTC will not investigate the Company's advertising in the future.
The Company is unable to predict the nature of any future laws, regulations, interpretations, or applications, nor can it predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. They could, however, require the reformulation of certain products not possible to be reformulated, imposition of additional record keeping requirements, and expanded documentation of the properties of certain products, expanded or different labeling and scientific substantiation regarding product ingredients, safety or usefulness. Any or all such requirements could have a material adverse effect on the Company's results of operations and financial condition.
PRODUCT LIABILITY AND INSURANCE
The Company, like other producers and distributors of ingested products, faces an inherent risk of exposure to product liability claims in the event that, among other things, the use of its products results in injury. The Company maintains insurance against product liability claims with respect to the products it manufactures. With respect to the retail and direct marketing distribution of products produced by others, the Company’s principal form of insurance consists of arrangements with each of its suppliers of those products to name the Company as beneficiary on each of such vendor’s product liability insurance policies. The Company does not buy products from suppliers who do not maintain such coverage.
EMPLOYEES
As of March 31, 2012, the Company employed 5 persons, of whom one is primarily engaged in research and development and product support activities, two are primarily engaged in overall managerial functions associated with operations, capital raising, distribution partnerships and sales and marketing, one is primarily engaged in day to day managerial operations and one is primarily engaged in general administrative and wholesale/direct consumer sales function. The Company has no collective bargaining agreements with its employees.
INFORMATION SYSTEMS INFRASTRUCTURE
Our website, which is based on internally developed software and other third party software, is hosted in New York at Futurological Strategies, Inc. Our servers and our network are monitored 24 hours a day, seven days a week.
We use a variety of techniques to protect our confidential customer data. When our customers place an order or access their account information, we use a secure server (SSL) to transfer information. Our secure server software encrypts all information entered before it is sent to our server. All customer data is protected against unauthorized access. We use Thawte software to secure our credit card transactions.
ITEM 1A:
ITEM 1A:RISK FACTORS
The following cautionary statements identify important factors that could cause our actual result to differ materially form those projected in the forward-looking statements made in this report.
We have operated at a loss and cannot assure that we will be able to attain profitable operations.
Although we are generating revenues, we continue to operate at a loss. During the year ended December 31, 2011, we generated revenues of $137,438 from sales of our three products. However, during this period we realized net losses of $5,724,451, of which $2,484,674 were non-cash items. The non-cash items are primarily related to issuance of shares and warrants for compensation in the amount of $1,305,679, services in the amount of $226,250 , and interest in the amount of $9,074 during the period. Other non-cash items were gain on extinguishment of debt of $668,583, debt extinguishment of $1,129,321, amortization of debt discount of $190,937, amortization expense of $576 and change in inventory reserve in the amount of $291,420. We expect to continue incurring operating losses until we are able to derive meaningful revenues from marketing our three products and other products we intend to bring to market. We cannot assure that we will be able to attain profitable operations.
We require additional funding to maintain our operations and to further develop our business. Our inability to obtain additional financing would have an adverse effect on our business.
Our success depends on our ability to develop a market for our three products and other nutraceutical supplements we intend to bring to market. This means having an adequate advertising and marketing budget and adequate funds to continue to promote our products. Although our revenues have decreased, our operating expenses are significantly greater than our revenues. During 2011, the Company obtained new capital in the form of debt resulting in the receipt by the Company of $1,500,000. The Company obtained $950,000 from new subscriptions for Series G convertible preferred stock. These funds in conjunction with on going operating revenues provided adequate capital for our operating needs for 2011. 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. We plan to do this, as before, through additional equity or debt financings. We may not be able to raise such funds on terms acceptable to us or at all. Financings may be on terms that are dilutive or potentially dilutive to our stockholders. If sources of financing are insufficient or unavailable, we will be required to modify our operating plans to the extent of available funding or curtail or suspend operations.
Our year end audited financial statements contain a “going concern” explanatory paragraph. Our inability to continue as a going concern would require a restatement of assets and liabilities on a liquidation basis, which would differ materially and adversely from the going concern basis on which our financial statements included in this report have been prepared.
Our consolidated financial statements for the year ended December 31, 2011 included herein have been prepared on the basis of accounting principles applicable to a going concern. Our auditors’ report on the consolidated financial statements contained herein includes an additional explanatory paragraph following the opinion paragraph on our ability to continue as a going concern. A note to these consolidated financial statements describes the reasons why there is substantial doubt about our ability to continue as a going concern and our plans to address this issue. Our December 31, 2011 and 2010 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our inability to continue as a going concern would require a restatement of assets and liabilities on a liquidation basis, which would differ materially and adversely from the going concern basis on which our consolidated financial statements have been prepared.
We are subject to significant government regulation.
The packaging, labeling, advertising, promotion, distribution and sale of Resurgex Select®, Resurgex Essential™ and Surgex™ and other products we plan to produce and market are subject to regulation by numerous governmental agencies, the most active of which is the U.S. Food and Drug Administration (the "FDA"), which regulates our products under the Federal Food, Drug and Cosmetic Act (the "FDCA") and regulations promulgated thereunder. Our products are also subject to regulation by, among other regulatory entities, the Consumer Product Safety Commission (the "CPSC"), the U.S. Department of Agriculture (the "USDA") and the Environmental Protection Agency (the "EPA"). Advertising and other forms of promotion and methods of marketing of our products are subject to regulation by the U.S. Federal Trade Commission (the "FTC"), which regulates these activities under the Federal Trade Commission Act (the "FTCA"). The manufacture, labeling and advertising of our products are also regulated by various state and local agencies. Failure to comply with applicable regulatory requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, and fines.
Our involvement in defending product liability claims could have a detrimental effect on our operations.
Like other retailers and distributors of products designed for human consumption, we face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury. We may be subjected to various product liability claims, including, among others, that our products include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. We carry $10,000,000 of product liability insurance. Thus, any product liabilities exceeding our coverage relating to our products could have a material adverse effect on our business, financial condition and results of operations.
We face significant competition.
The biotechnology and nutraceutical supplement industries are highly competitive and subject to significant and rapid technological change. Developments by our competitors may render our products obsolete or noncompetitive. Numerous companies compete in our market, many of which have greater size and financial, personnel, distribution and other resources greater than ours. Our principal competition in the distribution channels where we are marketing our current products and where we intend to market other products comes from a limited number of large nationally known manufacturers and many smaller manufacturers of nutraceutical supplements. In addition, large pharmaceutical companies compete with us on a limited basis in the nutraceutical supplement market. Increased competition from such companies could have a material adverse effect on us because such companies have greater financial and other resources available to them and possess distribution and marketing capabilities far greater than ours. We also face competition in mass market distribution channels from private label nutraceutical supplements offered by health and natural food store chains and drugstore chains. We cannot assure that we will be able to compete.
If we are unable to protect our intellectual property or we infringe on intellectual property of others, our business and financial condition may be materially and adversely affected.
We own all rights to the formulation of Resurgex®, Resurgex Plus®, Resurgex Select®, and Surgex™ have a use and compositional patent with respect to Resurgex® (which covers Resurgex Plus®), and Resurgex Select®. Surgex™ is patent pending. We also have registered trademarks for the names "Resurgex", “Resurgex Plus” and “Resurgex Select”. “Surgex” has preliminary Trade mark reservation status. We have filed patent applications internationally with regards to all patents and patents pending. No assurance can be given that patents will be issued from pending applications or that there right, if issued and the rights from our existing patents and registered name will afford us adequate protections. In addition, we rely on trade secrets and unpatented proprietary technology. There is no assurance that others may not independently develop the same or similar technology or produce products which provide the same benefits as the current product lines.
Although we will seek to ensure that our products do not infringe the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement claims against us. Any infringement claims by third parties against us may have a material adverse effect on our business, financial condition and results of operations.
Because our Board can issue common stock and convertible preferred without stockholder approval, you could experience substantial dilution.
Our Board of Directors has the authority to issue up to 2,000,000,000 shares of common stock, shares of preferred stock that can be converted into common stock at high rations and options and warrants to purchase shares of our common stock without stockholder approval. As of March 31, 2012, there were 87,744,409 shares issued and outstanding or reserved for issuance on a fully-diluted basis. Future issuance of additional shares of common stock could be at values substantially below the current market price of our common stock and, therefore, could represent substantial dilution to investors in this offering. In addition, our Board could issue large blocks of our common stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval.
Anti-takeover provisions of the Delaware General Corporation Law could discourage a merger or other type of corporate reorganization or a change in control even if they could be favorable to the interests of our stockholders.
The Delaware General Corporation Law contains provisions which may enable our management to retain control and resist a takeover of us. These provisions generally prevent us from engaging in a broad range of business combinations with an owner of 15% or more of our outstanding voting stock for a period of three years from the date that this person acquires his stock. Accordingly, these provisions could discourage or make more difficult a change in control or a merger or other type of corporate reorganization even if they could be favorable to the interests of our stockholders.
We do not intend to pay cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our earnings, if any, for use in its business and do not anticipate paying any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will depend upon a number of factors, including future earnings, the success of our business activities, our general financial condition and future prospects, general business conditions and such other factors as the Board of Directors may deem relevant. In addition, no cash dividends may be declared or paid on our Common Stock if, and as long as, the Series B Preferred Stock is outstanding or there are unpaid dividends on outstanding shares of Series C Preferred Stock. No dividends may be declared on the Series C Preferred Stock if, and as long as, the Series B Preferred Stock is outstanding. Accordingly, it is unlikely that we will declare any cash dividends in the foreseeable future. The Series E and F Convertible Preferred Stock do not carry any dividends. The Series G Preferred Stock does not pay a cash dividend, but does pay a quarterly payment in kind dividend.
We cannot assure that there will be a sustained public market for our common stock.
At present, our common stock is quoted on the OTC Bulletin Board and tradable in the over-the-counter market. Our common stock is not traded on a sustained basis or with significant volume. In addition, we currently do not meet the requirements for listing our common stock on NASDAQ or a national securities exchange and we cannot assure if or when our common stock will be listed on such an exchange. For the foregoing reasons, we cannot assure that there will be a significant and sustained public market for the sale of our common stock. Accordingly, if you purchase our common stock, you may be unable to resell it. In the absence of any readily available secondary market for our common stock, you may experience great difficulty in selling your shares at or near the price that you originally paid.
The market price of our common stock may be volatile.
The market price of our common stock may fluctuate significantly in response to the following factors:
·variations in quarterly operating results;
·our announcements of significant contracts, milestones, acquisitions;
·our relationships with other companies or capital commitments;
·additions or departures of key personnel;
·sales of common stock or termination of stock transfer restrictions;
·changes in financial estimates by securities analysts; and
·fluctuations in stock market price and volume.
Our stock price may be adversely affected if a significant amount of shares are sold in the public market.
As of March 31, 2012, approximately 3,725,000 shares of our common stock constituted "restricted securities" as defined in Rule 144 under the Securities Act. Generally, pursuant to Rule 144, stockholders who are not affiliates of our company can resell their restricted securities after they have held them for at least six months. Consequently, most of our restricted securities are or soon will be eligible for public sale. As of March 31, 2012, we also had warrants outstanding for the purchase of an aggregate of 9,656,544 shares of our common stock, and no stock options outstanding. To the extent the exercise price of the warrants is less than the market price of the common stock, the holders of the warrants are likely to exercise them and, eventually, sell the underlying shares of common stock and to the extent that the exercise price of the warrants are adjusted pursuant to anti-dilution protection, the warrants could be exercisable or convertible for even more shares of common stock. Moreover, we most likely will issue additional shares of common stock and/or instruments convertible into or exercisable for common stock to raise funding or compensate employees, consultants and/or directors. We are unable to estimate the amount, timing or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market could cause the market price for our common stock to decrease. Furthermore, a decline in the price of our common stock would likely impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities.
Our shares are subject to the Penny Stock Reform Act.
Our shares are subject to the Penny Stock Reform Act of 1990 which may potentially decrease your ability to easily transfer our shares. Broker-dealer practices in connection with transactions in "penny stocks" are regulated. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules.
Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
ITEM 1B:
ITEM 1B:UNRESOLVED STAFF COMMENTS
None.
ITEM 2:
ITEM 2:PROPERTIES
The Company leases certain office space and equipment under operating leases.
The current lease in Paramus, New Jersey is scheduled to expire on November 30, 2012.
In October 2001 the Company entered into a lease for 4,558 square feet of office space located in Basking Ridge, New Jersey. In October 2007 the Company extended its lease commitment for an additional 5 years commencing in December 2007, with an annual right to renew or cancel. The terms of the lease provide for a rental fee of $10,635 per month, plus an allocated portion of certain operating expenses. The lease is personally guaranteed by the Company’s former Chairman of the Board of Directors and former Chief Executive Officer Jerry E. Swon. The Company entered into a verbal sub-lease agreement with (“Sub-tenant 2”) in September 2008. Sub-tenant 2 paid rent in the amount of $4,000 per month directly to the landlord from September 2008 through August 2009. In September 2009 Sub-tenant 2 increased rent payments direct to the landlord to $7,000 per month. This arrangement continues to the present time and Sub-tenant 2 was current in its payments to the landlord as of December 31, 2009. In December 2009, the Company relocated its operations to a new facility in Paramus, New Jersey, and entered into a three-year lease for 1,724 square feet of office space, at a monthly rent of $2,299 plus utilities. To reduce the carrying cost of the Basking Ridge, NJ lease. In April 2010 the Company negotiated and entered into a formal sub-lease agreement with a third sub-tenant (“Sub-tenant 3”) who will occupy the facilities in Basking Ridge, NJ through December 2012. As of April 2010 Sub-tenant 2 and 3 are paying $7,000 per month and $6,440 per month, respectively. This provides the Company with complete coverage of the Lease Obligations related to the Basking Ridge, NJ location entering into the second quarter of 2010.
ITEM 3:
ITEM 3:LEGAL PROCEEDINGS
Creative Healthcare Solutions, LLC vs. Millennium Biotechnologies Inc, Ct. of Common Pleas of Delaware County Ohio, Case No. 07 CV H 11 1420). Millennium was not satisfied with the service rendered by Creative Healthcare Solutions, LLC in 2005 which were associated with the development of Resurgex Select collateral materials developed in December of 2005. Millennium subsequently was forced to destroy and dispose of over 80% of the materials provided by Creative Healthcare Solutions due to the poor quality of the materials. Millennium has been unsuccessful in resolving the dispute and subsequently Creative Healthcare Solutions, LLC has filed legal action for demand of payment in the amount of $63,718 for services rendered. Millennium continues to negotiate a settlement through counsel with regards to this legal proceeding.
Ronald Burgert vs. Millennium Biotechnologies, Inc., et al. filed on the 9th day of October 2008 in District Court of Dallas County, Dallas, Texas. Mr. Burgert has filed a claim in the amount of $25,000 based on a note dated May 18, 2006. As of March 26, 2008 the balance due on the note, including unpaid principal and interest, was $31,635. On December 1, 2008, the 14th Judicial District, Dallas County, Dallas, Texas issued a default judgment against Millennium Biotechnologies, Inc. in the amount of $31,636 plus interest and unpaid attorney’s fees.
Robert Half International vs. Millennium Biotechnologies, Inc. filed on September 30, 2009 in the Superior Court of New Jersey, Law Division, Middlesex County. Robert Half International claims a total of $18,507 plus costs and fees based upon the Millennium Biotechnologies, Inc.’s failure to pay the plaintiff the fees associated with the full time hiring of an employee.
First Insurance Fund vs. Millennium Biotechnologies filed on November 18, 2010 in the Superior Court of New Jersey, Civil Division, Somerset/Hunterdon-Special Civil Part, Case# SOM-DC007284-10. First Insurance Fund claims a total of $13,489.99 including costs and fees based upon Millennium Biotechnologies failure to pay the plaintiff for Insurance invoices. On February 28, 2011, there was a levy on Millennium’s bank account in the amount of $1,644. On February 14, 2012 there was a levy on Millennium’s bank account in the amount of $2,320.
ITEM 4:
ITEM 4:MINING SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5:
ITEM 5:MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
The Company’s common stock currently trades in the OTC market and is quoted on the Electronic Bulletin Board of the OTC market, under the symbol NRTI. The following table sets forth, for the calendar quarters indicated during the last two fiscal years and the first quarter of fiscal 2012, the high and low quotations of the Company’s common stock. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions. The market for the common stock has been sporadic and there have been long periods during which there were few, if any, transactions in the common stock and no reported quotations. Accordingly, reliance should not be placed on the quotes listed below, as the trades and depth of the market may be limited, and therefore, such quotes may not be a true indication of the current market value of the Company's common stock.
(b) Stockholders
As of March 30, 2012, there were approximately 512 stockholders of record for the Company’s Common Stock. The number of record holders does not include stockholders whose securities are held in street names. The Company estimates over 1,000 holders in street names. In addition, there were approximately 10 holders of record of the Company's Series B Convertible Preferred Stock, 67 holders of record of the Company's Series C Preferred Stock and 23 holders of record of the Company's Series G Convertible Preferred Stock.
(c) Dividends
	The Company has not declared or paid, nor has it any present intention to pay, cash dividends on its common stock. No cash dividends may be declared or paid on the Company's Common Stock if, and as long as, the Series B Preferred Stock is outstanding or there are unpaid dividends on outstanding shares of Series C Preferred Stock. No dividends may be declared on the Series C Preferred Stock if, and as long as, the Series B Preferred Stock is outstanding. Accordingly, it is unlikely the Company will declare any cash dividends in the foreseeable future. The Series E and Series F Convertible Preferred Stock carry no dividends. The Series G Preferred Stock does not pay a cash dividend, but does pay a quarterly payment in kind dividend.
Recent Issues of Unregistered Securities
During the fourth quarter of 2011, the Company issued the following unregistered securities
(i)3,595,701 shares of common stock to fifteen investors that converted their debt into common stock.
(ii)125,000 shares of common stock to one consultant for services rendered to the Company.
(iii)250,000 shares of common stock to two directors for 2011 director fees.
(iv)53,375 shares of common stock to one investor for late payment penalties on a promissory note.
Information about common stock that may be issued upon the exercise of options and warrants is contained in Note 11 to the Consolidated Financial Statements attached hereto.
Securities authorized for issuance under equity compensation plans
Information about common stock that may be issued upon the exercise of options and warrants is contained in the Notes to Consolidated Financial Statements attached hereto.
Company repurchases of Equity Securities
None.
ITEM 6:
ITEM 6:SELECTIVE FINANCIAL DATA
Not applicable.
ITEM 7:
ITEM 7:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the year ended December 31, 2011 compared to the year ended December 31, 2010:
Total revenues generated from the sales of Resurgex Essential™, Resurgex Essential Plus™, Resurgex Select® and Surgex for the year ended December 31, 2011 totaled $137,438, a decrease of 47% from the year ended December 31, 2010 which totaled $259,290.
At this stage in the Company’s development, revenues are not yet sufficient to cover ongoing operating expenses.
Gross profits for the year ended December 31, 2011 amounted to $58,353 for a 42% gross margin. Gross profits decreased $46,857 or 45% for the year ended December 31, 2011 compared to $105,210 for the year ended December 31, 2010 and a gross margin of 41%. The decrease in gross profits and gross margin is a result of lower revenue and product mix. The decrease in revenue was attributable to the long-term care market.
After deducting research and development costs of $38,312 and selling, general and administrative expenses of $4,093,559, which primarily included $1,923,925 in non-cash outlays in the form of restricted stock and warrants issued for professional fees and compensation , the Company realized an operating loss of $4,073,518. Operating losses for 2011 of $4,073,518 were up $2,697,952 or 196% as compared to the 2010 operating loss of $1,375,566. Approximately $2,460,000 of the decrease was due from the change in compensation expense. In 2011 a management warrant grant was recorded in the amount of $1,280,679. In 2010 there was a reversal of the 2009 management stock grant valued at $1,298,000 which was returned to the Company.
Non-operating expenses totaled $1,397,333 for the year ended December 31, 2011 a decrease of 32% or $669,674 as compared to $2,067,007 for the year ended December 31, 2010. The decrease in non-operating expenses of $669,674 was due to material differences in the other income/expense section of the Statement of Operations. The first was a net gain of $668,583 which was realized on a gain incurred in connection with debt restructuring which occurred in the third quarter of 2011 versus the prior years loss of $275,403 which occurred in the second quarter of 2010. In the third quarter of 2011 a loss of $1,129,321 was recorded from debt extinguishment versus zero in 2010. The amortization of debt discount was $190,937 in 2011 which is a decrease of $179,660 from $370,597 in 2010 due to the debt conversion which occurred in the third quarter of 2011. Interest and financing expense which was $745,658 and zero, respectively, in 2011 decreased by $57,576 and $612,573, respectively, from $803,234 and $612,573, respectively in 2010. The decrease in interest and financing expense of $670,149 was due to the debt conversion which occurred in the third quarter of 2011.
The net result for the year ended December 31, 2011 was a loss of $5,724,451 or $0.24 per share, compared to a loss of $3,442,573 or $0.20 per share for the prior year. 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.
Liquidity and Capital Resources
The Company’s business operations generally have been financed by new equity and debt investments through convertible promissory notes with accredited investors. During 2011, the Company obtained new equity capital and issued new debt that supplied the majority of the funds that were needed to finance operations during the reporting period. The Company received new equity capital in the amount of $950,000 from the sale of Series G convertible preferred stock. Such new borrowings resulted in the receipt by the Company of $1,500,000. 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 year showed a working capital deficit of $3,339,432. During the first and quarter of 2012 the Company obtained new financing sufficient to fund ongoing working capital requirements. During the first quarter of 2012 the Company received $225,000 (five three year convertible notes totaling $150,000 and one demand note for $75,000). 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.
ITEM 7 A:
ITEM 7 A:QUANTiTatIVE AND QUALITATIVE DISCLOUSURES ABOUT MARKET RISKS
Not applicable.
ITEM 8:
ITEM 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of and for the two years ended December 31, 2011 and 2010 and Notes to Financial Statements are included at the end of this report. Reference is made to the "Index to Financial Statements and Financial Statement Schedule" on page.
ITEM 9:
ITEM 9:CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the two years ended December 31, 2011, there were no reportable events as the term is described in Item 304(a)(1)(iv) of Regulation S-K.
Item 9A
Item 9A (T). Controls and Procedures
ITEM 9A (T). CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Management of the Company has evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness and significant deficiencies in our internal control over financial reporting described below, our disclosure controls and procedures were not effective, as of the December 31, 2011, to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011 based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation, our management concluded that, as of December 31, 2011, our internal control over financial reporting was not effective.
A significant deficiency is a deficiency, or combination of deficiencies in internal control over financial reporting, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Management identified the following material weakness and significant deficiencies in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2011:
·Material weakness: The Company did not maintain effective controls over certain aspects of the financial reporting process because we lacked a sufficient complement of personnel with a level of accounting expertise and an adequate supervisory review structure that is commensurate with the Company’s financial reporting requirements. In addition the Company does not have an audit committee.
·Significant deficiencies:
oInadequate segregation of duties
o Untimely account reconciliations
o Evaluation of, and accounting for, complex warrant grants
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal year covered by this Annual Report on Form 10-K. There was no change in the Company's internal control over financial reporting identified in that evaluation that occurred during the fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, other than what has been reported above.
ITEM 9B:
ITEM 9B: OTHER INFORMATION
None.
PART III
ITEM 10:
ITEM 10: 	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about all directors and executive officers of the Company are as follows:
Name
Position
Term(s) of Office
Mark Mirken, 67
President, Chief Operating Officer
September 2007 until August 4, 2008
Chief Executive Officer
August 4, 2008 until present
Chairman of the Board
August 4, 2008 until present
Frank Guarino, 37
Chief Operating Officer
July 1, 2010 until present
Chief Financial Officer
October15, 2001 until June, 30,2010
Benjamin Custodio, 69
Company Director
October 28, 2008 until January 2, 2012
Kenneth Sadowsky, 49
Company Director
September 17, 2008 until June 25, 2009 and then, since March 8, 2010
Michael C. James, 53
Chief Financial Officer
July 1, 2010 until present
Company Director
September 24, 2009 until present
Carl Germano, 57
Executive Vice President, Research
May 15, 2001 until present
and Product Development
There are no other family relationships among the Company's officers and directors. All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Vacancies on the Board of Directors may be filled by the remaining directors until the next annual stockholders' meeting. Officers serve at the discretion of the Board.
A summary of the business experience for each of our present officers and directors is as follows:
Mark C. Mirken
Mr. Mark C. Mirken has been our and Millennium’s President and Chief Operating Office since August 2007 and Chief Executive Officer since August 2008. He was previously employed by Turbo Chef Technologies, Inc. (NASDAQ:OVEN). At Turbo Chef, Mr. Mirken reported to the Chairman & Board of Directors and had global P&L accountability for the entire company. He conceived and executed business strategies, steered direction of development and growth, and managed all aspects of operations including R&D, engineering, product development, new business development, sales (domestic/international and direct/indirect), marketing (strategies, campaigns, collaterals), branding (differentiating features and benefits in six categories), manufacturing (in-house/contract and onshore/offshore), investor relations, PR, media affairs, and major/global channels and accounts management (Subway, Starbucks, BP, HMS Host). He also mentored and led a core management team of 10 executives (including CFO, CTO and Director of Manufacturing in China), directed 24-person global sales force, and provided indirect oversight to a worldwide workforce of 100 plus. Mr. Mirken earned a Bachelor of Science from the University of North Carolina, in addition he earned a J.D. from the University of North Carolina School of Law.
Frank Guarino
Mr. Frank Guarino has been our Chief Operating Officer since July 1, 2010. Prior to July 1, 2010 Mr. Guarino was the Chief Financial Officer (CFO) of Millennium since 2001. Mr. Guarino was previously employed from 1997 through February 2001, as the Controller of First National Funding Corporation of America, a mortgage banking firm which grew from a small family business to a medium sized corporation with 55 branches nationwide producing over $350 million in annual volume at the time of his departure. From 1995 to 1997, Mr. Guarino was employed by Panasonic Broadcast and Television Systems Co., where his responsibilities evolved to an independent supervisory position in the accounts receivable department which collected over $400 million annually in accounts receivable from clients which included national television networks. Mr. Guarino earned a Bachelor of Science in Accounting from St. Peter’s College in 1997.
Michael C. James
Mr. Michael James has been our Chief Financial Officer (CFO) of Inergetics since July 1, 2010. For the past eleven years, Mr. James has been the Managing Partner of Kuekenhof Capital Management, LLC, a private investment management company, where he holds the position of Managing Director of Kuekenhof Equity Fund, L.P. and Kuekenhof Partners, L.P. Currently, Mr. James is a director of Guided Therapeutics, Inc. where he is Chairman of the Compensation Committee and serves as Chairman on the Audit Committee. He was a board member of Nestor, Inc. from 2006 until June 2009 and CEO of that company from January 2009 through September 11, 2009. While acting as CEO, Mr. James turned that company profitable and headed a complete financial restructuring. The business was sold on September 8, 2009 from the Receiver's Estate in Superior Court of the State of Rhode Island. From 1995 to 1999, Mr. James was a Partner at Moore Capital Management, Inc., a private investment management company. Prior to his position at Moore Capital, from 1991 to 1994, he was employed by Buffalo Partners, L.P., a private investment management company, where he held the position of Chief Financial and Administrative Officer. From 1986 to 1991, he was employed by National Discount Brokers and held the positions of Treasurer and Chief Financial Officer. He began his career in 1980 as a staff accountant with Eisner, LLP. Mr. James received a Bachelor of Science in Accounting from Fairleigh Dickenson University.
Kenneth Sadowsky
Mr. Sadowsky is a Senior Beverages Advisor for Verlinvest. Verlinvest is a Brussels based investment holding company founded by family tied to Interbrew. Interbrew is now ABI (Anheuser Busch InBev). He was a principal of Atlas Distributing Inc., overseeing the non-alcoholic beverage division which he created. The division was founded in 1987 and sales were $50,000 that year. In 2007 sales were over $16,000,000 and the total company sales were in excess of $75 million. From September 2008 until June 2009, he was a director of the Company. He was a director of Energy Brands, Inc. makers of Glaceau vitaminwater, smartwater, and fruitwater from 2000 to 2006, when that company sold a minority interest to The Tata Group. Glaceau eventually sold to Coca Cola for over $4.1 Billion. He also does marketing consulting work in the beverage industry for Fusion5 Marketing Innovations (sold in 2003 to the WPP Group) and nowinc.net. Prior to forming Atlas's soda division in 1987, Mr. Sadowsky was a consultant for the Eagle Snack Division of Williams Distributing in Springfield, MA. He is the Executive Director of NIDA, a group of independent beverage distributors in the Northeast of the USA who are members of a trade association. From 1984 until 1986, he was the New England regional manager for California Cooler, Inc. which was acquired by Brown Forman in 1985. He has served on the Worcester JCC Health and Physical Education Board (1998 - 2000). He serves on the Tulane University's School of Liberal Arts Dean's Advisory Council (2000 - present). He is on the Worcester Academy Board of Visitors (2008 - present). He serves on the U Mass Memorial Hospital Committee NICU Unit "Tee Up For Tots." Mr. Sadowsky received a BA from Tulane University in New Orleans in 1984. Additionally, Mr. Sadowsky sits on the board of directors of All Market Inc., a private company who are the makers of Vita Coco coconut water, and Hint Inc., a private company who are the makers of Hint Water based in San Francisco.
Carl Germano
Mr. Carl Germano serves as Millennium’s executive vice president of research and product development. He is a registered, certified, and licensed nutritionist. Mr. Germano holds a Master’s degree in clinical nutrition from New York University and has over 27 years of experience using innovative, complementary nutritional therapies in private practice. For the past 20 years, he has dedicated his efforts to research and product development for the dietary supplement and medical foods industries, where he has been instrumental in bringing unique nutritional substances and formulations to the health/dietary supplement industry. From April 1999 to July 2001, Mr. Germano was senior vice president of research and product development with Nutratech, Inc., a nutraceutical raw materials supplier. From 1992 to 1999, he was vice president of product development and research with Solgar Vitamin and Herb (noting that in 2005 NBTY Inc. [NTY-NYSE] purchased the Solgar Vitamin and Herb Co. from Wyeth Consumer Healthcare [WYE-NYSE]).
Compliance with Section 16(a) of the Securities Exchange Act of 1934
To our knowledge, based solely on a review of such materials as are required by the Securities and Exchange Commission, no officer, director or beneficial holder of more than ten percent of our issued and outstanding shares of common stock failed to file in a timely manner with the Securities and Exchange Commission any form or report required to be so filed pursuant to Section 16(a) of the Securities Exchange Act of 1934.Mark C. Mirken, Frank Guarino and Kenneth Sadowsky are also currently late in filing Form 3.
Audit Committee and Audit Committee Expert
Audit Committee. We do not have an audit committee at this time. Our securities are not listed on a national securities exchange. Accordingly, all members of the audit committee are not required to be independent. We do not have a financial expert as defined in Securities and Exchange Commission rules on the committee in the true sense of the description.
Corporate Governance And Code Of Ethics
The Company has always been committed to good corporate governance. A copy of the Corporate Code of Ethics and Conduct was set forth as an exhibit to Form 10-KSB for the fiscal year ended December 31, 2002, and is included herein by reference. A copy may be obtained free of charge by submitting a request in writing to the Company at the address shown on the first page of this report.
ITEM 11:
ITEM 11:EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for: (i) the person who served as the Chief Executive Officer of the Company during the year ended December 31, 2011, regardless of the compensation level, and (ii) each of our other executive officers, serving as an executive officer at any time during 2011, as well as the most highly compensated employees who did not serve as executive officers during 2011. Compensation information is shown for the fiscal years ended December 31, 2010, and 2009:
_______________________
(1)The value of other non-cash compensation, except for the items listed under (2), (3), (4) and (5), that was extended to or paid for individuals named above did not exceed 10% of the aggregate cash compensation paid to such individual, or to all executive officers as a group.
(2)Consists of automobile expenses allowances.
(3)The Company recognizes expenses for options and warrants granted to employees on the basis of fair value calculated using the Black-Scholes formula (see below).
Some of the stock awards issued in 2009 consist of shares of Series E Convertible Preferred Stock (which converted into common shares on March 15, 2010 at the rate of 10,000 common shares for each share of Series E), such number of common shares into which they converted are included in the table above. As of December 31, 2009, the certificates for the preferred shares had not yet been issued. Refer to items (5) and (6). In addition, pursuant to the initial capital restructuring in the Spring of 2009, to protect the Company from foreclosure by its first secured creditor and in exchange for significant salary concessions made by Messrs Mirken, Guarino and Germano, the management team of the Company was given a conditional stock grant in the amount of 10% of the Company’s fully diluted shares. The purpose of the grant was to vest in Mark Mirken as CEO and Chairman of the board the right to allocate the grant among the Company’s employees including its management team. See Part III. Item 13 “Certain Relationships, Related Transactions and Director Independence” for a description of the terms of this grant.
(4)In 2009, Mr. Germano received 1,050,000 restricted common shares for special services performed, valued at $10,500, and was awarded a bonus of 1,500 shares of Series E Convertible Preferred Stock (which converted into 15,000,000 common shares on March 15, 2010), valued at $150,000. Certificates for these shares had not yet been issued at December 31, 2009, the grant was returned to the Company in 2010.
(5)In 2009, Mr. Mirken was awarded a bonus of 12,150 shares of Series E Convertible Preferred Stock (which converted into 121,500,000 common shares on March 15, 2010), valued at $1,215,000. Certificates for these E-shares had not yet been issued at December 31, 2009, the grant was returned to the Company in 2010. In 2009, $100,000 of that sum represents a repayment to Mr. Mirken under section 2.4 of his employment contract dated November 1, 2009 in which Mr. Mirken received a significantly reduced partial repayment of expenses owed to Mr. Mirken which he forgave to induce certain investors to save the Company from an act of foreclosure in the spring of 2009.
(6)In 2009, Mr. Guarino was awarded a bonus of 1,500 shares of Series E Convertible Preferred Stock (which converted into 15,000,000 common shares on March 15, 2010), valued at $150,000. Certificates for these E-shares had not yet been issued at December 31, 2009, the grant was returned to the Company in 2010.
Stock Options /Stock Purchase Warrants:
There were no options granted during 2011 and 2010. In 2011 there was a management stock warrant grant, but the allocation has notyet been issued to management. There were no warrants issued in 2010 to executive officers.
Compensation of our Directors
During 2011 and 2010 none of our Directors received cash compensation. In 2011 Benjamin Custodio and Kenneth Sadowsky each received 125,000 restricted shares of common stock. There was no compensation paid to the outside directors in 2010.
Employment Agreements
Certain employees have received employment agreements the details of which are outlined in the section “Employment Agreements” in Note 9 to the Financial Statements included at the end of this report.
ITEM 12:
ITEM 12:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The following table sets forth, as of March 31, 2012, the record and beneficial ownership of common stock of the Company by each executive officer and director, all executive officers and directors as a group, and each person known to the Company to own beneficially, or of record, five percent or more of the outstanding shares of the Company:
Address of all persons above: c/o the Company, except for Mr. Sadowsky: 450 Alton Road #1601, Miami Beach, FL 33139.
(1)For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock which such person has the right to acquire within 60 days of March 31, 2012. For purposes of computing the percentage of outstanding shares of common stock held by each person or group of persons named above, any security which such person or persons has or have the right to acquire within such date is deemed to be outstanding but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnote to this table and pursuant to applicable community property laws, the Company believes based on information supplied by such persons, that the persons named in this table have sole voting and investment power with respect to all shares of common stock which they beneficially own.
(2)See Item 13
ITEM 13:CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Pursuant to an amended and restated employment agreement, Mark C. Mirken is employed as the President and Chief Executive Officer of the Company and Millennium. The Agreement terminates on November 1, 2014, Mr. Mirken has the right to extend the term of employment for two additional years. Pursuant to the Summary of Debt Reorganization and Financing dated July 14, 2011, Mr. Mirken’s salary was amended to reduce his salary to $175,000 per annum until the Company reaches three consecutive fiscal quarters of positive “Net Income” at which point his annual salary will increase to $240,000. The gross-up provisions with regards to any issuances under the Management Warrant Grant Program have been eliminated. Mr. Mirken will receive a bonus of $32,500 upon receiving three consecutive fiscal quarters of positive Net Income. Mr. Mirken’s annual salary will increase to $306,000 upon the Company achieving $1,000,000 of Net Income in any twelve consecutive calendar month period.
Mr. Mirken also receives a $2,000 per month automobile reimbursement and standard benefits available to other executive officers.
The Agreement terminates upon Mr. Mirken’s death and may be terminated at the option of the Company as a result of Mr. Mirken’s disability or for “cause” as defined in the Agreement. Mr. Mirken has the right to terminate the Agreement for “good reason” as defined in the Agreement. In the event that the Agreement is terminated due to Mr. Mirken’s death or disability, he is entitled to receive his annual salary for a period equal to the lessor of (i) three months from the date of death or disability or (ii) the balance of the Term; and all other accrued but unpaid compensation and benefits. If the Agreement is terminated by the Company for “cause”, Mr. Mirken is not entitled to receive any compensation other than accrued but unpaid compensation and benefits. In the event Mr. Mirken terminates the Agreement for “good reason”, the Company shall pay to Mr. Mirken his annual salary through the date of the end of the contract term; bonuses that have accrued and are unpaid as of the date of termination; and any Options which have been granted to Mr. Mirken as of the date of the termination. The Agreement also provides for Mr. Mirken is subject to confidentiality, non-solicitation and non-compete covenants for a period of one year following his termination, provided such termination is not by the Company without “cause” or by Mr. Mirken for “good reason”.
Pursuant to an amended and restated employment agreement, Carl Germano is employed as the Chief Science Officer of Millennium. The Agreement terminates on November 1, 2014, Mr. Germano has the right to extend the term of employment for two additional years. Pursuant to the Agreement, Mr. Germano currently receives a base annual salary of $150,000 per year which increases to $200,000 per year in the event (a) the Company's annual revenues exceed $15,000,000; (b) the Company enters into a licensing agreement with an unrelated third party where the minimum upfront licensing fee is no less than $3,000,000; or (c) the Company achieves two quarters of positive cash flow. In addition, during the term of the Agreement, Mr. Germano is entitled to receive an annual bonus at the discretion of the Company. Mr. Germano also receives standard benefits available to other executive officers.
The Agreement terminates upon Mr. Germano’s death and may be terminated at the option of the Company as a result of Mr. Germano’s disability or for “cause” as defined in the Agreement. Mr. Germano has the right to terminate the Agreement for “good reason” as defined in the Agreement. In the event that the Agreement is terminated due to Mr. Germano’s death or disability, he is entitled to receive his annual salary for a period equal to the lessor of (i) three months from the date of death or disability or (ii) the balance of the Term; and all other accrued but unpaid compensation and benefits. If the Agreement is terminated by the Company for “cause”, Mr. Germano is not entitled to receive any compensation other than accrued but unpaid compensation and benefits. In the event Mr. Germano terminates the Agreement for “good reason”, the Company shall pay to Mr. Germano his annual salary through the date of the end of the contract term; bonuses that have accrued and are unpaid as of the date of termination; and any Options which have been granted to Mr. Germano as of the date of the termination. The Agreement also provides for Mr. Germano is subject to confidentiality, non-solicitation and non-compete covenants for a period of one year following his termination, provided such termination is not by the Company without “cause” or by Mr. Germano for “good reason”.
Pursuant to an employment agreement, Michael C. James is employed as the Chief Financial Officer of the Company and Millennium. The Agreement terminates on May 31, 2015; provided, Mr. James has the right to extend the term of employment for two additional years. Pursuant to the Summary of Debt Reorganization and Financing dated July 14, 2011, Mr. James’ salary was amended to reduce his salary to $150,000 per annum until the Company reaches three consecutive fiscal quarters of positive “Net Income” at which point his annual salary will increase to $200,000. The gross-up provisions with regards to any issuances under the Management Warrant Grant Program have been eliminated. Mr. James will receive a bonus of $25,000 upon receiving three consecutive fiscal quarters of positive Net Income.
The Agreement terminates upon Mr. James’ death and may be terminated at the option of the Company as a result of Mr. James’ disability or for “cause” as defined in the Agreement. Mr. James has the right to terminate the Agreement for “good reason” as defined in the Agreement. In the event that the Agreement is terminated due to Mr. James’ death or disability, he is entitled to receive his annual salary for a period equal to the lessor of (i) three months from the date of death or disability or (ii) the balance of the Term; and all other accrued but unpaid compensation and benefits. If the Agreement is terminated by the Company for “cause”, Mr. James is not entitled to receive any compensation other than accrued but unpaid compensation and benefits. In the event Mr. James terminates the Agreement for “good reason”, the Company shall pay to Mr. James his annual salary through the date of the end of the contract term; bonuses that have accrued and are unpaid as of the date of termination; and any Options which have been granted to Mr. James as of the date of the termination. The Agreement also provides for Mr. James is subject to confidentiality, non-solicitation and non-compete covenants for a period of one year following his termination, provided such termination is not by the Company without “cause” or by Mr. James for “good reason”.
The Company’s board of directors consists of the following three directors: Mark C. Mirken, Kenneth Sadowsky and Michael James.
ITEM 14:
ITEM 14:PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Friedman LLP billed us $109,268 and $133,165 for professional services rendered from their audit of our annual financial statements during 2011 and 2010.
AUDIT-RELATED FEES
Friedman LLP did not bill us for, nor perform professional services rendered for assurance and related services that were reasonably related to the performance of audit or review of the Company's financial statements during the fiscal years ended December 31, 2011 and December 31, 2010.
TAX FEES
Friedman LLP billed us in the aggregate amount of $0 for professional services rendered for tax related services during the fiscal year ended December 31, 2011 and 2010.
ALL OTHER FEES
	Friedman LLP billed us in the aggregate amount of $0 for professional services rendered for other services during the fiscal year ended December 31, 2011 and 2010.
The Board pre-approves all auditing services and the terms thereof (which may include providing comfort letters in connection with securities underwriting) and non-audit services (other than non-audit services prohibited under Section 10A(g) of the Exchange Act or the applicable rules of the SEC or the Public Company Accounting Oversight Board) to be provided to the Company by the independent auditor; provided, however, the pre-approval requirement is waived with respect to the provisions of non-audit services for the Company if the “de minimus” provisions of Section 10A (i)(1)(B) of the Exchange Act are satisfied. This authority to pre-approve non-audit services may be delegated to one or more members of the Board, who shall present all decisions to pre-approve an activity to the full Board at its first meeting following such decision.
PART IV
ITEM 15:
ITEM 15:EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
Description
3.1
Certificate of Incorporation and Bylaws of the Company.(1)
3.2
Amendment to Certificate of Incorporation
3.3
Certificate of Incorporation and Bylaws of Millennium.*
4.1
Certificate of Designations filed July 26, 2001*
4.2
Certificate of Designations (E and F Preferred Stock) (2)
4.3
Form of Unit Note(3)
4.4
Form of Series E Preferred Stock Certificate(3)
4.5
Form of Series F Preferred Stock Certificate(3)
10.1
Agreement and Plan of Reorganization between the Company, Millennium and the Stockholders of Millennium dated July 26, 2001.(4)
10.2
License Agreement with Isocell SA.(5)
10.3
Royalty and Investment Agreement between Millennium and P. Elayne Wishart dated January 11, 2001.*
10.4
Royalty and Investment Agreement between Millennium and Jane Swon dated January 11, 2001.*
10.5
Royalty and Investment Agreement between Millennium and David Miller dated January 11, 2001.*
10.6
Employment Agreement between Millennium and Jerry E. Swon dated April 1, 2001.*
10.7
Letter of Intent, among Millennium Biotechnologies Group, Inc., Millennium Biotechnologies Inc., Aisling Capital II, LP, dated April 5, 2006 (7)
10.8
Ventiv Subordination Agreement(3)
10.9
Second Amendment to Ventiv Security Agreements and Convertible Note(3)
10.10
Ventiv Service Agreement(3)
10.11
Amended and Restated Employment Agreement for Mark C. Mirken effective November 1, 2009
10.12
Amended and Restated Employment Agreement for Carl Germano effective November, 2009
10.13
Employment agreement of Michael C. James effective July 1, 2010
Subsidiaries of the Company:
(i) Millennium Biotechnologies, Inc. is a corporation formed under the laws of the State of Delaware and is the name under which it conducts business.
Corporate Code of Ethics and Business Conduct (6)
23.1
Consent of Friedman LLP, Independent Registered Public Accounting Firm.
31.1
Certification of Mark C. Mirken, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Michael C. James, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Mark C. Mirken, Chief Executive Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2
Certification of Michael C. James, Chief Financial Officer pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
* Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended July 31, 2001.
(1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1981, and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's report on Form 8-K filed on October 13, 2009, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's report on Form 8-K filed on November 17, 2009, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's report on Form 8-K filed on August 10, 2001, and incorporated herein by reference.
(5) Portions of this Exhibit were omitted and have been filed separately with the Secretary of the Securities and Commission pursuant to the Company's Application requesting Confidential Treatment under Rule 406 of the Securities Act of 1933.
(6) Previously filed as an exhibit to the Company’s Annual report on Form 10-KSB for the fiscal year ended December 31, 2002.
(7) Previously filed as an exhibit to the Company's report on Form 8-K filed on April 5, 2006, and incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ Michael C. James
Date: April 16, 2012
Michael C. James
Chief Financial Officer
(Principal Financial Officer)
In accordance with the requirements of the Securities Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Date
/s/ Mark C. Mirken
April 16, 2012
Mark C. Mirken, Director
/s/ Michael C. James
April 16, 2012
Michael C. James, Director
/s/ Kenneth Sadowsky
April 16, 2012
Kenneth Sadowsky, Director
Inergetics, Inc.
(f/k/a/Millennium Biotechnologies Group, Inc.)
and Subsidiary
Consolidated Financial Statements
December 31, 2011
Inergetics, Inc. and Subsidiary
Index to the Consolidated Financial Statements
[ Friedman LLP ]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Inergetics, Inc. and Subsidiary
(f/k/a Millennium Biotechnologies Group, Inc.)
Paramus, New Jersey
We have audited the accompanying consolidated balance sheets of Inergetics, Inc. (f/k/a Millennium Biotechnologies Group, Inc.) and subsidiary as of December 31, 2011 and 2010, and the related consolidated statement of operations, stockholders' deficit, and cash flows for each of the years in the two-year period ended December 31, 2011. Inergetics, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards established by the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for December 31, 2011 have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred substantial accumulated deficits and operating losses and has a working capital deficiency of $3,339,432. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also discussed in Note 2. The consolidated 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 outcome of this uncertainty.
/s/Friedman LLP
Marlton, New Jersey
April 16, 2012
Inergetics, Inc. and Subsidiary
Consolidated Balance Sheets
December 31
The accompanying notes are an integral part of the consolidated financial statements.
Inergetics, Inc. and Subsidiary
Consolidated Statements of Operations
For the Years Ended December 31, 2011 and 2010
The accompanying notes are an integral part of the consolidated financial statements.
Inergetics, Inc. and Subsidiary
Consolidated Statement of Stockholders’ (Deficit)
For the Years Ended December 31, 2011 and 2010
The accompanying notes are an integral part of the consolidated financial statements.
Inergetics, Inc. and Subsidiary
Consolidated Statement of Stockholders’ (Deficit)
For the Years Ended December 31, 2011 and 2010
The accompanying notes are an integral part of the consolidated financial statements.
Inergetics, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
The accompanying notes are an integral part of the consolidated financial statements.
Inergetics, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
The accompanying notes are an integral part of the consolidated financial statements.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and business
On March 15, 2010 the Company changed its name to Inergetics, Inc. Inergetics, Inc. (the Company or "Inergetics"), formerly Millennium Biotechnologies Group, Inc., which is the 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’s efforts going forward will focus on sales of Surgex in powder, bar and ready to drink forms.
In January 2011 the board of directors approved a reverse stock split of 1 for 80 on the Company’s issued and outstanding common stock. These consolidated financial statements have retroactively restated common shares to the earliest presentation reported along with the earnings per share calculation to reflect the 1 for 80 split.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with 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. We base our estimates and judgments on our experience and on various assumptions we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions.
Cash and Cash Equivalents
Cash and all highly liquid investments with a maturity of three months or less from the date of purchase, including money market mutual funds, short-term time deposits, and government agency and corporate obligations, are classified as cash and cash equivalents.
Accounts Receivable
We continuously monitor collections and payments from our customers and regularly adjust credit limits of customers based upon payment history and a customer’s current credit worthiness, as judged by us. We maintain a provision for estimated credit losses, as necessary.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation, which includes amortization of assets under capital leases, is calculated using the straight-line method over the estimated useful lives of the assets: 3-8 years for machinery and equipment, leasehold improvements are amortized over the shorter of the estimated useful lives or the underlying lease term. Repairs and maintenance expenditures which do not extend the useful lives of related assets are expensed as incurred.
Patents
Patents are capitalized and amortized over 240 months. Amortization expense was $576 for 2011 and 2010, respectively.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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, the Company has no further performance obligations and collection is reasonably assured as the majority of sales are paid for prior to shipping.
Advertising costs
Advertising costs are charged to operations when incurred. Advertising expense was $1,350 and $7,169 for the years ended December 31, 2011 and 2010, respectively.
Shipping and Handling Costs
Shipping costs of $30,748 and $18,195 are included in cost of sales for the years ended December 31, 2011 and 2010, respectively. Handling costs of $25,918 and $33,469 are included in general and administrative expenses for the years ended December 31, 2011 and 2010, respectively.
Equity Based Compensation
Equity based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). Compensation expense is recognized based on the estimated grant date fair value method using the Black-Scholes valuation model. The Company issued 7,533,406 warrants during the year ended December 31, 2011 for an expense of $1,280,679 and 0 warrants for an expense of $0 during the year ended December 31, 2010. The Company did not issue any stock options during the year ended December 31, 2011 and 2010, respectively.
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. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset for the years ended December 31, 2011 and 2010.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Loss Per Common Share
Basic and diluted loss per common share are computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Potential common shares used in computing diluted earnings per share related to stock options, warrants, convertible preferred stock and convertible debt which, if exercised, would have an anti- dilutive effect on earnings per share, and therefore have not been included. Anti-dilutive securities not included in net loss per share calculations for the years presented include:
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Research and Development
Research and development costs are expenses as incurred.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net assets or income.
2. GOING CONCERN
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.
However the Company has incurred substantial net losses for the years ended December 31, 2011 and 2010, has accumulated a deficit of approximately $76 million at December 31, 2011 and has a working capital deficiency of $3,339,432. 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 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.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions which currently are insured by the Federal Deposit Insurance Corporation. Balances in these accounts may, at times, exceed the federally insured limits.
The Company provides credit in the normal course of business to customers and 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 Consolidated Financial Statements
December 31, 2011 and 2010
4. INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out basis and consist of finished goods, raw materials and packaging for the Company’s Resurgex®, Resurgex Plus®, Resurgex Select®, and Surgex™ product lines. Cost-of-goods sold are calculated using the average costing method. Inventories at December 31, 2011 and 2010 consisted of the following:
5. PROPERTY AND EQUIPMENT
Property and equipment at cost, less accumulated depreciation, at December 31, 2011 and 2010, consisted of the following:
Depreciation expense charged to operations was $0 and $740 for the years ended December 31, 2011 and 2010.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at December 31, 2011 and 2010:
7. FAIR VALUE MEASUREMENTS
Certain financial assets and liabilities are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.
Obligations to be settled in stock are valued at the fair market value on the date of grant.
For financial instruments including cash, prepaid expenses and other current assets, short term debt, accounts payable and accrued expense, it was assumed that the carrying values approximated fair value because of their short-term maturities.
The following table represents the fair value hierarchy for those financial assets measured at fair value on a recurring basis as of December 31, 2011 and 2010:
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
8. DEBT
Short-term debt is as follows:
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
DEBT (Continued)
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
DEBT (Continued)
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
DEBT (Continued)
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
DEBT (Continued)
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
DEBT (Continued)
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
DEBT (Continued)
Long-Term Debt is as follows:
Long-Term Debt - related parties is as follows:
The following is a schedule of future minimum debt payments as of December 31, 2011:
2011 Gain on Troubled Debt Restructuring
The Company entered into restructuring agreements with various accredited investors, whereas these investors for economic reasons granted concessions to the Company. In accordance with ASC 470 “Debt” the Company treated the following transactions as troubled debt restructuring.
At December 31, 2010, the Company had Unit Notes issued to accredited investors with an outstanding balance of $3,350,309, which were in default and due on demand. In September 2011, the Company reached an agreement with the investors to convert this debt into Series G Preferred in full settlement of the note plus interest. The Series G preferred are convertible into 250 shares of common stock. At the dates of conversion the debt payable and accrued interest was $3,990,843 less debt discount of $228,190 totaling $3,762,653. At conversion $2,243,481 was held by a related party Investor Group and converted into 44,880 shares of Series G preferred valued at $2,099,835. The value of the debt in excess of Series G preferred of $143,646 was recorded in additional paid in capital on the Company Balance Sheet. The remaining debt and accrued interest of $1,519,172, net debt discount, was converted into 24,300 shares of Series G preferred valued at $1,136,918 which exceeded the fair market value by $382,254. Also the Company allocated restructuring charges of $167,964, which represents the pro-rata share of the $360,000 consulting fee due to the Investor Group for Unit Notes. The difference resulted in a gain on troubled debt restructuring of $214,290 has been included in the accompanying Statement of Operations in 2011. The gain incurred with troubled debt restructuring approximates $0.01 per share.
At December 31, 2010, the Company had Unsecured Notes issued to accredited investors with an outstanding balance of $1,581,530, which were in default and due on demand. In September 2011, the Company reached an agreement with the investors to convert a portion of the debt into common stock in full settlement of the notes plus interest. At the dates of conversion, the debt payable and accrued interest was $1,174,446. At conversion $53,994 was held by the Investor Group and converted into 269,970 shares of common stock valued at $53,994, resulting in no gain or loss on conversion. The remaining debt and accrued interest of $1,120,452, was converted into 3,325,728 shares of common stock valued at $665,146. The Company allocated restructuring costs of $49,429, which represents the pro-rata share of the $360,000 consulting fee due to the Investor Group. As of December 31, 2011 the gain on troubled debt restructuring of $405,877 has been included in the accompanying Statement of Operations in 2011. The gain incurred with troubled debt restructuring approximates $0.02 per share.
During 2011, the Company had Bridge Notes issued to a member of the Investor Group, an accredited investor, with an outstanding balance of $1,050,000, which were due on demand. In July 2011, the Company reached an agreement with the investor to convert the debt into Series G preferred in full settlement of the note plus interest. At the dates of conversion, the value of the amount of the debt payable and accrued interest was $1,078,704. The debt was converted into 21,575 shares of Series G preferred stock valued at $881,320 and exceeded the fair market by $197,384 which was recorded in additional paid in capital on the Company’s Balance Sheet. The Company recorded an expense of $81,362 which represents the pro-rata share of the $360,000 consulting fee due to the Investor Group for Bridge Notes against the gain incurred with troubled debt restructuring in the accompanying Statement of Operations in 2011.
Also, included in the gain incurred with debt restructuring is $130,000 which was due to Ardent Advisors. This amount was forgiven and the full amount was included in the gain incurred with debt restructuring in the accompanying Statement of Operations in 2011.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
DEBT (Continued)
2011 Extinguishment of Debt
The following debt instruments were modified in the current period. The extinguishment of debt included the addition of a conversion feature therefore requiring the Company to record the transaction in accordance with ASC 470 “Debt” extinguishment of debt accounting.
At December 31, 2010, the Company had promissory notes issued to four accredited investors with an outstanding balance of $825,000, which were in default and due on demand. In July 2011, the Company reached an agreement with the investors to convert the debt into a new convertible note in full settlement of the note plus interest. At the date of conversion, the debt payable and accrued interest was $977,268. The fair value of the new debt is $1,694,593, which includes the fair value of the conversion feature of $717,324. The Company valued the conversion feature utilizing the black scholes method with the following inputs: stock price on date of calculation of $0.17, exercise price of $0.20, volatility of 192.8%, years 2.25, discount rate of 15%, and dividend rate of 0%. The conversion rate on the new convertible note is $0.20 per share of common stock. The Company allocated restructuring costs of $41,131, which represents the pro-rata share of the $360,000 consulting fee due to the Investor Group for promissory note. As of December 31, 2011 the loss on debt extinguishment of $758,455 has been included in the accompanying Statement of Operations. The loss incurred with debt restructuring represents approximately $0.03 per share.
In January, 2011, the Company issued notes to three accredited investors with an outstanding balance of $450,000, due on demand. In July 2011, the Company reached an agreement with the investors to convert the debt into a new convertible note in full settlement of the note plus interest. At the date of conversion, the value of the debt payable and accrued interest was $477,860. The fair value of the new debt is $828,614, which includes the fair value of the conversion feature of $350,754. The Company valued the conversion feature utilizing the black scholes method with the following inputs: stock price on date of calculation of $0.17, exercise price of $0.20, volatility of 192.8%, years 2.25, discount rate of 15%, and dividend rate of 0%. The conversion rate on the new convertible note is $0.20 per share of common stock. The Company allocated restructuring costs of $20,112, which represents the pro-rate share of the $360,000 consulting fee due to the Investor Group for the promissory note. As of December 31, 2011 a loss of $370,866 has been included in the accompanying Statement of Operations for the loss on debt extinguishment. The loss incurred with debt restructuring represents approximately $0.02 per share.
The combination of the extinguished notes above are currently reflected as long term debt of $29,606 and related party long term debt of $1,425,522 on the accompanying balance sheet.
2010 Debt Restructuring
In the first half of 2010, the Company raised $1,182,500 from the sale of 11.825 units (the “Units”), each Unit consisting of a Senior Secured 12% thirty month $100,000 Note (a “Unit Note”) and 100 shares of the Company’s Series F convertible preferred stock (the “Series F Preferred”) in a private placement (the “Private Placement”). The issuance of these securities was part of the Company’s restructuring plan, and the securities were exempt from the registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Unit Notes have a term of 30 months and bear interest at the rate of 12% per annum. Installments of the principle and interest will commence on the first day of business of the calendar quarter following 18 months from the date of issuance and quarterly thereafter on the first business day of each calendar quarter in fixed payments in the amount of $25,372 each until the maturaity date, on which date any remaining principal and interest shall be due and payable in full. The Unit Notes are guaranteed by the Subsidiary and secured by a first lien and security interest in all of the assets of the Company and the Subsidiary.
In August, 2010, the Company issued Secured Promissory Notes due 2012 (the “Notes”) to Pershing LLC, custodian FBO Leon Frenkel IRA, Kenneth R. Sadowsky Revocable Trust and Seahorse Enterprises LLC in the aggregate principal amount of $825,000.
The Notes bear interest at 15% per annum, and installment payments of principal and interest are payable as follows: 25% of the original principal amount and all accrued interest shall be paid on or before October 10, 2010, and thereafter, 15% of the original principal amount and all accrued interest shall be paid on or before January 10th, April 10th, July 10th and October 10th of each year until the maturity date of January 10, 2012, at which time any remaining principal amount and accrued interest is due and payable. The Company may prepay all or any portion of the Notes. The Notes are guaranteed by the Company’s wholly owned subsidiary, Millennium Biotechnologies, Inc. (the “Guarantor”). A default under the Notes can be declared by Ken Sadowsky, Leon Frenkel and Seahorse Enterprises LLC, as representatives of the holders of the Notes, only upon vote or written instruction of the holders of the Notes representing a majority in dollar amount of the outstanding principal balance of all outstanding Notes.
INERGETICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
DEBT,(Continued)
The Company together with Ken Sadowsky, Leon Frenkel and Seahorse Enterprises LLC (the “Collateral Agents”) entered into a security agreement (the “Security Agreement”). Pursuant to the Security Agreement and subject to the Intercreditor Agreement (discussed below), the Company’s and the Guarantor’s obligations under the Notes are secured by a first lien and security interest in substantially all of the assets of the Company and the Guarantor (the “Collateral”), other than the “Permitted Liens” as defined in the Security Agreement. The Company and the Collateral Agents may amend, modify, waive or supplement provisions of the Security Agreement upon the written consent of the holders of the Notes representing the majority in dollar amount of the outstanding principal balance of all outstanding Notes.
The Company previously issued Unit Notes (the “Unit Notes”) in the aggregate principal amount of $5,972,098 of which Unit Notes in the aggregate principal amount of $3,253,419 remain outstanding. The Collateral Agents and the collateral agents for the Unit Notes (the “Unit Note Collateral Agents”) entered into an intercreditor agreement (the “Intercreditor Agreement”) pursuant to which the security interest in the Collateral is shared pari passu by the Collateral Agents, for its benefit and the benefit of the holders of the Notes, with the Unit Note Collateral Agents, for its benefit and the benefit of the holders of the Unit Notes.
Ken Sadowsky, Leon Frenkel and Seahorse Enterprises LLC are also the representatives of the holders of the Unit Notes and are the Unit Note Collateral Agents. Ken Sadowsky is a director of the Company. Leon Frenkel is the largest beneficial owner of the Company’s Common Stock and is the beneficial owner of a majority of the outstanding Unit Notes. Ken Sadowsky and Seahorse Enterprises LLC also are holders of outstanding Unit Notes.
At December 31, 2009, the Company had several unit notes payable to accredited investors and related parties with a total outstanding balance of $2,621,789, due on demand. In June 2010, the Company reached an agreement with the investors to convert the debt into equity in full settlement of the notes plus interest. At the date of conversion, the carrying amount of the debt payable exceeded the fair market value of the equity transferred by $239,700. A loss of $41,928 has been included in the Statement of Operations in 2010 for the extinguishment of debt, representing less than $0.01 per share. Additional paid in capital of $281,628 has been included in the Statement of Stockholders’ Deficit due to related party transactions.
Troubled Debt Restructuring
At December 31, 2009, the Company had promissory notes issued to two accredited investors with an outstanding balance of $375,000, due on demand. In May 2010, the Company reached an agreement with the investors to convert the debt into equity in full settlement of the note plus interest. At the date of conversion, the carrying amount of the debt payable and accrued interest exceeded the fair market value of the equity transferred by $44,795; a gain of $44,795 has been included in the Statement of Operations in 2010 for the extinguishment of debt, representing less than $0.01 per share.
At December 31, 2009, the Company had a 14% promissory note issued to one accredited investor with an outstanding balance of $50,000, due on demand. In June 2010, the Company reached an agreement with the investor to convert the debt into equity in full settlement of the note plus interest. At the date of conversion, the carrying amount of the debt payable exceeded the fair market value of the equity transferred by $40,100; a gain of $40,100 has been included in the Statement of Operations in 2010 for the extinguishment of debt, representing less than $0.01 per share.
During 2010, the Unit Note Collateral Agents received 10,000,000 shares each for a total of 30,000,000 shares to release collateral at a fair value of $600,000. A loss of $600,000 has been included in the Statement of Operations in 2010 for the extinguishment of debt.
8. INCOME TAX
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company does not believe it has any tax positions that should not be recognized under FASB ASC 740-10.
The reconciliation of the effective income tax rate to the Federal statutory rate is as follows:
As of December 31, 2011, the Company has net operating loss carry forwards of approximately $60,100,000 that can be utilized to offset future taxable income for Federal income tax purposes through 2030. Net operating loss carry forwards expire starting in 2024 through 2030. Utilization of these net loss carry forwards is subject to the limitations of Internal Revenue Code Section 382. Because of the current uncertainty of realizing the benefit of the tax carry forward, a valuation allowance equal to the tax benefit for deferred taxes has been established.
Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse. Because of the current uncertainty of realizing the benefit of the tax carry forward, a valuation allowance equal to the tax benefit for deferred taxes has been established. The full realization of the tax benefit associated with the carry forward depends predominantly upon the Company's ability to generate taxable income during the carry forward period.
Significant components of the Company's deferred tax assets and liabilities are summarized as follows:
The Company’s deferred income tax valuation allowance increased by $4,000,000 to $20,400,000 as of December 31 2011.
9. EMPLOYMENT AGREEMENTS
Pursuant to the Summary of Debt Reorganization and Financing dated July 14, 2011, Mr. Mirken’s salary was amended to reduce his salary to $175,000 per annum until the Company reaches three consecutive fiscal quarters of positive “Net Income” at which point his annual salary will increase to $240,000. The gross-up provisions with regards to any issuances under the Management Warrant Grant Program have been eliminated. Mr. Mirken will receive a bonus of $32,500 upon receiving three consecutive fiscal quarters of positive Net Income. Mr. Mirken’s annual salary will increase to $306,000 upon the Company achieving $1,000,000 of Net Income in any twelve consecutive calendar month period.
Pursuant to an amended and restated employment agreement, Carl Germano is employed as the Chief Science Officer of Millennium. The Agreement terminates on November 1, 2014; provided, Mr. Germano has the right to extend the term of employment for two additional years. Pursuant to the Agreement, Mr. Germano currently receives a base annual salary of $150,000 per year which increases to $200,000 per year in the event (a) the Company's annual revenues exceed $15,000,000; (b) the Company enters into a licensing agreement with an unrelated third party where the minimum upfront licensing fee is no less than $3,000,000; or (c) the Company achieves two quarters of positive cash flow. In addition, during the term of the Agreement, Mr. Germano is entitled to receive an annual bonus at the discretion of the Company. Mr. Germano also received 114.1667 E Preferred (which subsequently converted into 18,021 shares of Common Stock) and Performance Shares.
INERGETICS, INC. AND SUBSIDIARY
(f/k/a Millennium Biotechnologies Group, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYMENT AGREEMENTS, (Continued)
The Agreement terminates upon Mr. Germano’s death and may be terminated at the option of the Company as a result of Mr. Germano’s disability or for “cause” as defined in the Agreement. Mr. Germano has the right to terminate the Agreement for “good reason” as defined in the Agreement. In the event that the Agreement is terminated due to Mr. Germano’s death or disability, he is entitled to receive his annual salary for a period equal to the lessor of (i) three months from the date of death or disability or (ii) the balance of the Term; and all other accrued but unpaid compensation and benefits. If the Agreement is terminated by the Company for “cause”, Mr. Germano is not entitled to receive any compensation other than accrued but unpaid compensation and benefits. In the event Mr. Germano terminates the Agreement for “good reason”, the Company shall pay to Mr. Germano his annual salary through the date of the end of the contract term; bonuses that have accrued and are unpaid as of the date of termination; and any Options which have been granted to Mr. Germano as of the date of the termination. The Agreement also provides for Mr. Germano is subject to confidentiality, non-solicitation and non-compete covenants for a period of one year following his termination, provided such termination is not by the Company without “cause” or by Mr. Germano for “good reason”.
Pursuant to the Summary of Debt Reorganization and Financing dated July 14, 2011, Mr. James salary was amended to reduce his salary to $150,000 per annum until the Company reaches three consecutive fiscal quarters of positive Net Income at which point his annual salary will increase to $200,000. The gross-up provisions with regards to any issuances under the Management Warrant Grant Program have been eliminated. Mr. James will receive a bonus of $25,000 upon receiving three consecutive fiscal quarters of positive Net Income.
10. CAPITAL STOCK
a)Series B, C, D Convertible Preferred Stock
Convertible Series B preferred shares ("Series B") are non-dividend bearing, and are convertible into shares of the Company’s common stock at any time at the option of the holder and are subject to adjustment in accordance with certain anti-dilution clauses. Cumulative Series C preferred shares ("Series C") are not convertible but are entitled to cumulative cash dividends at the rate of $.65 per share per annum, payable in each year commencing the year after all the shares of Series B are retired. There were no cumulative cash dividends payable as of December 31, 2011 and 2010, respectively. Convertible Series D preferred shares ("Series D") are non-dividend bearing and are convertible into shares of the Company’s common stock at the option of the Company and are subject to adjustment in accordance with certain anti-dilution clauses. All Series D Preferred Shares were converted into common stock in April 2002.
a.1)Voting Rights
The holders of Series B and Series C preferred stock have no voting rights. Each share of common stock is entitled to one vote.
a.2)Dividend Restrictions
No cash dividends may be declared or paid on the Company’s common stock if, and as long as, Series B preferred stock is still outstanding or there are dividends in arrears on outstanding shares of Series C preferred stock. No dividends may be declared on Series C shares if, and as long as, any Series B shares are outstanding. There were no cumulative cash dividends payable as of December 31, 2011 and 2010, respectively.
a.3) Other information is summarized as follows:
(1)Plus any dividend in arrears.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
CAPITAL STOCK (continued)
b)Series E Convertible Preferred Stock
b.1) Authorized Number
Fifty Thousand (50,000) of the authorized shares of Preferred Stock are hereby designated “Series E Convertible Preferred Stock” par value $1.00 per share (“E Preferred”).
b.2) Designation
The rights, preferences, privileges, restrictions and other matters relating to E Preferred, as filed with the Secretary of State, Delaware, are as follows:
(1) Dividends. The shares of E Preferred shall not bear any dividends.
(2) Distribution of Assets Upon Liquidation. In the event the Company shall be liquidated, dissolved or wound up, whether voluntarily or involuntarily, each holder of shares of E Preferred, shall be able to share ratably in the proceeds available along with the holders of shares of Common Stock on an as converted basis (meaning for these purposes, that each share of E Preferred shall have rights equivalent to the number of shares of Common Stock into which such E Preferred is convertible).
(3) Voting Rights. Each holder of outstanding shares of E Preferred shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the share of E Preferred held by such holder would then be convertible assuming a sufficient number of shares of Common Stock were then authorized and available for issuance, at each meeting of the stockholders of the Company (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Company for their action or consideration (including without limitation, any matter voted on together with the holders of Common Stock). Except as provided by law, by any of the provisions contained herein or by the provisions establishing any other series of stock, holders of E Preferred shall vote together with the holders of Common Stock as a single class.
(4) Mandatory Conversion of E Preferred. All of the shares of E Preferred shall be automatically converted into shares of Common Stock at the Conversion Rate then in effect (a "Mandatory Conversion"). The “Conversion Rate” is 10,000 shares of Common Stock for each share of E Preferred. All issued and outstanding shares of E Preferred converted into shares of common stock on March 15, 2010 at the rate of 10,000 shares of common stock for each share of E Preferred.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
CAPITAL STOCK (continued)
c)Series F Convertible Preferred Stock
c.1) Authorized Number
Ten Thousand (10,000) of the authorized shares of Preferred Stock are hereby designated “Series F Convertible Preferred Stock” par value $1.00 per share (“F Preferred”).
c.2) Designation
The rights, preferences, privileges, restrictions and other matters relating to F Preferred, as filed with the Secretary of State, Delaware, are as follows:
(1) Dividends. The shares of F Preferred shall not bear any dividends.
(2) Distribution of Assets Upon Liquidation. In the event the Company shall be liquidated, dissolved or wound up, whether voluntarily or involuntarily, each holder of shares of F Preferred, shall be able to share ratably in the proceeds available along with the holders of shares of Common Stock on an as converted basis (meaning for these purposes, that each share of F Preferred shall have rights equivalent to the number of shares of Common Stock into which such F Preferred is convertible).
(3) Voting Rights. (a) Each holder of outstanding shares of F Preferred shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the share of F Preferred held by such holder would then be convertible assuming a sufficient number of shares of Common Stock were then authorized and available for issuance, at each meeting of the stockholders of the Company (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Company for their action or consideration (including without limitation, any matter voted on together with the holders of Common Stock). Except as provided by law, by any of the provisions contained herein or by the provisions establishing any other series of stock, holders of F Preferred shall vote together with the holders of Common Stock as a single class.
(b) Until such time as the Company has achieved annual EBITDA (as defined in the agreement) of at least $10,000,000, the consent of a majority of the holders of the outstanding shares of F Preferred, voting as a separate class, shall be required to approve: (i) any offer, sale, designation or issuance of any security senior to or pari passu with the F Preferred; (ii) the repurchase or redemption of capital stock of the Company (except from employees at cost upon termination); (iii) any increase or decrease in the number of authorized shares of Common Stock or Preferred Stock; (iv) any amendment to the Certificate of Incorporation or other governing documents of the Company; (v) any alteration or change to the rights, preferences or privileges of the F Preferred, by merger, consolidation or otherwise; (vi) the entry into the sale or exclusive license of all or substantially all the assets of the Company, mergers, consolidations, other business combinations, recapitalizations and liquidations; (vii) any acquisition of the stock or assets of any other entity; (viii) any dividends or distributions on the Company’s capital stock; and (ix) the expansion into any new businesses. The foregoing will apply to any subsidiary or controlled affiliate of the Company.
(4) Conversion of F Preferred. At the option of the holder each share of F Preferred may be converted into fully paid and non-assessable shares of the Company’s Common Stock at the rate of 120,000 shares of Common Stock for each share of F Preferred.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
CAPITAL STOCK (continued)
d)Series G Convertible Preferred Stock
c.1) Authorized Number
Two Hundred Thousand (200,000) of the authorized shares of Preferred Stock are hereby designated “Series G Convertible Preferred Stock” par value $1.00 per share, stated value $50 (“G Preferred”).
c.2) Designation
The rights, preferences, privileges, restrictions and other matters relating to G Preferred, as filed with the Secretary of State, Delaware, are as follows:
(1) Dividends. The shares of G Preferred shall bear a 10% annual dividend, payable quarterly in kind based on the equivalent of 90% of the average of the last ten trading day closing price of the Common Stock prior to the dividend payment date.
(2) Distribution of Assets Upon Liquidation. In the event the Company shall be liquidated, dissolved or wound up, whether voluntarily or involuntarily, each holder of shares of G Preferred, has a liquidation preference before any payment or distribution on the Common Stock or on any other class of stock ranking junior to the G Preferred up to the Stated Value and, thereafter, shares ratably in proceeds available along with the holders of shares of Common Stock and any other share of stock entitled to payment upon liquidation.
(3) Voting Rights. (a) Each holder of outstanding shares of G Preferred shall be entitled to the number of votes equal to the number of whole shares of Common Stock into which the share of G Preferred held by such holder would then be convertible assuming a sufficient number of shares of Common Stock were then authorized and available for issuance, at each meeting of the stockholders of the Company (and written actions of stockholders in lieu of meetings) with respect to any and all matters presented to the stockholders of the Company for their action or consideration (including without limitation, any matter voted on together with the holders of Common Stock). Except as provided by law, by any of the provisions contained herein or by the provisions establishing any other series of stock, holders of G Preferred shall vote together with the holders of Common Stock as a single class.
(4) Conversion of G Preferred. At the option of the holder each share of G Preferred may be converted into fully paid and non-assessable shares of the Company’s Common Stock at the rate of 250 shares of Common Stock for each share of G Preferred. The holder of each G Preferred has anti-dilution rights whereby any Common Stock shares that are issued or sold at a price less than the Conversion Rate in effect, then the Conversion Rate shall be reduced to an amount equal to the New Securities Issuance Price.
(5) Accounting Treatment . The Company records Convertible Series G Preferred outside of permanent equity due to a redemption feature that is not solely controlled by the issuer, in accordance with ASR 268.
During 2011, the Company received cash proceeds of $950,000 representing 19,000 shares of series G Convertible Preferred Stock. Additionally the Company converted debt totaling $4,418,065 into 96,755 shares of series G Convertible Preferred Stock. The Company issued 5,072 shares of series G Convertible Preferred Stock as payment for the series G Convertible Preferred Stock dividend.
11. OPTIONS AND WARRANTS
In February 2000, Millennium adopted its 2001 Stock Option Plan ("The 2001 Plan"). The 2001 Plan provides that certain options granted thereunder are intended to qualify as "Incentive Stock Options" (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The Plan provided for the grant of options for up to 500,000 shares. The purchase price per common stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total enhanced voting power of all classes of Millennium’s common stock, the exercise price of such option shall be at least 110% of the fair market value of the common stock on the date of grant and the term of the option shall not exceed five years from the date of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a committee established by the Board of Directors with the condition that such prices shall not be less than 85% of the fair market value of the common stock at the time of grant. Millennium had no options issued pursuant to this Plan as of December 31, 2011 and 2010, respectively.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
OPTIONS AND WARRANTS (continued)
Information regarding the Company’s stock options and warrants for fiscal years ended December 31, 2011 and 2010 is as follows:
There were no stock options issued or outstanding during the fiscal year ended December 31, 2011 and 2010, respectively.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
OPTIONS AND WARRANTS, Continued
The following table summarizes information about fixed-price stock options and warrants outstanding at December 31, 2011
The Company has used the fair value based method of accounting for its employee stock options beginning with the year ended December 31, 2006.
Upon closing of the Second Equity Offering as defined in the Summary of Debt Reorganization and Financing dated July 14, 2011, management warrant grants in the amount of 5,344,356 were earned. The Company valued the warrants utilizing the black scholes method with the following inputs: stock price of $0.17, exercise price of $0.17, volatility of 158.09%, term of 10 years, risk free rate of 2% and dividend rate of 0%. On October 6, 2011, the board of directors approved a revision to the Management Warrant Grant Program which was originally calculated at eleven percent (11%) of the “fully diluted” shares less 2,189,050 shares. Effective October 2011, the Board reinstated the 2,189,050 shares. Accordingly, 2,189,050 management warrants have been granted. The Company valued the warrants utilizing the black scholes method with the following inputs: stock price of $0.17, exercise price of $0.17, volatility of 157.64%, term of 10 years, risk free rate of 2% and dividend rate of 0%. The warrants are fully vested upon grant. Total compensation cost recognized in the income statement for stock-based employee and directors’ compensation awards was $1,280,679 and $0 in 2011 and 2010, respectively.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space in Paramus, NJ under an operating lease. The lease expires on November 30, 2012. During 2012 the Company’s minimum lease payments under the current lease agreement total $37,928
Net rent expense for the Company under operating leases for the years ended December 31, 2011 and 2010 was $56,119 and $26,232, respectively.
The Company entered into a Marketing and Sponsorship Contract (the “Contract”) beginning September 1, 2011 and ending on June 30, 2014. As of December 31, 2011 a $60,000 payment was made in relation to the terms of the Contract. Under the Contract the Company is required to make payments of $64,800 and $70,000 on or before September 1, 2012 and on or before September 1, 2013, respectively. In addition to the cash payments the Company must provide the Sponsor with $100,000 of the Company’s product during the duration of the Contract, commencing September 2011.
13. STOCK GRANTED FOR SERVICES
During 2011 the Company issued 375,000 shares of Common Stock valued at $51,248 which represents Director fees in the amount of $30,000 and consulting services in the amount of $21,248. The Company also issued 3,500 Preferred Convertible Series G Stock valued at $175,000 for consulting services. The value of the Common Stock and Preferred Convertible Series G Stock is the fair market value on the date of grant.
During 2011 the Company granted 1,500,000 shares of Common Stock for consulting services valued at $255,000 relating to financial advisory services and professional athlete introductory services. The Company also granted 187,500 shares of Common Stock for consulting services expense valued at $37,500 relating to professional athlete appearances. Additionally, the Company issued 625,000 shares of Common Stock valued at $125,000 as salary and a bonus to an officer of the Company. The value of the Common Stock is the fair market value on the date of grant. These amounts appear in obligations to be settled in stock in the liability section of the balance sheet as of December 31, 2011.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
14. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2011, the Investor Group, consisting of a director of the Company and two other parties received a $360,000 consulting fee for their assistance in the troubled debt reorganization and financing performed by the Company. The $360,000 fee, payable in common stock, is recorded in Common Stock Subscribed in the Balance Sheet. The fee has been reported net of gain incurred in connection with troubled debt restructuring on the Statement of Operations.
In May 2009, the current holders of an aggregate of $2,700,000 principal amount of senior debt secured by the assets of the Company (“Senior Secured Notes”) threatened foreclose on the Senior Secured Notes as a result of the Company’s default under the terms of the Senior Secured Notes. The perfected first lien and security interest securing the Senior Secured Notes were superior to all other liens, claims, judgments and other security interests in the Company. In May, 2009, a group of three investors, including Ken Sadowsky, a director of the Company, Leon Frenkel and Seahorse Enterprises (collectively, the “Creditor Investors”), purchased all of the Senior Secured Notes. By purchasing the Notes, the Creditor Investors relieved the Company of the difficulties associated with the previous holders of the Senior Secured Notes and the threat of immediate foreclosure. Also, the Creditor Investors provided an additional $924,000 in financing to the Company, enabling the Company to fund the manufacturing and production of products to fulfill outstanding key customer purchase orders. In November 2009, the Creditor Investors converted all of the above debt into 32.2 Units in the Private Placement. The E Preferred converted into shares of Common Stock on March 15, 2010.
As part of the debt restructuring discussed in “ Note 8”., in November 2009, the Company granted management an aggregate of 15,500 shares of E Preferred (the “Performance Shares”), which represented such number of E Preferred that are convertible into common stock equal to 10% of the fully diluted common shares following December 15, 2009, the final closing date (the “Final Closing Date”) of the Private Placement. Pursuant to these management grants, Mark C. Mirken received 12,150 shares of E Preferred, Frank Guarino received 1,500 shares of E Preferred and Carl Germano received 1,500 shares of E Preferred. All of the foregoing shares of E Preferred automatically converted into shares of Common Stock on March 15, 2010 at the rate of 10,000 shares of Common Stock for each share of E Preferred. In the event that the gross revenue of our subsidiary, Millennium Biotechnologies, Inc., for the 13 month period immediately following the Final Closing Date (the “Target Period”) is less than $15 million (the “Target Revenue”), the number of Performance Shares shall be reduced by 10% for each $1 million under the Target Revenue and such number of reduced Performance Shares shall be issue to the purchasers of the Units in the Private Placement based upon the percentage of Units purchased by each such purchaser. The Target Period shall commence when the Company and/or the subsidiary have received at least $1,000,000 in working capital from any sources including from the net proceeds of the Private Placement. The right to so reduce and reallocate any portion of the Performance Shares is dependent on the Target Period commencing within 60 days of the Final Closing Date. Notwithstanding any of the foregoing, the Performance Shares shall not be reduced by more than 50% of the total Performance Shares issued. In November 2010 all of the shares were returned back to the Company valued at $1,298,000.
Inergetics, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
RELATED PARTY TRANSACTIONS, (Continued)
During 2011 and 2010, the Company also issued restricted stock awards to certain officers and directors, as follows:
Mr. Custodio received 125,000 shares of restricted Common Stock in 2011for consideration of his director’s fees. Mr. Custodio received $40,000 in cash compensation and 200 shares of E Preferred which were converted into 2,000,000 common shares, as a director’s fee in 2010.
Mr. Sadowsky received 125,000 shares of restricted Common Stock in 2011 for consideration of his director’s fees.
Michael C. James received 100 shares of E Preferred which converted into 1,000,000 common shares, as a director’s fee. In addition, in 2010, Mr. James purchased one Unit (100 shares of F Preferred and a Unit Note in the principal amount of $100,000) for $100,000. Under the Summary of Debt Reorganization and Financing Agreement dated July 14, 2011, The accrued salary of $100,000 owed Mr. James as of December 31, 2010 was converted into common stock at the conversion rate of $0.20 per share or 500,000shares of common stock. Mr. James also received a bonus of $25,000 in common stock upon the completion of debt conversion completed September 13, 2011 at the conversion rate of $0.20 per share or 125,000 shares of common stock. The shares of stock were issued in February 2012.
Refer to Note 8 for related party debt transactions.
15. MAJOR CUSTOMERS
The Company had one customer that comprised approximately 80% of revenue for the year ended December 31, 2011. The Company had three customers that comprised approximately 88% of revenue for the year ended December 31, 2010. The largest customer comprised 43% of revenue, the second largest customer comprised 35% of revenue and the third customer comprised 10% of revenue.
16. LITIGATION
All legal matters contained within this Note to the Financial Statement are reserved on the Company’s balance sheet as a liability as of December 31, 2011.
Creative Healthcare Solutions, LLC vs. Millennium Biotechnologies Inc, Ct. of Common Pleas of Delaware County Ohio, Case No. 07 CV H 11 1420) Millennium was not satisfied with the service rendered by Creative Healthcare Solutions, LLC in 2005 which were associated with the development of Resurgex Select collateral materials developed in December of 2005. Millennium subsequently was forced to destroy and dispose of over 80% of the materials provided by Creative Healthcare Solutions due to the poor quality of the materials. Millennium has been unsuccessful in resolving the dispute and subsequently Creative Healthcare Solutions, LLC has filed legal action for demand of payment in the amount of $63,718 for services rendered. Millennium continues to negotiate a settlement with regards to this legal proceeding.
Ronald Burgert vs. Millennium Biotechnologies, Inc., et al. filed on the 9th day of October 2008 in District Court of Dallas County, Dallas, Texas. Mr. Burgert has filed a claim in the amount of $25,000 based on a note dated May 18, 2006. As of March 26, 2008 the balance due on the note, including unpaid principal and interest, was $31,635. On December 1, 2008, the 14th Judicial District, Dallas County, Dallas, Texas issued a default judgment against Millennium Biotechnologies, Inc. in the amount of $31,636 plus interest and unpaid attorney’s fees.
Robert Half International vs. Millennium Biotechnologies, Inc. filed on September 30, 2009 in the Superior Court of New Jersey, Law Division, Middlesex County. Robert Half International claims a total of $18,507 plus costs and fees based upon the Millennium Biotechnologies, Inc.’s failure to pay the plaintiff the fees associated with the full time hiring of an employee.
First Insurance Fund vs. Millennium Biotechnologies filed on November 18, 2010 in the Superior Court of New Jersey, Civil Division, Somerset/Hunterdon-Special Civil Part, Case# SOM-DC007284-10. First Insurance Fund claims a total of $13,489.99 including costs and fees based upon Millennium Biotechnologies failure to pay the plaintiff for Insurance invoices. On February 28, 2011, there was a levy on Millennium’s bank account in the amount of $1,644. On February 14, 2012 there was a levy on Millennium’s bank account in the amount of $2,320.
17. SUBSEQUENT EVENTS
During the first quarter of 2012 the Company issued five three year convertible promissory notes totaling $150,000. The notes are convertible into common stock at the conversion price of $0.20 per share. The notes bear interest at 10% per annum. The note holders also received 1,875,000 warrants which expire three years from date of issuance and are convertible at the price of $0.20 per common share.
The Company also issued a demand note in the amount of $75,000. The note bears interest at the annual rate of 12%. The note holder also received 150,000 cashless warrants which expire three years from date of issuance and are convertible at the price of $0.20 per common share.
The Company issued 6,000 shares of Series G Preferred for consulting services relating to investor relations, public relations and retail distributors.
The Company issued 2,600,000 shares of common stock for consulting services relating to investor relations, public relations, financial advisory services and professional athlete introductory services.
The Company issued 419,357 shares of common stock for financing costs in the first quarter of 2012.