UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
x
Annual
Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
1934
For
the
fiscal year end
March
31, 2008
¨
Transition
Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
For
the
transition period from _____ to _____
COMMISSION
FILE NUMBER
033-24138-D
IMAGENETIX,
INC.
(Name
of
small business issuer in its charter)
NEVADA
|
|
87-043772
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
10845
Rancho Bernardo Road, Suite 105
|
|
|
San
Diego, California
|
|
92127
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Issuer's
telephone number
(858)
674-8455
Securities
registered under Section 12(b) of the Exchange Act:
NONE.
Securities
registered under Section 12(g) of the Exchange Act:
COMMON
STOCK, $0.001 PAR VALUE PER SHARE.
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act
¨
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x
No
o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes
o
No
x
Revenues
for the fiscal year ended March 31, 2008 were
:
$5,569,593.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold as of
June
16, 2008
was
$5,891,765
.
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date.
As
of June 25, 2008 the issuer had 10,960,788
shares
of Common Stock outstanding.
Transitional
Small Business Disclosure Format (Check one): Yes
¨
No
x
Annual
Report on Form 10-KSB
For
the Year Ended March 31, 2008
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
PART
I
|
|
|
|
ITEM
1.
|
Description
of Business
|
3
|
ITEM
2.
|
Description
of Property
|
10
|
ITEM
3.
|
Legal
Proceedings
|
10
|
ITEM
4.
|
Submission
of Matters to a Vote of Security Holders
|
10
|
|
|
|
PART
II
|
|
|
|
ITEM
5.
|
Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities
|
10
|
ITEM
6.
|
Management's
Discussion and Analysis or Plan of Operation
|
11
|
ITEM
7.
|
Financial
Statements
|
19
|
ITEM
8.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
19
|
ITEM 8A.
|
Controls
and Procedures
|
19
|
ITEM 8B.
|
Other
Information
|
21
|
|
|
|
PART
III
|
|
|
|
ITEM
9.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance With
Section
16(a) of the Exchange Act
|
21
|
ITEM
10.
|
Executive
Compensation
|
23
|
ITEM
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
24
|
ITEM
12.
|
Certain
Relationships and Related Transactions
|
25
|
ITEM
13.
|
Exhibits
|
25
|
ITEM
14.
|
Principal
Accountant Fees and Services
|
27
|
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements contained in this Annual Report on Form 10-KSB constitute
"forward-looking statements". These statements, identified by words such as
“plan”, "anticipate", "believe", "estimate", "should," "expect" and similar
expressions, include our expectations and objectives regarding our future
financial position, operating results and business strategy. These statements
reflect the current views of management with respect to future events and are
subject to risks, uncertainties and other factors that may cause our actual
results, performance or achievements, or industry results, to be materially
different from those described in the forward-looking statements. Such risks
and
uncertainties include those set forth under the caption "Management's Discussion
and Analysis or Plan of Operation" and elsewhere in this Form 10-KSB. We advise
you to carefully review the reports and documents we file from time to time
with
the Securities and Exchange Commission (“SEC”), particularly our quarterly
reports on Form 10-QSB and our current reports on Form 8-K.
As
used
in this annual report, the terms "we", "us", "our", and “Imagenetix” mean
Imagenetix, Inc., unless otherwise indicated.
PART
I
ITEM
1. DESCRIPTION OF
BUSINESS.
Overview
We
were
organized as a Nevada corporation in March 1988. Our principal executive offices
are located at 10845 Rancho Bernardo Road, Suite 105, San Diego, California
92127, and our telephone number is (858) 674-8455. Our home page can be located
on the World Wide Web at
http://www.imagenetix.net
.
We
develop, formulate and market over-the-counter, natural-based nutritional
supplements and skin care products. Our products are proprietary, often
supported by scientific studies which we request and are offered through
multiple channels of distribution, including direct marketing companies, also
known as network marketing or multi-level marketing companies, and chain store
retailers. Our primary product is Celadrin® a product formulation which we sell
to the mass market through retailers and on a private label basis to wholesale
customers.
A
key
part of our marketing strategy is to provide to our wholesale customers a
"turnkey" approach to the marketing and distribution of our products. This
turnkey approach provides these customers with all the services necessary to
market our products, including developing specific product formulations,
providing supporting scientific studies regarding the effectiveness of the
product and arranging for the manufacture and marketing of the product.
We
sell
InflameAway, our own Celadrin® branded product, directly to the mass markets
through retail sellers. We also develop and sell products and formulations
to
businesses and organizations that market these products through multiple
channels of distribution, including direct marketing companies, mass marketing
companies, medical, health and nutritional professionals, medical newsletters
and direct response radio and television. We also offer Celadrin® products
through wholesale customers that in turn offer their products containing
Celadrin® to mass market retailers.
Our
Business
We
develop, formulate and market over-the-counter, natural-based nutritional
supplements and skin care products. Our products are proprietary, often
supported by scientific studies which we request and are offered through
multiple channels of distribution including direct sales to the mass market
through retailers, direct marketing companies, medical, health and nutritional
professionals, medical newsletters and direct response radio and television.
A
key
part of our marketing strategy is to provide a "turnkey" approach to the
marketing and distribution of our products. Our "turnkey" approach provides:
|
•
|
Specific
product formulations requested by our customers;
|
|
•
|
Scientific
studies to support claims made for our products;
|
|
•
|
Assistance
in complying with U.S. laws and regulations;
|
|
•
|
Assistance
in obtaining foreign country regulatory approval for sale of our
products;
|
|
•
|
Marketing
materials and marketing assistance to support product sales; and
|
|
•
|
Manufacture
of products with delivery directly to the customer.
|
Following
development of a new product, and on behalf of our customers, we:
|
•
|
Conduct
and complete any scientific studies necessary for regulatory compliance;
|
|
•
|
Arrange
for the manufacture of finished products to our specifications;
and
|
|
•
|
Develop
marketing tools and plans to promote product sales, including labels
and
graphic designs, promotional brochures and providing speakers to
promote
the
products.
|
Our
management and key personnel have many years experience in developing and
selling nutritional products to domestic and international marketers, including
direct marketers, health food stores and mass market merchandisers.
Our
two
largest customers accounted for 29% and 16% of our net sales for the year ended
March 31, 2008 and 23% and 15% for the year ended March 31, 2007.
Our
Strategy
We
are a
developer, formulator and supplier of natural-based products, designed to
enhance human and animal health. We develop, formulate over-the-counter topical
creams, nutritional and skin care products marketed globally through multiple
channels of distribution. Our strategy involves:
|
•
|
Continuing
to develop innovative and proprietary nutritional and skin care products;
|
|
•
|
Continuing
to offer "turnkey" services, including product development, regulatory
compliance, manufacturing and marketing services, to assist our customers
in quickly bringing new products to market;
|
|
•
|
Marketing
our products internationally by assisting our customers in registering
their products for sale in foreign countries.
|
To
date,
we have completed the registration of over 25 products in foreign countries,
including Japan, Australia, Norway, Venezuela, Germany, India and Canada. Most
of the products registered contain our proprietary Celadrin® compound.
Industry
Overview
The
dietary supplement industry is highly diversified and intensely competitive.
It
includes companies that manufacture, distribute and sell products that are
generally intended to supplement our daily diets with nutrients that may enhance
the body's performance and well-being. Dietary supplements include vitamins,
minerals, herbs, botanicals, amino acids and compounds. Specific statutory
provisions governing the dietary supplement industry were codified in the
Dietary Supplement Health and Education Act. This act provides new statutory
protections for dietary supplements and allows for statements that inform
consumers of the effect dietary supplements have upon the structure or functions
of the body.
We
expect
that the following factors will contribute to the ongoing growth of the domestic
nutritional supplement industry:
|
•
|
The
aging of the American population, which is likely to cause increased
consumption of nutritional supplements;
|
|
•
|
New
product introductions in response to new research supporting the
positive
health effects of certain nutrients;
|
|
•
|
The
nationwide trend toward preventative medicine resulting from rising
health
care costs;
|
|
•
|
Increased
consumer interest in alternative health products such as herb-based
nutritional supplements;
|
|
•
|
A
heightened awareness of the connection between diet and health.
|
Nutritional
supplements are sold primarily through:
|
•
|
Mass
market retailers, including mass merchandisers, drug stores, supermarkets
and discount stores;
|
|
•
|
Mail
order companies; and
|
|
•
|
Direct
sales organizations, including network marketing companies
.
|
Products
We
offer
a variety of specialized proprietary nutritional formulations, over-the-counter
topical creams, and skin care products. Since beginning operations in February
1999, we have developed and sold over 90 products and formulations to businesses
and organizations that market these products through multiple channels of
distribution, including direct selling, sales to mass market retailers, direct
response radio, nutritional newsletters and medical care professionals. Our
product formulations may be developed by our customers, co-developed by us
and
our customers or developed exclusively by us for the customer.
Our
leading product is Celadrin®, a nutritional supplement compound comprised of a
complex of fatty acid esters which plays a role in human and animal joint health
and scientifically supported by our clinical studies. For the year ended March
31, 2008, approximately 74% of our revenue was generated from the sale of
various formulations containing Celadrin®. We offer Celadrin® as part of a
formulated branded or private label product and also as a branded ingredient
to
be used by our wholesale customers in their own product formulations.
A
number
of safety and efficacy studies have been conducted on Celadrin®'s principal
composition, cetylated fatty acids. Studies have been presented at international
scientific conferences, with two studies having been published in the Journal
of
Rheumatology and one study published in the Journal of Strength and Conditioning
Research. We are continuing research to determine Celadrin®'s effects on the
body, including any role it may play in providing support for the normal
functioning of muscles and joints. We produce a wide range of formulas using
the
Celadrin® compounds and market these formulations through multiple distribution
channels. Our wholesale customers resell Celadrin® and other formulated products
under their own labels and trade names. We do not own or have any ownership
interest in the labels or trade names under which these products are sold.
Using
multiple manufacturing processes to produce Celadrin®, we offer the product to
our customers in soft gel capsule, tablet, two-piece capsules and topical cream
forms.
We
use
paid consultants who are medical doctors, scientific research consultants,
independent scientific researchers and laboratories and universities to assist
us in the development and testing of our products. We believe Celadrin® will
continue to be our principal compound. We intend to expand the number of
customers who use this compound in formulas and to develop other formulas for
new customers.
In
addition to Celadrin®, which we sell in many formulations including an oral
product, a cream, and as a pet product, we have also developed other natural
based products designed to address specific health issues, including compounds
and formulations involving a proprietary blend of fruit and vegetable extracts
which represented approximately 13% of our sales and a weight loss product
which
represented approximately 12% of our sales for the year ended March 31, 2008.
We
also
are at the early stage of developing therapies for the treatment of inflammatory
conditions, such as periodontal disease. We have conducted in-vivo and in-vitro
efficacy and safety studies on our drug compound for the treatment of gum
disease including periodontitis.
Raw
Materials and Manufacturing
We
develop and formulate proprietary, natural based, nutritional supplements,
over-the-counter topical creams and skin care products but do not manufacture
any of these products. We currently purchase ingredients from suppliers for
delivery to manufacturers chosen by us. We have an agreement with our sole
supplier of Celadrin® to purchase sufficient quantities of the compound to meet
our anticipated needs through January 2012. We believe this agreement can be
extended although we can give no such assurance. All other ingredients can
be
obtained from a number of suppliers, although the loss of any supplier could
adversely affect our business.
We
use a
number of manufacturers to combine ingredients furnished by our suppliers into
our nutritional and skin care products. By outsourcing product manufacture,
we
eliminate the capital required to manufacture our own products and increase
the
flexibility of our manufacturing resources. We have written confidentiality
and
exclusivity agreements with key manufacturers and believe suitable replacement
manufacturers are available. However, the loss of a manufacturer could adversely
affect our business.
Marketing
and Distribution.
We
market
our products to customers in multiple channels of distribution. Our marketing
strategy consists of:
|
•
|
Continuing
to offer our proprietary products to existing customers while seeking
new
customers, emphasizing those engaged in the direct selling and mass
marketing of nutraceutical supplements and other nutraceutical products;
|
|
•
|
Continuing
to assist our customers in designing new nutritional, topical, and
skin
care products using our formulations;
|
|
•
|
Continuing
to design marketing materials, provide marketing spokespersons and
offering other value added services to assist customers in expanding
their
sales of our product;
|
|
•
|
Developing
and offering new products to direct marketing and mass marketing
companies;
|
|
•
|
Offering
products for distribution through medical and nutritional oriented
professionals;
|
|
•
|
Offering
products for distribution through direct response radio and television.
|
We
will
continue to offer our customers a turn key approach to their product needs.
This
approach emphasizes providing the customer with the support necessary to allow
them to sell our products, including providing the scientific studies required
by U.S. and foreign regulators, tailoring our product formulations specifically
for each customer, obtaining approvals in foreign countries for our customers
to
market there, providing full marketing support for the products, including
product information, product descriptions and speakers to discuss products
at
customer conventions and seminars and arranging for manufacture and shipment
of
the products according to customer instructions.
Approximate
sales by principal geographic area (as a percentage of sales) for fiscal years
ended March 31, 2008 and 2007 were as follows:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Domestic
sales
|
|
|
88.2
|
%
|
|
96.9
|
%
|
|
|
|
|
|
|
|
|
Foreign
sales:
|
|
|
|
|
|
|
|
Canada
|
|
|
10.4
|
|
|
0.5
|
|
India
|
|
|
0.9
|
|
|
2.2
|
|
Australia
|
|
|
0.5
|
|
|
0.3
|
|
Taiwan
|
|
|
-
|
|
|
0.1
|
|
Total
foreign sales
|
|
|
11.8
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
Total
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
All
of
our operating assets are located within the United States. While sales to
certain geographic areas generally vary from year to year, we do not expect
that
changes in the geographic composition of sales will have a material adverse
effect on operations
.
Competition
The
nutritional supplement and skin care industries are large and intensely
competitive. We compete generally with companies that manufacture and market
competitive nutritional products in each of our product lines, including
companies such as Twin Labs, Weider Nutrition, IVC Industries and Perrigo.
We
also compete with companies that supply nutritional products to direct
distribution companies, such as Leiner Health, Natural Alternatives and
Vitatech. We also compete with companies that develop and sell skin care
products, such as West Coast Cosmetics, CA Botana and Cosmetic Products
International.
Competitive
factors in the nutritional supplement and skin care markets include product
effectiveness, scientific validation, proprietary formulations, price, quality
of products, reliability of product delivery and marketing services offered
to
customers. We believe we compete favorably with respect to each of these
factors. Nevertheless, most of our competitors have longer operating histories,
wider product offerings, greater name recognition and financial resources than
do we. However, we believe our turnkey approach of offering our customers
significant regulatory and marketing support, as well as unique, scientifically
validated products, improves our competitive position.
Government
Regulation
In
both
the United States and foreign markets, we are subject to extensive laws and
governmental regulations at the federal, state and local levels. For example,
we
are subject, directly or indirectly, to regulations pertaining to:
•
|
The
manufacturing, packaging, labeling, promotion, distribution, importation,
sale and storage of our products;
|
•
|
Product
claims, labeling and advertising (including direct claims and advertising
by us as well as claims in labeling and advertising by others, for
which
we may be held responsible);
|
•
|
Transfer
pricing and similar regulations that affect the level of foreign
taxable
income and customs duties; and
|
•
|
Taxation,
which in some instances may impose an obligation on us to collect
taxes
and maintain appropriate records.
|
The
dietary ingredients, manufacturing, packaging, storing, labeling, advertising,
promotion, distribution and sale of our products are subject to regulation
by
one or more governmental agencies, including the Food and Drug Administration,
the Federal Trade Commission, the Consumer Product Safety Commission, the
Department of Agriculture, the Department of Customs, the Patent and Trademark
Office, and the Environmental Protection Agency. Our activities are, or may
be,
regulated by various agencies of the states, localities and foreign countries
in
which our products are manufactured, distributed and/or sold. The FDA, in
particular, regulates the ingredients, manufacture, packaging, storage,
labeling, promotion, distribution and sale of foods, dietary supplements and
over-the-counter drugs, such as those we distribute. We and our suppliers are
required by FDA regulations to meet relevant current good manufacturing practice
guidelines for the preparation, packing and storage of foods and drugs. The
FDA
has also published proposed rules for the establishment of good manufacturing
practices for dietary supplements, but it has not yet issued a proposal rule.
The FDA conducts unannounced inspections of companies that manufacture,
distribute and sell dietary supplements, issues warning letters for rule
violations found during these inspections and refers matters to the U.S.
Attorney and Justice Department for prosecution under the Federal Food, Drug
and
Cosmetic Act. There can be no assurance that the FDA will not question our
labeling or other operations in the future.
The
Dietary Supplement Health and Education Act revised the provisions governing
dietary ingredients and labeling of dietary supplements. The legislation created
a new statutory class of "dietary supplements." This new class includes
vitamins, minerals, herbs, botanicals, other dietary substances to supplement
the daily diet, and concentrates, metabolites, constituents, extracts and
combinations thereof. The legislation requires no federal pre-market approval
for the sale of dietary ingredients that were on the market before October
15,
1994. Since cetylated fatty acids, the primary ingredient in Celadrin®, was on
the market prior to October 15, 1994, we have not been required to provide
the
FDA with any proof as to safety or efficacy of Celadrin®. Dietary ingredients
first marketed after October 15, 1994 may not be distributed or marketed in
interstate commerce unless:
|
•
|
The
manufacturer has proof that the dietary ingredient has been present
in the
food supply as an article used for food and in a form in which the
food
has not been chemically altered, or
|
|
•
|
The
manufacturer supplies the FDA with proof to the FDA's satisfaction
of the
dietary ingredient's safety.
|
Manufacturers
and distributors of dietary supplements may include statements of nutritional
support, including structure and function claims, on labels and in advertising
if:
|
•
|
The
claims are corroborated by "competent and reliable scientific evidence"
consistent with FTC standards for advertising review;
|
|
•
|
The
claims for labels and labeling are filed in a certified notice with
the
FDA no later than 30 days after first market use of the claims;
|
|
•
|
The
manufacturer retains substantiation that the claims are truthful
and
non-misleading;
|
|
•
|
Each
claim on labels and in labeling is cross-referenced by an asterisk
to a
mandatory FDA disclaimer.
|
The
majority of the products marketed, or proposed to be marketed, by us are
classified as dietary supplements. In September 1997, the FDA issued regulations
governing the labeling and marketing of dietary supplement products. The
regulations cover:
|
•
|
The
identification of dietary supplements and their nutrition and ingredient
labeling;
|
|
•
|
The
terminology to be used for nutrient content claims, health claims
and
statements of nutritional support, including structure and function
claims;
|
|
•
|
Labeling
requirements for dietary supplements for which "high potency" and
"antioxidant" claims are made;
|
|
•
|
Notification
procedures for statements of nutritional support, including structure
and
function claims, on dietary supplement labels and in their labeling;
|
|
•
|
Pre-market
notification procedures for new dietary ingredients in dietary
supplements.
|
Dietary
supplements are subject to federal laws dealing with drugs and regulations
imposed by the FDA. Those laws regulate, among other things, health claims,
ingredient labeling and nutrition content claims characterizing the level of
nutrient in the product. They also prohibit the use of any health claim for
dietary supplements, unless the health claim is supported by significant
scientific agreement and is pre-approved by the FDA. A federal court has ruled
that the FDA must authorize health claims presented to the agency in health
claims petitions unless they are inherently misleading and must rely on
disclaimers to eliminate any potentially misleading connotation conveyed by
a
claim. The court also held that even claims not supported by significant
scientific agreement must be allowed if disclaimers can correct misleading
connotations.
Prior
to
permitting sales of our products in foreign markets, we may be required to
obtain an approval, license or certification from the country's ministry of
health or comparable agency. The approval process generally would require us
to
present each product and product ingredient to appropriate regulators and,
in
some instances, arrange for testing of products by local technicians for
ingredient analysis. These approvals may be conditioned on reformulation of
our
products or may be unavailable with respect to certain products or certain
ingredients. We must also comply with product labeling and packaging regulations
that vary from country to country.
The
Federal Trade Commission, which exercises jurisdiction over the marketing
practices and advertising of products similar to those we offer, has in the
past
several years instituted enforcement actions against several dietary supplement
companies for deceptive marketing and advertising practices. These enforcement
actions have frequently resulted in consent orders and agreements. In certain
instances, these actions have resulted in the imposition of monetary redress
requirements. Importantly, the commission requires that "competent and reliable
scientific evidence" corroborate each claim of health benefit made in
advertising before the advertising is first made. A failure to have that
evidence on hand at the time an advertisement is first made violates federal
law. While we have not been the subject to enforcement action for the
advertising of its products, there can be no assurance that this agency will
not
question our advertising or other operations in the future.
We
believe we are in compliance with all material government regulations which
apply to our products. However, we are unable to predict the nature of any
future laws, regulations, interpretations or applications, nor can we predict
what effect additional governmental regulations or administrative orders, when
and if promulgated, would have on our business in the future. These future
changes could, however, require the reformulation or elimination of certain
products; imposition of additional record keeping and documentation
requirements; imposition of new federal reporting and application requirements;
modified methods of importing, manufacturing, storing or distributing certain
products; and expanded or different labeling and substantiation requirements
for
certain products and ingredients. Any or all of these requirements could harm
our business.
Trademarks
and Patents
We
received a trademark for "Celadrin" in February 2002.
In
March
2003 we filed a patent application for Genepril, seeking approval of claims
for
the prevention and treatment of various types of arthritis and other
inflammatory joint diseases, as well as periodontal, psoriasis, lupus and
cardiovascular conditions. We received notification that the application had
been approved and that a patent could be issued. Subsequent to the notification,
we requested additional claims be added to the application. Accordingly, the
patent office is continuing its review of our application. There can be no
assurance that others may not develop compounds superior to Genepril.
Employees
At
March
31, 2008, we had seven full-time employees and four part-time consultants,
including our executive officers.
ITEM
2.
DESCRIPTION
OF PROPERTY.
We
conduct our corporate functions and manufacturing, product development, sales
and marketing activities in San Diego, California. We rent 5,426 square feet
of
office space at 10845 Rancho Bernardo Road, Suite 105, San Diego, California
92127 under a seven-year lease ending December 2012 for a monthly rent ranging
from a current level of $11,044 increasing annually to $12,673 for the seventh
year. The average monthly rent for the seven-year period is $11,212. In addition
we rent 4,575 square feet of distribution and storage space at 1420 Decision
Street, Suite B, Vista, California 92083 under a three-year lease ending August
31, 2009 for a monthly rent of $3,889. This space is intended to meet our needs
for the foreseeable future.
ITEM
3. LEGAL PROCEEDINGS.
We
are
not aware of any legal proceedings, pending or threatened, to which we are
a
party.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
None.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND SMALL BUSINESS ISSUER PRUCHASES OF EQUITY
SECURITIES.
Our
Common Stock is traded in the over-the-counter market and is quoted on the
NASD
OTC Bulletin Board system maintained by the National Association of Securities
Dealers, Inc. Prices reported represent prices between dealers, do not include
markups, markdowns or commissions and do not necessarily represent actual
transactions. The market for our shares has been sporadic and at times very
limited.
The
following table sets forth the high and low closing price for the Common Stock
for the fiscal years ended March 31, 2008 and 2007:
|
|
Closing
Price
|
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
Fiscal
Year Ended March 31, 2008
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.49
|
|
$
|
0.90
|
|
Second
Quarter
|
|
$
|
1.42
|
|
$
|
0.94
|
|
Third
Quarter
|
|
$
|
1.22
|
|
$
|
0.77
|
|
Fourth
Quarter
|
|
$
|
1.05
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended March 31, 2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.25
|
|
$
|
0.85
|
|
Second
Quarter
|
|
$
|
1.13
|
|
$
|
0.80
|
|
Third
Quarter
|
|
$
|
0.83
|
|
$
|
0.59
|
|
Fourth
Quarter
|
|
$
|
1.17
|
|
$
|
0.61
|
|
We
had
approximately 314 shareholders of record as of June 25, 2008. Because most
of
our common stock is held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of beneficial owners
represented by these record holders. We have never paid a cash dividend on
our
common stock and do not expect to pay one in the foreseeable
future.
Recent
Sale of Unregistered Securities
None
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
Overview
We
develop, formulate and market over-the-counter, natural-based nutritional
supplements and skin care products. Our products are proprietary, often
supported by scientific studies which we request and are offered through
multiple channels of distribution, including direct marketing companies, also
known as network marketing or multi-level marketing companies, and chain store
retailers. Our primary product is Celadrin® a product formulation which we sell
to the mass market through retailers and on a private label basis to wholesale
customers.
A
key
part of our marketing strategy is to provide to our wholesale customers a
"turnkey" approach to the marketing and distribution of our products. This
turnkey approach provides these customers with all the services necessary to
market our products, including developing specific product formulations,
providing supporting scientific studies regarding the effectiveness of the
product and arranging for the manufacture and marketing of the product.
We
sell
InflameAway, our own Celadrin® branded product, directly to the mass markets
through retail sellers. We also develop and sell products and formulations
to
businesses and organizations that market these products through multiple
channels of distribution, including direct marketing companies, mass marketing
companies, medical, health and nutritional professionals, medical newsletters
and direct response radio and television. We also offer Celadrin® products
through wholesale customers that in turn offer their products containing
Celadrin® to mass market retailers.
Management's
discussion and analysis of results of operations and financial condition are
based upon the Company's financial statements. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require management to make certain
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions
.
Critical
Accounting Policies and Estimates
We
have
identified eight accounting principles that we believe are key to an
understanding of our financial statements. These important accounting policies
require management's most difficult, subjective judgments
.
1.
Cash and Cash Equivalents.
For
purposes of the financial statements, we consider all highly liquid debt
investments purchased with a maturity of three months or less to be cash
equivalents.
2.
Accounts receivable
.
Accounts
receivable are carried at the expected net realizable value. The allowance
for
doubtful accounts is based on management’s assessment of the collectibility of
specific customer accounts and the aging of the accounts receivable. If there
were a deterioration of a major customer’s creditworthiness, or actual defaults
were higher than historical experience, our estimates of the recoverability
of
amounts due to us could be overstated, which could have a negative impact on
operations.
3.
Inventory
Inventory
is carried at the lower of cost or market. Cost is determined by the first-in
first-out method. Indirect overhead costs are allocated to
inventory.
4.
Property and Equipment
Property
and equipment are stated at cost. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized, upon being placed in service. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is computed over the
estimated useful life of three to seven years, except leasehold improvements
which are depreciated over the lesser of the remaining lease life or the life
of
the asset, using the straight-line method. We follow the provisions of the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment of Long-lived
Assets." Long-lived assets and certain identifiable intangibles to be held
and
used by us are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. We continuously evaluate the recoverability of our long-lived
assets based on estimated future cash flows and the estimated fair value of
such
long-lived assets, and provide for impairment if such undiscounted cash flows
are insufficient to recover the carrying amount of the long-lived
asset.
5.
Trademarks and Patents
Patents
and trademarks are carried at cost less accumulated amortization and are
amortized over their estimated useful lives of from 8 to 17 years for patents
and 10 years for trademarks. The carrying value of patents and trademarks is
periodically reviewed and impairments, if any, are recognized when the expected
future benefit to be derived from individual intangible assets is less than
its
carrying value determined based on the provisions of SFAS No. 144 as discussed
above.
6.
Stock
Based Compensation
We
adopted SFAS No.123R effective January 1, 2006, which requires that share-based
payments be reflected as an expense based upon the grant-date fair value of
those awards. The expense is recognized over the remaining vesting periods
of
the awards. The Company estimates the fair value of these awards, including
stock options and warrants, using the Black-Scholes model. This model requires
management to make certain estimates in the assumptions used in this model,
including the expected term the award will be held, volatility of the underlying
common stock, discount rate and forfeiture rate. We develop our assumptions
based on our past historical trends as well as consider changes for future
expectations.
7.
Revenue Recognition
We
recognize revenue in accordance with the SEC’s Staff Accounting Bulletin
No. 104, “Revenue Recognition in Financial Statements” (SAB104), Statement
of Financial Accounting Standards No. 48, “Revenue Recognition When Right
of Return Exists” (SFAS 48), and Emerging Issues Task Force Abstract (EITF)
No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products.” SAB 104 requires that four
basic criteria be met before revenue can be recognized: 1) there is evidence
that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
determinable; and 4) collectibility is reasonably assured. SFAS 48 states that
revenue from sales transactions where the buyer has the right to return the
product shall be recognized at the time of sale only if (1) the seller’s
price to the buyer is substantially fixed or determinable at the date of sale;
(2) the buyer has paid the seller, or the buyer is obligated to pay the
seller and the obligation is not contingent on
resale
of
the product; (3) the buyer’s obligation to the seller would not be changed
in the event of theft or physical destruction or damage of the product;
(4) the buyer acquiring the product for resale has economic substance apart
from that provided by the seller; (5) the seller does not have significant
obligations for future performance to directly bring about resale of the product
by the buyer; and (6) the amount of future returns can be reasonably
estimated. We recognize revenue upon determination that all criteria for revenue
recognition have been met. The criteria are usually met at the time title passes
to the customer, which usually occurs upon shipment. Revenue from shipments
where title passes upon delivery is deferred until the shipment has been
delivered.
We
account for payments made to customers in accordance with EITF 01-09, which
states that cash consideration (including a sales incentive) given by a vendor
to a customer is presumed to be a reduction of the selling prices of the
vendor’s products or services and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor’s income statement, rather
than a sales and marketing expense. We have various agreements with customers
that provide for discounts and rebates. These agreements are classified as
a
reduction of revenue. Certain other costs associated with customers that meet
the requirements of EITF 01-09 are recorded as sales and marketing expense.
Vendor considerations recorded as a reduction of sales were $893,000 and
$232,000 for the years ended March 31, 2008 and 2007.
We
guarantee customer satisfaction. Our policy requires the customer to return
the
unused product to the retailer from whom they originally purchased it. We pay
the retailer for the returned product plus a handling cost. We periodically
assess the adequacy of this policy and will record a liability as necessary.
For
the year ended March 31, 2008, there were no returns that would suggest a
liability needed to be recorded.
We
review
gross revenue for estimated returns of private label contract manufacturing
products and direct-to-consumer products. The estimated returns are based upon
the trailing six months of private label contract manufacturing gross sales
and
our historical experience for both private label contract manufacturing and
direct-to-consumer product returns. However, the estimate for product returns
does not reflect the impact of a large product recall resulting from product
nonconformance or other factors as such events are not predictable nor is the
related economic impact estimable. For the year ended March 31, 2008 there
were
no returns that would suggest a liability needed to be recorded.
As
part
of the services we provide to our private label contract manufacturing
customers, we may perform, but are not required to perform, certain research
and
development activities related to the development or improvement of their
products. While our customers typically do not pay directly for this service,
the cost of this service is included as a component of the price we charge
to
manufacture and deliver their products.
8.
Income Taxes
We
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes.” This statement requires an
asset and liability approach for accounting for income taxes.
Selected
Financial Information
Results
of Operations
Year
Ended March 31, 2008 Compared to Year Ended March 31, 2007
|
|
Year
Ended
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
3/31/08
|
|
3/31/07
|
|
(Decrease)
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
5,569,593
|
|
$
|
5,596,725
|
|
$
|
(27,132
|
)
|
|
-0.5
|
%
|
Cost
of goods sold
|
|
|
3,344,034
|
|
|
2,969,002
|
|
|
375,032
|
|
|
12.6
|
%
|
%
of net sales
|
|
|
60.04
|
%
|
|
53.05
|
%
|
|
7
|
%
|
|
13.2
|
%
|
Gross
profit
|
|
|
2,225,559
|
|
|
2,627,723
|
|
|
(402,164
|
)
|
|
-15.3
|
%
|
%
of net sales
|
|
|
40
|
%
|
|
47
|
%
|
|
-7
|
%
|
|
-14.9
|
%
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,456,192
|
|
|
1,407,996
|
|
|
1,048,196
|
|
|
74.4
|
%
|
Payroll
expense
|
|
|
1,037,775
|
|
|
712,945
|
|
|
324,830
|
|
|
45.6
|
%
|
Consulting
expense
|
|
|
961,349
|
|
|
1,339,515
|
|
|
(378,166
|
)
|
|
-28.2
|
%
|
Total
operating expenses
|
|
|
4,455,316
|
|
|
3,460,456
|
|
|
994,860
|
|
|
28.7
|
%
|
Interest
expense
|
|
|
(4,367
|
)
|
|
(6,791
|
)
|
|
(2,424
|
)
|
|
-35.7
|
%
|
Other
income
|
|
|
32,182
|
|
|
32,885
|
|
|
(703
|
)
|
|
-2.1
|
%
|
Income
tax benefit
|
|
|
425,300
|
|
|
139,000
|
|
|
286,300
|
|
|
206.0
|
%
|
Net
(loss)
|
|
|
(1,776,642
|
)
|
|
(667,639
|
)
|
|
1,109,003
|
|
|
166.1
|
%
|
Net
(loss) per share basic and diluted
|
|
|
(0.16
|
)
|
|
(0.06
|
)
|
|
(0.10
|
)
|
|
160.9
|
%
|
Net
Sales
Net
sales
for the year ended March 31, 2008 decreased $27,132, 0.5%, to $5,569,593
compared to $5,596,725 for the year ended March 31, 2007. Gross sales increased
by approximately $1 million due to our initiating a direct mass market strategy
with our own product, InflameAway, that identifies Celadrin
â
as its
marquee ingredient. This sales increase was offset by a like amount in product
rebates and giveaways in support of marketing InflameAway through retail
distribution channels. We anticipate, the new marketing program coupled with
additional distribution agreements to wholesale and multi-level marketing
customers to result in improved sales during our next fiscal year.
Cost
of Goods Sold
Cost
of
goods sold as a percentage of net sales increased from 53% for the year ended
March 31, 2007 to 60% for the year ended March 31, 2008. This increase was
primarily due to the rebate and giveaway marketing strategy discussed above
which resulted in InflameAway product being provided at no cost to the eventual
customer. Although rebate and giveaway programs are customary in the mass market
distribution channel, we do not anticipate this year’s level of activity used to
launch the awareness of InflameAway to continue during the next fiscal
year.
General
and Administrative
General
and administrative expenses increased by $1,048,196, a 74.4% increase, to
$2,456,192 for the year ended March 31, 2008 from $1,407,996 for the year ended
March 31, 2007. The primary reasons for the increase were an approximate
increase of $1,268,000 of marketing and advertising costs related to the media
campaign to introduce InflameAway to the mass market offset by an approximate
$231,000 decrease in research and development costs during the current fiscal
year.
Payroll
Expense
Payroll
expense increased to $1,037,775 for the year ended March 31, 2008, an increase
of 45.6% or $324,830, compared to $712,945 for the year ended March 31, 2007.
This increase was a result of non-cash compensation expense of approximately
$269,000 related to the issuance of employee stock options and approximately
$55,000 in normal salary and bonus increases during the current fiscal year.
Consulting
Expenses
Consulting
expenses decreased to $961,349 for the year ended March 31, 2008, a decrease
of
28.2% or $378,166, compared to $1,339,515 for the year ended March 31, 2007.
This decrease was a result of a decrease in litigation expenses of approximately
$100,000, a decrease in consulting related to new product introduction including
our periodontal application of approximately $204,000, and a reduction in
accounting and other professional and technical expenses across the
board.
Provision
for Income Taxes
As
a
result of the loss during the year ended March 31, 2008, we reflected an income
tax benefit of $425,300 compared to income tax benefit of $139,000 for the
year
ended March 31, 2007. Since we have used up our federal and state tax loss
carry-forwards, we anticipate income tax expense to increase in the future
relative to income before taxes.
Capital
Resources
|
|
Year
Ended
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
3/31/08
|
|
3/31/07
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Working
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
4,012,527
|
|
$
|
4,583,149
|
|
$
|
(570,622
|
)
|
Current
liabilities
|
|
|
929,300
|
|
|
650,602
|
|
|
278,698
|
|
Working
capital
|
|
$
|
3,083,227
|
|
$
|
3,932,547
|
|
$
|
(849,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
2,980
|
|
$
|
37,239
|
|
$
|
(34,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
$
|
3,083,592
|
|
$
|
4,572,762
|
|
$
|
(1,120,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Cash Flows Select Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided (used) by:
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(116,736
|
)
|
$
|
(819,292
|
)
|
$
|
702,556
|
|
Investing
activities
|
|
$
|
(30,626
|
)
|
$
|
(51,838
|
)
|
$
|
21,212
|
|
Financing
activities
|
|
$
|
211,021
|
|
$
|
22,010
|
|
$
|
189,011
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Select Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,022,555
|
|
$
|
958,896
|
|
$
|
63,659
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
765,492
|
|
$
|
1,576,641
|
|
$
|
(811,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Inventory,
net
|
|
$
|
1,109,845
|
|
$
|
1,284,458
|
|
$
|
(174,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
785,625
|
|
$
|
432,354
|
|
$
|
353,271
|
|
Liquidity
We
have
historically financed our operations internally and through debt and equity
financings. At March 31, 2008, we had cash holdings of $1,022,555, an increase
of $63,659 compared to March 31, 2007. Our net working capital position at
March
31, 2008, was $3,083,227 compared to $3,932,547 as of March 31, 2007. This
reduction was primarily the result of a decrease in accounts receivable and
inventory. We believe that our cash position is sufficient to fund our operating
activities for at least the next 12 months.
New
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 161,
Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133.
This
standard requires companies to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
This Statement is effective for financial statements issued for fiscal years
and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company has not yet adopted the provisions of SFAS No. 161,
but
does not expect it to have a material impact on its consolidated financial
position, results of operations or cash flows.
In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107),
in
developing an estimate of expected term of "plain vanilla" share options
in
accordance with SFAS No. 123 (R),
Share-Based
Payment
. In
particular, the staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company
has
sufficient information to make more refined estimates of expected term. At
the
time SAB 107 was issued, the staff believed that more detailed external
information about employee exercise behavior (e.g., employee exercise patterns
by industry and/or other categories of companies) would, over time, become
readily available to companies. Therefore, the staff stated in SAB 107 that
it
would not expect a company to use the simplified method for share option
grants
after December 31, 2007. The staff understands that such detailed information
about employee exercise behavior may not be widely available by December
31,
2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007.
The
Company currently uses the simplified method for “plain vanilla” share options
and warrants, and will assess the impact of SAB 110 for fiscal year 2009.
It is
not believed that this will have an impact on the Company’s consolidated
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
—an
amendment of ARB No. 51. This statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. Before this statement was issued, limited guidance existed
for reporting noncontrolling interests. As a result, considerable diversity
in
practice existed. So-called minority interests were reported in the consolidated
statement of financial position as liabilities or in the mezzanine section
between liabilities and equity. This statement improves comparability by
eliminating that diversity. This statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier
adoption is prohibited. The effective date of this statement is the same as
that
of the related Statement 141 (revised 2007). The Company will adopt this
Statement beginning April 1, 2009. It is not believed that this will have an
impact on the Company’s consolidated financial position, results of operations
or cash flows.
In
December 2007, the FASB, issued FAS No. 141 (revised 2007),
Business
Combinations.
’This
Statement replaces FASB Statement No. 141,
Business
Combinations
,
but
retains the fundamental requirements in Statement 141. This
Statement establishes principles and requirements for how the acquirer: (a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This statement
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. An entity may not apply it before that date. The
effective date of this statement is the same as that of the related FASB
Statement No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
. The
Company will adopt this statement beginning April 1, 2009. It is not believed
that this will have an impact on the Company’s consolidated financial position,
results of operations or cash flows.
In
February 2007, the FASB, issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Liabilities
—Including
an Amendment of FASB Statement No. 115. This standard permits an
entity to choose to measure many financial instruments and certain other items
at fair value. This option is available to all entities. Most of the provisions
in FAS 159 are elective; however, an amendment to FAS 115
Accounting
for Certain Investments in Debt and Equity Securities
applies
to all entities with available for sale or trading securities. Some requirements
apply differently to entities that do not report net income. SFAS No. 159 is
effective as of the beginning of an entities first fiscal year that begins
after
November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity makes that choice in the first
120
days of that fiscal year and also elects to apply the provisions of SFAS No.
157
Fair
Value Measurements
. The
Company will adopt SFAS No. 159 beginning April 1, 2008 and is currently
evaluating the potential impact the adoption of this pronouncement will have
on
its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements
This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this statement does not require
any
new fair value measurements. However, for some entities, the application of
this
statement will change current practice. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an interim
period within that fiscal year. The Company will adopt this statement April
1,
2008, and it is not believed that this will have an impact on the Company’s
consolidated financial position, results of operations or cash
flows.
Risk
Factors
You
should consider the following discussion of risks as well as other information
regarding our common stock. The risks and uncertainties described below are
not
the only ones. Additional risks and uncertainties not presently known to us
or
that we currently deem immaterial also may impair our business operations.
If
any of the following risks actually occur, our business could be harmed.
There
Is Only One Supplier for Celadrin®. If We Are Unable to Purchase Celadrin® from
This Supplier, Our Business Would Be Harmed.
There
is
only one supplier for Celadrin®, which we use in approximately 58% of our
products and which represented approximately 74% of our sales for the year
ended
March 31, 2008. We will rely upon Celadrin® to expand our product lines and
revenue in the future. If our Celadrin® supplier goes out of business or elects
for any reason not to supply us with Celadrin®, we would have to find another
Celadrin® supplier or suffer a significant reduction in our
revenue.
We
Rely upon a Limited Number of Customers the Loss of Which Would Reduce Our
Revenue and Any Earnings.
Our
two
largest customers accounted for 29% and 16% of our net sales for the year ended
March 31, 2008 and 23% and 15% for the year ended March 31, 2007. The loss
of
any of these customers could significantly reduce our revenue and adversely
affect our cash flow and earnings, if any.
We
Rely upon Other Outside Suppliers to Produce Our Products Which Could Delay
Our
Product Deliveries.
All
of
our products are produced by outside manufacturers who process ingredients
provided to them by our suppliers and with whom we have contracts. Our profit
margins and our ability to deliver products on a timely basis are dependent
upon
these manufacturers and suppliers. Should any of these manufacturers or
suppliers fail to provide us with product, we would be required to obtain new
manufacturers and suppliers, which would be costly and time consuming and could
delay our product deliveries.
Product
Liability Claims Against Us Could Be Costly.
Some
of
our nutritional supplements contain newly-introduced ingredients or combinations
of ingredients, and we have little long-term health information about
individuals consuming those ingredients. If any of these products were thought
or proved to be harmful, we could be subject to litigation. Although we carry
product liability insurance in the face amount of $1,000,000 per occurrence
and
$2,000,000 in the aggregate and require our suppliers and manufacturers to
include us as insured parties on their product liability insurance policies,
our
coverage may not be adequate to protect us from potential product liability
claims and costs of defense.
We
Are Subject to Intense Competition from Other Nutritional Supplement Marketers
Which Could Reduce Our Revenue and Profit Margins.
Competition
in the nutritional supplement market is intense. We compete with numerous
companies that have longer operating histories, more products and greater name
recognition and financial resources than we do. In order to compete, we could
be
forced to lower our product prices, which would reduce our revenue and profit
margins.
We
Are Highly Regulated, Which Increases Our Costs of Doing Business.
We
are
subject to laws and regulations which cover:
|
•
|
the
formulation, manufacturing, packaging, labeling, distribution,
importation, sale and storage of our products;
|
|
•
|
the
health and safety of food and drugs;
|
|
•
|
trade
practice and direct selling laws; and
|
|
•
|
product
claims and advertising by us; or for which we may be held
responsible.
|
Compliance
with these laws and regulations is time consuming and expensive. Moreover,
new
regulations could be adopted that would severely restrict the products we sell
or our ability to continue our business. We are unable to predict the nature
of
any future laws, regulations, interpretations or applications, nor can we
predict what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on our business in the future.
These
future changes could, however, require the reformulation or elimination of
certain products; imposition of additional record keeping and documentation
requirements; imposition of new federal reporting and application requirements;
modified methods of importing, manufacturing, storing or distributing certain
products; and expanded or different labeling and substantiation requirements
for
certain products and ingredients. Any or all of these requirements could harm
our business.
There
Are Limitations on the Liability of Our Officers and Directors Which May
Restrict Our Stockholders from Bringing Claims.
Our
Bylaws substantially limit the liability of our officers and directors to us
and
our stockholders for negligence and breach of fiduciary or other duties to
us.
This limitation may prevent stockholders from bringing claims against our
officers and directors in the future.
Shares
of Our Common Stock Which Are Eligible for Sale by Our Stockholders May Decrease
the Price of Our Common Stock.
We
have
10,960,788 common shares outstanding which are freely tradeable or saleable
under Rule 144. We also have outstanding common stock warrants and stock options
exercisable into up to 4,846,957 shares of common stock which could become
free
trading if exercised. If our stockholders sell substantial amounts of our common
stock, the market price of our common stock could decrease.
There
is a Limited but Potentially Volatile Trading Market in Our Common Stock, Which
May Adversely Affect Our Stock Price.
Our
common stock trades on the Electronic Bulletin Board. The Bulletin Board tends
to be highly illiquid, in part because there is no national quotation system
by
which potential investors can track the market price of shares except through
information received or generated by a limited number of broker-dealers that
make a market in particular stocks. There is a greater chance of market
volatility for securities that trade on the Bulletin Board as opposed to a
national exchange or quotation system. This volatility may be caused by a
variety of factors, including:
|
•
|
The
lack of readily available price quotations;
|
|
•
|
The
absence of consistent administrative supervision of "bid" and "ask"
quotations;
|
|
•
|
Lower
trading volume; and
|
There
could be wide fluctuations in the market price of our common stock. These
fluctuations may have an extremely negative effect on the market price of our
securities and may prevent you from obtaining a market price equal to your
purchase price when you attempt to sell our securities in the open market.
In
these situations, you may be required to either sell our securities at a market
price which is lower than your purchase price, or to hold our securities for
a
longer period of time than you planned.
Because
Our Common Stock May Be Classified as "Penny Stock," Trading in it Could Be
Limited, and Our Stock Price Could Decline.
In
the
future, our common stock may fall under the definition of "penny stock" if
our
net tangible assets decline below $2,500,000. In such event, trading in our
common stock would be limited because broker-dealers will be required to provide
their customers with disclosure documents prior to allowing them to participate
in transactions involving our common stock. These disclosure requirements are
burdensome to broker-dealers and may discourage them from allowing their
customers to participate in transactions involving our common stock.
"Penny
stocks" are equity securities with a market price below $5.00 per share, other
than a security that is registered on a national exchange or included for
quotation on the Nasdaq system, unless, as in our case, the issuer has net
tangible assets of more than $2,000,000 and has been in continuous operation
for
greater than three years. Issuers who have been in operation for less than
three
years must have net tangible assets of at least $5,000,000.
Rules
promulgated by the Securities and Exchange Commission under Section 15(g) of
the
Exchange Act require broker-dealers engaging in transactions in penny stocks,
to
first provide to their customers a series of disclosures and documents,
including:
|
•
|
A
standardized risk disclosure document identifying the risks inherent
in
investment in penny
stocks;
|
|
•
|
All
compensation received by the broker-dealer in connection with the
transaction;
|
|
•
|
Current
quotation prices and other relevant market data; and
|
|
•
|
Monthly
account statements reflecting the fair market value of the securities.
In
addition, these
rules
require that a broker-dealer obtain financial and other information
from a
customer, determine that transactions in penny stocks are suitable
for
such customer and deliver a written statement to such customer setting
forth the basis for this determination.
|
ITEM
7. FINANCIAL STATEMENTS.
The
financial statements required by this item begin on page F-1 with the index
to
consolidated financial statements.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL
DISCLOSURE.
None
ITEM 8A(T).
CONTROLS AND PROCEDURES
(a)
Management’s
Annual
Report
on Internal Control
Over
Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting
is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act,
as amended, as a process designed by, or under the supervision of, a company’s
principal executive and principal financial officers and effected by a company’s
board of directors, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that:
|
*
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of our assets;
|
|
*
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that our receipts and expenditures are
being
made only in accordance with authorizations of our management and
directors;
|
|
*
|
and
provide reasonable assurance regarding prevention or timely detection
of
unauthorized acquisition, use or disposition of our assets that could
have
a material effect on the financial statements.
|
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence
and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented
or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. In addition, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions or that
the
degree of compliance with the policies or procedures may deteriorate. In order
to evaluate the effectiveness of our internal control over financial reporting
as of March 31, 2008, as required by Sections 404 of the Sarbanes-Oxley Act
of 2002, our management commenced an assessment, based on the criteria set
forth
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “ COSO Framework “). A material
weakness is a control deficiency, or a combination of control deficiencies,
that
results in more than a remote likelihood that a material misstatement of our
annual or interim financial statements will not be prevented or detected on
a
timely basis. In assessing the effectiveness of our internal control over
financial reporting, our management, including the chief executive officer
and
chief financial officer, identified the following deficiencies:
(1)
Deficiencies in Segregation of Duties. The Chief Executive Officer and the
Chief
Financial Officer are actively involved in the preparation of the financial
statements, and therefore cannot provide an independent review and quality
assurance function within the accounting and financial reporting group. The
limited number of qualified accounting personnel discussed above results in
an
inability to have independent review and approval of financial accounting
entries. Furthermore, management and financial accounting personnel have
wide-spread access to create and post entries in the Company’s financial
accounting system. There is a risk that a material misstatement of the financial
statements could be caused, or at least not be detected in a timely manner,
due
to insufficient segregation of duties, and (2) Our financial statement
closing process did not identify all the journal entries that needed to be
recorded as part of the closing process for certain complex and non-routine
transactions. As part of the audit, our independent registered public accounting
firm proposed certain entries that should have been recorded as part of the
normal closing process. Our internal control over financial reporting did not
detect such matters and, therefore, was not effective in detecting misstatements
in the financial statements.
To
address the material weakness, we performed additional analysis and other
post-closing procedures in an effort to ensure our consolidated financial
statements included in this annual report have been prepared in accordance
with
generally accepted accounting principles. Accordingly, management believes
that
the financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for
the
periods presented. As a result, we have put an implementation plan in place
whereby in fiscal year 2009 sufficient testing to satisfy COSO requirements
will
be performed. The absence of the ability to conclude as to the sufficiency
of
internal controls, is a material weakness.
This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Our internal controls were not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of
the
Securities and Exchange Commission that permit us to provide only managements
report in this annual report.
(b)
Changes
in Internal Control Over Financial Reporting
.
There
were no significant changes in the Company’s internal controls or in other
factors that could significantly affect internal controls subsequent to the
date
of the evaluation above.
ITEM
8B.
OTHER
INFORMATION.
None.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The
following table and biographical summaries set forth information, including
principal occupations and business experience, about our directors and the
executive officer at March 31, 2008:
Name
|
|
Age
|
|
Position
|
William
P. Spencer
|
|
55
|
|
Chief
Executive Officer, President and Director
|
Debra
L. Spencer
|
|
56
|
|
Secretary,
Treasurer and Director
|
Lowell
W. Giffhorn
|
|
61
|
|
Chief
Financial Officer
|
Derek
C. Boosey
|
|
65
|
|
Vice
President—International
|
Jeffrey
G. McGonegal
|
|
57
|
|
Director
|
Robert
Burg
|
|
51
|
|
Director
|
Barry
S. King
|
|
62
|
|
Director
|
Biographical
Information
William
P. Spencer
has
served as a director and has been our president since January 1999. From
January 1986 to December 1996 he served as chief operating officer,
chief financial officer and executive vice-president of Natural Alternatives
International, Inc., a company engaged in the formulation and production of
encapsulated vitamins and nutrients. He was president of NAI from
December 1996 to October 1998 and was a director from
January 1986 to October 1998. From 1976 to 1988 he was a regional vice
president for San Diego Trust and Savings Bank. Mr. Spencer earned a B.S.
degree in finance and an MBA degree from San Diego State University.
Debra
L. Spencer
has
served as a director and has been our secretary since March 1999 and served
as
our treasurer from March 1999 to July 2005. Her responsibilities also include
product label copy and graphic design in compliance with FDA regulations as
well
as developing marketing materials for our private label products. From 1970
to
1981 she was an Executive Assistant to the Vice President of a local San Diego
bank. She was a homemaker from 1981 to 1987. From 1987 to 1993 she served as
vice president, secretary and treasurer for Vitamin Direct, Inc., a
consumer mail order vitamin company.
Derek
C. Boosey
has
served as our vice-president—international since September 1999. From 1994
to September 1999, he was new business manager for National Alternatives
International, Inc., and from 1990 to 1994 was director of marketing for
Athletics Canada. From 1984 to 1990, Mr. Boosey was a technical advisor to
the Korean Ministry of Sports and a sports and marketing consultant for MKC
International. He earned degrees in physical education from Keele University
(England) and Opu University (England) and is the Senior Olympics world record
holder in the triple jump in the age 55 to 60 class.
Barry
S. King
joined
our Board in 2003. He was the Director of Marketing for the United States
Olympic Committee from 1987 to 2002. Since 2002, Mr. King has been the Vice
President and General Manager of Triactive America. Mr. King graduated with
a B.A. degree from the University of Colorado in 1969.
Lowell
W. Giffhorn
has
served as our Chief Financial Officer since July 2005. Since October 2005,
Mr.
Giffhorn also has served as the Chief Financial Officer and, since December
2005, has served on the board of directors of Brendan Technologies, Inc., a
publicly held company that provides computer software to the pharmaceutical
and
life science industries. From November 1996 to June 2005, Mr. Giffhorn was
the
Chief Financial Officer of Patriot Scientific Corp., a publicly held
semiconductor and intellectual property company. From June 1992 to August 1996
and from September 1987 to June 1990 he was the CFO of Sym-Tek Systems, Inc.
and
Vice President of Finance for its successor, Sym-Tek Inc., a supplier of capital
equipment to the semiconductor industry. Mr. Giffhorn obtained a M.B.A. degree
from National University in 1976 and he obtained a B.S. in Accountancy from
the
University of Illinois in 1969. Mr. Giffhorn is also a director and chairman
of
the audit committee of DND Technologies, Inc., a publicly held company. Mr.
Giffhorn devotes approximately 50% of his time to our affairs.
Jeffrey
G. McGonegal
joined
our board in 2005. He also serves as the chief financial officer of AspenBio
Pharma, Inc., a publicly-held biomedical company and of Security with Advanced
Technology, Inc., a publicly held security products and services company and
as
senior vice president — finance of Cambridge Holdings, a publicly-held real
estate and business development firm with limited activities, and since 1997,
Mr. McGonegal has served as managing director of McGonegal and Co., a company
engaged in providing accounting and business consulting services. From 1974
to
1997, he was an accountant with BDO Seidman LLP. While at BDO Seidman, Mr.
McGonegal served as managing partner of the Denver, Colorado office. Until
April
2007, following its sale he was also a member of the board of directors of
Applied Medical Devices, Inc., a publicly-held shell company. Mr. McGonegal
received a B.A. degree in accounting from Florida State University and he is
a
certified public accountant licensed in Colorado.
Robert
Burg
joined
our board in 2005. Since 1998, Mr. Burg has been the owner of The Burg Group,
a
business development company based in the sports industry. From 1992 to 1998,
Mr. Burg held several executive level positions, including President from 1995
to 1998, with Royal Grip, Inc., a publicly traded company that designed and
distributed golf club grips and athletic headware. He received a B.A. degree
in
Business from the Great Western States University in 1977.
William
P. Spencer and Debra L. Spencer are married to each other.
Committees
of the Board Of Directors
Our
Board
has a standing Audit Committee. The entire Board serves as the Compensation
Committee.
Audit
Committee.
The
Audit
Committee is responsible for: (1) selection and oversight of our independent
accountant; (2) establishing procedures for the receipt, retention and treatment
of complaints regarding accounting, internal controls and auditing matters;
(3)
establishing procedures for the confidential, anonymous submission of concerns
regarding accounting and auditing matters; (4) engaging outside advisors; and,
(5) funding for the outside auditors and any outside advisors engagement by
the
audit committee. The Audit Committee, which met four times during 2008, is
composed of one employee director and one other director, who was determined
by
the Board to be an independent director. During 2008, the Audit Committee
consisted of Mr. McGonegal (Chairman) and Mr. Spencer.
The
Board
of Directors has determined that Mr. McGonegal is an audit committee
financial expert as defined in Item 401 of Regulation S-B promulgated by the
Securities and Exchange Commission. The Board's conclusions regarding the
qualifications of Mr. McGonegal as an audit committee financial expert were
based on his service as a chief financial officer of a public company, his
prior
practice as an audit partner for a national certified public accounting firm
and
his degrees in accounting and business administration.
Code
of Ethics
Imagenetix
has set forth its policy on ethical behavior in a document called "Code of
Business Conduct and Ethics." This policy applies to the members of our Board
of
Directors and all employees, including (but not limited to) our principal
executive officer, principal financial officer, principal accounting officer
or
controller and persons performing similar functions. This policy comprises
written standards that are reasonably designed to deter wrongdoing and to
promote the behavior described in Item 406 of Regulation S-B promulgated by
the Securities and Exchange Commission. No waivers of the Code were granted
in
2008.
Compliance
with Section 16(a) of the Securities Exchange Act
Due
to
our status as a Section 15(d) reporting company, our executive officers,
directors, and persons who beneficially own more than 10% of a registered class
of our equity securities are not required to file with the SEC reports of
ownership and changes in ownership of Imagenetix's equity securities pursuant
to
Section 16(a) of the Securities Exchange Act of 1934.
ITEM
10.
EXECUTIVE
COMPENSATION.
There
is
shown below information concerning the compensation of our principal executive
officer and the most highly compensated executive officers whose total
compensation exceeded $100,000 (each a “Named Officer”) for the fiscal years
ended March 31, 2008 and 2007.
SUMMARY
COMPENSATION TABLE
Name and
|
|
Fiscal
|
|
|
|
|
|
Option
|
|
All Other
|
|
|
|
Principal Position
|
|
Year
|
|
Salary ($)
|
|
Bonus ($)
|
|
Awards ($)
|
|
Compensation ($)
|
|
Total ($)
|
|
[a]
|
|
|
[b
]
|
|
|
[c]
|
|
|
[d]
|
|
|
[f]
|
|
|
[i]
|
|
|
[j]
|
|
William
P. Spencer
|
|
|
2008
|
|
$
|
178,956
|
|
$
|
30,500
|
|
$
|
20,000
|
|
$
|
9,903
|
|
$
|
239,359
|
|
President,
CEO and Director
|
|
|
2007
|
|
$
|
174,386
|
|
$
|
39,000
|
|
|
-
|
|
$
|
9,903
|
|
$
|
223,289
|
|
The
amount included in other compensation during the year ended March 31, 2008,
is a
car allowance paid to Mr. Spencer. We estimate the fair value of the option
issued to Mr. Spencer at the issuance date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
those options issued during the year ended March 31, 2008: dividend yield of
zero percent; expected volatility of 71%, risk-free interest rates of 4.55%;
and
expected life of 5 years.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
Name
|
|
Number
|
|
Number
|
|
Option
|
|
Option
|
|
|
|
of
|
|
of
|
|
Exercise
|
|
Expiration
|
|
|
|
Securities
|
|
Securities
|
|
Price
|
|
Date
|
|
|
|
Underlying
|
|
Underlying
|
|
($)
|
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
|
|
|
|
|
|
Options
|
|
Options
|
|
|
|
|
|
|
|
(#)
|
|
(#)
|
|
|
|
|
|
|
|
Exercisable
|
|
Unexercisable
|
|
|
|
|
|
[a]
|
|
[b]
|
|
[c]
|
|
[e]
|
|
[f]
|
|
William
P. Spencer
|
|
|
25,000
|
|
|
-
|
|
$
|
2.00
|
|
|
Aug. 21, 2010
|
|
President, CEO and
|
|
|
60,000
|
|
|
-
|
|
$
|
1.95
|
|
|
July 1, 2010
|
|
Director
|
|
|
12,500
|
|
|
12,500
|
|
$
|
1.30
|
|
|
May 8, 2012
|
|
Employment
Contracts
We
do not
have employment contracts with any of our executive officers.
DIRECTOR
COMPENSATION
Name
|
|
Fees
|
|
Option
|
|
All Other
|
|
Total
|
|
|
|
Earned
|
|
Awards
|
|
Compensation
|
|
($)
|
|
|
|
or
|
|
($)
|
|
($)
|
|
|
|
|
|
Paid In
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
($)
|
|
|
|
|
|
|
|
[a]
|
|
[b]
|
|
(d)
|
|
[g]
|
|
[h]
|
|
Debra
Spencer
|
|
$
|
-
|
|
$
|
20,000
|
|
$
|
86,371
|
|
$
|
106,371
|
|
Jeffrey
McGonegal
|
|
$
|
10,000
|
|
$
|
16,000
|
|
$
|
-
|
|
$
|
26,000
|
|
Barry
King
|
|
$
|
4,800
|
|
$
|
12,000
|
|
$
|
-
|
|
$
|
16,800
|
|
Robert
Burg
|
|
$
|
7,500
|
|
$
|
16,000
|
|
$
|
-
|
|
$
|
23,500
|
|
Mrs.
Spencer is an employee and director of ours. The amount reflected as other
compensation is the amount she was paid as an employee. She received no
compensation for being a director.
We
estimate the fair value of the options issued to our directors at the issuance
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for those options issued during the year
ended
March 31, 2008: dividend yield of zero percent; expected volatility of 71%,
risk-free interest rates of 4.55%; and expected life of 5
years.
Liability
and Indemnification of Officers and Directors
Our
Articles of Incorporation provides that our directors will not be liable for
monetary damages for breach of their fiduciary duty as directors, other than
the
liability of a director for:
|
•
|
A
breach of the director’s duty of loyalty to our company or our
stockholders;
|
|
•
|
Acts
or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law;
|
|
•
|
Willful
or negligent declaration of an unlawful dividend, stock purchase
or
redemption; or
|
|
•
|
Transactions
from which the director derived an improper personal benefit.
|
Our
Articles of Incorporation require us to indemnify all persons whom we may
indemnify pursuant to Nevada law to the full extent permitted by Nevada law.
Our
bylaws require us to indemnify our officers and directors and other persons
against expenses, judgments, fines and amounts incurred or paid in settlement
in
connection with civil or criminal claims, actions, suits or proceedings against
such persons by reason of serving or having served as officers, directors,
or in
other capacities, if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to our best interests and, in a
criminal action or proceeding, if he had no reasonable cause to believe that
his/her conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction or upon a plea of no contest or
its
equivalent shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he or she reasonably believed to be
in
or not opposed to our best interests or that he or she had reasonable cause
to
believe his or her conduct was unlawful. Indemnification as provided in our
bylaws shall be made only as authorized in a specific case and upon a
determination that the person met the applicable standards of conduct. Insofar
as the limitation of, or indemnification for, liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, or persons
controlling us pursuant to the foregoing, or otherwise, we have been advised
that, in the opinion of the Securities and Exchange Commission, such limitation
or indemnification is against public policy as expressed in the Securities
Act
of 1933 and is, therefore, unenforceable.
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The
following table sets forth certain information concerning our common stock
ownership as of June 25, 2008, by (1) each person who is known by us to be
the
beneficial owner of more than five percent of our common stock; (2) each of
our
executive officers and directors; and (3) all of our directors and executive
officers as a group. The address of each such stockholder is in care of us
at
10845 Rancho Bernardo Road, Suite 105, San Diego, California 92127.
|
|
Amount of Benefical
|
|
Percent of
|
|
Name of Beneficial Owner
|
|
Ownership (1)(2)
|
|
Ownership
|
|
|
|
|
|
|
|
William
P.and Debra L. Spencer (3)
|
|
|
2,918,000
|
|
|
26.2
|
%
|
Gary
J. McAdam (4)
|
|
|
2,988,108
|
|
|
23.9
|
%
|
Estate
of James Scibelli (5)
|
|
|
901,625
|
|
|
7.8
|
%
|
Barry
S. King (6)
|
|
|
24,000
|
|
|
*
|
|
Robert
Burg (7)
|
|
|
70,000
|
|
|
*
|
|
Jeffrey
G. McGonegal (7)
|
|
|
70,000
|
|
|
*
|
|
Lowell
W. Giffhorn (8)
|
|
|
70,000
|
|
|
*
|
|
Derek
C. Boosey (9)
|
|
|
225,000
|
|
|
2.0
|
%
|
All
officers and directors as a group (6 persons) (10)
|
|
|
3,377,000
|
|
|
29.3
|
%
|
*
|
Represents
less than 1%
|
(1)
|
Reflects
amounts as to which the beneficial owner has sole voting power and
sole
investment power.
|
(2)
|
Includes
stock options and common stock purchase warrants exercisable within
60
days from the date hereof.
|
(3)
|
Comprised
of 2,740,000 shares and 178,000 stock options. William P. and Debra
Spencer are husband and wife and are deemed to share beneficial ownership
of these shares and options.
|
(4)
|
Comprised
of 1,435,557 shares and 1,552,551 common stock purchase warrants,
all of
which are owned by entities controlled by Mr. McAdam.
|
(5)
|
Includes
370,000 shares and 531,625 common stock purchase warrants, all of
which
are owned by entities controlled by the estate of Mr. Scibelli.
|
(6)
|
Comprised
of 24,000 stock options.
|
(7)
|
Comprised
of 70,000 stock options.
|
(8)
|
Comprised
of 30,000 shares and 40,000 stock
options.
|
(9)
|
Comprised
of 50,000 shares and 175,000 stock
options.
|
(10)
|
Comprised
of 2,820,000 shares and 557,000 stock
options.
|
Equity
Compensation Plan Information
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
Number of securities
|
|
|
|
for issuance under
|
|
|
|
to be issued upon
|
|
Weighted average
|
|
equity compensaton
|
|
|
|
exercise of
|
|
exercise price of
|
|
plans (excluding
|
|
|
|
outstanding options,
|
|
outstanding options,
|
|
securities reflected in
|
|
|
|
warrants and rights
|
|
warrants and rights
|
|
column (a))
|
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
944,000
|
|
$
|
1.76
|
|
|
771,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
3,902,957
|
|
$
|
1.18
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,846,957
|
|
$
|
1.30
|
|
|
771,000
|
|
Common
shares issuable on the exercise of common stock warrants have not been approved
by the security holders and, accordingly, have been segregated in the above
table.
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
GJM
Trading Partners, Ltd., an entity controlled by Gary McAdam, a principal
stockholder, holds exclusive rights to market some of our products through
certain e-commerce distribution channels.
In
January 2005 we entered into a consulting agreement with Business Partners
Operations, LLC., a company in which Mr. McAdam is an officer and principal
stockholder. Under the agreement, Mr. McAdam provides us with business
consulting in the areas of finance and marketing strategies. The agreement,
which was verbally amended in January 2008, calls for us to pay a fee of $6,500
per month and can be terminated by either party with a 30 day notice.
We
believe that the above transactions were fair, reasonable and upon terms at
least as favorable to us as those we might have obtained from unaffiliated
third
parties.
ITEM
13.
EXHIBITS.
|
(a)
|
The
following documents are filed as a part of this Report:
|
|
1.
|
Financial
Statements. The following consolidated financial statements and Report
of
|
|
Independent
Registered
Certified Public Accounting Firm are included in Part II of this
Report:
|
Report
of
HJ Associates & Consultants LLP, Independent Registered Public Accounting
Firm
Consolidated
Balance Sheets- As of March 31, 2008 and 2007
Consolidated
Statements of Operation- Years Ended March 31, 2008 and 2007
Consolidated
Statement of Stockholders' Equity- Years Ended March 31, 2008
and
2007
Consolidated
Statements of Cash Flows- Years Ended March 31, 2008 and 2007
Notes
to
Consolidated Financial Statements
|
2.
|
Exhibits.
The following Exhibits are filed as part of, or incorporated by reference
into,
this
Report:
|
Exhibit No.
|
|
Title
|
|
|
|
3.01
|
|
Articles
of Incorporation of the Registrant(1)
|
|
|
|
3.02
|
|
Bylaws
of the Registrant(1)
|
|
|
|
3.03
|
|
Amendment
to Articles of Incorporation (Name change)(2)
|
|
|
|
4.01
|
|
2000
Stock Option Plan (6)
|
|
|
|
10.01
|
|
Celadrin®
Supply Agreement with Organic Technologies(2)
|
|
|
|
10.19
|
|
Business
Partners Operations Agreement (4)
|
|
|
|
10.20
|
|
Office
Lease Agreement with Bernardo Gateway Partners (5)
|
|
|
|
10.21
|
|
Patent
License with University of Minnesota (5)
|
|
|
|
10.22
|
|
Patent
License with EHP Products, Inc. (5)
|
|
|
|
14
|
|
Code
of Ethics (3)
|
|
|
|
31.1
|
|
302
Certification of William P. Spencer
|
|
|
|
31.2
|
|
302
Certification of Lowell W. Giffhorn
|
|
|
|
32.1
|
|
906
Certification of William P. Spencer
|
|
|
|
32.2
|
|
906
Certification of Lowell W. Giffhorn
|
|
(1)
|
Incorporated
by reference to our Registration Statement on Form SB-1, file number
333-87535,
filed
on September 22, 1999.
|
|
(2)
|
Incorporated
by reference to our Registration Statement on Form SB-2, File Number
333-71756,
declared
effective on July 26, 2002 and post-effective amendment No. 1 thereto
declared effective on August 25, 2003.
|
|
(3)
|
Incorporated
by reference to our Annual Report on Form 10-KSB for the year ended
March
31, 2005.
|
|
(4)
|
Incorporated
by reference to our Registration Statement on Form SB-2, File Number
333-123159, declared effective on March 18,
2005.
|
|
(5)
|
Incorporated
by reference to our Annual Report on Form 10-KSB for the year ended
March
31, 2006.
|
|
(6)
|
Incorporated
by reference to our Registration Statement on Form S-8, File Number
333-146318, filed on September 26,
2007.
|
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
The
following is a summary of the fees billed to Imagenetix by its principal
accountants for the fiscal years ended March 31, 2008 and 2007:
|
|
HJ Associates &
|
|
HJ Associates &
|
|
Mayer Hoffman
|
|
|
|
Consultants LLP
|
|
Consultants LLP
|
|
McCann P.C.
|
|
Fee
category
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit
fees
|
|
$
|
58,896
|
|
$
|
33,563
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit-related
fees
|
|
$
|
|
|
$
|
3,513
|
|
$
|
3,440
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
fees
|
|
$
|
3,934
|
|
$
|
1,922
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
All
other fees
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fees
|
|
$
|
62,830
|
|
$
|
38,998
|
|
$
|
8,440
|
|
Audit
fees. Consists of fees for professional services rendered by our principal
accountants for the audit of our annual financial statements and the review
of
financial statements included in our Forms 10-QSB or services that are normally
provided by our principal accountants in connection with statutory and
regulatory filings or engagements.
Audit-related
fees. Consists of fees for assurance and related services by our principal
accountants that are reasonably related to the performance of the audit or
review of our financial statements and are not reported under "Audit fees."
Tax
fees.
Consists of fees for professional services rendered by our principal accountants
for tax compliance, tax advice and tax planning.
All
other
fees. Consists of fees for products and services provided by our principal
accountants, other than the services reported under "Audit fees," "Audit-related
fees" and "Tax fees" above. The fees disclosed in this category include due
diligence, preparation of pro forma financial statements as a discussion piece
for a Board member, and preparation of letters in connection with the filing
of
Current Reports on Form 8-K.
Pre-Approval
Policies and Procedures
All
services provided by our independent registered public accounting firm, HJ
Associates & Consultants LLP (“HJ”), are subject to pre-approval by our
Audit Committee. The Audit Committee has authorized each of its members to
approve services by HJ in the event there is a need for such approval prior
to
the next full Audit Committee meeting. The Audit Committee has also adopted
policies and procedures that are detailed as to the particular service and
that
do not include delegation of the Audit Committee’s responsibilities to
management under which management may engage HJ to render audit or non-audit
services. Any interim approval given by an Audit Committee member and any such
engagement by management must be reported to the Audit Committee no later than
its next scheduled meeting. Before granting any approval, the Audit Committee
(or a committee member if applicable) gives due consideration to whether
approval of the proposed service will have a detrimental impact on HJ’s
independence. The full Audit Committee pre-approved all services provided by
HJ
in fiscal 2008.
Based
upon the Audit Committee's discussion with management and the independent
auditors and the Audit Committee review of the representations of management
and
the report of the independent accountants to the Audit Committee, the Audit
Committee recommended that the Board of Directors include our audited financial
statements in our Annual Report on Form 10-KSB for the year ended March 31,
2008
filed with the Securities and Exchange Commission.
Index
to Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Consolidated
Balance Sheets, March 31, 2008 and 2007
|
|
F-3
|
|
|
|
Consolidated
Statements of Operation, for the years ended March 31, 2008 and
2007
|
|
F-4
|
|
|
|
Consolidated
Statement of Stockholders' Equity, for the years ended March 31,
2008 and
2007
|
|
F-5
|
|
|
|
Consolidated
Statements of Cash Flows, for the years ended March 31, 2008 and
2007
|
|
F-6
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-7-F-25
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors
Imagenetix,
Inc.
San
Diego, California
We
have
audited the consolidated balance sheets of Imagenetix, Inc. and subsidiary
as of
March 31, 2008 and 2007, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Imagenetix,
Inc. and subsidiary as of March 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
We
were
not engaged to examine management's assertion about the effectiveness of
Imagenetix, Inc.'s internal control over financial reporting as of March 31,
2008 included in the accompanying Form 10-KSB and, accordingly, we do not
express an opinion thereon.
HJ
Associates & Consultants, LLP
Salt
Lake
City, Utah
June
23,
2008
Imagenetix,
Inc.
Consolidated
Balance Sheets
March
31,
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,022,555
|
|
$
|
958,896
|
|
Accounts
receivable, net
|
|
|
765,492
|
|
|
1,576,641
|
|
Inventories,
net
|
|
|
1,109,845
|
|
|
1,284,458
|
|
Prepaid
expenses and other current assets
|
|
|
252,138
|
|
|
384,217
|
|
Income
tax receivable
|
|
|
-
|
|
|
269,140
|
|
Deferred
tax asset
|
|
|
862,497
|
|
|
109,797
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
4,012,527
|
|
|
4,583,149
|
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
112,190
|
|
|
125,456
|
|
|
|
|
|
|
|
|
|
Long-term
prepaid expenses
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
218,155
|
|
|
551,998
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
4,384,872
|
|
$
|
5,260,603
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
713,324
|
|
$
|
368,089
|
|
Accrued
liabilities
|
|
|
72,301
|
|
|
64,265
|
|
Customer
deposits
|
|
|
63,216
|
|
|
136,645
|
|
Contract
payable
|
|
|
46,200
|
|
|
49,970
|
|
Short
term license payable
|
|
|
34,259
|
|
|
31,633
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
929,300
|
|
|
650,602
|
|
|
|
|
|
|
|
|
|
Long
term license payable
|
|
|
2,980
|
|
|
37,239
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
932,280
|
|
|
687,841
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 5,000,000 shares authorized: none
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $.001par value; 50,000,000 shares authorized: 10,960,788 and
10,871,400 issued and outstanding at March 31, 2008 and 2007,
respectively
|
|
|
10,960
|
|
|
10,871
|
|
Capital
in excess of par value
|
|
|
12,481,407
|
|
|
10,734,945
|
|
Accumulated
deficit
|
|
|
(9,039,775
|
)
|
|
(6,173,054
|
)
|
Total
stockholders' equity
|
|
|
3,452,592
|
|
|
4,572,762
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
4,384,872
|
|
$
|
5,260,603
|
|
See
accompanying report of independent registered public accounting firm, summary
of
accounting policies and notes to consolidated financial
statements.
Imagenetix,
Inc.
Consolidated
Statements of Operation
Years
Ended March 31,
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
5,569,593
|
|
$
|
5,596,725
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
3,344,034
|
|
|
2,969,002
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,225,559
|
|
|
2,627,723
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,456,192
|
|
|
1,407,996
|
|
Payroll
expense
|
|
|
1,037,775
|
|
|
712,945
|
|
Consulting
expense
|
|
|
961,349
|
|
|
1,339,515
|
|
Operating
expenses
|
|
|
4,455,316
|
|
|
3,460,456
|
|
Operating
(loss)
|
|
|
(2,229,757
|
)
|
|
(832,733
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
Other
income
|
|
|
32,182
|
|
|
32,885
|
|
Interest
expense (Note 6)
|
|
|
(4,367
|
)
|
|
(6,791
|
)
|
Other
income (expense)
|
|
|
27,815
|
|
|
26,094
|
|
Loss
before income taxes
|
|
|
(2,201,942
|
)
|
|
(806,639
|
)
|
|
|
|
|
|
|
|
|
Benefits
from taxes (Note 10)
|
|
|
(425,300
|
)
|
|
(139,000
|
)
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(1,776,642
|
)
|
$
|
(667,639
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) per share
|
|
$
|
(0.16
|
)
|
$
|
(0.06
|
)
|
See
accompanying report of independent registered public accounting firm, summary
of
accounting polices and notes to consolidated financial
statements.
Imagenetix,
Inc.
Consolidated
Statements of Stockholders' Equity
Years
Ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Capital in excess
|
|
Retained Earnings
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
of Par Value
|
|
(Deficit)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
April 1, 2006
|
|
|
10,721,400
|
|
|
10,721
|
|
|
10,342,395
|
|
|
(5,398,019
|
)
|
|
4,955,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services at $.94 per share
|
|
|
150,000
|
|
|
150
|
|
|
140,850
|
|
|
-
|
|
|
141,000
|
|
Purchase
price of warrants
|
|
|
-
|
|
|
-
|
|
|
1,250
|
|
|
-
|
|
|
1,250
|
|
Value
of warrants issued
|
|
|
-
|
|
|
-
|
|
|
143,054
|
|
|
-
|
|
|
143,054
|
|
Non-cash
dividend issued to certain warrant holders
|
|
|
-
|
|
|
-
|
|
|
107,396
|
|
|
(107,396
|
)
|
|
-
|
|
Net
(loss) for the year ended March 3l, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(667,639
|
)
|
|
(667,639
|
)
|
Balance
March 31, 2007
|
|
|
10,871,400
|
|
$
|
10,871
|
|
$
|
10,734,945
|
|
$
|
(6,173,054
|
)
|
$
|
4,572,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercised at $1.00 to $1.10 per share
|
|
|
89,388
|
|
|
89
|
|
|
90,799
|
|
|
-
|
|
|
90,888
|
|
Cash
received on extension of warrants
|
|
|
-
|
|
|
-
|
|
|
155,536
|
|
|
-
|
|
|
155,536
|
|
Value
of stock options and warrants issued
|
|
|
-
|
|
|
-
|
|
|
410,048
|
|
|
-
|
|
|
410,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
dividend issued to certain warrant holders
|
|
|
-
|
|
|
-
|
|
|
1,090,079
|
|
|
(1,090,079
|
)
|
|
-
|
|
Net
(loss) for the year ended March 3l, 2008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,776,642
|
)
|
|
(1,776,642
|
)
|
Balance
March 31, 2008
|
|
|
10,960,788
|
|
$
|
10,960
|
|
$
|
12,481,407
|
|
$
|
(9,039,775
|
)
|
$
|
3,452,592
|
|
See
accompanying report of independent registered public accounting firm, summary
of
accounting policies and notes to consolidated finacial
statements.
Imagenetix,
Inc.
Consolidated
Statements of Cash Flows
Years
Ended March 31,
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(1,776,642
|
)
|
$
|
(667,639
|
)
|
Adjustments
to reconcile net (loss) to cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
Amortization
and depreciation
|
|
|
50,334
|
|
|
41,410
|
|
Provision
for doubtful accounts
|
|
|
15,000
|
|
|
40,000
|
|
Provision
for inventory obsolescence
|
|
|
15,454
|
|
|
(61,380
|
)
|
Non
cash expense related to issuance of warrants and stock
options
|
|
|
410,048
|
|
|
143,054
|
|
Stock
issued for services
|
|
|
-
|
|
|
141,000
|
|
Change
in deferred taxes
|
|
|
(425,300
|
)
|
|
(100,497
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
796,149
|
|
|
(805,443
|
)
|
(Increase)
decrease in employee receivable
|
|
|
3,177
|
|
|
2,870
|
|
(Increase)
decrease in inventory
|
|
|
159,159
|
|
|
518,390
|
|
(Increase)
decrease in other assets
|
|
|
86,904
|
|
|
(147,591
|
)
|
Increase
(decrease) in accounts payable
|
|
|
345,234
|
|
|
(372,372
|
)
|
Increase
(decrease) in accrued liabilities
|
|
|
8,036
|
|
|
12,316
|
|
Increase
(decrease) in customer deposits
|
|
|
(73,429
|
)
|
|
88,160
|
|
Increase
(decrease) in income taxes payable
|
|
|
269,140
|
|
|
348,430
|
|
Net
cash (used in) operating activities
|
|
|
(116,736
|
)
|
|
(819,292
|
)
|
Investing
activities:
|
|
|
|
|
|
|
|
Acquisition
of office equipment and leasehold improvements
|
|
|
(19,014
|
)
|
|
(51,838
|
)
|
Trademarks,
patents and infomercial
|
|
|
(11,612
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(30,626
|
)
|
|
(51,838
|
)
|
Financing
activities:
|
|
|
|
|
|
|
|
Proceeds
from extension of warrants
|
|
|
155,536
|
|
|
-
|
|
Proceeds
from exercise of warrants
|
|
|
90,888
|
|
|
-
|
|
Proceeds
from issuance of warrant
|
|
|
-
|
|
|
1,250
|
|
Proceed
from contracts payable
|
|
|
95,605
|
|
|
102,143
|
|
Payments
on contracts payable
|
|
|
(99,375
|
)
|
|
(52,173
|
)
|
Payments
on patent license financed
|
|
|
(31,633
|
)
|
|
(29,210
|
)
|
Net
cash provided by financing activities
|
|
|
211,021
|
|
|
22,010
|
|
Net
increase (decrease) in cash
|
|
|
63,659
|
|
|
(849,120
|
)
|
Cash
and cash equivalents
,
beginning of year
|
|
|
958,896
|
|
|
1,808,016
|
|
Cash
and cash equivalents,
end of year
|
|
$
|
1,022,555
|
|
$
|
958,896
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,367
|
|
$
|
6,791
|
|
Income
taxes
|
|
$
|
-
|
|
$
|
-
|
|
Non
Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
Non-cash
dividend issued to certain warrant holders
|
|
$
|
1,090,079
|
|
$
|
107,396
|
|
Non-cash
expense related to issuance of warrants and stock options
|
|
$
|
410,048
|
|
$
|
143,054
|
|
Stock
issued for services
|
|
$
|
-
|
|
$
|
141,000
|
|
See
accompanying report of independent registered public accounting firm, summary
of
accounting policies and notes to consolidated financial
statements.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements
March
31,
2008 and 2007
NOTE
1 –
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The
accompanying consolidated financial statements represent the accounts of
Imagenetix, Inc. [“Parent”] organized under the laws of the State of Nevada on
March 28, 1988; and its subsidiary Imagenetix, Inc [“Subsidiary”] organized
under the laws of the state of Colorado on July 26, 1996 and its subsidiary
Imagenetix [“Imagenetix CA”] organized under the laws of the State of California
on January 7, 1999. We are engaged in the business of developing and marketing
nutritional supplements and skin care products primarily in domestic
markets.
On
March
23, 1999, Subsidiary completed an exchange agreement with Imagenetix CA wherein
Subsidiary issued 3,900,000 shares of its common stock in exchange for all
of
the outstanding common stock of Imagenetix CA. The Acquisition was accounted
for
as a recapitalization of Imagenetix CA as the shareholders of the Imagenetix
CA
controlled the combined entity after the acquisition. There was no adjustment
to
the carrying values of the assets or liabilities of the Subsidiary or Imagenetix
CA as a result of the recapitalization.
During
October 2000, the Subsidiary entered into a definitive merger agreement and
plan
of reorganization with Parent. The transaction was accounted for as a
recapitalization of the Subsidiary, wherein the Subsidiary became a wholly
owned
subsidiary of the Parent. After giving effect to the preceding transaction,
the
parent had 8,550,000 shares of common stock, 3,183,750 warrants, and 525,000
options outstanding. In connection with the reverse acquisition, the Parent
changed its name to Imagenetix, Inc.
We
have,
at the present time, not paid any dividends, and any dividends that may be
paid
in the future will depend upon our financial requirements and other relevant
factors.
Consolidation
All
significant intercompany transactions between the Parent, Subsidiary, and
Imagenetix CA have been eliminated in consolidation.
Accounting
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that effect the reported amounts of assets and
liabilities, the disclosures of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues
and
expenses during the reporting period. Actual results could differ from those
estimated by management.
Cash
and Cash Equivalents
For
purposes of the financial statements, we consider all highly liquid debt
investments purchased with a maturity of three months or less to be cash
equivalents. At various times throughout the year, we have exceeded federally
insured limits.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
Accounts
receivable
Accounts
receivable are carried at the expected net realizable value. The allowance
for
doubtful accounts is based on management’s assessment of the collectibility of
specific customer accounts and the aging of the accounts receivable. If there
were a deterioration of a major customer’s creditworthiness, or actual defaults
were higher than historical experience, our estimates of the recoverability
of
amounts due to us could be overstated, which could have a negative impact on
operations.
Inventory
Inventory
is carried at the lower of cost or market. Cost is determined by the first-in
first-out method. Indirect overhead costs are allocated to inventory.
Property
and Equipment
Property
and equipment are stated at cost. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized, upon being placed in service. Expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is computed over the
estimated useful life of three to seven years, except leasehold improvements
which are depreciated over the lesser of the remaining lease life or the life
of
the asset, using the straight-line method. We follow the provisions of the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment of Long-lived
Assets." Long-lived assets and certain identifiable intangibles to be held
and
used by us are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. We continuously evaluate the recoverability of our long-lived
assets based on estimated future cash flows and the estimated fair value of
such
long-lived assets, and provide for impairment if such undiscounted cash flows
are insufficient to recover the carrying amount of the long-lived
asset.
Trademarks
and Patents
Patents
and trademarks are carried at cost less accumulated amortization and are
amortized over their estimated useful lives of from 8 to 17 years for patents
and 10 years for trademarks. The carrying value of patents and trademarks is
periodically reviewed and impairments, if any, are recognized when the expected
future benefit to be derived from individual intangible assets is less than
its
carrying value determined based on the provisions of SFAS No. 144 as discussed
above.
Stock
Based Compensation
Effective
January 1, 2006, we adopted FASB Statement No. 123R, “Accounting for Stock-Based
Compensation” (“SFAS 123R”). SFAS 123R requires all share-based payments to
employees, including grants of employee stock options and restricted stock,
to
be recognized in the financial statements based on their fair values. Under
SFAS
123R, the pro forma disclosures previously permitted under SFAS 123R are no
longer an alternative to financial statement recognition.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
We
have
selected the Black-Scholes method of valuation for share-based compensation
and
have adopted the modified prospective transition method under SFAS 123R, which
requires that compensation cost be recorded, as earned, for all unvested stock
options outstanding at the beginning of the first quarter of adoption of SFAS
123R. As permitted by SFAS 123R, prior periods have not been restated. The
charge is being recognized in non cash compensation, which is included in
stock-based compensation expense, on a straight-line basis over the remaining
service period after the adoption date based on the options’ original estimate
of fair value. Prior to the adoption of SFAS 123R, the Company applied the
intrinsic-value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.”
Under this method, compensation cost was recorded only if the market price
of
the underlying stock on the grant date exceeded the exercise price. As permitted
by SFAS 123, the Company elected the disclosure only requirements of SFAS 123.
The fair-value based method used to determine historical pro forma amounts
under
SFAS 123 was similar in most respects to the method used to determine
stock-based compensation expense under SFAS 123R.
Revenue
Recognition
We
recognize revenue in accordance with the SEC’s Staff Accounting Bulletin
No. 104, “Revenue Recognition in Financial Statements” (SAB104), Statement
of Financial Accounting Standards No. 48, “Revenue Recognition When Right
of Return Exists” (SFAS 48), and Emerging Issues Task Force Abstract (EITF)
No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products.” SAB 104 requires that four
basic criteria be met before revenue can be recognized: 1) there is evidence
that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
determinable; and 4) collectibility is reasonably assured. SFAS 48 states that
revenue from sales transactions where the buyer has the right to return the
product shall be recognized at the time of sale only if (1) the seller’s
price to the buyer is substantially fixed or determinable at the date of sale;
(2) the buyer has paid the seller, or the buyer is obligated to pay the
seller and the obligation is not contingent on resale of the product;
(3) the buyer’s obligation to the seller would not be changed in the event
of theft or physical destruction or damage of the product; (4) the buyer
acquiring the product for resale has economic substance apart from that provided
by the seller; (5) the seller does not have significant obligations for
future performance to directly bring about resale of the product by the buyer;
and (6) the amount of future returns can be reasonably estimated. We
recognize revenue upon determination that all criteria for revenue recognition
have been met. The criteria are usually met at the time title passes to the
customer, which usually occurs upon shipment. Revenue from shipments where
title
passes upon delivery is deferred until the shipment has been delivered.
We
account for payments made to customers in accordance with EITF 01-09, which
states that cash consideration (including a sales incentive) given by a vendor
to a customer is presumed to be a reduction of the selling prices of the
vendor’s products or services and, therefore, should be characterized as a
reduction of revenue when recognized in the vendor’s income statement, rather
than a sales and marketing expense. We have various agreements with customers
that provide for discounts and rebates. These agreements are classified as
a
reduction of revenue. Certain other costs associated with customers that meet
the requirements of EITF 01-09 are recorded as sales and marketing expense.
Vendor considerations recorded as a reduction of sales were $893,000 and
$232,000 for the years ended March 31, 2008 and 2007.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
We
guarantee customer satisfaction. Our policy requires the customer to return
the
unused product to the retailer from whom they originally purchased it. We pay
the retailer for the returned product plus a handling cost. We periodically
assess the adequacy of this policy and will record a liability as necessary.
For
the year ended March 31, 2008, there were no returns that would suggest a
liability needed to be recorded.
We
review
gross revenue for estimated returns of private label contract manufacturing
products and direct-to-consumer products. The estimated returns are based upon
the trailing six months of private label contract manufacturing gross sales
and
our historical experience for both private label contract manufacturing and
direct-to-consumer product returns. However, the estimate for product returns
does not reflect the impact of a large product recall resulting from product
nonconformance or other factors as such events are not predictable nor is the
related economic impact estimable. For the year ended March 31, 2008 there
were
no returns that would suggest a liability needed to be recorded.
As
part
of the services we provide to our private label contract manufacturing
customers, we may perform, but are not required to perform, certain research
and
development activities related to the development or improvement of their
products. While our customers typically do not pay directly for this service,
the cost of this service is included as a component of the price we charge
to
manufacture and deliver their products.
Income
Taxes
We
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes.” This statement requires an
asset and liability approach for accounting for income taxes (See Note
10).
Earnings
Per Share
The
computation of earnings per share is based on the weighted average number of
shares outstanding during the period presented in accordance with Statement
of
Financial Accounting Standards No. 128, “Earnings Per Share” (See Note
11).
Recently
Enacted Accounting Standards
In
December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 161,
Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133.
This
standard requires companies to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
This Statement is effective for financial statements issued for fiscal years
and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company has not yet adopted the provisions of SFAS No. 161,
but
does not expect it to have a material impact on its consolidated financial
position, results of operations or cash flows.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
In
December 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 110 regarding
the use of a "simplified" method, as discussed in SAB No. 107 (SAB 107), in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS No. 123 (R),
Share-Based
Payment
. In
particular, the staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. At
the
time SAB 107 was issued, the staff believed that more detailed external
information about employee exercise behavior (e.g., employee exercise patterns
by industry and/or other categories of companies) would, over time, become
readily available to companies. Therefore, the staff stated in SAB 107 that
it
would not expect a company to use the simplified method for share option grants
after December 31, 2007. The staff understands that such detailed information
about employee exercise behavior may not be widely available by December 31,
2007. Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond December 31, 2007. The
Company currently uses the simplified method for “plain vanilla” share options
and warrants, and will assess the impact of SAB 110 for fiscal year 2009. It
is
not believed that this will have an impact on the Company’s consolidated
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
—an
amendment of ARB No. 51. This statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. Before this statement was issued, limited guidance existed
for reporting noncontrolling interests. As a result, considerable diversity
in
practice existed. So-called minority interests were reported in the consolidated
statement of financial position as liabilities or in the mezzanine section
between liabilities and equity. This statement improves comparability by
eliminating that diversity. This statement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier
adoption is prohibited. The effective date of this statement is the same as
that
of the related Statement 141 (revised 2007). The Company will adopt this
Statement beginning April 1, 2009. It is not believed that this will have an
impact on the Company’s consolidated financial position, results of operations
or cash flows.
In
December 2007, the FASB, issued FAS No. 141 (revised 2007),
Business
Combinations.
’This
Statement replaces FASB Statement No. 141,
Business
Combinations
,
but
retains the fundamental requirements in Statement 141. This
Statement establishes principles and requirements for how the acquirer: (a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This statement
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. An entity may not apply it before that date. The
effective date of this statement is the same as that of the related FASB
Statement No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
. The
Company will adopt this statement beginning April 1, 2009. It is not believed
that this will have an impact on the Company’s consolidated financial position,
results of operations or cash flows.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
In
February 2007, the FASB, issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Liabilities
—Including
an Amendment of FASB Statement No. 115. This standard permits an
entity to choose to measure many financial instruments and certain other items
at fair value. This option is available to all entities. Most of the provisions
in FAS 159 are elective; however, an amendment to FAS 115
Accounting
for Certain Investments in Debt and Equity Securities
applies
to all entities with available for sale or trading securities. Some requirements
apply differently to entities that do not report net income. SFAS No. 159 is
effective as of the beginning of an entities first fiscal year that begins
after
November 15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity makes that choice in the first
120
days of that fiscal year and also elects to apply the provisions of SFAS No.
157
Fair
Value Measurements
. The
Company will adopt SFAS No. 159 beginning April 1, 2008 and is currently
evaluating the potential impact the adoption of this pronouncement will have
on
its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements
This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this statement does not require
any
new fair value measurements. However, for some entities, the application of
this
statement will change current practice. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for that fiscal year, including financial statements for an interim
period within that fiscal year. The Company will adopt this statement April
1,
2008, and it is not believed that this will have an impact on the Company’s
consolidated financial position, results of operations or cash
flows.
NOTE
2 – ACCOUNTS RECEIVABLE
Accounts
receivable are carried at the expected realizable value. Accounts receivable
consisted of the following:
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Accounts
receivable - trade
|
|
$
|
870,492
|
|
$
|
1,666,641
|
|
Allowance
for doubtful accounts
|
|
|
(105,000
|
)
|
|
(90,000
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
765,492
|
|
$
|
1,576,641
|
|
NOTE
3 – INVENTORY
Inventory
consisted of the following:
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
824,807
|
|
$
|
797,498
|
|
Finished
products
|
|
|
295,615
|
|
|
401,895
|
|
Boxes,
labels, tubes & bottles
|
|
|
139,965
|
|
|
220,153
|
|
|
|
|
1,260,387
|
|
|
1,419,546
|
|
Reserve
for obsolescence
|
|
|
(150,542
|
)
|
|
(135,088
|
)
|
|
|
$
|
1,109,845
|
|
$
|
1,284,458
|
|
NOTE
4 – PROPERTY AND EQUIPMENT
The
following is a summary of equipment, at cost, less accumulated
depreciation:
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Office
equipment
|
|
$
|
72,632
|
|
$
|
66,456
|
|
Lease-hold
improvements
|
|
|
139,191
|
|
|
126,353
|
|
|
|
|
211,823
|
|
|
192,809
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
99,633
|
|
|
67,353
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,190
|
|
$
|
125,456
|
|
Depreciation
expense for the year ended March 31, 2008 and 2007 was $32,280 and $23,956,
respectively.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
NOTE
5 – OTHER ASSETS
The
following is a summary of other assets included on the face of the balance
sheet:
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
13,032
|
|
$
|
13,032
|
|
Patent
|
|
|
172,965
|
|
|
161,353
|
|
Deferred
tax asset
|
|
|
87,700
|
|
|
415,100
|
|
|
|
|
273,697
|
|
|
589,485
|
|
|
|
|
|
|
|
|
|
Less
accumulated amortization
|
|
|
55,542
|
|
|
37,487
|
|
|
|
|
|
|
|
|
|
|
|
$
|
218,155
|
|
$
|
551,998
|
|
For
the
year ended March 31, 2008 and 2007 amortization expense was $18,054 and $17,454,
respectively. The estimated future amortization expense related to intangible
assets as of March 31, 2008 is as follows:
Year
Ended March 31.
|
|
Amount
|
|
|
|
|
|
2009
|
|
|
19,858
|
|
2010
|
|
|
19,858
|
|
2011
|
|
|
19,858
|
|
2012
|
|
|
19,757
|
|
2013
and thereafter
|
|
|
51,124
|
|
NOTE
6 –
LICENSE
AND ROYALTY PAYABLE
In
May,
2005, we entered into an agreement with EHP Products, Inc. acquiring a
non-exclusive world-wide license to make, use and sell products relating to
Cetyl Myristoleate covered under U.S. Patent No. 5,569,676. The agreement
provides for payments of $3,000 per month from May, 2005 through April, 2009,
at
which time EHP Products, Inc. has agreed to convey ownership in the product
to
us.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
As
of
March 31, 2008 the following obligations were outstanding related to this
license:
|
|
As of March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Patent
License and Royalty Payable
|
|
$
|
37,239
|
|
$
|
68,872
|
|
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
34,259
|
|
|
31,633
|
|
|
|
|
|
|
|
|
|
Long
term license payable
|
|
$
|
2,980
|
|
$
|
37,239
|
|
NOTE
7 – LEASES OBLIGATIONS
Operating
Lease
We
entered into a seven-year building lease for our office commencing in January
2006 and expiring in December 2012. In addition we entered into a three-year
lease for warehouse space commencing in September 2006 and expiring in August
2009. Lease expense for the years ended March 31, 2008 and 2007 amounted to
$165,207 and $160,902, respectively. The following is a schedule of minimum
annual rental payments for the next five years.
Years
ending March 31,
|
|
|
|
|
|
|
|
2009
|
|
$
|
184,491
|
|
2010
|
|
|
158,993
|
|
2011
|
|
|
143,206
|
|
2012
|
|
|
148,218
|
|
2013
|
|
|
114,056
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
748,964
|
|
NOTE
8 – COMMITMENTS AND CONTINGINCIES
Contingencies
We
are
involved in litigation from time to time in the normal course of business.
Management
believes there are no such claims, which would have a material effect on our
financial position.
Other
agreements
We
routinely enter into contracts and agreements with suppliers, manufacturers,
consultants, product marketing, and sales representatives in the normal course
of doing business. These agreements can be either short or long term and are
normally limited to specific products and marketing opportunities. We are
committed to purchase a minimum of $1,680,000 each year through 2012 of the
major ingredient in our current products. However, we have in the past entered
into waivers, which have eliminated a portion of the purchase
commitment.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
NOTE
9 – CAPITAL STOCK
Preferred
Stock
We
have
authorized 5,000,000 shares of preferred stock, $.001 par value, with such
rights, preferences and designations and to be issued in such series as
determined by the Board of Directors. No shares are issued and outstanding
at
March 31, 2008.
Common
Stock
The
Company has authorized 50,000,000 shares of common stock at $.001 par value.
At
March 31, 2008, the Company had 10,960,788 shares of common stock issued and
outstanding.
During
the year ended March 31, 2008, we issued 89,388 shares of common stock for
proceeds of $90,888. The shares were issued upon shareholders exercising
warrants with exercise prices ranging from $1.00 to $1.10 per
share.
During
the year ended March 31, 2007, we issued 150,000 shares of common stock to
one
individual in exchange for services he will provide to the company. The services
to be performed were valued based on the price of the common stock on the date
of issuance, $0.94 per share or $141,000 in the aggregate. This amount is being
amortized over 24 months, the life of the contract under which the services
are
to be provided, as non-cash expense.
Stock
Bonus Plan
During
the year ended March 31, 2000, our board of directors adopted a stock bonus
plan. The plan provides for the granting of awards of up to 724,500 shares
of
common stock to officers, directors, consultants and employees. Awards under
the
plan will be granted as determined by the board of directors. As of March 31,
2008, 499,500 shares have been granted under the plan.
Warrants
A
summary
of the status of the warrants granted under various agreements at March 31,
2008
and 2007, and changes during the years then ended is presented
below:
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
|
|
Warrants
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
|
Exercise
|
|
Fair
|
|
|
|
Shares
|
|
Price
|
|
Value
|
|
|
|
|
|
|
|
|
|
Outstanding,
April 1, 2006
|
|
|
4,107,100
|
|
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
250,000
|
|
|
1.00
|
|
$
|
0.57
|
|
Outstanding,
March 31, 2007
|
|
|
4,357,100
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
175,000
|
|
|
1.30
|
|
$
|
0.80
|
|
Exercised
|
|
|
(89,388
|
)
|
|
1.02
|
|
|
|
|
Cancelled/
Expired
|
|
|
(539,755
|
)
|
|
1.59
|
|
|
|
|
Outstanding,
March 31, 2008
|
|
|
3,902,957
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2007
|
|
|
4,357,100
|
|
$
|
1.26
|
|
|
|
|
Exercisable,
March 31, 2008
|
|
|
3,902,957
|
|
$
|
1.18
|
|
|
|
|
During
the year ended March 31, 2008, we issued warrants to three individuals for
services valued at $140,588 which we expensed to general and administrative
expenses. We estimated the fair value of each warrant at the issuance date
by
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the year ended March 31, 2008: dividend yield of zero
percent; expected volatility of 71%, risk-free interest rates of 4.55%; and
expected lives of 5 years.
During
the year ended March 31, 2007, we issued warrants to one individual for services
valued at $143,054 which we are amortizing to general and administrative
expenses over 24 months. We estimated the fair value of each warrant at the
issuance date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the year ended March 31, 2007: dividend
yield of zero percent; expected volatility of 71%, risk-free interest rates
of
4.83%; and expected lives of 5 years.
During
the year ended March 31, 2008, we offered warrant holders with warrants
scheduled to expire on October 23, 2007, the right to extend their warrants
for
three additional years in exchange for a warrant extension fee of $0.05 per
warrant share, such amount to be reduced from the existing exercise price,
and a
right for us to call the warrants should our common stock trade at a 20% premium
to the revised exercise price for 10 business days. As a result of this offer,
53 warrants with exercise prices ranging from $0.75 to $2.00 totaling 3,110,710
warrant shares were extended until October 23, 2010 at an accumulated fee of
$155,536. We determined that the offering was a modification of warrants which
were originally issued as part of equity transactions. We calculated the
incremental fair value of the modified warrants by using the Black Sholes
pricing model and recorded a non-cash dividend of $1,090,079 for the year ended
March 31, 2008.
We
estimated the fair value of the non-cash dividends declared during the year
ended March 31, 2008 by using the Black-Scholes pricing model with the following
weighted average assumptions: dividend yield of zero percent; expected
volatility of 55%; risk free interest rate of 3.09%; and expected lives of
3
years.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
During
the year ended March 31, 2007, we extended the expiration date on warrants
exercisable for up to 415,375 shares of common stock to October 23, 2007. These
warrants were issued in 2000 and 2001 as part of an equity unit sale. By the
terms of the warrants, we were to use our best efforts to maintain a
registration statement under which the holders could resell the common shares
on
the exercise of the warrants. Since we failed to maintain a timely registration
statement, we decided to extend the expiration date of the warrants. Due to
this
modification, we recorded non-cash dividends of $107,396 for the year ended
March 31, 2007. We estimated the fair value of the non-cash dividends declared
during the year ended March 31, 2007 by using the Black-Scholes pricing model
with the following weighted average assumptions: dividend yield of zero percent;
expected volatility of 70% to 72%; risk free interest rate of 4.56% to 4.87%;
and expected lives of 13 to 18 months.
A
summary
of the status of the warrants granted under the various agreements at
March
31,
2008, are presented in the table below:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
Range
of
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
Prices
|
|
Outstanding
|
|
Life
|
|
Price
|
|
Exercisable
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.65-0.95
|
|
|
1,068,210
|
|
|
2.56
|
|
$
|
0.88
|
|
|
1,068,210
|
|
$
|
0.88
|
|
$
|
1.00-1.05
|
|
|
1,780,000
|
|
|
2.46
|
|
$
|
1.04
|
|
|
1,780,000
|
|
$
|
1.04
|
|
$
|
1.20-1.70
|
|
|
522,250
|
|
|
2.76
|
|
$
|
1.38
|
|
|
522,250
|
|
$
|
1.38
|
|
$
|
1.95
|
|
|
457,500
|
|
|
2.25
|
|
$
|
1.95
|
|
|
457,500
|
|
$
|
1.95
|
|
$
|
2.33-3.45
|
|
|
74,997
|
|
|
2.17
|
|
$
|
2.85
|
|
|
74,997
|
|
$
|
2.85
|
|
|
|
|
|
3,902,957
|
|
|
2.50
|
|
$
|
1.18
|
|
|
3,902,957
|
|
$
|
1.18
|
|
Stock
Option Plan
In
August 2000 we adopted a Stock Option Plan, which we refer to as the
"Plan," which provides for the grant of stock options intended to qualify as
"incentive stock options" and "nonqualified stock options" (collectively "stock
options") within the meaning of Section 422 of the United States Internal
Revenue Code of 1986 (the "Code"). Stock options may be issued to any of our
officers, directors, key employees or consultants.
Under
the
Plan, we have reserved 1.5 million shares underlying stock options for
issuance, of which 1,139,000 options have been granted to executive officers,
employees and consultants at prices ranging from $.86 to $2.00 per share. The
Plan is administered by the full Board of Directors, who determine which
individuals shall receive stock options, the time period during which the stock
options may be exercised, the number of shares of common stock that may be
purchased under each stock option and the stock option price.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
The
per
share exercise price of incentive stock options may not be less than the fair
market value of the common stock on the date the option is granted. The
aggregate fair market value (determined as of the date the stock option is
granted) of the common stock that any person may purchase under an incentive
stock option in any calendar year pursuant to the exercise of incentive stock
options will not exceed $100,000. No person who owns, directly or indirectly,
at
the time of the granting of an incentive stock option, more than 10% of the
total combined voting power of all classes of our stock is eligible to receive
incentive stock options under the Plan unless the stock option price is at
least
110% of the fair market value of the common stock subject to the stock option
on
the date of grant.
No
incentive stock options may be transferred by an optionee other than by will
or
the laws of descent and distribution, and, during the lifetime of an optionee,
the stock option may only be exercisable by the optionee. Except as otherwise
determined by the Board of Directors, stock options may be exercised only if
the
stock option holder remains continuously associated with us from the date of
grant to the date of exercise. The exercise date of a stock option granted
under
the Plan may not be later than ten years from the date of grant. Any stock
options that expire unexercised or that terminate upon an optionee's ceasing
to
be employed by us will become available once again for issuance. Shares issued
upon exercise of a stock option will rank equally with other shares then
outstanding. No stock options will be granted by us at an exercise price less
than 85% of the fair market value of the stock underlying the option on the
date
the option is granted. During the years ended March 31, 2008 and 2007 there
were
options granted to purchase up to 350,000 and 0, respectively, shares of common
stock and there were no options exercised.
A
summary
of the status of the options granted under the Company’s 2000 stock option plan
and other agreements at March 31, 2008 and 2007, and changes during the years
then ended is presented below:
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
|
|
Options
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
|
Exercise
|
|
Fair
|
|
|
|
Shares
|
|
Price
|
|
Value
|
|
|
|
|
|
|
|
|
|
Outstanding,
April 1, 2006
|
|
|
1,129,000
|
|
$
|
1.74
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
|
Outstanding,
March 31, 2007
|
|
|
1,129,000
|
|
$
|
1.74
|
|
|
|
|
Granted
|
|
|
350,000
|
|
$
|
1.30
|
|
$
|
0.80
|
|
Cancelled
|
|
|
(535,000
|
)
|
$
|
1.41
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
|
|
Outstanding,
March 31, 2008
|
|
|
944,000
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2007
|
|
|
1,129,000
|
|
$
|
1.74
|
|
|
|
|
Exercisable,
March 31, 2008
|
|
|
769,000
|
|
$
|
1.87
|
|
|
|
|
A
summary
of the status of the options granted under the stock option plan and other
agreements at March 31, 2008, are presented in the table below:
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Range
of
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
|
Exercise
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
|
Prices
|
|
Outstanding
|
|
Life
|
|
Price
|
|
Exercisable
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.30
|
|
|
350,000
|
|
|
4.09
|
|
$
|
1.30
|
|
|
175,000
|
|
$
|
1.30
|
|
|
$
|
1.95
|
|
|
249,000
|
|
|
2.25
|
|
$
|
1.95
|
|
|
249,000
|
|
$
|
1.95
|
|
|
$
|
2.00
|
|
|
245,000
|
|
|
2.39
|
|
$
|
2.00
|
|
|
245,000
|
|
$
|
2.00
|
|
|
$
|
2.35
|
|
|
100,000
|
|
|
2.47
|
|
$
|
2.35
|
|
|
100,000
|
|
$
|
2.35
|
|
|
|
|
|
|
944,000
|
|
|
2.99
|
|
$
|
1.76
|
|
|
769,000
|
|
$
|
1.87
|
|
NOTE
10 – INCOME TAXES
At
March
31, 2008 and 2007, the total of all deferred tax assets was approximately
$950,197 and $524,897, respectively. There are no deferred tax liabilities
for
either year.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
The
temporary differences gave rise to the following deferred tax asset
(liability):
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
of financial accounting over tax depreciation
|
|
$
|
21,700
|
|
$
|
17,100
|
|
State
income tax benefits
|
|
|
211,597
|
|
|
12,497
|
|
Net
operating loss carryforward
|
|
|
541,400
|
|
|
-
|
|
Allowance
for obsolete inventory
|
|
|
60,000
|
|
|
53,800
|
|
Allowance
for bad debts
|
|
|
41,800
|
|
|
35,800
|
|
Valuation
of stock options and warrants
|
|
|
66,000
|
|
|
398,000
|
|
Vacation
accrual
|
|
|
7,700
|
|
|
7,700
|
|
Net
deferred tax asset
|
|
$
|
950,197
|
|
$
|
524,897
|
|
The
reconciliation of income tax from continuing operations computed at the U.S.
federal statutory tax rate to our effective rate is as follows for the year
ended:
March
31,
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Federal
income tax expense computed at the Federal statutory rate
|
|
$
|
(748,700
|
)
|
$
|
(274,300
|
)
|
State
income tax expense net of Federal benefit
|
|
|
(153,100
|
)
|
|
(46,300
|
)
|
Other-
permanent differences
|
|
|
476,500
|
|
|
4,500
|
|
Other
|
|
|
-
|
|
|
177,100
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
$
|
(425,300
|
)
|
$
|
(139,000
|
)
|
The
components of federal income tax (benefit) expense from continuing operations
consisted of the following for the year ended:
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Current
income tax expense:
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
$
|
(97,300
|
)
|
State
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
current tax expense
|
|
$
|
-
|
|
$
|
(97,300
|
)
|
|
|
|
|
|
|
|
|
Deferred
tax expense (benefit) resulted from:
|
|
|
|
|
|
|
|
Excess
of financial accounting over tax depreciation
|
|
$
|
(4,500
|
)
|
$
|
(11,200
|
)
|
State
income tax benefits
|
|
|
(199,200
|
)
|
|
35,100
|
|
Valuation
of stock options and warrants
|
|
|
332,000
|
|
|
(73,700
|
)
|
Net
operating loss
|
|
|
(541,400
|
)
|
|
-
|
|
Allowance
for obsolete inventory
|
|
|
(6,200
|
)
|
|
24,400
|
|
Vacation
accrual
|
|
|
-
|
|
|
(400
|
)
|
Allowance
for bad debts
|
|
|
(6,000
|
)
|
|
(15,900
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax expense (benefit)
|
|
$
|
(425,300
|
)
|
$
|
(41,700
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(425,300
|
)
|
$
|
(139,000
|
)
|
Deferred
income tax expense (benefit) results primarily from the reversal of temporary
timing differences between tax and financial statement income.
At
March
31, 2008, the Company has net operating loss carry forwards for income tax
reporting purposes of approximately $1,592,000 and $2,394,000 available to
offset future federal and California taxable income, respectively. Based on
current tax law, the Company’s federal net operating loss carry forward will
begin to expire in the year ending March 31, 2028 and the state net operating
loss carry forward will begin to expire in the year ending March 31,
2016.
We
periodically evaluate the likelihood of the realization of deferred tax assets,
and adjust the carrying amount of the deferred tax assets by the valuation
allowance to the extent the future realization of the deferred tax assets is
not
judged to be more likely than not. We consider many factors when assessing
the
likelihood of future realization of our deferred tax assets, including our
recent cumulative earnings experience by taxing jurisdiction, expectations
of
future taxable income or loss, the carry forward periods available to us for
tax
reporting purposes, and other relevant factors.
At
March
31, 2008, based on the weight of available evidence, including cumulative losses
in recent years and expectations of future taxable income, the Company
determined that it was more likely that its deferred tax assets would be
realized and has not recorded a valuation allowance associated with its deferred
tax assets.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
On
April
1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48,
Accounting
for Uncertainty in Income taxes
(FIN
48). FIN 48 prescribes a comprehensive model of how a company should
recognize, measure, present, and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax
return. FIN 48 states that a tax benefit from an uncertain position
may be recognized if it is "more likely than not" that the position is
sustainable, based upon its technical merits. The tax benefit of a qualifying
position is the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with a taxing authority having
full knowledge of all relevant information.
Upon
adoption of FIN 48, there was no impact to the Company's consolidated financial
statements. The Company estimates that the unrecognized tax benefit
will not change significantly within the next twelve months. The
Company will continue to classify income tax penalties and interest as part
of
general and administrative expense in its statements of
operations. Accrued interest on uncertain tax positions is not
significant. There are no penalties accrued as of March 31,
2008. The following table summarizes the open tax years for each
major jurisdiction:
Jurisdiction
|
|
Open
Tax Years
|
Federal
|
|
2004 – 2006
|
California
|
|
2004 – 2006
|
As
the
Company has significant net operating loss carry forwards, even if certain
of
the Company’s tax positions were disallowed, it is not foreseen that the Company
would have to pay any taxes in the near future. Consequently, the Company does
not calculate the impact of interest or penalties on amounts that might be
disallowed.
NOTE
11 – EARNINGS PER SHARE
The
following data show the amounts used in computing earnings per share of common
stock for the period presented:
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
|
|
For the Year Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Income
(loss) available to common shareholders (Numerator)
|
|
$
|
(1,776,642
|
)
|
$
|
(667,639
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding used in basic income
per share
during the period (Denominator)
|
|
|
10,936,657
|
|
|
10,745,647
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding used in diluted income
per
share during the period (Denominator)
|
|
|
10,936,657
|
|
|
10,745,647
|
|
At
March
31, 2008, we had options to purchase 944,000 shares of common stock at prices
ranging from $1.30 to $2.35 per share and warrants to purchase 3,902,957 shares
of common stock at prices ranging from $0.88 to $2.85 per share that were not
included in the computation of earnings per share because their effects are
anti-dilutive due to a loss being recognized for the year then
ended.
At
March
31, 2007, we had options to purchase 1,129,000 shares of common stock at prices
ranging from $0.86 to $2.00 per share and warrants to purchase 4,387,100 shares
of common stock at prices ranging from $0.70 to $3.45 per share that were not
included in the computation of earnings per share because their effects are
anti-dilutive due to a loss being recognized for the year then
ended.
NOTE
12 – CONCENTRATIONS
Sales
During
the year ended March 31, 2008, we had two significant customers which accounted
for 29%, and 16% of sales.
During
the year ended March 31, 2007, we had two significant customers which accounted
for 23% and 15% of sales.
Supplier
We
also
have a single source and exclusive supplier arrangement with the supplier of
a
specific raw material, which is used as part of products which accounts for
approximately 74% of our sales. The interruption of raw materials provided
by
this supplier or the loss of a significant customer would adversely affect
our
business and financial condition.
IMAGENETIX,
INC.
Notes
to
the Consolidated Financial Statements (Continued)
March
31,
2008 and 2007
During
the year ended March 31, 2008, we had one significant vendor who accounted
for
29% of cost of sales.
During
the year ended March 31, 2007, we had one significant vendor which accounted
for
12% of cost of sales.
Accounts
Receivable
At
March
31, 2008, we had two customers which accounted for 16% and 12% of our accounts
receivable balances.
At
March
31, 2007, we had two customers which accounted for 47% and 16% of our accounts
receivable balances.
NOTE
13 – SUBSEQUENT EVENT
In
May
2008, we received $2,100,000 ($1,750,000 after costs) as a result of entering
into a settlement agreement with a company we alleged was infringing on the
Celadrin trademark. In addition, we entered into a supply agreement with the
same company whereby we will provide Celadrin for use in their
products.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IMAGENETIX,
INC.
|
a
Nevada corporation
|
|
|
By:
|
/s/
WILLIAM P. SPENCER
|
|
William
P. Spencer
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
WILLIAM P. SPENCER
|
|
Chief
Executive Officer,
|
|
June
25, 2008
|
William
P. Spencer
|
|
President
and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
DEBRA L. SPENCER
|
|
Secretary,
Treasurer, and Director
|
|
June
25, 2008
|
Debra
L. Spencer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
BARRY S. KING
|
|
Director
|
|
June
25, 2008
|
Barry
S. King
|
|
|
|
|
|
|
|
|
|
/s/
JEFFREY G. MC GONEGAL
|
|
Director
|
|
June
25, 2008
|
Jeffrey
McGonegal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
ROBERT BURG
|
|
Director
|
|
June
25, 2008
|
Robert
Burg
|
|
|
|
|
|
|
|
|
|
/s/
LOWELL W. GIFFHORN
|
|
Chief
Financial Officer (Principal
|
|
June
25, 2008
|
Lowell
W. Giffhorn
|
|
Accounting
Officer)
|
|
|
Imagenetix (CE) (USOTC:IAGX)
Gráfica de Acción Histórica
De May 2024 a Jun 2024
Imagenetix (CE) (USOTC:IAGX)
Gráfica de Acción Histórica
De Jun 2023 a Jun 2024