UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
Quarterly
Report Under Section 13 Or 15(d) Of The Securities Exchange Act Of
1934
For
quarterly period ended
June
30, 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.
(Exact
name of registrant as specified in its charter)
NEVADA
|
87-0463772
|
(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)
Registrant’s
telephone number (including area code)
(858)
674-8455
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date:
Common
Stock, $.001 par value
|
|
10,960,788
|
(Class)
|
|
Outstanding
at August 13, 2008
|
Imagenetix,
Inc.
INDEX
|
|
|
Page
|
|
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements:
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2008 (unaudited) and March
31,
2008
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the three months ended
June 30,
2008 and 2007 (unaudited)
|
4
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended
June 30,
2008 and 2007 (unaudited)
|
5
|
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
6
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operation
|
11
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
*
|
|
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
18
|
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
*
|
|
Item 1A.
|
Risk
Factors
|
*
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
*
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
*
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
*
|
|
Item
5.
|
Other
Information
|
*
|
|
Item
6.
|
Exhibits
|
19
|
|
|
|
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SIGNATURES
|
|
*
No
information provided due to inapplicability of the item.
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
Imagenetix,
Inc.
Condensed
Consolidated Balance Sheets
|
|
June 30,
|
|
March 31,
|
|
|
|
2008
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,065,256
|
|
$
|
1,022,555
|
|
Accounts
receivable, net
|
|
|
1,249,603
|
|
|
765,492
|
|
Inventories,
net
|
|
|
1,246,851
|
|
|
1,109,845
|
|
Prepaid
expenses and other current assets
|
|
|
170,121
|
|
|
252,138
|
|
Deferred
tax asset
|
|
|
390,097
|
|
|
862,497
|
|
Total
current assets
|
|
|
5,121,928
|
|
|
4,012,527
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
104,652
|
|
|
112,190
|
|
Long-term
prepaid expenses
|
|
|
39,000
|
|
|
42,000
|
|
Other
assets
|
|
|
231,705
|
|
|
218,155
|
|
Total
Assets
|
|
$
|
5,497,285
|
|
$
|
4,384,872
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
974,378
|
|
$
|
713,324
|
|
Accrued
liabilities
|
|
|
91,878
|
|
|
72,301
|
|
Customer
deposits
|
|
|
262,666
|
|
|
63,216
|
|
Contract
payable
|
|
|
23,100
|
|
|
46,200
|
|
Short
term license payable
|
|
|
28,929
|
|
|
34,259
|
|
Total
current liabilities
|
|
|
1,380,951
|
|
|
929,300
|
|
Long
term license payable
|
|
|
-
|
|
|
2,980
|
|
Total
Liabilities
|
|
|
1,380,951
|
|
|
932,280
|
|
|
|
|
|
|
|
|
|
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 issued and outstanding at
|
|
|
|
|
|
|
|
June
30 and March 31, 2008
|
|
|
10,960
|
|
|
10,960
|
|
Capital
in excess of par value
|
|
|
12,558,073
|
|
|
12,481,407
|
|
Accumulated
deficit
|
|
|
(8,452,699
|
)
|
|
(9,039,775
|
)
|
Total
stockholders' equity
|
|
|
4,116,334
|
|
|
3,452,592
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
5,497,285
|
|
$
|
4,384,872
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
Imagenetix,
Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,394,358
|
|
$
|
1,126,991
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
819,711
|
|
|
536,604
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
574,647
|
|
|
590,387
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
605,472
|
|
|
646,509
|
|
Payroll
expense
|
|
|
372,190
|
|
|
356,497
|
|
Consulting
expense
|
|
|
345,761
|
|
|
251,524
|
|
Operating
expenses
|
|
|
1,323,423
|
|
|
1,254,530
|
|
Operating
income (loss)
|
|
|
(748,776
|
)
|
|
(664,143
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
Other
income
|
|
|
7,742
|
|
|
6,944
|
|
Settlement
income
|
|
|
1,785,000
|
|
|
-
|
|
Interest
expense
|
|
|
(690
|
)
|
|
(1,327
|
)
|
Other
income
|
|
|
1,792,052
|
|
|
5,617
|
|
Income
(loss) before income taxes
|
|
|
1,043,276
|
|
|
(658,526
|
)
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
456,200
|
|
|
(223,000
|
)
|
|
|
|
|
|
|
|
|
Income
(loss)
|
|
$
|
587,076
|
|
$
|
(435,526
|
)
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share
|
|
$
|
0.05
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share
|
|
$
|
0.05
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
10,960,788
|
|
|
10,871,400
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
11,021,173
|
|
|
10,871,400
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
Imagenetix,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Three Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
587,076
|
|
$
|
(435,526
|
)
|
Adjustments
to reconcile net income (loss)
|
|
|
|
|
|
|
|
to
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
Amortization
and depreciation
|
|
|
10,188
|
|
|
12,176
|
|
Provision
for doubtful accounts
|
|
|
-
|
|
|
15,000
|
|
Provision
for inventory obsolescence
|
|
|
(12,003
|
)
|
|
22,105
|
|
Non
cash expense related to issuance of warrants
|
|
|
|
|
|
|
|
and
granting of stock options
|
|
|
76,666
|
|
|
304,607
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
(484,111
|
)
|
|
656,053
|
|
(Increase)
decrease in employee receivable
|
|
|
845
|
|
|
764
|
|
(Increase)
decrease in inventories
|
|
|
(125,003
|
)
|
|
(152,389
|
)
|
(Increase)
decrease in other assets
|
|
|
84,171
|
|
|
(11,434
|
)
|
(Increase)
decrease in deferred taxes
|
|
|
456,200
|
|
|
(223,000
|
)
|
Increase
(decrease) in accounts payable
|
|
|
261,055
|
|
|
57,410
|
|
Increase
(decrease) in accrued liabilities
|
|
|
19,577
|
|
|
11,319
|
|
Increase
(decrease) in customer deposits
|
|
|
199,450
|
|
|
375,000
|
|
Net
cash provided by operating activities
|
|
|
1,074,111
|
|
|
632,085
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
-
|
|
|
(12,840
|
)
|
Net
cash used in investing activities
|
|
|
-
|
|
|
(12,840
|
)
|
Financing
activities:
|
|
|
|
|
|
|
|
Payments
on contracts payable
|
|
|
(23,100
|
)
|
|
(24,985
|
)
|
Payments
on patent license financed
|
|
|
(8,310
|
)
|
|
(7,673
|
)
|
Net
cash used in financing activities
|
|
|
(31,410
|
)
|
|
(32,658
|
)
|
Net
increase in cash and cash equivalents
|
|
|
1,042,701
|
|
|
586,587
|
|
Cash
and cash equivalents
,
beginning of period
|
|
|
1,022,555
|
|
|
958,896
|
|
Cash
and cash equivalents,
end of period
|
|
$
|
2,065,256
|
|
$
|
1,545,483
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
690
|
|
$
|
1,327
|
|
Income
taxes
|
|
$
|
-
|
|
$
|
-
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
IMAGENETIX,
INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
The
consolidated financial statements of Imagenetix, Inc. ("Imagenetix") presented
herein have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America. These statements should be read in conjunction
with our audited consolidated financial statements and notes thereto included
in
Form 10-KSB for the year ended March 31, 2008.
In
the
opinion of management, the interim consolidated financial statements reflect
all
adjustments of a normal recurring nature necessary for a fair statement of
the
results for interim periods. Operating results for the three month period is
not
necessarily indicative of the results that may be expected for the year.
Earnings
Per Share
We
follow
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." Under SFAS No. 128, basic earnings per share is calculated as earnings
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings per share is calculated as net
income divided by the diluted weighted average number of common shares. The
diluted weighted average number of common shares is calculated using the
treasury stock method for common stock issuable pursuant to outstanding stock
options and common stock warrants. See Note 6 for discussion of commitments
to
issue additional shares of common stock and warrants.
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.
We
have
selected the Black-Scholes method of valuation for share-based compensation.
The
charge is recognized in non cash compensation, which is included in stock-based
compensation expense, on a straight-line basis over the remaining service period
based on the options’ original estimate of fair value.
We
apply
SFAS No. 123 in valuing options granted to consultants and estimate the fair
value of such options using the Black-Scholes option-pricing model. The fair
value is recorded as consulting expense as services are provided. Options
granted to consultants for which vesting is contingent based on future
performance are measured at their then current fair value at each period end,
until vested.
2.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities” (SFAS No. 161”). SFAS
No. 161 amends and expands the disclosure requirement for FASB Statement
No. 133, “Derivative Instruments and Hedging Activities” (“SFAS
No. 133”). It requires enhanced disclosure about (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and
related hedge items are accounted for under SFAS No. 133 and its related
interpretations, and (iii) how derivative instruments and related hedge
items affect an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 is effective for the Company as of April 1, 2009.
The Company is currently assessing the impact of SFAS 161 on its consolidated
financial position and results of operations.
IMAGENETIX,
INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)
In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting
the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized because
it
is directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the
same
level of due process as FASB Statements of Financial Accounting Standards,
below
industry practices that are widely recognized as generally accepted but that
are
not subject to due process. The Board believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. The adoption of FASB 162 is not expected
to have a material impact on the Company’s consolidated financial position and
results of operations.
In
April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of
Intangible Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine
the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill
and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning
after December 15, 2008. The Company is currently assessing the impact of
FSP 142-3 on its consolidated financial position and results of operations.
3.
ACCOUNTS
RECEIVABLE
Accounts
receivable are carried at the expected realizable value. Accounts receivable
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable - trade
|
|
$
|
1,354,603
|
|
$
|
870,492
|
|
Allowance
for doubtful accounts
|
|
|
(105,000
|
)
|
|
(105,000
|
)
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
1,249,603
|
|
$
|
765,492
|
|
At
June
30, 2008, we had two customers which accounted for 46% and 19% of our accounts
receivable balances.
At
March
31, 2008, we had two customers which accounted for 16% and 12% of our accounts
receivable balances.
For
the
three months ended June 30, 2008, we had two significant customers which
accounted for 48%, and 26% of sales. For the three months ended June 30, 2007,
we had three significant customers which accounted for 28%, 11% and 11% of
sales.
IMAGENETIX,
INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)
4.
INVENTORIES
Inventories
consist of the following:
|
|
June 30,
|
|
March 31,
|
|
|
|
2008
|
|
2008
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
940,746
|
|
$
|
824,807
|
|
Finished
products
|
|
|
236,242
|
|
|
295,615
|
|
Boxes,
labels, tubes & bottles
|
|
|
208,402
|
|
|
139,965
|
|
|
|
|
1,385,390
|
|
|
1,260,387
|
|
Reserve
for obsolescence
|
|
|
(138,539
|
)
|
|
(150,542
|
)
|
|
|
$
|
1,246,851
|
|
$
|
1,109,845
|
|
The
following is a summary of intangible assets which are included in “Other Assets”
on the face of the balance sheet:
|
|
June 30,
|
|
March 31,
|
|
|
|
2008
|
|
2008
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
13,032
|
|
$
|
13,032
|
|
Patent
|
|
|
172,965
|
|
|
172,965
|
|
Deferred
tax asset
|
|
|
103,900
|
|
|
87,700
|
|
|
|
|
289,897
|
|
|
273,697
|
|
|
|
|
|
|
|
|
|
Less
accumulated amortization
|
|
|
58,192
|
|
|
55,542
|
|
|
|
|
|
|
|
|
|
|
|
$
|
231,705
|
|
$
|
218,155
|
|
6.
EQUITY
TRANSACTIONS
We
recorded non-cash compensation expense for stock options and warrants issued
to
employees and consultants of $76,666 for the three months ended June 30, 2008
and $164,019 for the three months ended June 30, 2007. Also, we recorded
non-cash general and administrative expense for warrants granted to individuals
of $140,588 for the three months ended June 30, 2007.
The
significant assumptions used in the Black-Scholes model to estimate the
compensation and general and administrative expense for the issuance of stock
options and warrants are as follows:
|
|
Three
months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Expected
term of options and warrants
|
|
|
5
years
|
|
|
5
years
|
|
Expected
volatility
|
|
|
61
|
%
|
|
71
|
%
|
Expected
dividends
|
|
|
None
|
|
|
None
|
|
Risk-free
interest rate
|
|
|
3.36
to 3.54
|
%
|
|
4.55
|
%
|
Forfeitures
|
|
|
0
|
%
|
|
0
|
%
|
IMAGENETIX,
INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)
A
summary
of the options outstanding follows:
|
|
For
the Three Months Ended
|
|
|
|
June
30, 2008
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
Options
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at beginning of year
|
|
|
944,000
|
|
$
|
1.00
|
|
Granted
|
|
|
305,000
|
|
|
0.65
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Outstanding
at end of the period
|
|
|
1,249,000
|
|
|
0.92
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of the the period
|
|
|
1,096,500
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted during the period
|
|
|
305,000
|
|
$
|
0.36
|
|
As
of
June 30, 2008, the unamortized portion of stock compensation expense on all
existing stock options was $54,562.
A
summary
of warrants outstanding follows:
|
|
For the Three Months Ended
|
|
|
|
June 30, 2008
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
Warrants
|
|
|
Shares
|
|
|
Price
|
|
Outstanding
at beginning of year
|
|
|
3,902,957
|
|
$
|
1.18
|
|
Granted
|
|
|
25,000
|
|
|
1.20
|
|
Cancelled
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Outstanding
at end of the period
|
|
|
3,927,957
|
|
|
1.18
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of the the period
|
|
|
3,927,957
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of warrants granted during the period
|
|
|
25,000
|
|
$
|
0.42
|
|
7.
INCOME
TAXES
We
file
income tax returns in the U.S. federal jurisdiction and the state of California.
With few exceptions, we are no longer subject to U.S. federal, state and local
or non-U.S. income tax examinations by tax authorities for years before
2004.
We
adopted the provisions of FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes,
on April 1, 2007. As a result of the
implementation of Interpretation 48, we did not recognize an increase
in
the liability for unrecognized tax benefits. No unrecognized tax
benefits are being reported for the three months ended June 30,
2008.
IMAGENETIX,
INC.
Notes
to the Unaudited Condensed Consolidated Financial Statements
(Continued)
Included
in the balance at April 1, 2007, were no tax positions for which the ultimate
deductibility is highly certain but for which there is uncertainty about the
timing of such deductibility. Because of the impact of deferred tax accounting,
other than interest and penalties, the disallowance of the shorter deductibility
period would not affect the annual effective tax rate but would accelerate
the
payment of cash to the taxing authority to an earlier period.
Our
policy is to recognize interest accrued related to unrecognized tax benefits
in
interest expense and penalties in operating expenses.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
THE
FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR
FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY
OF
FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "RISK FACTORS."
SEE ALSO OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31,
2008.
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
directly to the mass markets through retailers InflameAway, our own Celadrin®
branded product. 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 or plan of operation is 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 four 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.
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.
2.
Inventory
Inventory
is carried at the lower of cost or market. Cost is determined by the first-in
first-out method. At each period end, management adjusts the inventory allowance
based on estimates. These estimates take into account
spoilage,
yields, obsolescence and overstocked inventory amounts.
3.
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.
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 three months ended June 30, 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 three months ended June 30, 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.
4.
Income Taxes
Deferred
income taxes are provided using the liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for
the
effects of the changes in tax laws and rates of the date of
enactment.
When
tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position
is
recognized in the financial statements in the period during which, based on
all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other portions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that
is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with the
tax
positions taken that exceed the amount measured as described above is reflected
as a liability for unrecognized tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would be payable to the
taxing authorities upon examination.
Selected
Financial Information
Results
of Operations
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
6/30/08
|
|
6/30/07
|
|
(Decrease)
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,394,358
|
|
$
|
1,126,991
|
|
$
|
267,367
|
|
|
23.7
|
%
|
Cost
of goods sold
|
|
|
819,711
|
|
|
536,604
|
|
|
283,107
|
|
|
52.8
|
%
|
%
of net sales
|
|
|
59
|
%
|
|
48
|
%
|
|
11
|
%
|
|
23.5
|
%
|
Gross
profit
|
|
|
574,647
|
|
|
590,387
|
|
|
(15,740
|
)
|
|
-2.7
|
%
|
%
of net sales
|
|
|
41
|
%
|
|
52
|
%
|
|
-11
|
%
|
|
-21.3
|
%
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
605,472
|
|
|
646,509
|
|
|
(41,037
|
)
|
|
-6.3
|
%
|
Payroll
expense
|
|
|
372,190
|
|
|
356,497
|
|
|
15,693
|
|
|
4.4
|
%
|
Consulting
expense
|
|
|
345,761
|
|
|
251,524
|
|
|
94,237
|
|
|
37.5
|
%
|
Total
operating expenses
|
|
|
1,323,423
|
|
|
1,254,530
|
|
|
68,893
|
|
|
5.5
|
%
|
Interest
expense
|
|
|
(690
|
)
|
|
(1,327
|
)
|
|
(637
|
)
|
|
-48.0
|
%
|
Settlement
income
|
|
|
1,785,000
|
|
|
-
|
|
|
1,785,000
|
|
|
NM
|
|
Other
income
|
|
|
7,742
|
|
|
6,944
|
|
|
798
|
|
|
11.5
|
%
|
Provision
for (benefit from) taxes
|
|
|
456,200
|
|
|
(223,000
|
)
|
|
(679,200
|
)
|
|
NM
|
|
Net
income (loss)
|
|
|
587,076
|
|
|
(435,526
|
)
|
|
1,022,602
|
|
|
NM
|
|
Net
income (loss) per share basic
|
|
|
0.05
|
|
|
(0.04
|
)
|
|
0.09
|
|
|
NM
|
|
Net
Sales
Net
sales
for the quarter ended June 30, 2008 increased $267,367, a 23.7% increase, to
$1,394,358 compared to $1,126,991 for the quarter ended June 30, 2007. The
primary reason for the sales increase was attributed to increased sales to
a
distributor of our raw material. Sales of our own branded product, Inflame
Away,
that identifies Celadrin
â
as its
marquee ingredient, continued to increase but was offset by product rebates
and
giveaways in support of marketing InflameAway through retail distribution
channels. In addition, sales of our weight loss product increased during the
first fiscal quarter. We anticipate, the new marketing program coupled with
additional distribution agreements to wholesale and multi-level marketing
customers to result in improved sales during the balance of our current fiscal
year.
Cost
of Goods Sold
Cost
of
goods sold as a percentage of net sales increased from 48% for the quarter
ended
June 30, 2007 to 59% for the quarter ended June 30, 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. Rebate and giveaway programs are customary in the mass market
distribution channel. We anticipate levels of promotional activities used to
launch the awareness of InflameAway will be reduced in the
future.
General
and Administrative
General
and administrative expenses decreased by $41,037, a 6.3% decrease, to $605,472
for the quarter ended June 30, 2008 from $646,509 for the quarter ended June
30,
2007. The primary reasons for the decrease were an approximate $73,000 decrease
in advertising expenses related to the launch of InflameAway offset by an
increase in expenses related to clinical research studies and travel expenses.
We anticipate continued increases in general and administrative expenses as
a
result of increasing our advertising campaign for our Inflame Away product
and
an increase in clinical research studies.
Payroll
Expense
Payroll
expense increased to $372,190 for the quarter ended June 30, 2008, an increase
of 4.4% or $15,693, compared to $356,497 for the quarter ended June 30, 2007.
This increase was a result of normal salary increases.
Consulting
Expenses
Consulting
expenses increased to $345,761 for the quarter ended June 30, 2008, an increase
of 37.5% or $94,237 compared to $251,524 for the quarter ended June 30, 2007.
This increase was a result of increased litigation expenses related to the
settlement of a potential trademark infringement case coupled with increased
audit fees related to requirements to include management’s assessment of
internal controls in financial statements. We anticipate consulting fees to
decrease since litigation has been successfully concluded.
Settlement
Income
During
the quarter ended June 30, 2008, we received $2,100,000 ($1,785,000 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.
Provision
for Income Taxes
As
a
result of income for the quarter ended June 30, 2008, an income tax expense
of
$456,200 was recognized during the current quarter compared to $223,000 of
income tax benefit being recognized during the quarter ended June 30, 2007.
Capital
Resources
Working
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
6/30/08
|
|
3/31/08
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
5,121,928
|
|
$
|
4,012,527
|
|
$
|
1,109,401
|
|
Current
liabilities
|
|
|
1,380,951
|
|
|
929,300
|
|
|
451,651
|
|
Working
capital
|
|
$
|
3,740,977
|
|
$
|
3,083,227
|
|
$
|
657,750
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
-
|
|
$
|
2,980
|
|
$
|
(2,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
$
|
4,116,334
|
|
$
|
3,452,592
|
|
$
|
663,742
|
|
Statements
of Cash Flows Select Information
|
|
Thre
e Months Ended
|
|
Increase
|
|
|
|
6/30/08
|
|
6/30/07
|
|
(Decrease)
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
1,074,111
|
|
$
|
632,085
|
|
$
|
442,026
|
|
Investing
activities
|
|
$
|
-
|
|
$
|
(12,840
|
)
|
$
|
12,840
|
|
Financing
activities
|
|
$
|
(31,410
|
)
|
$
|
(32,658
|
)
|
$
|
1,248
|
|
Balance
Sheet Select Information
|
|
|
|
|
|
Increase
|
|
|
|
6/30/08
|
|
3/31/08
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalients
|
|
$
|
2,065,256
|
|
$
|
1,022,555
|
|
$
|
1,042,701
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
1,249,603
|
|
$
|
765,492
|
|
$
|
484,111
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
1,246,851
|
|
$
|
1,109,845
|
|
$
|
137,006
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,089,388
|
|
$
|
785,625
|
|
$
|
303,763
|
|
Liquidity
We
have
historically financed our operations internally and through debt and equity
financings. At June 30, 2008, we had cash holdings of $2,065,256, an increase
of
$1,042,701 compared to March 31, 2008. Our net working capital position at
June
30, 2008, was $3,740,977 compared to $3,083,227 as of March 31, 2008. We have
initiated a direct mass market strategy with our own product, Inflame Away.
Although, a significant portion of our working capital may be needed to
implement this strategy, we believe that our cash position is sufficient to
fund
our operating activities for at least the next 12 months.
New
Accounting Pronouncements
See
Note
2- Recent Accounting Pronouncements- to our condensed consolidated financial
statements included in Item 1 of this Form 10-Q for discussion of recent
accounting pronouncements.
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 48% and 26% of our net sales for the three months ended
June
30, 2008. The loss 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:
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•
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the
formulation, manufacturing, packaging, labeling, distribution,
importation, sale and storage of
our
products;
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•
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the
health and safety of food and drugs;
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•
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trade
practice and direct selling laws; and
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•
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product
claims and advertising by us; or for which we may be held
responsible.
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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 5,176,957 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
•
Market conditions.
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:
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A
standardized risk disclosure document identifying the risks inherent
in
investment in penny
stocks;
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All
compensation received by the broker-dealer in connection with the
transaction;
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Current
quotation prices and other relevant market data; and
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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.
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ITEM
4T. CONTROLS AND PROCEDURES.
Disclosure
Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to
provide reasonable assurance that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is
recorded, processed, summarized, and reported within the specified time periods
and accumulated and communicated to the Company’s management, including its
Principal Executive Officer and Principal Financial Officer, as appropriate,
to
allow timely decisions regarding required disclosure.
The
Company’s management, under the supervision and with the participation of its
Principal Executive Officer and its Principal Financial Officer, evaluated
the
effectiveness of its disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of the
end of the period covered by this report. Based on that evaluation, the
Company’s Principal Executive Officer and Principal Financial Officer concluded
that the Company’s disclosure controls and procedures were effective as of
June 30, 2008 to provide reasonable assurance in the Company’s financial
reporting.
Remediation
of Certain Weaknesses and Changes in Internal Controls
As
discussed in the Company’s Annual Report on Form 10-KSB for the year ended March
31, 2008, filed with the SEC on June 25, 2008, during the financial reporting
process for the fiscal year end March 31, 2008, the following weaknesses in
the
Company’s internal control over financial reporting were
identified:
(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, during the quarter ended June 30, 2008, we
performed additional analysis and other post-closing procedures in an effort
to
ensure our consolidated financial statements included in this quarterly report
have been prepared in accordance with generally accepted accounting principles.
We continue to implement a plan whereby during 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.
Management
believes that there are no material inaccuracies or omissions of material fact
and, to the best of its knowledge, believes that the condensed consolidated
financial statements for the quarter ended June 30, 2008, fairly present in
all material respects the financial condition and results of operations for
the
Company in conformity with accounting principles generally accepted in the
United States of America.
Other
than as described above, there have not been any other changes in the Company’s
internal control over financial reporting during the quarter ended June 30,
2008, which have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Limitations
on the Effectiveness of Controls
A
control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. The
Company’s management, including its Principal Executive Officer and its
Principal Financial Officer, do not expect that the Company’s disclosure
controls will prevent or detect all errors and all fraud. Further, the design
of
a control system must reflect the fact that there are resource constraints,
and
the benefits of controls must be considered relative to their costs. Because
of
the inherent limitations in all control systems, no evaluation of controls
can
provide absolute assurance that all control issues and instances of fraud,
if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also
be
circumvented by the individual acts of some persons, by collusion of two or
more
people, or by management override of the controls. The design of any system
of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with associated policies or procedures. Because
of
the inherent limitations in a cost-effective control system, misstatements
due
to error or fraud may occur and not be detected.
PART
II.
OTHER
INFORMATION
ITEM
6.
EXHIBITS.
Exhibit No.
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Title
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31.1
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302
Certification of William P. Spencer, Chief Executive
Officer
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31.2
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302
Certification of Lowell W. Giffhorn, Chief Financial
Officer
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32.1
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906
Certification of William P. Spencer, Chief Executive
Officer
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32.2
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906
Certification of Lowell W. Giffhorn, Chief Financial
Officer
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SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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IMAGENETIX,
INC.
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a
Nevada corporation
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Date:
August 13
,
2008
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By:
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/s/
WILLIAM P. SPENCER
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William
P. Spencer
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Chief
Executive Officer
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(Principal
Executive Officer and duly authorized
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to
sign on behalf of the
Registrant)
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