U.S.
Securities And Exchange Commission
Washington,
D.C. 20549
Form
10-QSB
(check
one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
Quarterly Period Ended August 31, 2008
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
EXCHANGE ACT OF 1934
Commission
File Number
000-25277
Herborium
Group, Inc.
(Exact
Name Of Small Business Issuer As Specified In Its Charter)
Nevada
(State
Or
Other Jurisdiction Of
Incorporation
Or Organization)
88-0353141
(I.R.S.
Employer Identification No.)
Park
80W Plaza II, Suite 200, Saddle Brook, NJ 07663
(Address
Of Principal Executive Offices)
(201)
291-2602
(Issuer's
Telephone Number)
Check
whether the registrant (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
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
Yes
¨
No
x
As
of
October 14, 2008, there were 125,067,080 shares of the registrant's common
stock, par value $.001 per share, issued and outstanding.
ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING
THE PRECEDING FIVE YEARS
Check
whether the issuer has filed all documents and reports required to be
filed
by
Section 12, 13 or 15(d) of the Securities Exchange Act after the
distribution
of
securities under a plan confirmed by a court.
Yes
x
No
¨
Transitional
Small Business Disclosure Format (Check One):
Yes
¨
No
x
Herborium
Group, Inc.
Index
To Form 10-QSB
|
Part
I-Financial Information
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
1
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of August 31, 2008 (Unaudited)
and November
30, 2007
|
1
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine
Months Ended
August 31, 2008 and 2007 (Unaudited)
|
2
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended
August 31,
2008 and 2007 (Unaudited)
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Stockholders’ Deficiency for the Nine Months
Ended August 31, 2008 (Unaudited)
|
4
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements as of August 31,
2008
(Unaudited)
|
5
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operation
|
12
|
|
|
|
|
|
Item 3 A(T).
|
Controls
and Procedures
|
17
|
|
|
|
|
|
Part
II-Other Information
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
18
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
18
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
19
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
19
|
|
|
|
|
|
Item
5.
|
Other
Information
|
19
|
|
|
|
|
|
Item
6.
|
Exhibits
|
19
|
Signatures
In
this report, the terms the “Company”, “we”, “our” and “us” refer to Herborium
Group, Inc., a Nevada corporation, and its wholly-owned subsidiaries.
Cautionary
Statement Regarding Forward-Looking Statements
Certain
statements in the "Management’s Discussion and Analysis or Plan of Operation"
and elsewhere in this quarterly report constitute "forward-looking statements"
(within the meaning of the Private Securities Litigation Reform Act of 1995
(the
"Act")) relating to us and our business, which represent our current
expectations or beliefs including, but not limited to, statements concerning
our
operations, performance, financial condition and growth. All statements, other
than statements of historical facts, included in this quarterly report that
address activities, events or developments that we expect or anticipate will
or
may occur in the future, including such matters as our projections, future
capital expenditures, business strategy, competitive strengths, goals,
expansion, market and industry developments and the growth of our businesses
and
operations are forward-looking statements. Without limiting the generality
of
the foregoing, words such as "may,” “believes,” ”expects,” "anticipates,”
"could,” "estimates,” “grow,” “plan,” "continue," “will,” “seek,” “scheduled,”
“goal” or “future” or the negative or other comparable terminology are intended
to identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, such as credit losses, dependence on
management and key personnel, variability of quarterly results, our ability
to
continue our growth strategy and competition, certain of which are beyond our
control. Any or all of our forward-looking statements may turn out to be wrong.
They may be affected by inaccurate assumptions that we might make or by known
or
unknown risks or uncertainties. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove incorrect,
actual outcomes and results could differ materially from those indicated in
the
forward-looking statements.
Because
of the risks and uncertainties associated with forward-looking statements,
you
should not place undo reliance on them. Additional factors that could affect
future results are discussed in
the
section titled "Description of Business" (Item 1) -"Risks Related to Our
Business"
of
our Annual Report on Form 10-KSB for the year ended November 30, 2007 and in
the
section titled “Risk Factors” of this Quarterly Report on Form 10-QSB. We
caution investors that the forward-looking statements contained in this
Quarterly Report must be interpreted and understood in light of conditions
and
circumstances that exist as of the date of this Quarterly Report. We expressly
disclaim any obligation or undertaking to update or revise forward-looking
statements to reflect any changes in management's expectations resulting from
future events or changes in the conditions or circumstances upon which such
expectations are based.
Herborium
Group, Inc. And Subsidiaries
Condensed
Consolidated Balance Sheets
|
|
|
August 31,
2008
|
|
November 30,
2007
|
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,850
|
|
$
|
2,077
|
|
|
Accounts
receivable
|
|
|
2,876
|
|
|
4,772
|
|
|
Inventory
|
|
|
38,308
|
|
|
31,181
|
|
|
Prepaid
expenses and other current assets
|
|
|
7,292
|
|
|
7,292
|
|
|
Total
current assets
|
|
|
52,326
|
|
|
45,322
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $23,284-2008;
$20,954–2007
|
|
|
10,471
|
|
|
4,231
|
|
|
Deferred
financing costs, net of accumulated amortization of
$62,712-2008
|
|
|
76,542
|
|
|
—
|
|
|
Other
assets, net of accumulated amortization of $11,227-2008;
$9,214–2007
|
|
|
56,284
|
|
|
28,997
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
195,623
|
|
$
|
78,550
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
800,822
|
|
$
|
640,403
|
|
|
Convertible
notes payable
|
|
|
437,234
|
|
|
—
|
|
|
Credit
cards payable
|
|
|
65,866
|
|
|
129,077
|
|
|
Lines
of credit payable
|
|
|
158,353
|
|
|
166,372
|
|
|
Due
to others
|
|
|
24,276
|
|
|
50,895
|
|
|
Due
to related parties
|
|
|
20,000
|
|
|
35,000
|
|
|
Due
to stockholders
|
|
|
226,757
|
|
|
201,056
|
|
|
Total
current liabilities
|
|
|
1,733,308
|
|
|
1,222,803
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficiency:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 10,000 shares authorized, no shares issued
and
outstanding
|
|
|
—
|
|
|
—
|
|
|
Common
stock, $0.001 par value; 500,000,000 shares authorized, 125,067,080
shares
issued and outstanding (115,567,080 – November 30, 2007)
|
|
|
36,500
|
|
|
27,000
|
|
|
Common
stock subscribed; no shares issued and outstanding
|
|
|
188,500
|
|
|
188,500
|
|
|
Additional
paid-in capital
|
|
|
801,497
|
|
|
500,500
|
|
|
Deferred
consulting fees
|
|
|
(101,250
|
)
|
|
(106,250
|
)
|
|
Accumulated
deficit
|
|
|
(2,462,932
|
)
|
|
(1,754,003
|
)
|
|
Total
stockholders’ deficiency
|
|
|
(1,537,685
|
)
|
|
(1,144,253
|
)
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
$
|
195,623
|
|
$
|
78,550
|
|
Herborium
Group, Inc. And Subsidiaries
Condensed
Consolidated Statements Of Operations
(Unaudited)
|
|
|
For The Three Months Ended
|
|
For The Nine Months Ended
|
|
|
|
|
August 31,
|
|
August 31,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
$
|
101,142
|
|
$
|
158,363
|
|
$
|
317,146
|
|
$
|
571,041
|
|
|
COST
OF SALES
|
|
|
48,320
|
|
|
90,660
|
|
|
153,339
|
|
|
268,385
|
|
|
GROSS
PROFIT
|
|
|
52,822
|
|
|
67,703
|
|
|
163,807
|
|
|
302,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and selling
|
|
|
58,305
|
|
|
63,287
|
|
|
121,908
|
|
|
212,000
|
|
|
General
and administrative
|
|
|
211,523
|
|
|
155,667
|
|
|
625,485
|
|
|
457,453
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
269,828
|
|
|
218,954
|
|
|
747,393
|
|
|
669,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(217,006
|
)
|
|
(151,251
|
)
|
|
(583,586
|
)
|
|
(366,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(58,584
|
)
|
|
(11,753
|
)
|
|
(125,343
|
)
|
|
(33,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(275,590
|
)
|
$
|
(163,004
|
)
|
$
|
(708,929
|
)
|
$
|
(400,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic and diluted
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
(0.01
|
)
|
$
|
0.00
|
|
|
Weighted
average number of shares outstanding during the period - basic and
diluted
|
|
|
124,817,080
|
|
|
114,067,080
|
|
|
121,066,989
|
|
|
112,898,582
|
|
Herborium
Group, Inc. And Subsidiaries
Condensed
Consolidated Statements Of Cash Flows
(Unaudited)
|
|
|
Nine
months ended
|
|
|
|
|
August 31,
|
|
August 31,
|
|
|
|
|
2008
|
|
2007
|
|
|
CASH
FLOWS USED IN OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(708,929
|
)
|
$
|
(400,056
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
76,744
|
|
|
3,236
|
|
|
Stock-based
professional and consulting fees
|
|
|
195,000
|
|
|
150,000
|
|
|
Changes
in assets (increase) decrease:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,896
|
|
|
603
|
|
|
Inventory
|
|
|
(7,127
|
)
|
|
19,991
|
|
|
Prepaid
expenses and other current assets
|
|
|
—
|
|
|
442
|
|
|
Changes
in liabilities increase:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
160,419
|
|
|
178,100
|
|
|
Net
cash used in operating activities
|
|
|
(281,997
|
)
|
|
(47,684
|
)
|
|
CASH
FLOWS USED IN INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(8,570
|
)
|
|
—
|
|
|
Purchase
of other assets
|
|
|
(10,050
|
)
|
|
(3,270
|
)
|
|
Net
cash used in investing activities
|
|
|
(18,620
|
)
|
|
(3,270
|
)
|
|
CASH
FLOWS PROVIDED BY FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance
of convertible notes payable
|
|
|
450,000
|
|
|
—
|
|
|
Deferred
financing costs
|
|
|
(60,462
|
)
|
|
—
|
|
|
Repayment
of lines of credit, net
|
|
|
(8,019
|
)
|
|
(6,010
|
)
|
|
Decrease
in credit card payable, net
|
|
|
(63,211
|
)
|
|
(4,714
|
)
|
|
Increase
(decrease) in due to others
|
|
|
(26,619
|
)
|
|
12,841
|
|
|
Increase
(decrease) in due to related parties
|
|
|
(15,000
|
)
|
|
13,000
|
|
|
Increase
in due to stockholders
|
|
|
25,701
|
|
|
33,784
|
|
|
Net
cash provided by financing activities
|
|
|
302,390
|
|
|
48,901
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
1,773
|
|
|
(2,053
|
)
|
|
CASH,
BEGINNING OF PERIOD
|
|
|
2,077
|
|
|
4,649
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
END OF PERIOD
|
|
$
|
3,850
|
|
$
|
2,596
|
|
Herborium
Group, Inc. And Subsidiaries
Condensed
Consolidated Statement Of Stockholders’ Deficiency
For
The Nine Months Ended August 31, 2008
(Unaudited)
|
|
|
Common Stock
|
|
Common Stock Subscribed
|
|
Additional
|
|
Deferred
Consulting
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in Capital
|
|
Fees
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 1, 2007
|
|
|
115,567,080
|
|
$
|
27,000
|
|
|
—
|
|
$
|
188,500
|
|
$
|
500,500
|
|
$
|
(106,250
|
)
|
$
|
(1,754,003
|
)
|
$
|
(1,144,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued in connection with an asset acquisition
|
|
|
3,500,000
|
|
|
3,500
|
|
|
—
|
|
|
—
|
|
|
15,750
|
|
|
—
|
|
|
—
|
|
|
19,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued to consultants for services
|
|
|
4,250,000
|
|
|
4,250
|
|
|
—
|
|
|
—
|
|
|
185,750
|
|
|
(190,000
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued to note purchasers in connection with the issuance of
Convertible Notes
|
|
|
450,000
|
|
|
450
|
|
|
—
|
|
|
—
|
|
|
22,005
|
|
|
—
|
|
|
—
|
|
|
22,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued to advisor in connection with the issuance of Convertible
Notes
|
|
|
1,300,000
|
|
|
1,300
|
|
|
—
|
|
|
—
|
|
|
19,892
|
|
|
—
|
|
|
—
|
|
|
21,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued to advisor in connection with the issuance of Convertible
Notes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57,600
|
|
|
—
|
|
|
—
|
|
|
57,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred consulting fees
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
195,000
|
|
|
—
|
|
|
195,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(708,929
|
)
|
|
(708,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
August 31, 2008
|
|
|
125,067,080
|
|
$
|
36,500
|
|
|
-
|
|
$
|
188,500
|
|
$
|
801,497
|
|
$
|
(101,250
|
)
|
$
|
(2,462,932
|
)
|
$
|
(1,537,685
|
)
|
Herborium
Group, Inc.
And
Subsidiaries
Notes
To Condensed Consolidated Financial Statements
As
of August 31, 2008
(Unaudited)
NOTE
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying condensed consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America and reflect all adjustments which management believes necessary (which
include only normal recurring adjustments) to present fairly the financial
position, results of operations, and cash flows of the Company. These
statements, however, do not include all information and footnotes necessary
for
a complete presentation of the Company’s consolidated financial position,
results of operations and cash flows in conformity with accounting principles
generally accepted in the United States. The interim financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto, included in the Company’s audited financial statements for the fiscal
year ended November 30, 2007 included in its Annual Report on Form 10-KSB,
and
are not necessarily indicative of the results to be expected for the full year
ending November 30, 2008. The consolidated balance sheet at November 30, 2007
has been derived from the audited financial statements for fiscal
2007.
NOTE
2.
ORGANIZATION
AND NATURE OF BUSINESS
The
Company provides unique, natural and complementary healthcare related products
to consumers and healthcare professionals seeking alternative answers to the
management of healthcare issues not currently met by standard Western medicine.
Its products are botanical supplements comprised of unique herbal formulations,
referred to as botanical therapeutics, that have a record of clinical efficacy
and safety established in China; however, these products have not been evaluated
according to standards of clinical efficacy and safety applicable to
pharmaceutical products sold in the United States and other countries, and
because these products are herbal-based, they are not recognized as
pharmaceuticals by the Food and Drug Administration (the "FDA"). The Company’s
business model is based on (i) owning and/or marketing unique products with
established clinical history in their country of origin, and (ii) a proactive
approach to meeting the regulatory changes and challenges of the new healthcare
marketplace. Historically, substantially all of the Company’s revenue has been
derived from the sale of AcnEase through its corporate website.
Herborium,
Inc., was incorporated in the State of Delaware on June 4, 2002, and was the
surviving entity following a merger of G.O. International, Inc., a New Jersey
corporation, with and into the Company effective June 6, 2002. On September
18,
2006, the Company was acquired by Pacific Magtron International Corporation,
Inc. (“PMIC”), a publicly traded Nevada Corporation, pursuant to a Merger
Agreement and PMIC’s plan of reorganization in bankruptcy. The transaction was
accomplished by the merger of a PMIC subsidiary into the Company, with the
Company as the surviving corporation (the “Merger”). Under the provisions of the
Merger Agreement and the plan of reorganization, the stockholders of the Company
exchanged 100% of their common stock of the Company for 85% of the post-Merger
PMIC common stock. The previously outstanding common shares of PMIC were
cancelled under the plan of reorganization, and one new share of the Company
was
issued in exchange for each cancelled shares held by all PMIC shareholders,
other than its majority shareholder, Advanced Communications Technologies,
Inc
(“ACT”). A total of 11,454,300 shares were issued to the shareholders of ACT in
exchange for the cancellation of the PMIC shares and ACT’s contribution of
$50,000 to the bankruptcy. Shares of our common stock have been distributed
to
PMIC shareholders. Following this distribution, as well as certain other
distributions that are included in the plan of reorganization, an aggregate
of
108,567,080 shares of common stock of Herborium Group was issued and outstanding
as a result of the merger.
The
Company’s merger with PMIC is treated as a recapitalization with no purchase
price allocation. In connection with the merger, PMIC changed its name to
Herborium Group, Inc. and adopted the fiscal year of Herborium Group, Inc.
which
is November 30.
Herborium
Group, Inc.
And
Subsidiaries
Notes
To Condensed Consolidated Financial Statements
As
of August 31, 2008
(Unaudited)
NOTE
3.
BASIS
OF ACCOUNTING AND SIGNIFICANT ACCOUNTING
POLICIES
The
Company's condensed consolidated financial statements have been prepared on
a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The Company incurred
a net loss of $709,000 for the nine months ended August 31, 2008 and net losses
of $643,000 and $340,000 for the years ended November 30, 2007 and 2006,
respectively. The Company had an excess of current liabilities over current
assets of $1,681,000 and $1,177,000 as of August 31, 2008 and November 30,
2007,
respectively. Management is pursuing additional capital and debt financing
and
the acquisition of the AcnEase formula (See Notes 4 and 5). However, there
is no
assurance that these efforts will be successful.
Our
ability to generate sufficient profits and obtain additional funding and pay
off
our obligations will determine our ability to continue as a going concern.
Our
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
|
|
b.
|
Principles
of consolidation
|
The
condensed consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Herborium, Inc. and Herborium.com, Inc.
All
significant intercompany accounts and transactions are eliminated in
consolidation.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income
tax expense includes current and deferred federal and state taxes arising from
temporary differences between income for financial reporting and income tax
purposes, as well as from the expected realization of net operating loss
carryforwards. A valuation allowance is established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
The
Company recognizes revenue when inventory is shipped to its
customers.
Basic
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution of securities which could share in the earnings of an
entity as determined by using the treasury stock method. During the Nine month
period ended August 31, 2008, the Company had securities convertible into common
stock which have been excluded from the calculation of diluted loss per share
as
their effect, because of the net loss, would have been anti-dilutive. At August
31, 2008 and 2007, potentially dilutive securities totaled 61,950,000 and -0-,
respectively.
At
August
31, 2008, the Company had an obligation to issue common stock pursuant to
subscription agreements, as well as an obligation to grant warrants to purchase
shares of common stock. Such shares, had the number thereof been determinable,
would have been excluded from the calculation of diluted loss per share as
their
effect would have been anti-dilutive.
Herborium
Group, Inc.
And
Subsidiaries
Notes
To Condensed Consolidated Financial Statements
As
of August 31, 2008
(Unaudited)
|
|
g.
|
Allowance
for doubtful accounts
|
The
Company makes judgments as to its ability to collect outstanding trade
receivables and provides allowances, if deemed necessary, for the portion of
receivables when collection becomes doubtful. Provisions are made based upon
a
specific review of all significant outstanding invoices.
|
|
h.
|
Deferred
Financing Costs
|
Costs
associated with the Company’s debt obligations are capitalized and amortized
over the life of the related debt obligation using the interest method. Interest
expense includes $63,000 and $0 of amortization of deferred financing costs
for
the nine months ended August 31, 2008 and 2007, respectively.
Certain
amounts in the statement of operations for the three and nine months ended
August 31, 2007 have been reclassified to conform to the August 31, 2008
presentation.
|
|
j.
|
Recent
accounting pronouncements
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 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 is
effective for financial statements issued for fiscal years beginning after
November 15, 2008. Management does not believe that the adoption of this
pronouncement will have a material impact on the Company’s financial position or
results of operations.
In
June
2006, the FASB issued Financial Accounting Standards Board Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an
interpretation of SFAS 109. FIN No. 48 provides a comprehensive model
for the recognition, measurement and disclosure in the financial statements
of
uncertain tax positions taken or expected to be taken on a tax return. The
Company adopted FIN No. 48 effective beginning on December 1, 2007. The
adoption of this interpretation did not have an impact on the Company’s
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115.” This Standard allows entities to voluntarily choose, at
specified election dates, to measure many financial assets and financial
liabilities (as well as certain non-financial instruments that are similar
to
financial instruments) at fair value. The election is made on an
instrument-by-instrument basis and is irrevocable. If the fair value option
is
elected for an instrument, the Statement specifies that all subsequent changes
in fair value for that instrument shall be reported in earnings. SFAS No. 159
is
effective beginning on December 1, 2008. We are currently evaluating the
impact this new Standard could have on our financial position and results of
operations.
The
FASB
has issued Statement No. 141 (R), “Business Combinations”. This statement
retains the fundamental requirements in Statement No. 141 that the acquisition
method of accounting (which Statement No. 141 called the “purchase method”) be
used, and applies to all business entities, including mutual entities that
previously used the pooling of interest method of accounting for some business
combinations. The statement is effective for transactions within the annual
reporting period beginning on or after December 15, 2008. We are currently
evaluating the impact this new Standard could have on our financial position
and
results of operations.
The
FASB
has issued Statement No. 160, “Non-controlling Interests in Consolidated
Financial Statements”. This statement changes the way the consolidated income
statement is presented when non-controlling interests are present. It requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the non-controlling interest, and is
effective for periods beginning on or after December 15, 2008. We are currently
evaluating the impact this new Standard could have on our financial position
and
results of operations.
Herborium
Group, Inc.
And
Subsidiaries
Notes
To Condensed Consolidated Financial Statements
As
of August 31, 2008
(Unaudited)
In
April
2008, the FASB issued Final
FASB
Staff Position
(FSP)
No.
FAS 142-3,
“Determination
of the Useful Life of Intangible Assets”. The guidance is intended to improve
the consistency between the useful life of a recognized intangible asset under
Statement of Financial Accounting Standards
(SFAS)
No. 142,
“Goodwill
and Other Intangible Assets”, and the period of expected cash flows used to
measure the fair value of the asset under
SFAS
No.
141(R),
Business
Combinations, and other guidance under accounting principles generally accepted
in the United States of America. FSP No. FAS 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. Early adoption is prohibited.
Paragraph
11(d)
of
SFAS
No. 142 requires entities to base assumptions for determining the useful life
of
a recognized intangible asset on the legal, regulatory, or contractual
provisions that permit extending the asset’s useful life without appreciably
adding to its cost. FSP No. FAS 142-3, requires that an entity must consider
its
own experience with similar arrangements in developing its assumptions. If
an
entity has had no similar arrangements, then it should consider the assumptions
other market participants use. We are currently evaluating the impact this
new
Standard could have on our financial position and results of
operations.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (”SFAS No. 162”). 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 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 financial position.
On
June
16, 2008, the FASB issued final Staff Position ("FSP") No. EITF 03-6-1,
"Determining Whether Instruments Granted in Share-Based Payment Transactions
Are
Participating Securities", to address the question of whether instruments
granted in share-based payment transactions are participating securities prior
to vesting. The FSP determined that unvested share-based payment awards that
contain rights to dividend payments should be included in earnings per share
calculations. The guidance will be effective for fiscal years beginning after
December 15, 2008. Management is currently evaluating the impact this new
standard could have on the Company’s financial position and results of
operations.
For
the
three and nine month periods ended August 31, 2008, the Company purchased all
of
its inventory from AH USA, a China-based business entity owned by the individual
who is the inventor and sole owner of AcnEase, an acne product. The Company
is
party to a licensing agreement with AH USA under which the Company, as licensee,
is the exclusive worldwide distributor of AcnEase.
On
January 10, 2008, the Company and the individual owning the intellectual
property rights related to AcnEase (the “Seller”) entered into a Purchase
Agreement (“Agreement”) for the acquisition of all rights related to AcnEase,
including the formulation thereof, all sourcing information, extraction
procedures, manufacturing and packaging information as well as all related
clinical and testing information and trade secrets. Consideration will consist
of aggregate cash payments of $500,000 and issuances of 5,428,354 shares of
common stock. In accordance with the Agreement, 3,500,000 shares of the
Company’s common stock having a value of $19,250 were issued to Seller following
the Agreement’s signing. Upon obtaining sufficient financing to complete the
purchase of the rights related to AcnEase, and provide sufficient working
capital to expand the business following such purchase, the Company will make
an
initial payment of $450,000 to the Seller in return for all the aforementioned
information regarding the acne product. There is no date by which time the
Company is required to obtain financing; however, the Agreement expires January
10, 2009. The remaining portions of the purchase price, $50,000 cash and
1,928,354 shares of common stock, will be held in escrow and released when
certain conditions are met, principally the successful manufacturing of the
acne
product on a commercial scale. The aforementioned shares of common stock to
be
held in escrow have not been issued as of October 20, 2008, nor has the cash
been escrowed.
The
Agreement also requires the Company to purchase on an as-needed basis at a
negotiated price any inventory of the acne product in the possession of the
Seller at the time that the Company has the ability to manufacture the product.
The value of the common stock issued in connection with this potential
acquisition, or $19,250, is included in other assets as of August 31, 2008.
Herborium
Group, Inc.
And
Subsidiaries
Notes
To Condensed Consolidated Financial Statements
As
of August 31, 2008
(Unaudited)
NOTE
5. CONVERTIBLE NOTES PAYABLE
Pursuant
to a private offering (the “Offering”), through August 31, 2008, the Company
sold Units of its securities consisting of an aggregate $450,000 in principal
amount of its Convertible Notes (the “Notes”), 450,000 shares of its common
stock and warrants (the “Warrants”) exercisable for 900,000 shares of common
stock. In accordance with
ETIF
00-27: Application of Issue No. 98-5, “Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
to Certain Convertible Instruments”,
the
Company allocated certain amounts to the fair value of the shares of common
stock and warrants to purchase common stock included in each Unit, as well
as
the 20% conversion discount applicable in certain circumstances. Based on this
allocation, the indicated fair value of each Note (face value - $50,000) amounts
to $47,505. The resulting discount of $2,495 is attributable to a warrant value
of $1,662 and a common stock value of $833.
The
Warrants are exercisable for a period of five years from issuance. 50% of the
Warrants are exercisable at $.025 per share and 50% are exercisable at $.05
per
share, subject to certain adjustments, including, but not limited to,
adjustments for stock splits, stock dividends, mergers and
consolidations.
The
Notes
are convertible, beginning six months after issuance or, if earlier, the closing
of a qualified financing or an acquisition of the Company, into shares of common
stock in whole or in part from time to time at the option of the investors
at a
Conversion Price equal to $.025 or 80% of the issuance price in a qualified
financing or in connection with an acquisition of the Company. The Notes define
a qualified financing as the date upon which the Company completes the sale
of
common stock (or like security) for aggregate gross proceeds of at least $1.5
million. The Conversion Price is subject to certain customary adjustments,
including, but not limited to, adjustments for stock splits, stock dividends,
mergers and consolidation.
The
Notes
bear interest at the rate of 10% per annum, payable semi-annually in shares
of
the Company’s common stock valued at $.025 per share (currently trading at $.01
per share).
Unless
converted to Common Stock, the principal balance of each Note is payable upon
demand made any time after the first anniversary of the issuance of the Note,
or
upon a qualified financing or acquisition of the Company. In addition, the
Company is required to escrow in a separate bank account 5% of its gross
revenues for redemption of the principal amount of the Notes. The escrowed
revenues are to be distributed to the Note holders semi-annually, pro rata
in
accordance with the outstanding principal balance of each Note. As of October
20, 2008, none of the gross revenues have been escrowed as required.
Pursuant
to a Registration Rights Agreement, the Company has agreed to include the shares
of common stock issuable upon conversion of the Notes and exercise of the
Warrants, as well as the shares of common stock issued to the investors, in
any
registration statement filed by the Company under the Securities Act of 1933
with respect to the Company’s equity securities to be sold by the Company or any
other stockholder.
The
Company’s Board of Directors authorized the sale of up to an additional $125,000
principal amount of the Notes as part of the Offering, in Units together with
125,000 shares of common stock and Warrants exercisable for 250,000 shares
of
common stock. The Company’s Board of Directors has authorized two extensions for
the closing date of the Offering, which is currently October 31, 2008. In the
quarter ended August 31, 2008, the Company sold additional Units of its
securities consisting of an aggregate $75,000 in principal amount of its
Convertible Notes, 75,000 shares of its common stock and warrants exercisable
for 150,000 shares of the common stock.
Southridge
Investment Group LLC (“Southridge”) is serving as the Company’s placement agent
in connection with the offer and sale of the Notes, common stock and Warrants.
In its capacity as placement agent, Southridge is paid a cash fee equal to
10%
of the gross proceeds received by the Company, as well as an expense allowance
equal to 2% of the gross proceeds. In addition, Southridge was issued Warrants
exercisable for a number of shares of common stock equal to 10% of the aggregate
shares issued by the Company in the private placement, assuming conversion
and
exercise of all of the Notes and Warrants. This amounts to Warrants exercisable
for approximately 5.8 million shares of common stock valued at $58,000 based
on
the Black-Scholes Option Pricing Model and has been classified as a deferred
financing cost and is being amortized over the life of the related debt. The
placement agent warrants will be exercisable for 5 years at a price of $.03
per
share.
In
its
capacity as the Company’s financial advisor, Southridge is entitled to a
retainer fee of 750,000 shares of the Company’s common stock, and one share for
each $1 received by the Company in the private placement As of August 31, 2008,
1,300,000 shares of common stock have been issued to Southridge at a value
of
$21,192 and has been classified as a deferred financing cost and is being
amortized over the term of the related debt.
Herborium
Group, Inc.
And
Subsidiaries
Notes
To Condensed Consolidated Financial Statements
As
of August 31, 2008
(Unaudited)
NOTE
6.
LINES
OF CREDIT AND CREDIT CARDS PAYABLE
The
Company has entered into four revolving line of credit agreements with
commercial banks. The credit agreements provide for aggregate borrowings of
up
to $187,500 and are payable on demand with no maturity dates set forth in the
loan agreements. Borrowings under these facilities bear interest at rates
ranging from prime plus 1.25% to 14%.
The
Company also has entered into a number of standard credit card agreements that
it uses for business expenses. Borrowings under these agreements, which have
no
set maturity dates, bear interest at rates ranging from approximately 11% to
40%.
NOTE
7.
DUE
TO STOCKHOLDERS
Due
to
stockholders consists of unsecured non-interest bearing demand loans to the
Company with no specified terms, including the payment of interest, and,
accordingly, this liability is included in current liabilities and no interest
expense has been accrued. Substantial repayments of amounts owed are not
expected until such time as the Company has adequate funds available.
The
Company relies extensively on the services of Drs. Agnes P. Olszewski and James
P. Gilligan, its co-founders, who play key roles in all aspects of operations
and management and the loss of their services would materially and adversely
affect the Company’s prospects. Until the Company raises substantial financing,
neither of these key individuals will be able to receive cash compensation.
NOTE
9.
CONSULTING
AGREEMENTS
On
January 19, 2007, the Board of Directors of the Company approved the Herborium
Group, Inc. 2007 Stock Plan (“Plan”) which provides for a maximum aggregate of
20 million shares of common stock to be issued upon grants of restricted stock
or upon exercise of options granted under the Plan, as compensation and
incentive to eligible employees, directors, consultants and advisors. On January
26, 2007, the Company filed a Registration Statement on Form S-8 with the
Securities and Exchange Commission in connection with the consultant’s shares.
On
January 1, 2007, the Company entered into a two-year Consulting Agreement with
an individual and in consideration of the services to be provided pursuant
to
the Financial Consulting Agreement, the Company agreed to initially issue up
to
9 million shares of the Company’s common stock pursuant and subject to the Plan,
and when so issued, such shares shall be validly issued, fully paid and
non-assessable, of which 7.5 million shares vested immediately, with 5.5 million
of such shares being issued immediately. The remaining shares will vest over
the
term of the Consulting Agreement, and, in the event the Company acquires the
AcnEase formula, up to an additional 3 million shares could be issued per terms
of the Consulting Agreement. An additional 2,750,000 shares were issued in
April
2008. The shares issued and yet to be issued have been valued at $.05 per share
based on the market value on the date granted for an aggregate cost of $450,000,
which cost is being expensed over the period of the agreement. Accordingly,
consulting expense in the amount of approximately $168,000 and $150,000 was
recorded in general and administrative expense during each of the nine month
periods ended August 31, 2008 and 2007, respectively.
On
February 14, 2007, the Company entered into a two-year consulting agreement
with
a consulting firm and, in consideration of the services to be provided pursuant
to that agreement, the Company agreed to issue up to 3 million shares of the
Company’s common stock pursuant and subject to the Plan, and when so issued,
such shares shall be validly issued, fully paid and non-assessable, of which
500,000 shares vested and were issuable immediately. Of the remaining shares,
500,000 will vest upon the occurrence of one or more transactions, as defined,
and the remaining 2,000,000 will vest ratably on the sixth, ninth, twelfth
and
eighteenth month anniversaries of this agreement. 1,500,000 of such shares
were
issued as of November 30, 2007, with the remaining 1,500,000 shares issued
during the period ended May 31, 2008, valued at $.035 per share based on the
market value on the date granted for an aggregate cost of $105,000, which cost
is being expensed over the period of the agreement. Accordingly, consulting
expense in the amount of approximately $27,000 and $0 was recorded in general
and administrative expense during the nine months ended August 31, 2008 and
2007, respectively.
Herborium
Group, Inc.
And
Subsidiaries
Notes
To Condensed Consolidated Financial Statements
As
of August 31, 2008
(Unaudited)
In
September 2008, the Company’s Board of Directors has authorized two additional
consulting agreements and, in consideration of the services to be provided
pursuant to such agreements, the Company agreed to issue an aggregate of
approximately 1.7 million shares of the Company’s common stock pursuant and
subject to the Plan, and when so issued, such shares shall be validly issued,
fully paid and non-assessable, and shall vest immediately.
NOTE
10.
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
The
following are the payments made during the nine months ended August 31, 2008
and
2007 for income taxes and interest:
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
64,518
|
|
$
|
31,817
|
|
Noncash
investing and financing activities:
|
|
During
the nine months ended August 31, 2008 the Company
issued:
|
|
|
(i)
3,500,000 shares of common stock valued at $19,250 for intellectual
property rights.
|
|
|
(ii)
450,000 shares of common stock and 750,000 Warrants valued at $22,455
to
investors in connection with the issuance of Convertible
Notes
|
|
|
(iii)
1,300,000 shares of common stock valued at $21,192 to an advisor
in
connection with the issuance of Convertible Notes
|
|
|
(iv)
5,800,000 Warrants valued at $.01 per share, or $58,000, to an advisor
in
connection with the issuance of Convertible Notes
|
|
|
(v)
4,250,000 shares of common stock valued at $190,000 to consultants
for
professional services
|
|
|
During
the nine months ended August 31, 2007 the Company issued 5,500,000
shares
of common stock valued at $275,000 to consultants for professional
services
|
|
|
|
Item
2.
Management's
Discussion And Analysis Or Plan Of Operation
The
following is management's discussion and analysis of certain significant factors
that will or have affected our financial condition and results of operations.
The discussion should be read in conjunction with our financial statements
and
the related notes and the other financial information appearing elsewhere in
this report and included in the Company’s Annual Report on Form 10-KSB for the
year ended November 30, 2007. In addition to historical information, the
following discussion and other parts of this quarterly report contain words
such
as “may,” "estimates," "expects," "anticipates," "believes," “plan,” "grow,"
"will," “could,” "seek," “continue,” “future,” “goal,” “scheduled” and other
similar expressions that are intended to identify forward-looking information
that involves risks and uncertainties. In addition, any statements that refer
to
expectations or other characterizations of future events or circumstances are
forward-looking statements. Actual results and outcomes could differ materially
as a result of important factors including, among other things, general economic
conditions, the Company's ability to renew or replace key supply and credit
agreements, fluctuations in operating results, committed backlog, public market
and trading issues, risks associated with dependence on key personnel, and
competitive market conditions in the Company's existing lines of business,
as
well as other risks and uncertainties. See “Risk Related To Our Business” and
“Risks Related To Our Stock” below.
GENERAL
We
provide unique, natural and complementary healthcare related products to
consumers and healthcare professionals seeking alternative answers to the
management of healthcare issues not currently met by standard Western medicine.
Our products are botanical supplements comprised of unique herbal formulations.
We select products that have a record of clinical efficacy and safety
established in China; however, these products have not been evaluated according
to standards of clinical efficacy and safety applicable to pharmaceutical
products sold in the United States and other countries, and because these
products are herbal-based, they are not recognized as pharmaceuticals by the
Food and Drug Administration (the "FDA").
Our
business model is based on:
|
|
Ÿ
|
owning
and/or marketing unique products with established clinical history
in
their country of origin, and
|
|
|
Ÿ
|
a
proactive approach to meeting the regulatory changes and challenges
of the
new healthcare marketplace.
|
FINANCIAL
CONDITION
We
had
net losses of $709,000 and $643,000 for the nine months ended August 31, 2008
and the year ended November 30, 2007, respectively. As of August 31, 2008,
we
had cash and current assets of $4,000 and $52,000, respectively, and current
liabilities of $1,733,000, with obligations aggregating $801,000 for trade
creditors and accrued expenses, $66,000 for credit card obligations, $158,000
payable for line of credit obligations, $24,000 for amounts due to others,
$20,000 for amounts due to related parties, $227,000 for amounts due to
stockholders and $437,000 of Convertible Notes. We have been operating at a
loss
since inception and have been funding these losses in a number of ways,
including lines of credit, credit card debt, advances from stockholders and
others and entering into subscription agreements with “friends and family” for
investment funds. As described in Note 5 to the accompanying consolidated
financial statements, we obtained $450,000 of debt financing ($390,000 net
of
financing costs) during the nine month period ended August 31, 2008. We continue
to actively seek additional substantial equity or debt financing; however,
we
have received no commitments for such financing. Our working capital at August
31, 2008, despite the aforementioned financing, is not sufficient to meet our
working capital needs for the next twelve-month period and we will need to
obtain additional financing from one or more sources.
Our
independent registered public accounting firm added an explanatory paragraph
to
their audit reports issued in connection with our fiscal 2007 and 2006 financial
statements, which states that there is substantial doubt about our ability
to
continue as a going concern. Our ability to generate sufficient profits and
obtain additional funding and pay off our obligations will determine our ability
to continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As
described above, we merged into and with PMIC and became a publicly traded
corporation; however, we have not closed, nor obtained a commitment for, the
financing that was originally contemplated to close contemporaneously with
the
closing of the merger. As a result of this lack of funding, a condition
unfavorably impacting us since inception, revenue and profitability have not
increased as we believe would have otherwise been the case. Since we have not
been able to obtain sufficient financing, we have not been able to (i) acquire
ownership of several products, particularly the intellectual property rights
to
and formulation of, our principal product, AcnEase®, (ii) market and promote our
products, (iii) conduct certain clinical trials that would further such
marketing and promotional activities and (iv) hire additional employees.
RELATED
PARTY TRANSACTIONS
During
the nine months ended August 31, 2008, the Company's due to stockholders
obligation increased by $26,000. During the nine months ended August 31, 2008,
the Company's due to related parties obligation decreased by
$15,000.
COMPARISON
OF THE THREE MONTHS ENDED AUGUST 31, 2008 TO THE THREE MONTHS ENDED AUGUST
31,
2007
Summary
Results of Operations
The
following table sets forth certain selected financial data as a percentage
of
sales for the three months ended August 31, 2008 and 2007:
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost
of sales
|
|
|
47.8
|
|
|
57.2
|
|
|
Gross
profit
|
|
|
52.2
|
|
|
42.8
|
|
|
Operating
expenses
|
|
|
266.8
|
|
|
138.3
|
|
|
Loss
from operations
|
|
|
(214.6
|
)
|
|
(95.5
|
)
|
|
Interest
expense
|
|
|
(57.9
|
)
|
|
(7.4
|
)
|
|
Net
loss
|
|
|
(272.5
|
)%
|
|
(102.9
|
)%
|
Sales
Net
sales
for the three months ended August 31, 2008, were $101,000 compared to $158,000
for the three months ended August 31, 2007. The decrease of $57,000, or 36.1%,
can be principally attributed to a decrease in internet sales in the United
States resulting from changes in the Internet environment and the Company's
on
-going restructuring of its hosting and web-managing services. Together, those
factors decreased internet visibility, traffic and conversion rate. These
changes were undertaken to enhance the Company’s long-term ability to generate
online sales volume, and management anticipates that the temporarily negative
impact of the changes will begin to diminish in the quarter ending November
30,
2008.
Gross
Profit
Gross
profit decreased to $53,000 for the three months ended August 31, 2008 compared
to $68,000 for the three months ended August 31, 2007, a decrease of $15,000
or
22.1%, with gross margin increasing to 52.2% from 42.8% for the prior period.
The decrease in gross profit in the current period is principally attributable
to the decrease in sales volume, partially offset by a higher realized gross
margin. The lower gross margin in the earlier period was a result of higher
product sales promotions in the period, as well as price incentives offered
in
response to certain delivery problems experienced in the period.
Operating
Expenses
Total
operating expenses increased by $51,000, or 23.2%, to $270,000 for the three
months ended August 31, 2008, from $219,000 for the three months ended August
31, 2007. A $56,000 increase in general and administrative expenses was
principally attributable to increases of $10,000 in noncash consulting expense
principally related to the amortization of grants of common stock over the
term
of the related consulting agreements, $16,000 in accrued professional fees,
$24,000 on web site development and programming fees and additional travel
expense of $12,000 incurred in part due to the Company’s business development
efforts and meetings in connection with additional financing.
Interest
Expense
Interest
expense increased to $59,000 from $12,000 for the three months ended August
31,
2008 as compared with the three months ended August 31, 2007, or $47,000, due
to
interest on the Convertible Notes including amortization of deferred financing
costs and debt discount.
COMPARISON
OF THE NINE MONTHS ENDED AUGUST 31, 2008 TO THE NINE MONTHS ENDED AUGUST 31,
2007
Summary
Results of Operations
The
following table sets forth certain selected financial data as a percentage
of
sales for the nine months ended August 31, 2008 and 2007:
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost
of sales
|
|
|
48.3
|
|
|
47.0
|
|
|
Gross
profit
|
|
|
51.7
|
|
|
53.0
|
|
|
Operating
expenses
|
|
|
235.7
|
|
|
117.3
|
|
|
Loss
from operations
|
|
|
(184.0
|
)
|
|
(64.3
|
)
|
|
Interest
expense
|
|
|
(39.5
|
)
|
|
(5.8
|
)
|
|
Net
loss
|
|
|
(223.5
|
)%
|
|
(70.1
|
)%
|
Sales
Net
sales
for the nine months ended August 31, 2008, were $317,000 compared to $571,000
for the nine months ended August 31, 2007. The decrease of $254,000, or 44.5%,
can be principally attributed to a decrease in internet sales in the United
States resulting from changes in the Internet environment and the Company's
on-going restructuring of its hosting and web-managing services. Together,
those
factors decreased internet visibility, traffic and conversion rate. These
changes were undertaken to enhance the Company’s long-term ability to generate
online sales volume, and management anticipates that the temporarily negative
impact of the changes will begin to diminish in the quarter ending November
30,
2008.
Gross
Profit
Gross
profit decreased to $164,000 for the nine months ended August 31, 2008 compared
to $303,000 for the nine months ended August 31, 2007, a decrease of $139,000
or
45.9%, with gross margin decreasing to 51.7% from 53.0% for the prior period.
The decrease in gross profit is principally attributable to the decrease in
sales volume and, to a lesser extent, to the slightly lower gross margin
realized in the current period.
Operating
Expenses
Total
operating expenses increased by $78,000, or 11.6%, to $747,000 for the nine
months ended August 31, 2008, from $669,000 for the nine months ended August
31,
2007. A $90,000 decrease in marketing and selling expenses is principally due
to
a decrease in on-line advertising and promotion expense of $75,000 during the
period of website design and programming described above since the effectiveness
of such expenses would have been diminished, and a decrease of $15,000 in sales
commissions. A $168,000 increase in general and administrative expenses was
principally attributable to an increase of $62,000 in consulting expense
principally related to the expense of grants of common stock over the term
of
the related consulting agreements, $19,000 in printing, transfer agent and
other
public company administrative fees, $27,000 on web site development and
programming fees and additional travel expense of $35,000 incurred in part
due
to the Company’s business development efforts and meetings in connection with
additional financing.
Interest
Expense
Interest
expense increased to $125,000 from $33,000 for the nine months ended August
31,
2008 as compared with the nine months ended August 31, 2007, or $92,000, due
to
interest on the Convertible Notes including amortization of deferred financing
costs and debt discount.
Seasonality
There
are
no seasonality factors that affect the Company.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on the Company’s financial condition, changes
in financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors, and
the
Company does not have any non-consolidated special purpose
entities.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
August 31, 2008, we had a cash balance of $4,000 and a negative cash flow from
operations of $282,000 for the nine-month period then ended. We have been
operating at a loss since inception and have been funding these losses in a
number of ways, including lines of credit, credit card debt, advances from
stockholders and entering into subscription agreements with “friends and family”
for investment funds. As described in Note 5 to the accompanying consolidated
financial statements, we obtained $450,000 of debt financing ($390,000 net
of
financing costs) in the form of Convertible Notes during the nine month period
ended August 31, 2008. We continue to actively seek additional substantial
equity or debt financing; however, we have received no commitments for such
financing. Our working capital at August 31, 2008, despite the aforementioned
financing, is not sufficient to meet our working capital needs for the next
twelve-month period and we will need to obtain additional financing from one
or
more sources.
Our
independent registered public accounting firm added an explanatory paragraph
to
their audit reports issued in connection with our fiscal 2007 and 2006 financial
statements, which states that there is substantial doubt about our ability
to
continue as a going concern. Our ability to generate profits and obtain
additional funding and pay off our obligations will determine our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Below
is
a discussion of our sources and uses of funds for the nine months ended August
31, 2008 and 2007.
Net
Cash Used In Operating Activities
Net
cash
used in operating activities was $282,000 and $48,000 for the nine months ended
August 31, 2008 and 2007, respectively. Cash used in operating activities for
the nine months ended August 31, 2008 was principally the result of a net loss
of $709,000, partially offset by noncash expenses of $272,000 and an increase
in
accounts payable and accrued expenses of $160,000. Net cash used in operating
activities for the nine months ended August 31, 2007 was principally the result
of a net loss of $400,000, offset by non-cash expenses of $153,000 and an
increase in accounts payable and accrued expenses of $178,000.
Net
Cash Used In Investing Activities
Net
cash
used in investing activities was $19,000 and $3,000 for the nine months ended
August 31, 2008 and 2007, respectively. Cash used in investing activities for
the nine months ended August 31, 2008 consisted of purchases of equipment of
$9,000 and purchases of other assets, principally expenditures for trademarks,
of $10,000. Cash used in investing activities for the nine months ended August
31, 2007 consisted of purchases of other assets, principally expenditures for
trademarks, of $3,000.
Net
Cash Provided By Financing Activities
Net
cash
provided by financing activities for the nine months ended August 31, 2008
and
2007 amounted to $302,000 and $49,000, respectively. Net cash provided by
financing activities for the nine months ended August 31, 2008 was principally
attributable to proceeds from the issuance of convertible notes in the principal
amount of $450,000 ($390,000 net of financing costs), offset by decreases of
$63,000 in credit card payable, $27,000 in due to others and $15,000 in due
to
related parties. Net cash provided by financing activities for the nine months
ended August 31, 2007 was principally attributable to an increase of $33,000
in
amount due to stockholders.
Stock
Issuance and Stock Plan
On
January 1, 2007, we entered into a two-year consulting agreement with an
individual and, in consideration of the financial consulting services to be
provided under the consulting agreement, we agreed to initially issue up to
nine
million shares of our common stock pursuant and subject to the Herborium Group,
Inc. 2007 Stock Plan (the “Plan”). As of August 31, 2008, 8.25 million of these
shares have vested and we have issued 7.25 million shares. The remaining
1,000,000 unvested shares will vest over the term of the consulting agreement.
In addition, in the event certain transactions are consummated, up to an
additional six million shares could be issued per terms of the agreement. The
shares issued and yet to be issued have been valued at $.05 per share based
on
the market value on the date granted for an aggregate cost of $450,000, which
cost is being expensed over the period of the agreement. Accordingly, we
recorded as expense approximately $168,000 and $150,000 during the nine months
ended August 31, 2008 and 2007.
On
February 14, 2007, the Company entered into a two-year consulting agreement
with
a consulting firm and, in consideration of the services to be provided pursuant
to that agreement, the Company agreed to issue up to 3 million shares of the
Company’s common stock pursuant and subject to the Plan, and when so issued,
such shares shall be validly issued, fully paid and non-assessable, of which
500,000 shares vested and were issuable immediately. Of the remaining shares,
500,000 will vest upon the occurrence of one or more transactions, as defined,
and the remaining 2,000,000 will vest ratably on the sixth, ninth, twelfth
and
eighteenth month anniversaries of this agreement. The shares, 1,500,000 of
which
have been issued as of August 31, 2008, have been valued at $.035 per share
based on the market value on the date granted for an aggregate cost of $105,000,
which cost is being expensed over the period of the agreement. Accordingly,
consulting expense in the amount of approximately $27,000 and $0 was recorded
in
general and administrative expense during the nine months ended August 31,
2008
and 2007.
In
September 2008, the Company’s Board of Directors has authorized two additional
consulting agreements and, in consideration of the services to be provided
pursuant to such agreements, the Company agreed to issue an aggregate of
approximately 1.7 million shares of the Company’s common stock pursuant and
subject to the Plan, and when so issued, such shares shall be validly issued,
fully paid and non-assessable, and shall vest immediately.
Our
Board
of Directors approved the Plan on January 19, 2007. The Plan provides for a
maximum aggregate of 20 million shares of common stock to be issued upon grants
of restricted stock or upon exercise of options granted under the Plan, as
compensation and incentive to eligible employees, directors, consultants and
advisors. On January 26, 2007, we filed a Registration Statement on Form S-8
with the Securities and Exchange Commission to in connection with the
Plan.
RISK
FACTORS
Our
business and results of operations are subject to numerous risks, uncertainties
and other factors that you should be aware of, some of which are described
below
and in the section entitled “Cautionary Statement Concerning Forward-Looking
Statements.” . In addition to the other information included in this Quarterly
Report on Form 10-QSB, you should carefully review and consider the factors
discussed in
the
section titled "Description of Business" (Item 1) -"Risks Related to Our
Business"
of
our Annual Report on Form 10-KSB for the year ended November 30, 2007, certain
of which have been updated below. These factors materially affect our business,
financial condition or future results of operations. The risks, uncertainties
and other factors described in our Annual Report on Form 10-KSB and below are
not the only ones facing our company. Additional risks, uncertainties and other
factors not presently known to us or that we currently deem immaterial may
also
impair our business operations, financial condition or operating results. Any
of
the risks, uncertainties and other factors could cause the trading price of
our
common stock to decline substantially.
Risks
Relating to Our Business
We
have a history of losses, and will incur additional
losses.
We
are a
company with a limited history of operations, and do not expect to significantly
increase ongoing revenues from operations in the immediately foreseeable future.
To date, we have not been profitable. We had a net loss of $709,000 during
the
nine months ended August 31, 2008 and $643,000 for the year ended November
30,
2007. Our losses have resulted principally from costs incurred in product
development, including product testing and selection, and from general and
administrative costs associated with our operations. While we seek to attain
profitability, we cannot be sure that we will ever achieve product and other
revenue sufficient for us to attain this objective.
With
the
exception of
AcnEase®
,
our
product candidates are in research or various stages of development. For some
of
these products we will want to conduct additional research, development and
clinical trials in order to improve our ability to advertise and differentiate
these products from others in the market place. We cannot be sure that we will
successfully research, develop, commercialize, manufacture and market any other
product candidates. We expect that these activities, together with future
general and administrative activities, will result in significant expenses
for
the foreseeable future.
Item
3 A(T).
Controls
And Procedures
(A)
Evaluation Of Disclosure Controls And Procedures
Prior
to
the filing of this Report on Form 10-QSB, an evaluation was performed under
the
supervision of and with the participation of the Company’s management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of
the Company’s disclosure controls and procedures. Based on the evaluation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) as of August 31, 2008, our Chief Executive Officer and Chief Financial
Officer has concluded that the Company’s disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Company
in
reports that it files or submits under the Securities Exchange Act of 1934,
as
amended, is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and is accumulated and communicated to the
Company’s management, as appropriate, to allow timely decisions regarding
required disclosure. It should be noted that 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, regardless
of
how remote.
(B)
Changes In Internal Controls
During
the quarter ended August 31, 2008, there were no significant changes in the
Company’s internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Part
II-Other Information
Item
1.
Legal
Proceedings
None.
Item
2.
Unregistered
Sales Of Equity Securities And Use Of Proceeds
Pursuant
to a private offering, during the period from February 2008 through August
31,
2008, we sold Units of our securities consisting of an aggregate $450,000 in
principal amount of our Convertible Notes (the “Notes”), 450,000 shares of our
Common Stock and warrants (the “Warrants”) exercisable for 900,000 shares of our
Common Stock.
The
Warrants are exercisable for a period of five years from issuance. Half of
the
Warrants are exercisable at $.025 per share and half are exercisable at $.05
per
share, subject to certain adjustments, including, but not limited to,
adjustments for stock splits, stock dividends, mergers and
consolidations.
The
Notes
are convertible, beginning six months after issuance or, if earlier, the closing
of a qualified financing or an acquisition of the Company, into shares of Common
Stock in whole or in part from time to time at the option of the investors
at a
Conversion Price equal to
|
|
·
|
80%
of the issuance price in a qualified financing or in connection with
an
acquisition of the Company. The Notes define a qualified financing
as the
date upon which the Company completes the sale of Common Stock (or
like
security) for aggregate gross proceeds of at least $1.5 million.
|
The
Conversion Price is subject to certain customary adjustments, including, but
not
limited to, adjustments for stock splits, stock dividends, mergers and
consolidation.
The
Notes
bear interest at the rate of 10% per annum, payable semi-annually in shares
of
the Company’s common stock valued at $.025 per share (currently trading at $.01
per share).
Unless
converted to Common Stock, the principal balance of the each Note is payable
upon demand made any time after the first anniversary of the issuance of the
Note, or upon a qualified financing or acquisition of the Company. In addition,
we are required to set aside 5% of gross revenue for redemption of the principal
amount of the Notes. None of the aforementioned cash has been set aside as
of
October 20, 2008. The set-aside revenue will be distributed to the Note holders
semi-annually, pro rata in accordance with the outstanding principal balance
of
each Note.
Pursuant
to a Registration Rights Agreement, we have agreed to include the shares of
Common Stock issuable upon conversion of the Notes and exercise of the Warrants,
as well as the shares of Common Stock issued to the investors, in any
registration statement filed by the Company under the Securities Act of 1933
with respect to our equity securities to be sold by us or any other
stockholder.
Our
Board
of Directors has authorized the sale of up to an additional $125,000 principal
amount of the Notes, in Units together with 125,000 shares of Common Stock
and
Warrants exercisable for 250,000 shares of Common Stock.
Southridge
Investment Group is serving as the placement agent in connection with the offer
and sale of the Notes, Common Stock and Warrants. In its capacity as placement
agent, Southridge will be paid a cash fee equal to 10% of the gross proceeds
received by the Company, as well as an expense allowance equal to 2% of the
gross proceeds. In addition, Southridge will be issued Warrants exercisable
for
a number of shares of Common Stock equal to 10% of the aggregate shares issued
by the Company in the private placement, assuming conversion and exercise of
all
of the Notes and Warrants. This amounts to Warrants exercisable for
approximately 5.8 million shares of common stock. The placement agent warrants
will be exercisable for 5 years at a price of $.03 per share. In its capacity
as
the Company’s financial advisor, Southridge is entitled to and received a
retainer fee of 750,000 shares of our Common Stock, and one share for each
$1
received by the Company in the private placement.
A
s
of
August 31, 2008, 1,300,000 shares of common stock have been issued to
Southridge.
The
offer
and sale of the Notes, Common Stock and Warrants, and the Common Stock into
which the Notes may be converted and for which the Warrants may be exercised
(collectively, the “Securities”) by the Company to the investors was exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof
and
Rule 506 of Regulation D promulgated thereunder. Each of the investors
represented and warranted to us that it was an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D. Each of the investors further
represented and warranted that it was purchasing the Securities for its own
account and not with a present view towards the public sale or distribution
thereof, except pursuant to sales registered or exempted from registration
under
the Securities Act. Any certificates issued representing the Notes, Common
Stock
or Warrants will be legended to indicate that they are restricted. No sale
of
the Securities involved the use of underwriters.
Item
3.
Defaults
Upon Senior Securities
None.
Item
4.
Submission
Of Matters To A Vote Of Security Holders
None.
Item
5.
Other
Information
None.
Item
6.
Exhibits
Exhibits
are incorporated herein by reference or are filed with this Quarterly Report
as
set forth in the Exhibit Index beginning on page 22 hereof.
S
ignatures
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.
Herborium
Group, Inc.
|
By:
|
/s/Agnes
Olszewski.
|
|
|
Name:
Agnes Olszewski.
|
|
Title: President and Chief Executive Officer (Principal Executive Officer) and
|
|
Chief
Financial Officer (Principal Accounting Officer)
|
|
|
|
|
Date:
October 20, 2008
|
Exhibit
Index
Herborium
Group, Inc.
Form
10-QSB for Quarter Ended August 31, 2008
|
Exhibit No.
|
|
Description
(1)
|
|
2.1
|
|
Fourth
Amended Plans of Reorganization for Pacific Magtron International
Corp.
and LiveWarehouse, Inc. (incorporated by reference to Exhibit 2.1
to
Pacific Magtron International Corp.’s Current Report on Form 8-K filed on
August 16, 2006).
|
|
|
|
|
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2.2
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Order
Approving Fourth Amended Plans of Reorganization for Pacific Magtron
International Corp. and LiveWarehouse, Inc. entered August 11, 2006
(incorporated by reference to Exhibit 2.2 to Pacific Magtron International
Corp.’s Current Report on Form 8-K filed on August 16,
2006).
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2.3
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Agreement
and Plan of Merger, dated as of September 18, 2006, by and among
Pacific
Magtron International Corp., LiveWarehouse, Inc. and Herborium, Inc.
(incorporated by reference to Exhibit 2.3 to the Company’s Current Report
on Form 8-K filed on September 22, 2006)
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3(i)
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Second
Amended and Restated Articles of Incorporation of Pacific Magtron
International Corp. (incorporated by reference to Exhibit 3(i) to
the
Company’s Current Report on Form 8-K filed on September 22,
2006)
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3(ii)
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Amended
and Restated Bylaws of Pacific Magtron International Corp. (incorporated
by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K
filed on September 22, 2006)
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4.1
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Form
of Convertible Note (incorporated by reference to Exhibit 4.1 to
the
Company’s Current Report on Form 8-K filed on February 25,
2008)
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4.2
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Form
of Warrant (incorporated by reference to Exhibit 4.2 to the Company’s
Current Report on Form 8-K filed on February 25, 2008)
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4.3
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Form
of Registration Rights Agreement (incorporated by reference to Exhibit
4.3
to the Company’s Current Report on Form 8-K filed on February 25,
2008)
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10.1
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Form
of Subscription Agreement (incorporated by reference to Exhibit 10.1
to
the Company’s Current Report on Form 8-K filed on February 25,
2008)
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31
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Rule
13a-14(a) Certification of Chief Executive Officer and Chief Financial
Officer
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32
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Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002
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(1)
In the
case of incorporation by reference to documents filed by the registrant under
the Securities Exchange Act of 1934, as amended, the registrant’s file number
under the Exchange Act is 000-25277.
Herborium (PK) (USOTC:HBRM)
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